A Socialist Campaign For Europe - Part 2 of 5

The Fantasy of Social-Democracy in One Country

The reality is that Socialism is only feasible on at least a European wide scale, which is why the argument that Britain should leave so that some currently non-existent, future left government could implement a left, social-democratic, statist programme, unimpeded by the EU apparatus is itself nonsense, and indeed reactionary. One reason that conservative politicians and the conservative media wanted to present the situation in Greece as “stay in and accept austerity, or reject austerity and get out”, was precisely for this reason. The last thing those conservatives want is the idea to take hold that it is possible to argue for staying in the EU, and fighting against austerity, on the basis of an EU wide struggle for a return to the kind of social-democratic principles upon which the EU was founded.

What, in fact, Greece demonstrated, was that under current political conditions, not only is Socialism impossible other than on an EU wide basis, but even consistent social-democracy is impossible other than on an EU wide basis. It was not the interests of capital, which made resolving the situation in Greece – and the same applies for Ireland, Portugal, Spain etc. – impossible, on the basis of cancelling the debt, ending austerity and so on. Quite the contrary, the interests of productive capital, real capital, the capital that creates the surplus value on which all other forms of capital depend for their revenues, and which creates the potential for growth, reside precisely in the cancellation of large amounts of debt, in the bursting of astronomical asset price bubbles, and an end to the destructive policy of austerity, that undermines capital accumulation.

It is the interests of the owners of that fictitious capital, that are served by those policies of austerity, combined with money printing that are being pursued by conservative governments across Europe, in opposition to the interests of real capital. As Marx described such situations in the past,

“The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proof of the growing power of these bandits, who are augmented by financiers and stock-jobbers.”

(Capital III, Chapter 33)

And, in fact, it is precisely this which is the real justification for supporting the taking of governmental office by social-democratic parties such as Syriza in Greece, Podemos in Spain, the Left Bloc in Portugal, as well as the potential of a Corbyn Labour government in the UK. It is obvious that, at the moment, European governments, and thereby the EU Council of Ministers, is dominated by conservative parties. Even the “social-democratic” parties that governed over the last thirty years, adapted to the changed conditions to absorb conservative ideas, just as in the post-war period, conservative parties adapted to absorb social-democratic ideas. This reflects a changed milieu in which these parties fish for votes. But, the strength of Marxist analysis is not to see the world in fixed terms, and to simply accept the superficial appearance of how the world currently looks. It is to understand the underlying objective reality, and how that is constantly changing, creating not only the potential, but the necessity for new social relations, and the ideas and political alignments that flow from them. The subterranean currents as Trotsky once described them.

The fact of the rise of Syriza, as much as the collapse of Pasok, along with the rise of Podemos, of the Portuguese Left Bloc, of Corbyn, of Sanders in the US, are not some kind of accidental and coincidental occurrences. In fact, neither is the rise of the FN in France, of Golden Dawn in Greece, of UKIP in Britain, of Trump and Cruz in the US and so on. They are all consequences of those underlying material changes. They are all a reflection of a feature I have made central in my new novel “2017”, which is “the collapse of the political centre”.

That collapse means that the old economic and political solutions that were pursued by that political centre, over the last thirty years, which have been variously described as “The Third Way”, "neo-liberalism", and so on, are no longer viable. They were dependent upon the idea that what was really just fictitious wealth, reflected in ever more astronomically inflated asset prices, of houses, shares, and bonds was real wealth, that somehow simply grew year after year, and sometimes visibly month after month. All of this fictitious wealth facilitated, as collateral, the increase of ever more private debt, and this ever increasing private debt, was then used to inflate even further all of the prices of the fictitious capital. But, the financial crash of 2000 was an initial tremor, giving warning that this construction was built on shaky ground; and the financial crisis of 2008, was a more powerful shock, giving an indication of the severity of the real financial earthquake, when it comes.

Back To Part 1

Forward To Part 3

Why That 1% Figure Is Meaningless and Misleading

The media has been full, over the last few days, of the report from Oxfam, suggesting that the wealthiest 1%, of the world's population, own nearly as much as the other 99%, put together, and soon will own more. According to Newsnight, to be in that top 1%, you need the equivalent of £530,000 of assets, including your house. To put that in context, that would include about a third of people who live in the UK. I doubt the vast majority of those people – about 20 million – would consider themselves anything more than comfortably well off, let alone rich, and certainly not part of the global super rich. In what way is it useful to lump together such large numbers of people, who are simply comfortable, with someone like Warren Buffett, with more than $50 billion of wealth, or any of the other truly super rich, who are able to exercise real control over capital, and political power?

The average house in London currently is priced at £400,000. That leaves just £130,000 to be made up, for someone to fall into this category. Someone, in their late 50's, for example, who bought such an average house, 40 years ago, when it would have cost around £26,000, simply on the basis of being on average earnings, during that period, could easily have made up the other £130,000 from the value of their pension, and just using their annual allowance for tax free TESSA's, PEP's and ISA's. For example, if you had put just £1,000 a year into a PEP, between 1982-87, tracking the DOW Jones, the £5,000 you put in, just during that five year period, would today be worth around £80,000, and a lot more, if it reinvested dividends.

What the figure actually demonstrates, is the huge gap in wealth between rich countries and poor countries, where billions of people continue to live in terrible poverty, even as many of those economies grow rapidly, and increasing numbers of people, in those countries, continue to be lifted out of poverty. Its not surprising that OXFAM focus on such a division, rather than the division between the truly rich and the rest, that exists within each society, rich or poor. In fact, this 1% figure obliterates that more significant distinction, and, in the process, lumps together the interests of workers and capitalists, rich and poor in one country, against the interests of those same groups in some other country.

But, the 1% figure is bogus for another reason. Picketty, in his analysis of wealth, failed to make the distinction between productive wealth and other forms of wealth, such as household wealth. Marx long ago made the point that there is a big distinction between owning a house, which cannot self expand in value, i.e. is not capital, and owning, for example a factory, which is capital, because its sole function for its owner is to produce commodities that can be sold at a profit. In other words, there is a great difference between productive wealth, and non-productive wealth.

Yet, left-wing economists, including some Marxists, have effectively fallen into the same trap when they consider the wealth of the majority of capitalists today. The reality is that wealth of the majority of capitalists, and of today's other super rich (such as landlords in the Gulf etc.), does not exist in the form of ownership of productive-capital. In fact, ownership of productive-capital today, as has been the case for more or less the last 100 years, is the preserve not of the super rich, but of the small capitalists, or alternatively of socialised capital itself. In other words, the productive-capital is owned by the functioning capitalist be that a private capitalist, or the firm itself. A public liability company, can, for example, use its profits, or use other forms of borrowing so as to buy back all of the issued shares, so that it has no shareholders.  It then only has employees, with all of the productive-capital manifestly owned by the firm, as a legal entity, itself.  It is not owned by the shareholders or others who merely lend money to the firm to be used as money-capital, to metamorphose into productive-capital.

The vast majority of the super rich do not own productive-capital, they own shares, bonds, and other forms of fictitious capital. In other words, as Marx put it, in Capital III, they have been turned into money-lending capitalists, coupon clippers, and the money they lend is to the actually functioning productive-capital. When a bank lends money to someone to buy a house, the bank does not own the house, the person who buys the house does. The bank, as Marx and Engels set out, continues to own the money they lend, and on that basis they have a right to its return, plus interest. The bank owns the mortgage not the house.

Similarly, when the bank lends money to a productive-capitalist to buy a machine, the bank owns the money it lends, and is entitled to its return, plus interest, whilst the firm or capitalist that borrows this money, is the owner of the machine, not the bank. Nothing is changed here, if the firm that borrows the money does so by issuing bonds, or issuing shares as the means of borrowing the money it requires. The bond holder or share holder continues to own the money they lend to the company when they initially buy its shares or bonds, whilst it is the firm, not the shareholder or bondholder that owns the productive-capital itself.

The bank that holds a mortgage, or other form of loan certificate, the bondholder, or shareholder are not the owners of productive-capital, but as Marx sets out, the owners of fictitious capital. But, the price of fictitious capital moves up and down on the market, independently of changes in the actual value of productive-capital. It is determined by quite different dynamics that drive demand and supply for bonds, and shares etc. Because none of this fictitious capital has any real value – it is not the product of labour, and its price is determined purely subjectively on the basis of demand and supply – what appears to be a great deal of wealth in the hands of such money-lending capitalists, landowners and so on, today, can have completely evaporated overnight. The people who owned large amounts of this fictitious capital in 1929, soon discovered that reality.  The same was true when house prices collapsed by 60% in various markets in 2008/9.  By contrast, the value of real productive-capital, in the shape of say a machine, continues to be determined objectively by the labour-time required for its production, and that machine, as productive-capital continues to be able to self-expand in value, to produce profits, just as before.

What determines the market price of shares, bonds, and land/property is not the rate of profit, but the rate of interest, and the rate of interest is determined on the basis of a struggle between money-lending capital and productive-capital. As Marx points out, one reason that interest rates tend to be lower in more mature societies, is that former productive-capitalists, having made enough money to live off, retire from their productive activity, and make this money-capital available to others to engage in production. The more mature a society, the more of such people there are, and so the greater mass of potential loanable money-capital, in proportion to the demand for that capital.

This determination of the rate of interest, which thereby determines the yield available on bonds, of dividends on shares etc. is then quite separate from the movement of the value of profits, or the value of productive capital. As Marx puts it,

“On the whole, then, the movement of loan capital, as expressed in the rate of interest, is in the opposite direction to that of industrial capital.”

(Capital III, Chapter 30)

As interest rates rise, because the demand for loanable money-capital rises relative to its supply, so bond, share and property prices fall. But, this fall in the price of fictitious capital, just as previously its rise, has nothing to do with the accumulation of real productive wealth.

"... the reduction of the money equivalents of these securities on the stock exchange list has nothing to do with the actual capital which they represent, but very much indeed with the solvency of their owners."

(Capital III, Chapter 30)

A share, or bond, or mortgage is no more capital than is a house. It has no potential to self expand in value. It only appears to do so, because it gives the owner an entitlement to interest. But, the payment of interest is only possible, if real productive-capital expands in value, in other words if it creates profits. But, that real productive-capital belongs to the productive-capital that borrowed money capital, in exchange for the issuing of shares, bonds etc., not to the money-lending capitalist that lent the money in exchange for bonds, shares and so on, that merely gives them a claim to interest, to be paid out of those future profits.

Whether the nominal value of bonds, shares, property and so on moves up or down has nothing to do with the creation of additional wealth. Additional wealth (in its capitalistic context) can only be created by productive-capital, via the accumulation of real capital, via the production of surplus value. Not one penny's worth of real wealth is created as a consequence of the price of shares rising by however great an amount. For the same reason, real wealth is not reduced by a penny due to a collapse in those bond, share and property prices. 

“As regards the fall in the purely nominal capital, State bonds, shares etc.—in so far as it does not lead to the bankruptcy of the state or of the share company, or to the complete stoppage of reproduction through undermining the credit of the industrial capitalists who hold such securities—it amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply, are mostly more enterprising than their former owners.”

(TOSV2 p 496) 

A rise in the price of bonds, shares, or property is then not at all the same as a rise in the mass of productive-capital. The former provides no basis for additional income, and so the nominal rise in this wealth is no different to the nominal rise in the price of houses. If house prices rise by 10%, anyone who sells their house for this higher price, equally finds that in buying an equivalent house it costs them 10% more, so that they have, in reality, gained absolutely nothing. Similarly, if the price of shares rises by 10%, if a shareholder sells their shares, in company X, in order to buy shares in company Y, the higher price they get for the shares they sell, is matched by the higher price they have to pay for the shares they buy.

It is a confusion of bourgeois economics, that many on the left seem to have accepted, that a rise in the nominal value of this fictitious capital, brings with it a claim to additional revenue, in the shape of additional dividends, yield etc., but Marx and Engels make clear that no such thing is possible. The maximum amount that can be paid out as interest in whatever form, is determined by the rate of profit, which is a function of the productive-capital, not the fictitious capital. If the amount that can be paid out as dividends, for instance, remains constant, because the rate of profit has remained constant, but share prices rise (which reflects the fact that the supply of loanable money-capital has risen relative to the demand) then dividend yields must fall. In fact, under such conditions a rise in the total stock value, may result in less revenue being distributed as dividends, rather than more.

How High Can Stocks Go? - Part 1

Keynes, who was a successful investor as well as economist, wrote that markets can remain irrational longer than most people can remain solvent. On Friday, the Dow Jones 30 Index finished over 16,000. Markets are significantly higher for the year, and for the last few months have been hitting new all-time highs, week after week. As usual, in such conditions, the business channels continue to cheer on the rallies, whilst claiming to only report the facts. They and the market bulls proclaim that despite such rises, markets remain fairly valued, or at best only a bit frothy. Yet, on many measures such as Tobin's Q, or the Cyclically Adjusted Price Earnings, markets are at levels they have only ever been at during times when there have been crashes. But, that has been true for months now. In 1996, Alan Greenspan proclaimed that markets exhibited “irrational exuberance”, but it was another 4 years, until 2000, before they crashed. From around 2003, the UK property market was judged to be in a bubble, yet it was not until 2008 that it crashed, and even then it quickly bubbled up again as mortgage rates were slashed. So, how high can stocks go?

Logically, the value of a share should be equal to what it is a share of, that is the value of the company. That is basically what Tobin's Q measures. It is a ratio of the total value of the shares in a company compared to the cost of replacing the capital employed by the company. That measure can then be extended across all shares traded to determine whether markets are above or below a fair value. 

The point from where global stock markets, and particularly the US stock markets, began to rise substantially is 1982. Yet, its clear that the rise in the value of these markets has little or nothing to do with the growth of economic activity, and, therefore, of productive capital in the period after that. In fact, that is not unusual. Periods of stock price appreciation have frequently accompanied periods of sluggish economic growth, and vice versa, for reasons I will explain later.

US GDP rose by 848% between 1950 and 1980, from $294 billion to $2788 billion. Between 1980 and 2000, it rose from $2788 billion to $9951 billion, a rise of 257%. Between 2000 and 2012, it rose to $15094 billion, a rise of 51.68%. I have chosen these dates because they are the closest I can get to periods of the Long Wave, i.e. 1949 – 74 (boom), 1974-1999 (downturn), 1999 – (boom).

For a fair comparison, I have looked at the compound increase per annum for each period. For the first period it is 7.79%, and 6.57% and 3.53% for the further two. Because, these periods do not properly coincide with the Long Wave, I'd suggest that they underestimate the higher growth in the first period compared to the second. They include the period of the second slump between 1974 and 1980 – US GDP fell 14.4% between Q4 1973 and Q2 1975 alone - and that the figure for the period after 2000, reflects the effect of the relative decline of the US, and the effect of the recession after 2008, on what is still only the first half of the boom phase.  In addition, these figures are nominal values.  Given that inflation was generally low in the first period, and last period, but high in the second period, this also flatters the real growth between 1980 -2000.  I will look at real rates of growth later.

However, the point here is to compare these figures for economic growth, which can also be used as a proxy for the growth of capital value in the economy, against what happened with the stock markets. For the first period, the Dow Jones Index rose from 200 to 824 in 1980, to 11723 in 2000, and to 13593 in 2012. In terms of annual compound growth this is then, 4.83%, 14.2%, and 1.24%. In other words, between 1980 and 2000, the Dow Jones Index rose by three times as much on an annualised basis, as it did in the high growth post war boom period from 1950 to 1980.

The low figures for 2000 to 2012, reflects the effect of the 2000 Stock Market Crash. I started compiling this data a year ago, but during that time, the Dow has risen from 13593, to now over 16000, a rise of 18%. Factoring that in would then give an annualised figure around 3% for the period. So, although there is a general belief that bubbles have been blown up in financial markets over the last 10 years, the data here suggests that the period when these asset price bubbles were inflated was, in fact, the 1980's and 90's. The money printing of the last 10 years, despite being of astronomical proportions, seems to have been much less effective in that regard, and has only served to keep already inflated asset prices inflated. The same picture is seen for other markets.

For the S&P 500. it rose from 16.93 to 107.94, to 1469.25, to 1379.32 over the same period. That is compound annual rates of 6.37, 13.95 and - 0.53 respectively. Last week it closed at 1805, which gives an approximate rise since 2000 of 1.5% p.a.

Forward To Part 2

Google At $1000. Bubble Bubble There's Going To Be Trouble

Yesterday, shares in Google surged by more than 13% to over $1,000.  That came on the back of a good earnings report from the company.  That is rather at odds with the general picture provided by this quarter's company earnings, which have been disappointing.  Despite the fact that the economy in the US, UK and Europe has continued to be sluggish, despite the fact that earnings have shown a decidedly lacklustre performance, and indeed there are many technology companies that are yet to make any profits, the surge in Google's share price reflects similar lofty valuations across all equity markets, in most countries.  In fact, the one place where equity markets have not shown such elevated levels has been the one place where the economy has continued to grow very strongly - China.

The increases in the share prices of some technology companies is now back to the kind of level that was seen in the late 1990's, ahead of the Tech Wreck of 2000.  Indeed, the NASDAQ, is now just below the 4000 level, 80% of its 2000 peak of 5000.  That may not sound too bubbly given that it is now 13 years on, but it should be remembered just how much of a bubble it was in in 2000.  Throughout the 1990's, the NASDAQ soared ahead.  Technology funds put in 70% increases in their valuations during many years over the period.  I remember at the time talking to a friend of mine who is a computer programmer, discussing a number of ideas of Internet companies we might set up, because it seemed at the time, anyone could do it, and make money.  And indeed, many of them did just that.  Almost like a 1980's privatisation, every Initial Public Offering automatically soared in value, as soon as shares in the company started trading, making instant multi-millionaires out of its founders, whether the company had any sizeable revenues let alone profits.  Even successful companies of today like Amazon were referred to as "The River of No Returns", because even as its business continued to grow, and its share price rise, the prospect of it ever making any profits was nowhere on the horizon.

On top of all of this were the mergers and acquisitions, which with each one pushed the acquisition price ever higher, each deal being bigger than the last.  The daddy of them all was the merger of AOL with Time-Warner, which marked the end of the bubble.  In March 2000 having gone above 5000, the NASDAQ bubble burst, going down by 75% once more to below 1000.  That, in reality, probably reflected something more like fair value.  Even then looking at the DOW Jones, which had risen from 1,000 in 1982, to over 10,000 in 2000, even that level of 1000 on the NASDAQ was probably an inflated level.  The ten fold rise in the DOW did not reflect any real increase in the value of US companies, it reflected only the fact that during the 1980's and 90's, massive amounts of money had been printed, which found its way into blowing up these asset price bubbles.

Its wrong then to look back from today's valuations to the peaks of 2000 for the DOW, NASDAQ, S&P 500, or any other stock index, and conclude that after 13 years, prices have only recovered those previous levels, because those previous levels were themselves grossly inflated, which is why the bubble burst in 2000, in the first place.  After the 1929 Stock Market Crash, it took until 1954 before share prices recovered their pre-crash levels.

If even 1000 on the NASDAQ was a reasonable level in 2000, there is no way that the value of US technology companies today has risen four fold since then.  A number of very significant companies like Google, have indeed developed during that time, but its hard not to conclude that these current valuations once more have far more to do with the $85 billion a month that the Federal Reserve is pumping into the economy, and which is being forced to find a home, that provides at least some yield, rather than that it is a result of the actual growth in the value of companies.  The evidence of that is the fall in stock markets a few months ago, when the Federal Reserve announced that it might begin even to just reduce the amount of money printing.

The fact that the money printing has continued, and that it looks set to continue into next year, means that the bubble is just getting blow up even further, and the bust will be that much more cataclysmic when it happens.