First some facts.
Billionaire investor, George Soros, has made a $1.25 billion bet
against the S&P 500. In virtually every month since 2000
foreigners have been net buyers of US debt. In the last 5 months in
a row they have been net sellers. The two biggest sellers of US
Treasuries in recent months have been China and Japan, who are
usually the biggest buyers. In June, there was the biggest
withdrawal of foreign money from US bonds since August 2007, when the
Credit Crunch began. Deutsch Bank is reported to have exposure to
global derivatives equal in amount to the entire global GDP.
According to the Bank for International Settlements, the total
exposure to derivatives of European banks is around ten times that
figure. Many of the surplus countries that have provided the funds
for buying the bonds of countries like the US and UK, have seen their
reserves fall in the last two years, meaning they have less spare
cash to invest. Global bond yields, having been on a downward path
for the last 30 years, are moving higher sharply.
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In the 1980's and
90's, many of the so called Asian Tiger economies, borrowed large
amounts of money to finance their own industrial revolution. Some of
that money also found its way into speculative ventures, blowing up
property and share price bubbles in those economies. That came to an
end with the Asian currency crisis of the late 90's. But, although
some of the debt they had built up went into speculation, a lot had
gone into bringing about their industrialisation. In the following
period, that process meant that they like China were able to export
large amounts of commodities, as the world entered the new Long Wave
Boom after 1999.
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In the United States,
student debt now stands at over $1 Trillion, which is now more than
the amount of credit card debt. Unlike other forms of debt, this
student debt is not even written off if you declared bankruptcy,
which means that once again, individuals are placed in a worse legal
position than companies.
A large part of the
debt in the US was run up to cover property speculation. When the
sub-prime crisis struck, many people, unable to pay their mortgage,
and with the value of the property below the outstanding amount on
the mortgage, simply walked away from their houses. The banks were
simply left with the debt they had recklessly created. But, as so
often happens, they escaped the consequences of that, as the banks
persuaded the Government to bail them out. Now, as people have
turned once again to Credit Unions as a means of dealing with their
need to borrow outside the clutches of the banks and usurers, the
banks in the US are pressuring the Government to remove some of the
tax advantages that the Credit Unions enjoy.
In Britain, the
Government is actively trying to get people to go more and more into
debt. For many that is not difficult. An increasing number are
unable to get to the end of the month on their income. Millions of
people are now dependent on the Pay Day Loan sharks. They operate by
knowing that a large part of their loans will never be repaid, but
afford it by extortionate rates of interest on those who, for a while
can make repayments. It is just like a revolving door of people who
have no money financing people who have even less, who then become
bankrupt only to be replaced by those who yesterday were just
managing to make the extortionate repayments. But, sooner or later
that merry-go round will stop, and it will be the money markets that
have lent to the usurers who will find that they don't get paid back.
It is all of this
complex of huge volumes of interconnected debt that makes all of the
derivatives necessary so that the real situation of bank and near
bank debt can be hidden. Most of the debt on the books of banks like
Deutsch Bank, however, remains property debt, comprised of vastly
over valued property across Europe, including Britain. The fact
that global interest rates are now rising threatens to quickly
collapse this house of cards in a far more dramatic way than occurred
in 2008.
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More capital has to
be invested in order to obtain any given increase in output. But, as
Marx points out in Volume III of capital, this does not prevent
investment or growth, because the fall in the rate of profit is
compensated for the biggest companies, by the increased volume of
profit. But, it has other effects. In the previous period,
companies with large amounts of profits have used it to pay out as
dividends, or else to benefit shareholders in other ways, for
example, buying back shares, which pushes up the share price, giving
a capital gain to shareholders. That money pumped out to
shareholders, in turn finds its way back into the circulation of
money, speculating in other shares, in property, and in government
bonds. It also finances other forms of unproductive consumption by
these coupon clipping capitalists.
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But, in this
interconnected world of debt, the consequence of higher interest
rates is that first property markets crash. Existing mortgage payers
find they can't make their monthly payments. The first to sell out
in those cases should be the buy to let landlords, but many of them
think they are genius investors as they have made money when
conditions meant it was almost impossible not to. Many will instead
buy even more property, thinking its a buying opportunity, only to
find that prices fall further and faster, whilst rents fall and their
mortgage payments rise. The banks will no longer be able to continue
the policy of pretend and extend, by which they have held back from
foreclosures, and extended people's mortgages. Many of the banks
themselves will go bust as the web of derivatives unravels. Many
more will see the rising mortgage rates, and rapidly falling house
prices, and rationally decide as they struggle in any case to make
ends meet that their will be much better bargains to be had in
future. That is exactly what has been seen in the deflation that has
gripped Japan, where property prices fell by 90% in 1997, and have
continued to stagnate ever since.
In fact, the
increased economic activity that is being seen currently only
exacerbates this process. On the one hand, it is not enough to raise
wages enough to cover the inflated property prices. In fact, in the
UK it is not even enough to raise real wages to cover increasing
inflation. On the other, increased activity means more capital has
to be invested productively, which puts further upward pressure in
interest rates. The irony is that this increased economic activity
is likely to be a cause of both a collapse of the property market,
and the destruction of most of the zombie companies that only survive
on the back of low interest rates, and low wages. The good thing is
that it will mean workers will benefit from much lower housing costs,
and more efficient capitals will take over the zombies businesses,
providing better employment opportunities. That is also no doubt the
logic behind Soros' decision to buy $1.25 billion worth of put
options in the S&P. A put option gives you the right to sell
shares at a predetermined price, so if you think the price will fall,
you can sell shares at that price, buying the necessary shares at the
much lower price to cover the sale. Its a bet that there is going to
be a big shake out of capital.
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