Leverage

Share prices rise when more money joins the market, and they drop when money leaves the market. That money comes from somewhere and goes somewhere. In the first case, the money may come from the sale of property, from dividends, interest, unspent wages, windfalls, or borrowing. In the second case, the money may be consumed, invested elsewhere (real estate, gold, abroad, etc.), or used to pay back debts. These last few years there has been a lot of borrowing at low rates of interest. However, “Free credit” (Proudhon) still has to be paid back. When all those debts reach their terms, they will have to be renewed, reimbursed or defaulted on. Their renewal will be more costly, as interest rates are rising and that movement will probably accelerate. Their reimbursement will take money off the market and improve bank balance sheets. Their default on a large enough scale will push banks over the brink. As for corporate debts, which are historically huge according to the Federal Reserve (1), a good proportion has been used to buy back shares, thereby reducing the number in circulation and provoking a rise in their price. If that debt is renewed at a higher cost, it will reduce company profits. Paying it back will require large amounts of cash that can only be obtained by selling shares and debasing their value, after the Big Buy Back a Big Sell Back with reverse effects. While filing for bankruptcy is the alternative that seems increasingly fashionable, see Tidewater, Carillion, Claire’s, Toys“R”Us, Avaya, RadioShack and so on. In all cases share prices will drop. How far they drop will depend on the way debts are resolved. So the question is: can a debt bubble of the present magnitude be endlessly pushed a little further into the future?

1. Federal Reserve Board Governor Lael Brainard declared recently that, “business leverage outside the financial sector has risen to levels that are high relative to historical trends. In the nonfinancial business sector, the debt-to-income ratio has increased to near the upper end of its historical distribution, and net leverage at speculative-grade firms is especially elevated. […] As we have seen in previous cycles, unexpected negative shocks to earnings in combination with increased interest rates could lead to rising levels of delinquencies among business borrowers and related stresses to some banks’ balance sheets.”

https://wolfstreet.com/2018/04/19/now-even-a-fed-dove-homes-in-on-the-everything-bubble/

Which is contradicted by this: Torsten Sløk, chief international economist at Deutsche Bank, said Tuesday that, “Stocks are too worried about 3% today. The earnings season is going really well and at the macro level corporate America has plenty of cash and hence little borrowing needs, so companies are not impacted much by higher long rates.”

https://finance.yahoo.com/news/stocks-getting-smoked-companies-cant-step-stop-182135222.html

Time will tell who is spreading fake news.

Back where we started from

The 20^th century resounded with the clash of empires. By 1900, the planet had been divided up, so that further expansion depended on encroachments. The secular invasion and colonisation of foreign lands could no longer continue without confronting another coloniser. An early case occurred in 1898 at Fashoda in South Sudan, between French and British occupants. Things would warm up in Morocco, and finally explode over Serbia in 1914. Europeans would do their utmost to kill each other for the following four years. And a few millions did die, killed by bullets, shrapnel, poisonous gas, malnutrition, influenza and ensuing civil wars. The winners plundered the losers. The Ottoman domains in the Middle East became French and British mandates, German possessions in Africa were taken by France and Britain, and the Hapsburg Empire was split into a medley of nations in search of identities. The two other members of the victorious alliance got none of the spoils. America had supplied plenty of financial assistance but had only joined the fighting at the end, while Russia had stopped fighting separately and was in the throes of revolutionary upheavals. However, when the European empires went to war a second time, with Japan joining in, the US and the USSR would divide the planet in two.

Europe’s colonial empires did not fall apart immediately after the war’s final whistle was blown over Nagasaki, on August the 9^th 1945. In fact it took more than twenty years, and some are still waiting. As dozens of new nations managed to escape European (mostly French and British) clutches, the US and the USSR competed to clutch them back. Some tried to avoid this Manichean choice. Non-alignment was proclaimed by twenty-nine countries at the Bandung Conference of 1955, and a Tri-continental alliance was formed in Havana in 1966. But the two super-powers overshadowed both events, choices had to be made. And, by the time Reagan moved into the White House, lines were drawn that would only last another decade. The US had abandoned South-East Asia, but Egypt and Iraq had severed ties with Moscow. Iran had rebelled, but was under attack by Iraq, while Soviet troupes were getting bogged down in Afghanistan. The Reagan and Bush Sr. administrations ramped up economic and ideological pressures on the Soviet Union and, in 1989, the Berlin wall was breached. Two years later, the Warsaw Pact and the USSR no longer existed. 1991 was also the year when the first Gulf War was fought, and when the US and its European allies began their military build-up in the region.

For the last decade of the 20^th century America was hegemonic. The ex-Soviet Union’s economy had collapsed and its military was outdated. China’s primitive production still had a long way to go. Japan was (already) piling up a huge public debt. And the European Union was struggling to accommodate all its new members from the East. Ah, those Clinton years! Garage start-up wizards, Wall Street’s Golden Boys, everything seemed possible, even peace in Palestine. But reality struck back with the dotcom debacle and 9/11. Optimism gave way to pessimism, doubts and growing fears. The new millennium has seen America wage perpetual war to impose its rule, and the rise of Russia and China as potential opponents. The US and its allies won the Cold War by default and paid no attention to the chaos and misery that engulfed the defeated. This is precisely what happened after WW1, and when Germany finally managed to rebuild itself, its justified resentment fuelled rearmament and another total war. WW1 led to WW2, just as Cold War One has led to Cold War Two. The hubris of victors makes them blind to the fate of the vanquished, so the enmity is perpetuated and war comes back on the agenda. It turned out that evolving technology made WW2 far more widespread, destructive and deadly than WW1. How will history compare the two Cold Wars?

Capitalism on the loose

The proletariat can be defined as “the propertyless wage-earners who live by the sale of their labour” (Collins, 1963), or as “the class of industrial workers who lack their own means of production and hence sell their labour to live” (Merriam-Webster, 2018). This excludes the property owners who do not earn a wage, as well as wage-earners who do own property, the middle-class. In the decades following WW2 this last category grew considerably in size and influence in all industrial nations. Some even fancied that the trend would in time include everyone. It did not happen, and Galbraith’s call for more public services in an affluent society was ignored. By the 1990s the middle-class was in full regression. By the new millennium, developed nations could be diagnosed by Piketty & Co to be as socially polarised as they had been a century earlier. When the middle-class buffer breaks down, the have and the have-not, capitalists and proletarians, are in direct confrontation. Humanity has been here before and it did not end well.

When capital destroys its intermediary class and comes face to face with labour, it has recourse to two distractive strategies. Using its mass propaganda machine, it criminalises minority groups of citizens and makes enemies of foreigners. And history has shown that this can lead to concentration/death camps and total war. This is what happens when capitalist property severs all social control and follows its natural path of infinite accumulation. More wealth is all that matters, how and why are never asked, nor even considered. Left to its own devices capitalism is a free-for-all that spreads misery and chaos, and is brought down by its own contradictions. The last time led to the centralised control and public funding of global destruction. It was governments that grabbed power and slogged out the war, not the people who were just slaughtered in large numbers. So that when capital made its comeback in the 1980s, it could blame Big Government for all the nation’s woes. As Reagan put it, “government IS the problem”. Capital was able to convince the people that their common enemy was the state, rich and poor together would “drain the swamp”. The result was that governments were indentured to capital and neglected their duties to the people. Capital regained its hold on public spending, and diverted the common wealth into its private pockets. This new found freedom, to do as it wishes with government backing, has allowed capital to bring the world to the brink once again. Will it be climatic disruption, ecological collapse, financial default, or nuclear war? Or will one lead to the other? When the psychopathology of wealth takes over, society is condemned to violence, violence against itself, its immigrants and minorities, and against other nations. So good luck to anyone who thinks this madness can be turned around or stopped.

Last lap

Capital is accumulated by investing incomes instead of consuming them. On a national scale this means that more labour is employed in building infrastructures and making means of production, while the labour producing consumer goods and services regresses in proportion to the total labour force. More infrastructures and more means of production increase productivity down the chain to consumer goods and services, so that wages go up, or prices go down, to allow the increased supply to find a solvent demand. During the investment phase, capital accumulates by increasing its share of the value produced. When the consumption phase sets in, labour consumes by increasing its share of the value produced. This transfer is necessary for a solvent demand, but capital opposes it and substitutes credit for income. To be valid, investments need to be realised, and their final realisation is consumption. Capital needs consumption but does not want to pay for it. As the supply of consumption grows (some of it may be exchanged for investments abroad), demand is sustained by credit instead of wages.

Capital invests incomes and consumes with credit. But consumer credit, both private and public, piles up and reaches a stage where it is just paying interest and no longer consuming. At this point, capital is no longer increasing infrastructure and means of production. It is just increasing the value of existing infrastructure and means of production. This is when subprime lending and market bubbles become the norm. The problem is that a few get very large incomes and all the rest are deep in debt. Some earn more than they spend, and most spend more than they earn. But it is not about savers profligates, it is due to the way value is shared between capital’s profits and labour’s wages, and the way the property of capital is concentrated in just a few hands. Some can spend lavishly and still save income for investments, whereas many live frugally and still borrow to make ends meet.

Supposing incomes could only be consumed, and that extra investments were financed with credit granted by the community who would thereby own them. This is how infrastructure is (was) publically funded. Revenue would no longer be the result of rent, interest, profit, dividends, patents or copyrights. It would come from goods produced and services rendered. This would not signify equality, because supply cannot always keep up with demand and rareness increases exchange value. Moreover, muscular strength, manual agility and mental ability offer a wide spectrum of possibilities for excellence, above average remuneration and preying on the labour of others. However, the common property of capital would limit such abuse, and might put the value of general esteem above that of monetary wealth. Wanting more than others could be perceived as pathological. There is, of course, not the slightest chance that this daydream could become reality. Ninety years ago Keynes imagined today’s world having such a super abundance of capital that “the love of money as a possession – as distinguished from the love of money as a means to the enjoyments and realities of life – will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease.” (1) That super abundance has come about, but it either inflates market bubbles before dissipating in thin air, or is used to make ordnance for perpetual global war, and having more than everyone brings superstar status, not men in white with a strait-jacket. Super abundance just demands more and more again, and this escalation is bringing about the total collapse of the planet’s ecosystem on which all life depends. No number of trillions will stop hurricanes, or rising sea levels, or drought, nor bring back from extinction all the dying species.

Profit capitalism is out on a limb. It is unable to turn back, and the weight of debt is making the wood crack louder and louder. It seems to be competing with the planet in a race to annihilation. Will global finance default before the weather goes wild and food gets scarce, or will climate and pollution bring down the leveraged mountain of credit and expose money’s lack of intrinsic value? That race is running its final lap.

1. Economic Possibilities for our Grandchildren (1930)

Marxists Internet Archive

https://www.marxists.org/reference/subject/economics/keynes/1930/our-grandchildren.htm