Tuesday, May 12, 2020

Nearing the edge

Profits and interest are the surplus value of capital. They are the unpaid part of labour’s production, the extra value that is added on to costs without an equivalent value being circulated. Finance grants a certain credit and demands more in return. Commerce sells at a higher price than it has bought. Industry has more produce to sell than it has paid for. Capital expects to get more out of the market than it puts in. But all this supplementary value can only be obtained by colonial plunder or by granting credit. As it does not exist here and now, it must come from abroad or from the future. But plundering the planet and accumulating debt have reached their ultimate stages, and printing money is a sign of that finality. It is the last fuel of a failing system.

Capitalism could be dated back to the expropriation of land by armed force and the extraction of rent, or to the profits of trade. The monetisation of exchanges and the development of banking were also a turning point. But it was science and technology that really got capitalism started, by opening the path to unlimited investments and accumulation. A little over two centuries ago, the means of production took on a different signification. They had been essentially land and slave or serf labour. They would increasingly be machines and the buildings that housed them, while labour was “free” to be employed or not on demand. The acceleration brought about by engines resulted in mass production and the necessity of corresponding mass markets. But, as workers were only paid a fraction of their produce, markets had to be found elsewhere. Steam driven jennies and looms in English cotton mills would be the ruin of India. Industrial capitalism was ever more in need of foreign markets to sell its surplus value.

Capital began the 19th century by selling its industrial surplus for bullion. Then it colonised for raw materials. By the end of the century, European powers had been joined by the USA and Japan, and the fighting for dominion intensified. Meanwhile the Bessemer converter (1855) multiplied the production of steel, and thereby of railways, trains and steamships, and plenty of dreadnoughts and ordnance. Steel replaced textiles as the ruling industry and, along with coal, greatly influenced politics, eventually leading to war on a grand scale. Banking also grew in influence, lending to governments and businesses, organising the flows of capital and receiving the backing of military might. However the colonial system turned out to be a costly failure. After a second global conflict, more extensive and destructive than the first, and a lot of post-war fighting, a new world order was slowly put in place. The newly independent nations would trade their raw materials for consumption. The industrial nations could exchange their surplus value for investments. But this proved insufficient to absorb huge productivity gains, especially once reconstructed Europe and Japan joined the competition for market shares.

Surplus value is unpaid labour that has no equivalent demand. It can be exchanged for investments, or it can be monetised by credit. This advantages investment surplus values that can be exchanged among themselves. And it disadvantages the surplus value of consumption that must be exchanged for investments abroad, or resort to credit on a fast expanding scale. Consumer credit must be constantly renewed. If instead it is paid back, demand will slump. The mounting levels of debt were mitigated by strong economic growth and by occasional bouts of inflation. But, for the past three decades, growth has been mostly in developing nations, notably China and its satellites, and inflation has been historically low. Profit and interest have been paid with debt, and that debt has accumulated to gigantic proportions. And so far no one has implemented anything other than more of the same in ever larger quantities.

Profit and interest are paid with debt and then invested. Capital accumulates on one side and debt on the other. But capital is privately owned, whereas debt weighs on the public domain and on wage earners. Everyone is in debt, but just a few possess the capital. And that possession gives the right to decide how and to what ends it is used. That is, more profit at whatever cost to the community and the environment. Capital has accumulated on a mountain of debt that has no material consistence. It is just paper and writing, engagements and promises. And an increasing number cannot be held and kept. These defaults will leave empty holes in the structures of finance. They have the potential to be so big that even central banks will not be able to fill them. When interest rates start rising steeply, it will be the prelude to pandemonium.

Monday, May 04, 2020

Funny money

Commercial banks grant credit to their customers, big and small. But they only possess a tiny fraction of the money they lend, as little as 3%. The rest only exists in writing. It is scriptural money based on promises of future reimbursements. However, it is accepted as payment and circulates as such. At term these debts are either renewed for another period, or they are paid back, often in instalments. In the second case they are lent out again to other customers. What distinguishes payments is that some are made with past incomes while the others are made with future incomes that have not yet materialised. Credit and debt are bets that future revenues will be available. And the risk of such a wager justifies the extortion of interest. Defaults on debt do occur, and lenders write them off as calculated losses. Problems arise when the numbers of defaults is greater than expected, when they come in large clusters. If they pass a certain percentage, they cancel the profits of interest. Beyond that they consume the banks reserves and bankruptcy looms.

Credit comes from nowhere by writing, but it can only return to oblivion when future incomes materialise. It is and then is no more, as it has already been spent. However, credit can be and is prolonged indefinitely by being granted a new term or transferred to another borrower. This perpetual credit accumulates as additional ones are constantly being granted. Credit expands and reaches a point where the solvency of new borrowers is questionable. The mass of people whose future incomes are uncertain, and whose only source of credit used to be the pawnbroker and the payday lender, are encouraged to buy all they need or want and pay later. Subprime lending and junk bonds are attractive because they pay much higher rates of interest. This high interest comes with a heightened risk of default. But all those capital profits must be invested somewhere, either as company shares or in debt. And capital gains need to be as large as possible.

Bad debts are statistical probabilities. But they can be overwhelming. This can happen when there is overreach, when the vast volume of debts risks toppling at the slightest incident. A dozen years ago mortgages on inflated house prices had been granted far and wide, and the demand they generated pushed prices even higher. This created a perfect bubble that brought down Lehman Brothers and threatened global finance. The system was saved by floods of cash from central banks, and lending took off again to ever loftier heights. Bond buying by central banks was on such a gigantic scale that it pushed up their prices and brought interest down to almost nothing, and even lower. This led to a surge in debt funded acquisitions and share buybacks, but households and consumers went on being bled for their mortgages and overdrafts.

By the end of last year all kinds of debts, from governments to students, had reached alarming levels. Then came the COVID pandemic and the overburdened structure began to slowly fall apart. Central banks and governments seem to think that more of the same will solve the problem. But today’s crisis is not just about debt. It includes closed businesses and industrial sites, rent arrears and consumption falling off a cliff. Throwing cash at it will not save the situation this time. Whereas debt cancellation, democracy in work-places and a massive redistribution of income would solve a lot of things, and drastic cuts in carbon dioxide emissions would have to be part of the solution. None of this is likely, as most people seem to want to go back to where they were three months ago. The known is often preferred to the unknown, and this conservative preference is the ruling class’s main ideological foundation. What is was and will be, as there is no alternative.

Capitalism’s necessary expansion was already in trouble before the pandemic. The present contraction is so sudden and massive that the debt structure based on growth will probably collapse as defaults multiply. As usual, governments will pretend they have things under control, until they manifestly do not and resort to a state of emergency and martial law. The system was wobbling and is now broken beyond repair. Will something new emerge, or will the same old violence and oppression just accelerate their devastation?

Friday, April 24, 2020

An occasion for change

Two months ago it was generally accepted that shares on the stock market were overpriced. This was explained by the very low or negative interest rates that were the consequence of central bank interventions on the short term (repo) and long term (QE) lending markets. As dividends and interest are alternative forms of profit, they always keep more or less in step with one another. And even the smallest of dividends is better than negative interest.

The pandemic is savaging supply and demand, and countless businesses are on the verge of destruction. The market’s first reaction was to sell. The rush for cash resulted in most share indexes losing a third of their value, and interest went up a few decimal points. But holding cash does not generate revenue so, as soon as governments and central banks promised hand-outs of hundreds and thousands of billions, buying started up again. At present the Standard & Poor index is only about 17% below its peak and interest rates have sunk lower than ever.

Market gamblers are betting that industry, commerce and finance will weather the storm and regain their previous splendour. They seem to have forgotten that the past glory was built on sand, and was already showing severe signs of strain. The return of market exuberance seems premature, as nobody knows when or how the pandemic will end. All this commotion cannot fade away without a trace. Tomorrow will not be like yesterday. It could be better and it could be worse. In the second case, it might be just as well that Boomers are no longer around to see the mess they made and cry over spilt milk. But the first case would mean that same generation - who owns most of the world’s wealth and decides how it is governed - has radicalised suddenly and remembered its rebellious and carefree youth, or has mostly died off with respiratory symptoms.

The idea that the epidemic will go away just as it came: quickly and quietly, is presumptuous and most certainly wrong. The repercussions will be long lasting, measured in years not months. A different way of life will emerge, more centred on essentials and more localised. Travel and tourism will be the worst hit, in what could be a permanent trend. Sea cruises and sight-seeing plane flights may never start up again, and the makers of cruise ships and passenger planes will have no more customers. In which case, providing them with financial assistance is pure waste, especially Boeing with its parking lots already full of 737-MAXs. The countries that host tourism, and all do to some extent, will lose a more or less important inflow of foreign currency, with a direct impact on their national finances. The fall in travel miles equals a drop in fuel consumption, which means excess production and shrinking prices. And cutting off that surplus will be an unprecedented and massive reversal of the growth trend and its ideological monopoly. There is talk of a reduction in global demand of 25 million barrels per day, more than twice US production and over a quarter of world consumption. Agriculture is also in trouble. Especially industrial farming that employs large numbers of seasonal labour, lodged and fed in often sordid conditions with no social distancing, and many have been stopped by closed borders. A lot of these industries sell their crops and meat to fast-food and restaurant chains that have largely closed down. Small farms that employ family and neighbours, and sell their produce locally may fare better than the mega ones. The fashion industry is crashing and the production of cars and trucks is on standby, but so far the military-industrial sector does not seem to be complaining.

Exceptional life-changing events are occurring in every domain. The fundamental processes of expansion and growth have gone into reverse. Everything is shrinking, production, consumption and space itself has dwindled to domestic proportions. As this is likely to last a year or more, until widespread vaccination has occurred, it could be a time for thought. Humanity has been hurtling towards financial, environmental and climatic chaos, so the global lockdown could be an opportunity. Having almost come to a standstill, a complete change of direction becomes possible. For the time being all talk is about getting back to “normal”, the normality of poisoning the atmosphere, soils, rivers and oceans, of desperate poverty and of wanton mayhem with high-explosives. The desirability of such a norm is questionable, and what better time to question it than now, as it is forced into slow-motion. 2020 could be the year 01 of a cooperative, durable future, or of heightened violence and destruction. The outcome will depend on how many people are convinced that a different world is possible. And the disruption of the coming months will decide the balance.

Saturday, April 11, 2020

Oceans of cash

To keep interest rates close to zero or negative, and thereby encourage more borrowing, central banks are buying up debt as fast as they can. They are doing all this buying on the market, not at the source of emission, and market prices for the more secure debts (Treasury, corporate, mortgage-backed) are much higher and often multiples of their face values. In mid-October 2018, US Treasury 10-year bonds were offering 3.2% interest. They are presently at 0.74%, which means their price has multiplied by four. 3.2% of 100 equals 0.74% of 432. Central banks are accumulating ever larger stocks of overvalued debts, and overpaying necessarily devalues the currency.

The massive acquisition of debt by central banks – mysteriously named quantitative easing (QE) – was a response to the liquidity crisis caused by exorbitant subprime mortgage lending. A decade ago, the idea was to re-float the banks with liquidity in exchange for their stocks of debt, and have them start lending again. And, once the crisis was over, the cash poured into the system would be drained out progressively by selling back the debts or by redeeming them at term. But the crisis never really ended. And, after the briefest of interruptions, central banks had again started buying debt, even before COVID-19 laid waste to all previous planning. Now it seems that the whole process is spiralling out of control, with $Trillions materialising on a weekly basis and no end in sight. Print and spend is the new normal on the path to nowhere. Beware the pending coronal inflation.

Sunday, April 05, 2020

Social distancing or class divide?

Humanity is undergoing an amazing experience, unprecedented in scale. A situation where everyone must be wary of everyone else, neighbours, family, fellow workers, friends, customers, cashiers, any and every contact runs the risk of catching or transmitting the virus, and many do not even know they are ill and contagious. This general state of wariness seems quite similar to descriptions of life in totalitarian societies, except that the risk of social contacts is different. Instead of an Arctic labour camp, the consequence may be a hospital ventilator, and both can be terminal. It is not the exchange of ideas that is dangerous and possibly fatal, it is merely about spittle and snot, not what one says, only where one coughs. But the state of anxiety and suspicion can be just as extreme, and the psychological impact just as debilitating.

Humans are used to being and coming together. They enjoy gathering in large crowds for entertainment or to experience the power of numbers. Most people spend their time mingling, and the hermit’s isolation needs a particular, often mystical, mind-set. Very few are mentally prepared for a prolonged confinement. Fortunately, there are the virtual communications of print, sound and video. All those digital messages racing round the planet had already created a form of social distancing, where the screen obliterates the surroundings. Many already had a more intense life on-line than in the real world, especially among the younger generations. They will probably manage the best in isolation. And it so happens that they are also the ones least likely to have severe symptoms if they are infected by the virus.

This global quarantine is accentuating the importance of communication networks, cable and Hertzian. It is also showing the world what is essential to its survival, and how life is possible without the perpetual movement of fossil fuel consumption. And it has glaringly highlighted the fact that the workers who actually keep things running are among the lowest paid categories. They are the frontline heroes, and simply clapping for them every evening will not raise their wages. This springtime 2020 is pinpointing a number of realities that may be quickly forgotten once the pandemic abates, or maybe not.

Saturday, March 28, 2020

Game of lies

Those who are dying from COVID-19 infections are almost exclusively the elderly and the poor. And mortality among this latter group will become even more apparent when the virus gets a hold in the vast urban sprawls of Africa, Asia and South America. The old folks are those who remember the past and the wretched are those who do the dirty work. But who cares about yester-years and what might have been, as there is no alternative. And those who have little or nothing are so numerous that there will always be enough to do the lifting and carrying, pushing and pulling that machines cannot do more efficiently. A massive cull of poor and old would largely resolve the social question and the demand for a more egalitarian wealth distribution.

In the wings of power’s theatre lurk some very unscrupulous people, Bannon, Cummings and other less known murky characters. They have a simplistic vision of the world where only power is pertinent, and the power of money in particular. They completely ignore the subtle countless interactions that make society and the planet’s ecosystem possible. They whisper in the ears of the ruling class and give them words to express their instincts. What if there are a few million less old-age pensioners and destitute, they are of no use anyway. They are just cost and no gain. They add to the social bill, not to the bottom line. In a world where only the wealthy get wealthier, and where wealth crushingly dominates political power, the health and wellbeing, life or death, of unproductive elements is of least concern. From the top of the social pyramid a pandemic could be perceived as a source of profit. But, with their closed obsessional vision of society, they were unable to foresee that production would grind to a halt and profits would evaporate. The pandemic turned out to be a whirlwind that is battering the markets with unprecedented force, and plaintive cries are rising from the world’s stock exchanges, “save us before we sink”.

That the virus is highly infectious and that symptoms only appear after one or two weeks, if at all, so that people unknowingly contaminate all they touch for a period of two to four weeks, was made public in early January. All eyes were on China’s Hubei province in total shutdown. But just a few Asian governments actually organised to face the coming onslaught. Elsewhere they did nothing, contenting themselves with asinine comments on seasonal flu. Was the present situation planned or is it just the consequence of crass stupidity. In either case, those executives should not be where they are pretending to govern a nation for the benefit of all its citizens, a pretence that has been an obvious lie for quite a while.

Sunday, March 15, 2020

Who to blame

Stock markets have dived as the world goes into lockdown over the COVID-19 (pity the poor brewer) pandemic. Though no one could foretell what the detonator would be, it had been obvious for a while that a correction was imminent. The value of investments - whether shares, bonds or real estate - cannot increase infinitely. They go up and come down, and over time stay in line with the general growth of wealth. As they represent that wealth, they can only follow its actual progress. Deviations, above or below, must compensate each other so as to conform to reality. The value of investments on the market varies with supply and demand, which in turn are influenced by speculative trends, with prices rising or falling. Prices rise when there is more money entering the market and they fall when money is taken out. For close to a decade free credit and tax cuts supplied the vast quantities of liquidities that pushed up the market price of equity. Corporations were borrowing or, for a few, repatriating their overseas profits to buy back their shares. Meanwhile institutional investors, public and private, were doing their share of buying, with the more adventurous leveraging as much as they possibly could. All these were joined by millions of internet investors playing the game with their savings, or more when they could. An ever growing amount of funny money was investing the market and lifting its various indexes to unprecedented heights. From November last year to the end of February records were being broken on average twice a week on the NYSE. Then that unsustainable progression began to slow down and, in so doing, instilled doubt. Future obscurity became a manifest certainty with COVID-19, and quite suddenly everyone wanted cash, instead of all that other paper stuff. The need and the urge to sell combined and, as sufficient cash was not forthcoming, prices dropped. Wall Street was wilting, so the Federal Reserve Bank of New York poured money into the system through the repo market. Share prices have been moving up and down with unusual amplitudes, but so far the downward motion has been the strongest. When shares are in trouble, Treasury bonds are habitually in strong demand. But T-bonds are actually so overpriced –double last summer’s value, from 2% interest to 1% and below – that they are also being sold off (1). The demand for cash and particularly US dollars means other currencies are getting a beating on the foreign exchange market, though they are locally also in strong demand. Cash is cash. Even though there is more of it than usual because of quantitative easing, liquidity only represents a small fraction of exchanges. This works because money is constantly changing hands in serial exchanges. When money is being horded for security or is disappearing down the debt hole as credit repayments, cash becomes scarce and prices plunge. The present situation has been regularly offset since 2008 by more and cheaper credit, but all debts finally come home to roost and insist on obtaining their due. Credit and debt have ups and downs, in cycles that vary according to their periodicity. This multitude of time scales rising and falling may cancel each other, or may move together either up or down. Revolving credit and renewing debts reduces the effects of a downturn by pushing the reckoning further into the future. But that supposes the future inspires confidence. When it does not, lending dries up and cash is demanded. And as cash is rare bankruptcies will spread like prairie fires, driven by the viral winds of COVID-19.

The Federal Reserve's cash bomb seems to have made the US dollar less atractive.

1. 13/05/20. This was an exaggeration due to miscomprehension. The price of bonds varies according to interest rates, and interest rates vary according to the price of bonds. But the relation is not direct. What remains the same is the price plus the interest still to be paid. 100 at 5% will pay 50 over ten years (= 150). Supposing that a year after emission, when there are still nine payments pending (= 145), interest rates drop to 2.5%. Then 145 = 9 x 2.5 + the new price (122.5).