Stock markets are running out of fuel

The stock market deals in products that have exchange value but no use value. They are just paper receipts, some of which bring in a return. Not being used means these products can be bought and sold time and time again, indefinitely, except for mergers, acquisitions, buy-backs, bankruptcies, and the redemption of bonds at term. Having no use value makes them pure exchange value, which is determined partly by the rate of the return in dividends or interest, and more generally by supply and demand.

Demand has two basic forms. There are those in search of revenue, and there are those who bet that the price of the product they are buying will either rise or fall. The first are expecting an income, and will keep their acquisitions as long as it brings a return. The second are buying to sell, or selling to buy, over a short, sometimes very short, period of time. The first are investing in production or debt, while the second are speculating on a volatile market. The long term investor in search of an income depends on dividends or interest. The short term speculator in search of profit depends on prices moving up or down.

The dividends and interest paid out vary in absolute terms, because profits rise and fall and because the rate of interest on bonds emitted changes, and in relative terms, because the price of bonds and shares on the market is not constant. If 100 pays 2.5, that is 2.5%. But if the price goes up to 110, then 2.5 is only 2.27%. And if the price goes down to 90, then 2.5 is 2.78%. Dividends are a quota of profits, which can grow or shrink to nothing at short notice. This uncertainty means that when they do pay, they pay a higher rate than bonds. The medium term average price to earnings ratio has been around 16, which is about 6%. It has risen recently to almost 19, which is still over 5% and considerably higher than the interest paid by bonds (2%-3%). Considering that a yearly income of 10,000 needs an investment of 200,000 at 5%, or 500,000 at 2%, only millionaires can insure their retirement pensions.

A rise in the price of bonds and shares reduces their proportionate incomes. At some point these falling rates should discourage new investments and prices would fall back. Keynes estimated the limit to be 2%, below which investors would prefer to keep their cash. But that was a long time ago, when credit was still a minor actor. Nowadays a majority of payments are made with credit of some kind or another, and the stock market is no exception. In fact most nations have already spent two, three, or more years of their future incomes. And central bank policies of cash for debts and free credit (1) have reduced the supply of bonds, pushed up their prices and flooded the share market with easy money. It was a great party, but even the bottomless pockets of central banks ended up by feeling the political strain, and the effects on the productive economy were insignificant. Infrastructure was in disarray, productivity was stagnant, and gig employments were increasingly the only no-future prospects. So the party ended and the process is reversing in the US, while still continuing on a reduced scale in Japan and Europe. Now all eyes are on America. But the Federal Reserve’s reversal is incremental and slow. Interest rate increases are constantly postponed, and bond sales are small compared to those needed to fill the Treasury’s vast deficits. The party is over, but everyone is still hanging around wondering what to do next.

Prices on the stock markets move up and down. The upward movement is the result of more money going into the market and increasing demand. It is attenuated by more companies joining the market (initial public offers) and by bond issues, which increase supply. The downward movement is the result of money being withdrawn from the market and reducing demand. It can be attenuated by companies buying back their shares, and by central banks buying up bonds, which reduce supply. And both attenuations, if they are strong, can momentarily reverse the trend. However, the various flows of investments that make the trend must come from somewhere and go somewhere. These last few years, some of them were cash coming from quantitative easing and the trillions created by central banks. The rest was credit, notably corporations selling bonds to buy back shares. New money and free credit made the trend. Now both are running out of steam, and the upward movement they fuelled is beginning to turn down.

Since the low in 2008, there has been a huge increase in apparent wealth on the stock market, with no trickling down. As for growth in the production of wealth, it has barely kept up with population growth. Immense balloons of virtual riches are floating above the world’s stock markets and can no longer expand. Will they burst or just deflate slowly?

(1) Pierre Joseph Proudhon (1809-1865), the first to conceptualise anarchism, was a proponent of free credit for the workers, not the bankers.

Haunted by the past

Assassinations for political or ideological motives have occurred throughout history, but the earliest recorded organisation seems to have been the Nizari Ismaili sect based in the Alamut mountain stronghold just south of the Caspian Sea. And the Arabic Asāsīyūn, meaning "people who are faithful to the foundation [of the faith]", became a generic word. The state has also killed and executed since prehistoric legendary times, but the first to proclaim itself terrorist, and to herald the rule of terror, was the Comity of Public Safety (1793/4) during the French revolution. Since then governmental violence has been practiced with the same zeal, but with less noise and exposure. However, war is where the most killings occur, and where murder attains its utmost legitimacy. Being ordered to kill those who wear a different uniform can be made to seem normal. And the civilian deaths are just unavoidable collateral damage for which no one is accountable. In some cases all the dead are counted as enemy combatants, which absolves from any guilt. This happens in total war, where nations confront nations in a death struggle, or when an occupying army fights a popular uprising and a whole population is the enemy.

State terror at home and abroad is the norm. Governments constantly use violence to maintain their rule and keep their dominions. Force is the prerogative of an executive that has right as well as might on its side. This state monopoly means that all other sources of violence are automatically condemned and repressed. However, the justification of state terror may not seem obvious to those it is being exerted on. This should give them the right to oppose violence with violence, but only a very wide majority has a chance of success. A minority can only hope and be patient, or resort to subversive terror. This last is a desperate decision, as state might often retaliates without discrimination. It is the act of a minority within the minority, those whose despair is not mitigated by resignation. They are combatants prepared to kill and ready to die, martyrs without fear or pity. They are the produce of extreme conditions, of constant daily violence, of foreign occupation, of racial or religious oppression, of air-warfare. They have nothing to lose but their lives, which are deemed worthless. Their actions contradict the dominant system in such a radical way that its reaction far outweighs the apparent threat. Giving one’s life for an ideal seems aberrant in a mercenary world, where preserving it has reached the boundaries of science fiction, while mass killings elsewhere are perceived like Hollywood scripts of good against evil.

June 28^th 1914, a terrorist attack in Sarajevo sparked off a war that would kill millions, displace millions more, and change the political structures of Europe. September 11^th 2001, a terrorist attack in New York sparked off a war that would kill hundreds of thousands, displace millions, and is changing the political structures of Western and Eastern societies. The first event modelled history for the rest of the century (WW2, Cold War, national liberations, etc.). The second is shaping up to be a similar game changer. The present phase is that of paranoia, with totalitarian trends and rising police and military powers, very similar to events in the 1930s described by Hannah Arendt in chapter 9 of “The Origins of Totalitarianism”. The war on terror and its parallel on drugs have become war as such, provoking mass migrations of refugees trying to reach the only safe-havens of Europe, North America and Australia. This human flow to the heart of empire is the consequence of imperial terror around the globe, and it is severely disrupting institutions in the homelands of power. People are fleeing violence in growing numbers everywhere. And in the aftermath of a financial crisis that is not yet resolved, the impression of having been here before cannot be avoided. Like the beatings of a butterfly’s wings, a significant individual act can determine the path of history. Or was the storm gathering anyhow?