Tuesday, 20 February 2018

Its Not Inflation Driving Interest Rates Higher (3/10) - Inflation and Interest Rates

Inflation and Interest Rates 

On the one hand, therefore, orthodox theory claims that interest rates are reduced by the central bank printing money, and thereby increasing its supply, whilst, on the other hand, it says that interest rates are rising because of rising inflation, and what causes inflation? Printing money! The reality is, of course, that printing money, increasing liquidity, can neither raise nor lower interest rates. The rate of interest is determined by the demand and supply of money-capital. If more money tokens are printed, so that the value of each token is reduced, it simply changes the nominal amount of demand and supply on each side of the equation. As the currency is depreciated, the nominal amount of capital, required to reproduce the constant and variable capital may rise from £1 million to £1.2 million, but the nominal value of the output will also rise from say £1.5 million to £1.8 million, with the profit rising in nominal terms from £0.5 million to £0.6 million. The supply of potential money capital from these profits has then risen nominally from £0.5 million to £0.6 million, but in real terms it has not changed, because this £0.6 million will now buy only the same quantity of productive-capital as previously could be bought for £0.5 million. 

The main effect of any such change in prices would be in relation to the existing stock of money-capital, i.e. in relation to all of the existing money savings, whose real value would have fallen. Anyone with a stock of savings then faces a number of possibilities. If as in the Weimar Republic there is a hyperinflation of commodity prices, it makes sense to use those savings to buy in as many of those commodities as you can, because otherwise your stock of savings may buy only half as many of them tomorrow as it will buy today; if commodity prices are not rising rapidly, but asset prices are, for things such as shares, bonds, property, you will use your stock of savings to speculate in those assets, not because they will provide you with a decent yield in the form of interest or rent, but because again tomorrow, your savings will buy only a fraction of what it buys today, whilst by speculating in these assets, the rise in price provides you with a sizeable capital gain; if the prices of assets starts to fall, creating the potential of capital losses, whilst commodity prices start to rise even modestly, you will want to get rid of all those shares, bonds and property quickly, so as to avoid suffering those losses; instead of such speculation, you might want to use the money-capital for real investment, to accumulate real capital that produces profits that rise along with the rise in general inflation; you may want to lend money-capital, rather than engaging in real investment, but you will demand a higher rate of interest for doing so, because the longer you lend the money-capital for, the less the capital sum, and the interest on it, will be worth, in real terms, at the end of the period for which it is lent, and the more capitalists turn to real investment, as nominal profits rise, in line with nominal commodity prices, the higher the demand for money-capital becomes, which means that interest rates will rise along with it. 

This latter fact, is indeed the reason that longer term loans attract higher rates of interest than shorter term loans. It is also the basis of the orthodox theory that it is inflation that drives interest rates higher. So, if we examine the effect of QE, it has been, in conjunction with measures of austerity, to cause a hyperinflation of asset prices – the Dow Jones has trebled since 2009, and between 1980 and 2000, it had already risen by 2300%, house prices in Britain quadrupled in the 1980's, and again between 1997-2007, and similar rises have occurred in North America, Europe, and Asia – whilst creating disinflation, and the threat of deflation in commodity prices; it led to a dearth of funds for small and medium sized businesses causing the interest rates they faced to rise. 


Part 4 Tomorrow

Theories of Surplus Value, Part II, Chapter 13 - Part 15

Something similar can be seen in relation to Marx's comments concerning what Ricardo says about the rent of mines. Ricardo says in Chapter III “On the Rent of Mines” [David Ricardo, On the Principles of Political Economy, and Taxation, third edition, London, 1821, p. 76]. 

““… this rent” (of mines) “as well as the rent of land, is the effect, and never the cause of the high value of their produce” (l.c., p. 76).” (p 328) 

Marx points out that absolute rent is neither the cause nor the effect of “high value”. It is the effect of the excess of the value over the price of production. That excess is the result, not of the high value of the produce, but of landed property, whose monopoly is thereby enabled to restrict the supply of land until the price of agricultural commodities rises to a level whereby rent is payable. Something similar can be seen in relation to the monopoly of the money-lending capitalists. As Marx says in Capital III, if interest rates fall below a certain level, the owners of loanable money-capital can choose not to lend it, just as landowners can allow land to lie fallow, or use it for other purposes. By restricting supply, they can wait until prices rise to a point whereby rent is payable, or in the case of loanable money-capital, until interest rates at a minimum level are payable.

In Capital III, Marx points out that, if the supply of loanable money-capital were to rise to a level where interest rates fell below some minimum level, the owners of this money-capital could convert back into productive-capitalists.

“He has the choice of making use of his capital by lending it out as interest-bearing capital, or of expanding its value on his own by using it as productive capital, regardless of whether it exists as money-capital from the very first, or whether it still has to be converted into money-capital. But to apply it to the total capital of society, as some vulgar economists do, and to go so far as to define it as the cause of profit, is, of course, preposterous. The idea of converting all the capital into money-capital, without there being people who buy and put to use means of production, which make up the total capital outside of a relatively small portion of it existing in money, is, of course, sheer nonsense. It would be still more absurd to presume that capital would yield interest on the basis of capitalist production without performing any productive function, i.e., without creating surplus-value, of which interest is just a part; that the capitalist mode of production would run its course without capitalist production. If an untowardly large section of capitalists were to convert their capital into money-capital, the result would be a frightful depreciation of money-capital and a frightful fall in the rate of interest; many would at once face the impossibility of living on their interest, and would hence be compelled to reconvert into industrial capitalists.”

(Capital III, Chapter 23)

But, as I've set out elsewhere, the owners of money-capital could also use it simply as revenue, for unproductive consumption. They might also use it to purchase land and property, to obtain rental yield, thereby raising land and property prices, and reducing those rental yields. But, they may also use it for the purpose of speculation, buying existing shares, bonds and property, not for the purpose of obtaining revenue from rent and interest, but solely in the expectation of obtaining large nominal capital gains, as a result of financial, property, and other asset price bubbles.

The peculiar legal advantages of shareholders, as money-lending capitalists, adds to that, because, unlike any other money-lender, the shareholder also exercises a control, via their representatives on company boards, over the use of the firm's productive-capital. That is quite at odds with say the position of an owner of commercial bonds, a bank that makes a commercial loan, or a landlord who leases land or property to a productive-capitalist. The shareholders, therefore, collectively, can exercise control over investment and dividends policies that are not based upon economic laws, at least in the short and even medium term. Boards of Directors can respond to falling dividend yields by raising the share of corporate profits going to dividends, and reducing the proportion going to productive investment. So, according to Andy Haldane, at the Bank of England, in the 1970's, only 10% of profits went to dividends, whereas today that proportion has risen to around 70%. The Boards can make direct capital transfers back to shareholders and so on.

Monday, 19 February 2018

Its Not Inflation Driving Interest Rates Higher (2/10) - Money and Inflation

Money and Inflation 

When it comes to paper banknotes the possibility of melting them down to obtain their value is not possible, because the paper they are printed on has negligible value. If more of these notes are put into circulation than the amount of money they represent, the value of each note will thereby fall proportionately. So, if a central bank simply prints more of these notes, or engages in QE etc. this does not increase the amount of money in circulation, it only increases the quantity of money tokens in circulation, and thereby reduces the value of each of these tokens. In short, it creates inflation, because the money price of commodities rises in proportion to the rise in the quantity of money tokens thrown into circulation. But, it does not do so evenly, because once the additional money tokens are thrown into circulation, the central bank has no control over where those money tokens go. 

It may go to buy imported commodities, for example, where there are insufficient commodities produced in the home market to satisfy this inflated demand; it may go to inflate demand for particular types of commodities, rather than others, so that the money prices of some commodities may, in the short-term, rise proportionately more, whilst the prices of others rise proportionately less, or even fall; or it may go into the purchase of assets, rather than commodities, thereby sparking a speculative frenzy, as the rising prices of those assets cause speculators to buy more of them in the expectation of future capital gains. QE has been a means of the central bank actually controlling where some of the money tokens, it has printed, goes, because the central bank itself uses the additional liquidity to buy those assets, buying government bonds, mortgage bonds, and so on. In doing so, it promotes such a speculative frenzy, and thereby encourages other owners of potential money-capital to use it for such gambling. 

Although the central banks have claimed that QE was intended to stimulate the economy, and to fight deflation, its actual intention was the exact opposite. Its intention was to inflate asset prices, and in doing so to attract additional funds into that speculation, so that the asset prices that had been deflated in 2008, were pumped up again. It was facilitated by the actions of conservative governments that implemented austerity programmes to reduce the level of aggregate demand in the real economy, and thereby to reduce the demand for money-capital, so as to keep interest rates low, and raise the capitalised value of financial assets. Other programmes by conservative governments facilitated the driving of this liquidity into speculation and away from real economic activity. For example, governments created various programmes to prop up house and other property prices, they encouraged speculation in property from buy to let landlords, and established various scams to get people to buy overpriced houses, such as with the Help to Buy scams introduced in Britain. 

That is why, as I said at the start, government bond yields are a bad measure of actual interest rates, because they are so heavily manipulated. A better measure of interest rates is what small and medium sized businesses have to pay to borrow for real capital investment. There we find that there has been a dearth of available funds. The smaller businesses have often had to rely on use of personal credit cards to raise money, with interest rates of up to 30% p.a. Medium sized businesses have had to rely on their own profits for investment, or have resorted increasingly to peer to peer lending schemes, with interest rates of around 10% p.a. 



Theories of Surplus Value, Part II, Chapter 13 - Part 14

Marx inserts here a brief discussion on the relation between the landlord and capitalist. He quotes from the Morning Star of 15th July 1862. The Morning Star was the paper of the free traders, and so, essentially, of the larger industrial capitalists. The editorial asked who had responsibility for the plight of textile workers, suffering as a result of the cotton famine due to the US Civil War. The textile capitalists undoubtedly, as they had benefited from the “skill, time, and bodily labour of the workers. But, the capitalists, who had also contributed their capital and skill to the development of industry were not the only beneficiaries, it noted.

“... but what have the landed proprietors of Lancashire given? Nothing at all—literally nothing; and yet they have made from it more substantial gains than either of the other classes … it is certain that the increase of the yearly income of these great landlords, attributable to this single cause, is something enormous, probably not less than threefold.” (p 328) 

Marx comments,

“The capitalist is the direct exploiter of the workers, not only the direct appropriator but the direct creator of surplus-labour. But since (for the industrial capitalist) this can only take place through and in the process of production, he is himself a functionary of this production, its director. The landlord, on the other hand, has a claim—through landed property (to absolute rent) and because of the physical differences of the various types of land (differential rent)-which enables him to pocket a part of this surplus-labour or surplus-value, to whose direction and creation he contributes nothing. Where there is a conflict, therefore, the capitalist regards him as a mere super-fetation, a Sybarite excrescence, a parasite on capitalist production, the louse that sits upon him.}” (p 328) 

By the end of the 19th century, socialised capital, in the form of the joint stock company and co-operative had replaced private capital, when it came to the big industrial capitals, which dominate the economy. This functional role of the capitalists had been taken over by the day to day professional managers – production managers, marketing and purchasing managers, technicians and administrators – now drawn from a more educated working-class, and paid only skilled wages accordingly. The big private capitalists became merely lenders of money-capital, in the shape of bonds and shares, and these became just as much a “sybarite excresence” on productive-capital as the landlords had been before them.

Sunday, 18 February 2018

Its Not Inflation Driving Interest Rates Higher (1/10) - The Orthodox Theory of Money and Interest

The Orthodox Theory of Money and Interest 

Rising interest rates cause stock, bond and property market
crashes. 
For several months, global interest rates have been moving higher, most visibly in the form of higher yields on government bonds, though these are not a good measure, given that they are highly manipulated by central banks, especially in an era of QE. The rise in interest rates, and particularly the higher yields on bonds is causing some consternation amongst the financial pundits, as these higher yields are also a factor in the falls in stock markets seen over recent weeks. The explanations given for these rising interest rates expose the fallacy that underpins the orthodox bourgeois economic theory in relation to money and interest

The explanation for rising interest rates, we are told, by the various financial pundits, on all of the speculation news channels, is that inflation is rising. Indeed, one of the sparks for the near 10% sell-off in US stock markets just over a week ago, was a strong US payroll number that showed US wages rising at around 2.9%, and led to a spike in bond yields. But, a look at this explanation shows a fundamental contradiction within the orthodox theory. For several years these same orthodox economists, and financial pundits have told us that interest rates are dictated by central banks. That in itself is a hell of claim from people who usually tell us that prices cannot be determined by central planners! Yet, they console themselves with the idea that if economic conditions deteriorate, the central banks will ride to the rescue by reducing interest rates. The central banks dictate interest rates, we are told, by setting the official interest rates, the Bank Rate, or Fed Funds rate, or whatever is the relevant rate in each country, which determines the rate commercial banks can borrow from the central bank. The central bank can reinforce this official rate by other means, previously called Open Market Operations, and today called Quantitative Easing, or Tightening, by which the central bank can print money – nowadays actually just electronic deposits – which it uses to buy bonds from the commercial banks, so as to put additional liquidity into circulation, or else it sells bonds on its balance sheet to commercial banks, or requires them to hold additional reserves, which limits how much liquidity is put into circulation. 

Orthodox theory believes that the rate of interest is a price of money. As Marx demonstrated, that in itself is an absurdity. The price of £10 is £10, it makes no sense to say that the price of £10 is £11! As Marx demonstrates, the rate of interest is not a price of money, but of money-capital, in other words of the use value of that money-capital, its ability to produce the average profit. If £10 of capital can produce £3 of profit, with an average rate of profit of 30%, then productive capitalists may be prepared to borrow £10 of money-capital, and pay £1 of interest to the lender, in order to still be left with £2 of profit, after they have paid the interest. Similarly, the owner of £10 of money-capital may be prepared to lend it to a productive-capitalist, and accept only £1 of interest, guaranteed, rather than take the risk that they might not actually make the £3 of profit, if they were to use it productively themselves. The rate of interest, is then determined by a struggle of supply and demand, between the owners of money-capital who demand a price for lending it, and the productive-capitalists who seek to borrow it in order to produce profits, and who, therefore, seek to minimise the cost of doing so, in order to maximise their profits. 

Orthodox theory, therefore, believes that interest rates can be reduced by increasing the supply of money, liquidity, but Marx shows that this cannot be true, because an increase in the supply of money, is not the same thing as an increase in the supply of money-capital. Moreover, what the central bank does, when it prints more money – be it more notes and coins, more electronic deposits, or credit – is actually not to produce more money, but only to produce more money tokens. Money is actually a claim to a certain amount of value/social labour-time, it is the universal equivalent form of that value, and the amount of money in circulation is a function of the value of commodities to be circulated, and the velocity of circulation of the money. If money takes the form of 1 gram gold coins, each of which has a value equal to 10 hours of labour, and each coin circulates 10 times in a year, then if the total value of commodities to be circulated is 1,000 hours of labour, 10 such coins must be in circulation. 

If 20 such coins are thrown into circulation, then either the velocity of circulation of these coins must halve, or else half of the coins will fall out of circulation. Otherwise, these 20 coins will represent a claim to 2,000 hours of labour, where only 1,000 hours of value is available in the form of commodities. The result would be that the money price of those commodities would double. A commodity that previously sold for 1 gold coin would now rise in price to 2 gold coins. And, one of those commodities would be gold itself. It would mean that the price of a gram of gold would be equal to 2 1 gram gold coins! So, it would make sense for holders of coins to melt them down into bullion. That happened a few years ago, when the price of copper rose to such an extent that the value of the copper contained in some 2p coins was greater than 2p.

Saturday, 17 February 2018

Theories of Surplus Value, Part II, Chapter 13 - Part 13

This table is a summary of the tables setting out each of these scenarios, for each type of land.

[Class]
Capital £
Kilos
Total value TV £
Market value MV per Kilo
[Individual value] IV per Kilo
[Differential value] DV per Kilo
Cost-price per Kilo
[Absolute rent] AR Kilos
[Differential rent] DR £
[Absolute rent] AR £
[Differential rent] DR Kilos
Rental £
Rental Kilos
[Composition of capital and rate of absolute value]
A
I
100.00
60
120.00
2.00
2.00
0
1.83
10
0
5.00
0
10.00
0
60 c + 40 v for [a non-industrial capital of £100]
II
100.00
65
130.00
2.00
1.85.
0.15
1.69
10
10.00
5.00
5
20.00
10
80 c + 20 v for an industrial capital of [£100]
III
100.00
75
150.00
2.00
1.60
0.40
1.47
10
30.00
5.00
15
40.00
20
Absolute rent 10 percent
Total
300.00
200
400.00




30
40.00
15.00
20
15.00
35
20
B
I
90.00
60
108.00
1.80
1.80
0
1.65
9
0
5.00
0
9.00
5
54 c + 36 v for £90
II
90.00
65
117.00
1.80
1.66
0.14
1.52
9
9.00
5.00
5
18.00
10
60 c + 40 v for £100
III
90.00
75
135.00
1.80
1.44
0.36
1.32
9
27.00
5.00
15
36.00
20
Absolute rent 10 percent
Total
270.00
200
360.00




27
36.00
15.00
20
63.00
35

C
I
86.40
60
102.60
1.71
1.71.
0
1.58
7.56
0
4.42
0
7.56
4.42
54 c + 32.40 v for £86.40
II
86.40
65
111.15
1.71
1.58
0.13
1.46
7.56
8.55
4.42
[5]
16.11
9.42
62.50 c + 37.50 v for £100
III
86.40
75
128.25
1.71
1.37
0.34
1.27
7.56
25.65
4.42
[15]
33.21
19.42
[Capital] £100=[value of the product] £118.75. Hence absolute rent 8.75%
Total
259.20
200
342.00




22.68
34.20
13.26
20
56.88
33.26

D
I
90.00
60
110.00
1.83
1.83
0
1.65
11.00
0
6.00
0
11.00
6.00
50 c + 40 v = £90
II
90.00
65
119.17
1.83
1.69
0.14
1.52
11.00
9.17
6.00
[5]
20.17
11.00
55.56 c + 44.44 v= £100
III
90.00
75
137.50
1.83
1.47
0.37
1.32
11.00
27.50
6.00
[15]
38.50
21.00
[Capital] £100=[value of the product] £122.22 Absolute rent 12.22%
Total
270.00
200
366.67




33.00
36.67
18.00
20
69.67
38.00



A is the starting position with £100 of capital invested in each type of land. Absolute rent of £10 is levied on each type of land, amounting to £30 in total, which is also equal to a corn rent of 15 kilos. Differential rent of £10 is levied on land type II, and £30 on land type III, making £40 in total, or a corn rent of 20 kilos. Total rent is then £70 or 35 kilos.

In B, only £90 of capital is advanced, but the organic composition of the capital remains constant. The result here is that the rent falls to £9 on each type of land, £27 in total. But, the physical amount of capital and labour employed has remained constant. It's just that now it is cheaper. So, the same quantity of output is produced, but now has a lower value per kilo. Consequently, viewed in physical terms, the corn rent also remains the same at 5 kilos for each type of land, or 15 kilos in total. Similarly, in physical terms, the amount of differential rent remains constant at 5 kilos for land II, and 15 kilos for land III, or 20 kilos in total, whilst in money terms, this represents £36 rather than £40. The total corn rent, therefore, remains constant at 35 kilos, whilst the money rent falls from £70 to £63.

In C, the value of constant capital falls, but the value of variable capital falls even more, so the organic composition of capital rises. As a result, the absolute rent falls. The absolute rent falls to 4.42 kilos, for each type of land, or 13.26 kilos in total. That equates to an absolute rent of £7.56 for each type of land, or £22.68 in total. The absolute rent falls because the organic composition of capital has risen. But, because that affects each type of land equally, there is no change in the differential rent measured in corn. However, because the total capital laid out has fallen from £100 to £86.40, so the value of each kilo falls, that means that both the absolute rent and the differential rent falls in money terms.

In D, only the value of the constant capital falls.

“This was Ricardo's assumption.” (p 327)

Because only the value of constant capital falls, the total value of output falls, but only marginally. The organic composition has fallen, which brings about an increase in absolute rent. It rises to 6 kilos for each type of land, or 18 kilos in total. In money terms, that equates to a rent of £11 for each type of land or £33 in total. In contrast, the differential rent remains constant measured in corn, because there is no variation in the relative fertility of each soil type, but the differential rent falls in money terms, from £40 to £36.67.

Ricardo says,

““Whatever diminishes the inequality in the produce obtained from successive portions of capital employed on the same or on new land, tends to lower rent; and […] whatever increases that inequality, necessarily produces an opposite effect, and tends to raise it” (l.c., p. 74).” (p 327-8) 

Marx comments that this inequality may increase whilst land is withdrawn, and whilst fertility increases (either because of improvements to the soil or a rising marginal productivity of capital) and even when the least fertile land is thrown out of production. So, absolute rent might fall, whilst differential rent increased.

Northern Soul Classics - Interplay - Derek and Ray