Capitalism’s silent surrender

It has been abundantly clear at least since the start of the Global Financial Crisis (GFC) in 2007-8 that what is called the capitalist system has entered long-term decline, although it could well be argued that this decline actually set in many years – even decades – earlier. Despite this the Western financial and political establishment remains – for quite understandable reasons – resolutely in denial.

If there is one conspicuous reason why it is possible to pinpoint the system’s failure as being now unmistakeably beyond the point of no return it is the abandonment of any official pretence among the major industrialised powers (USA, Japan and EU) of pursuing a rational or sustainable monetary policy in line with the basic principles of market economics. This first became manifest with the widespread adoption of the monetisation of public debt – officially known as quantitative easing (QE) but really amounting to simple money printing without the backing of gold or any otherne finite reserve asset – in the wake of the onset of the GFC in 2008. At the same time the printed money was used by the central bank to buy up (mainly government) debt (bonds) at artificially high prices with a view to forcing market interest rates down to very low levels – the effective interest rate on a bond being inversely related to its price – thereby preventing the real insolvency of highly indebted governments as well as private borrowers from becoming manifest. The “success” of this manoeuvre is evident from the fact that the Bank of England has been able to keep its official discount rate at no more than 1 per cent ever since 2009 – whereas previously it had never fallen below 2 per cent at any time since the Bank’s foundation in 1694 (a pattern mirrored in the record of other leading central banks).

This drastic act of market distortion became necessary – at least in the eyes of the global financial and political élite – in face of the widespread threat of bank failures. These were only averted, in the first instance, by the injection of trillions of dollars of public money to shore up the balance sheets of otherwise insolvent institutions – effectively recapitalising them – as bad debts mounted in the unfolding GFC. Not to have taken this bold step would have led to the collapse of most if not all major Western banks as well as Lehman Brothers, the one major institution which was allowed to go bust in 2008 – with catastrophic effect. The resort to QE was needed as a supplementary support to the financial sector in face of its continuing fragility after the market crash in order to prevent interest rates from rising to unbearably high levels.

Such was the strategy adopted by the G7 leading industrial nations in 2008-9 and which led Gordon Brown, then Britain’s prime minister and one of its leading exponents, to proclaim that he had thereby “saved the world”. What was recognised at the time, at least by the more economically literate minority, was that this strategy was one of the utmost desperation which was not only without precedent in the history of global market capitalism but defied the most basic principles of financial orthodoxy – not to mention human rationality.

As such it was clearly not sustainable, as was evidently recognised by leading officials of Western governments when such money printing strategies were initiated in the immediate aftermath of the market meltdowns of 2008. Since then indeed it has been the unspoken official assumption that these policies would soon boost growth sufficiently to permit both a recovery of government revenues – enabling some paying down of debt – and a corresponding rise in interest rates. This optimistic view – that such extraordinary stimulus measures would be strictly temporary and shortly be reversed – is reflected in the pronouncements of Mark Carney, governor of the Bank of England, who almost from the start of his term of office in 2013 has promised an early rise in bank base rates. In reality he and his Monetary Policy Committee have been unable to impose any sustained increase in the Bank’s all time low rates in face of continued market weakness. Essentially the same fate has now befallen the attempt in 2018 by Jerome Powell, appointed by President Trump to be Chairman of the Federal Reserve Board, to raise US interest rates by a significant amount and to start the process (Quantitative Tightening) of unwinding the Fed’s massive balance sheet accumulated under QE.

QE to infinity

These developments vindicate the assertion of those critics of this central bank strategy of monetary expansion that, so far from enabling growth to be restored to the point where public debt could start to be paid down, it had trapped them in a vicious cycle of endless money printing – “QE to infinity” – to prevent the ever mounting pile of debt from crashing the global economy. The seeming paradox is that, despite general awareness that it is unsustainable – and that hence a point must soon be reached at which the enormous debt bubble will burst with devastating financial consequences, there is little sign at present that this is causing serious worry in the financial markets, even though many commentators have suggested that the stock market is overdue for a correction to the prolonged 10-year bull market that has endured since its collapse following the start of the GFC.

This apparent unconcern in the face of looming disaster – reminiscent of Monty Python’s Black Knight – may be partly encouraged by the emergence of a school of thought among some economists that seeks to suggest that debts can be allowed to rise much further (or even infinitely) without necessarily causing ruinous financial instability. According to this so-called Modern Monetary Theory (MMT) a state which controls its own currency can effectively borrow unlimited amounts to support investment and output – up to whatever level is needed to attain full employment – without suffering any adverse monetary consequences. Without attempting to assess this highly questionable “theory” in detail it is fair to say that it would never have been taken seriously in official circles in the absence of a perceived need to try and justify QE.

As it is, whether or not MMT is believed in by market players, the resulting general market euphoria is reflected in aggregate stock market indicators that remain remarkably buoyant notwithstanding their prolonged rise since 2009. Thus the price-earnings (P/E) ratio on the S&P 500 index of the US stock market is now around 21.5, which although high by historic standards is well below the astronomic levels attained just prior to the start of the GFC.

As against this, there are signs of growing nervousness among investors. This is reflected in multiple indications of weakened performance by pension and other investment funds, often accompanied or driven by substantial investor withdrawals, as reported more and more frequently in press outlets such as the Financial Times fund management supplement FTfm. This in turn feeds into a vicious circle in which fund managers’ high fees are measured against chronic poor performance and are consequently being forced down – even to negative levels, as fund managers compete desperately to retain investors’ funds. This tendency can only be offset for a limited time by speculative rises in asset values, driven by QE as well as by the phenomenal rise in the volume of (previously illegal) share buybacks designed to sustain the values artificially (i.e. effectively rigging the market). At the same time there is a chronic dearth of viable investment opportunities resulting from the twin pressures of a lack of visible market potential for new projects and the absence of attractive rates of return in financial markets depressed by artificially low interest rates.

Aside from these extreme cyclical factors affecting markets it must be emphasised, as noted frequently in this blog, that there is clear evidence of a long-term down-trend in demand for capital. Mainstream commentators are unsurprisingly reluctant to recognise this tendency openly, since to do so would amount to acceptance that capitalism has no validity as an economic system in the long term. However it was recently given voice – appropriately in the columns of FTfm – by the leading commentator John Dizard, when he posed the question, “What if… there is just too much capital in the world to support the income streams that have been promised?”

Another symptom of the malaise in financial markets is the continuing tendency of “the herd” (of speculative investors) to put high valuations on the equity of companies which have yet to make a genuine profit. This has come about, it would appear, due to a combination of

the lack of scope for earnings growth among established companies with already high P/E ratios;
the declining need for new capital in general (see above);
the huge volume of funds flowing into the market, both from still accumulating corporate earnings and share buybacks – frequently financed by cheap debt.

All these factors have given rise to an orgy of reckless speculation as investors and institutions engage in an ever more desperate search for remunerative yield. Thus Amazon, which had a high stock market valuation long before it started to record any actual profits in 2011, still has a P/E ratio as high as 80 (May 2019), while at the same time some of the most highly valued “hi-tech” stocks, notably including the ride-hailing taxi companies Uber and Lyft, are seemingly on track to follow Amazon’s example by attracting strong investor interest despite generating only losses to date – so that they were enabled to float on the stock exchange recently at multi-billion dollar valuations despite having made no profits.

It is a measure of the debauched state of the global capitalist order that such blatant distortions are evidently now regarded as normal by market participants. This is all the more extraordinary when viewed in the context of the ever growing mountain of non-repayable debt (private and public) and record (artificially) low interest rates. Because of this it is now clear that all funded pension schemes – particularly important in the US – are effectively bankrupt and will need to be wound up sooner rather than later, with the associated pension “promises” either dishonoured or the subject of hugely expensive bailouts by the taxpayer.

Creeping nationalisation

An even more striking example of stock market distortion is provided by Japan, which may claim the dubious distinction of having invented QE (in 2001). Since the onset of the GFC in 2008 it has had to resort to it again – with renewed intensity. This time, moreover, the Bank of Japan, ever more mindful of the chronic reluctance of the Japanese public to invest in either equities or bonds offering little prospect of a positive return, has felt obliged to intervene strongly in the market for both. The result is that the BoJ – which has lately set a negative official discount rate (-0.1 per cent), meaning that investors will have to pay to deposit money with it (signalling its frantic desire to encourage new capital investment) – is now estimated to own at least half both of all outstanding government bonds (JGBs) and of equities quoted on the Nikkei 225 Index of the Tokyo stock exchange. (Comparable data for other major economies are not readily available, although it is apparent that the Federal Reserve has by now accumulated a massive proportion of outstanding US Treasury bonds).

If this trend continues it is evident that the Japanese state will become the de facto owner of the bulk of what has been the hitherto privately owned enterprise sector. At the same time such a tendency to widespread nationalisation by default now appears as a looming possibility in other leading market economies. This is indicated by

a) a move by German market interest rates into negative territory, suggesting possible incipient “Japanification” of the German economy if not of the rest of the Eurozone;
b) official encouragement of reckless levels of speculation in markets, which amount to effective subsidisation of extremely risky businesses (distorting competition), as in the recent cases of Uber and Lyft;
c) the nationalisation of General Motors by the Obama administration in 2009 – before returning it discreetly to the private sector; without this intervention there would have been a catastrophic meltdown of the economically vital US motor industry.

Another indicator of a trend to covert public control of much of the supposedly capitalist economy is the growing dependency of much of what few major investment opportunities there are on public subsidy or guarantees to make them attractive to private investors, who remain the nominal owners. This applies notably to projects such as the new runway planned for Heathrow airport and the inherently loss-making HS2 railway in Britain as well as to numerous comparable infrastructure projects in other countries.

The above developments clearly point to an inexorable tendency to ever greater public involvement in the running of enterprises and the economy – even if corporate ownership remains vested in private shareholders, who also continue to ensure that management decisions are still taken mainly in their interests, reflecting the enduring dominance of narrow corporate interests in what remains a profoundly undemocratic order. Quite how this trend will unfold from now on is hard to predict in detail. What seems certain, however, is that in any event there will be no limit to the authorities’ desperate efforts to rig markets in order to try and avert their collapse. Nor is there likely to be any widespread public recognition of capitalism’s terminal failure until the GFC has been re-enacted at least one more time. When that happens it may suddenly dawn on the public that it has already, by default, assumed ownership of most or all of what was once believed to be the private enterprise sector – without ever having taken control of it.

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