The price of certain sovereign and corporate bonds might rise at particular times, not because of the potential for future income from them, but in a time of financial panic, because these bonds are seen as safe havens, where at least the value of the bond itself will not be devalued. Its on that basis that now, as global interest rates rise, and interest rates in place like Russia have risen to 12%, the interest rate on German bonds has fallen to below 1%, whilst that on even the bonds of Spain and Italy, backed by the ECB, has fallen to just 2%, even lower in the case of Spain than the rate of interest on UK bonds.
But, the fact that this fictitious capital itself can be traded on these markets, as commodities, itself gives rise to the development of yet further forms of fictitious capital, as a derivative of it. Unit trusts and investment trusts exist as fictitious capital that is itself derived from these company shares, and bonds. The price of units in these trusts moves up and down in accordance with the prices of the underlying shares and bonds contained within it, but also in accordance with the discount or premium to this net asset value.
Banks and finance houses developed mortgage bonds, and mortgage and other asset backed securities, which similarly packaged up a range of underlying assets – such as mortgages – which are themselves fictitious capital. These mortgage bonds and mortgage backed securities are then also bought and sold in the market as commodities, and their price moves up and down, depending upon their demand and supply, which in turn is affected by market rates of interest, and perceptions of what percentage of the underlying mortgages etc. may default.
In addition, other products are developed that provide insurance against such default. This is the purpose of Credit Default Swaps. But, a CDS can be bought by anyone, not just those who have bought the bonds of a particular country or company. In other words, they are a form of gambling on the potential for such bonds to default.
As the price of shares traded in the stock market moves up and down, establishing a measure of volatility, so even this volatility becomes a commodity that can be traded! The VIX index measures the level of volatility in the markets, and just as it is possible to spread bet on the number of goals by which one team will beat another etc., so it is possible to place bets on whether the level of volatility will move up or down, and to spread bet on the degree by which it will do so.
The number of these kinds of products grows every day, and each represents a layer of fictitious capital built upon already existing layers of fictitious capital, only some of which is ultimately based upon the loaning of money-capital, to productive-capitalists for the purpose of acquiring real productive-capital, for the purpose of generating surplus value, and creating real wealth. However, an increasing proportion of these products, and of this fictitious capital has no such relation to real capital, and to the production of real wealth. It is simply gambling pure and simple, and the financial crisis of 2008, demonstrated the extent of that gambling, and the fictitious nature of the capital involved. It is, ultimately, the expansion of this type of fictitious capital, as opposed to the expansion of fictitious capital as a mirror image of real productive-capital, that explains the increasingly low level of yields.
Even as the rate of profit expands by large amounts, if the mass of productive-capital expands by a smaller proportion than the mass of fictitious capital, the mass of profit whilst expanding hugely in absolute terms, declines relative to the mass of fictitious-capital, so interest rates/yields decline. It is also this that has been behind the black holes created in pension schemes. At a certain point, usually as the long wave cycle turns from the Spring to Summer phase, productive-capital is forced to invest a greater proportion of surplus value in real capital accumulation, so that the demand for money-capital rises, and interest rates rise, causing a fall in the price of the fictitious capital, sparking a financial crisis.
As I have set out in my book – Marx and Engels' Theories of Crisis: Understanding The Coming Storm – the fundamental basis of that crisis was not resolved after 2008. On the contrary, the increase in QE since that time, and financial manipulation to save the banks has, in fact, made the underlying causes of the crisis many times worse. A further, much bigger financial crisis, when all of this fictitious capital will be massively depreciated, is inevitable.
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