Investing in finance, but not in people

The world’s stock markets continue to make new all-time high index levels as central banks continue to pronounce that they will not push up interest rates for investing any time soon. The ECB has cut interest rates and is planning further credit easing measures. So is the Bank of Japan. And last week, the US Federal Reserve policy committee unanimously voted to hold off raising interest rates until late 2015 at the earliest. Only the Bank of England has hinted at raising its rate some time in 2015.

But while the world’s stock and bond markets are booming, the ‘real’ economy of output and incomes shows little sign of getting a proper head of steam. Last week, the International Monetary Fund (IMF) slashed its US growth forecast for 2014 from 2.8% it predicted at the beginning of this year to just 2% after a “harsh winter” led to a weak first quarter. It continued to forecast 3% real GDP growth in 2015, but given that it has now lowered its annual forecast for six times in row, that 3% may not survive.  And also last week, the US Fed reduced its forecasts for real GDP growth this year from 2.8-3.0% to 2.1-2.3%. Again, like the IMF, it kept its forecast for 2015 intact at about 3.1-3.2%.

World stock investors may be doing well, but the majority of people are not. The IMF agreed that the US recovery from the Great Recession had been better than in many other developed economies. But it noted that the productivity growth was poor and reckoned that the labour market was weaker than suggested by the headline numbers for people out of work. Long-term unemployment was still high and many people are not even seeking work, which means they don’t register in the official jobless numbers. Real wages are stagnant (see graph below) and poverty is stuck at more than 15%. It even called for a hike in the US minimum wage to help boost spending!

Real US wages

In the UK, real wages are still falling. And a new report from the High Pay Centre found that the UK’s lowest average disposable income is amongst the worst in the whole EU even though Britain’s richest people enjoy some of the highest salaries. The top 20% of UK households have an average disposable income of £31,670 (€39,662, $53,785) a year, which puts them behind only Germany and France. However, the lowest 20% in this country have an average disposable income of just £5,506 – the poorest in western Europe!

“Simply, for the millions of people comprising the poorest fifth of our population, life is much worse here than it is for the poorest fifth in virtually every other north-west European country – countries we would like to think of as our equals,” stated the study. And this Piketty-style level of inequality is not going to be reduced. The UK’s Institute for Fiscal Studies predicts that, as the economy recovers, inequality will be ‘about the same’ as pre-recession levels by 2015-16.

Also, the Poverty and Social Exclusion project has found that the number of British households falling below minimum living standards has more than doubled in the past 30 years, despite the size of the economy increasing two-fold. Now 33% of households endure below-par living standards – defined as going without three or more “basic necessities of life”, such as being able to adequately feed and clothe themselves and their children, and to heat and insure their homes. In the early 1980s, the comparable figure was 14%.

Almost 18 million Britons live in inadequate housing conditions and that 12 million are too poor to take part in all the basic social activities – such as entertaining friends or attending all the family occasions they would wish to. It suggests that one in three people cannot afford to heat their homes properly, while 4 million adults and children are not able to eat healthily. 5.5 million adults go without essential clothing; 2.5 million children live in damp homes; that 1.5 million children live in households that cannot afford to heat them; that one in four adults have incomes below what they themselves consider is needed to avoid poverty and that more than one in five adults have to borrow to pay for day-to-day needs. 21% of households are behind with household bills against 14% in the late 1990s. More than one in four adults (28%) have skimped on their own food so that others in the household might eat.

Behind the failure to restore reasonable levels of economic growth since the Great Recession is a failure to invest by the capitalist sector, while public sector investment has been slashed in austerity measures (see my post,  Capitalists are investing in the stock market but not in building homes for people.  In the UK, housing starts have failed to keep up with population growth for the most part of two decades and is currently falling further behind.

Many smaller companies are not making a profit or are heavily in debt. The Bank of England has found that the percentage of companies that don’t make a profit reached 35% in 2011, the last year for which figures were available. This figure of loss-making firms has been steadily rising since 1998 when it was 23%. These are ‘zombie’ companies, just making enough to service their debts but having nothing to pay workers more or invest in new technology. No wonder UK productivity levels continue to slip (see my post,

UK productivity

And in a great new paper to be delivered to the upcoming Rethinking Economics conference in London next weekend
Michael Burke shows that this failure to invest is endemic to the major capitalist economies (The Great Stagnation as the Crisis of Investment). Burke shows that gross investment (both business and government and before depreciation) experienced the sharpest decline of all main components of GDP during the Great Recession. Such gross investment is down 5.2% in the OECD since 2008 and as a proportion of GDP it is down from 22% to 20%, reaching a new low since 1960.

Burke finds that real GDP growth in the OECD has been in a secular slowdown over a very prolonged period. Every successive decade has seen slower growth than the preceding one. But the slowdown in investment has been even more pronounced. While OECD GDP growth in the most recent decade to 2010 was little more than a quarter of the rate in the 1960s, gross investment growth is little more than one-twentieth of the 1960s. Indeed, in the top seven capitalist economies (G7), gross investment fell in absolute terms in the final decade to 2010.

cumulative investment growth

Yet since 1960, consumption has risen as a proportion of GDP. So it has not been a Keynesian ‘lack of demand’ from consumers that has caused the slowdown in economic growth for the major economies, but capitalist sector investment. 21st century capitalists are good at speculating in financial assets and the stock market with cheap money, but are failing to accumulate in productive sectors where profitability just ain’t good enough for them.

7 thoughts on “Investing in finance, but not in people

  1. Michael, would you know how long the last investment strike, by capitalists, lasted? The current one began before the 2008 financial meltdown and it seems that its going to continue for sometime. Also are there any measures that could force the capitalists to end their investment strike? Thanx

  2. In the last 5 years the S&P 500 Index has trebled. Other stock markets have risen by similar amounts. In the UK, after the 20% drop in property prices in 2008/9, they have been rising by record amounts once more in London, encouraging in speculators from Singapore and Hong Kong etc.

    The executives of big companies, have been using plentiful and abundant credit, as well as the large rates and masses or profits of their companies to buy back the company shares, thereby boosting the value of their own share options, and reducing the power of shareholders over their actions.

    If you were an executive, and you could make a potential 20% profit from productive-investment, that might require a couple of years to bring on stream, and whose returns are spread out over a number more years, whereas you could invest those funds to simply by shares, which you expect to enjoy a capital gain of 50% p.a. pretty much backstopped by the central banks liquidity injections, which as a rational person would you choose?

    In the 1840’s, as Marx and Engels set out, Britain enjoyed a massive boom, as its textile industry shipped masses of textiles to China after the Opium War. Engels describes the masses of profits pouring in from Lancashire on the back of it, that fuelled investment in new machines, the opening of new factories and so on. The excess supply of money-capital over its demand, however, resulting from these massive profits, drove down interest rates. A speculative boom followed, as capitalists speculated in Railway and other shares.

    To obtain the additional funds required for this speculation, despite the massive profits to be made from their businesses, the capitalists diverted money from their textile businesses into funding the purchase of railways shares. They then funded their businesses with the available cheap credit instead. They obtained cash by various swindles on Bills of Exchange.

    In other words then as now, despite the availability of massive profits from productive investment, capitalists diverted funds into speculation, because it seemed to provide the opportunity for even bigger, even quicker even more certain capital gains. That continued until the bubble burst with the financial crisis of 1847. But, as marx points out after such crises, the psychology of capitalists is such that it takes time before they feel confident enough to invest large amounts again.

    Unlike 1847 we have the worst of both worlds, Resources that were diverted into massive speculation that caused a bubble, which partially burst with consequent economic consequences, which impact psychology, combined with a renewed speculative bubble rising on the back of the even greater liquidity now pumped into the economy by the central banks to save the banks, which again encourages potential money-capital to go into this fictitious rather than real capital. So property bubbles as well as stock and bond bubbles are blown up again.

    As Marx points out in Capital in relation to the export of Capital, it is not necessary for the opportunity for profitable investment in the home market to have ended to lead capital to be exported, as Lenin following Hobson seems to have believed, but only that the profits to be made in some other country are greater than those to be made in the home market. The fact that potential money-capital gets invested in fictitious capital rather than productive capital does not mean that there are not large profits being made on existing productive-capital, it simply means huge rapid capital gains are being guaranteed by central bank actions from speculation.

    That’s one reason inequality is rising as the apparent capital gains on this fictitious capital get blown out to preposterous proportions.

    1. Didn’t Marx link low interest rates with low profits and high interest rates with high profits or did I dream that?

      1. Edgar,

        You must have dreamt it. That idea was put forward by the so called “Currency School”, who were a bit like today’s proponents of QE. Marx describes various parts of the cycle where interest rates may be high or low.

        For example, in a crisis, where profits have crashed, interest rates will be very high, because businesses will try to hold on to money-capital, and will be desperate to borrow money-capital to stay afloat. By contrast, as he says in a time of prosperity, where firms profits are rising, they will be more prepared to offer credit to their customers, the demand for money to circulate capital will decline, the firms will have more access to money-capital from their own realised profits to use for internal accumulation, so will need to rely less on borrowing in the money-market. At the same time the increased money hoards they develop from this prosperity, to cover wear and tear on their increased quantity of fixed capital, to cover the float required for working-capital, to cover the portion of surplus value that cannot be immediately increased etc. will be placed in the money markets by firms as interest bearing capital.

        So, the supply of money capital will rise relative to the demand, and interest rates will fall. By contrast, he says, when the prosperity moves on to the boom, various pressures will cause the proportion of realised profit to fall relative to the demand, so he says interest rates rise, but not significantly. Its only where the demand for money-capital exceeds the supply, that interest rates rise, and its during a crisis where that is most acute.

        See; Capital III, Chapter 28 for Marx’s critique of Tooke and Fullarton and the Currency School, on this error, that many today have also fallen victim to.

      2. The relation between the rate of interest and the rate of profit is not simple. And yes Marx describes some episodes that both are either high or low.

        The relation between the two should be considered in short-run and in long-run separately. The short-run case is more of conflictual relation, dividing a given pie. But the pie grows or shrinks in the long-run and hence in this case it is more like sharing a pie that changes in size. Recall that interest is a subtraction from profit, and therefore the Interest rate can’t be high for too long when the profit rate is low for a protracted period.

        But the short-run case is more complicated since it varies throughout the business cycle. And, yes, it is possible that both interest rate and profit rate are either high or low. For example, both are low at trough, while both are high at the transition point from boom to burst.

        These are all explicit or implicit in Marx.

  3. “As Marx points out in Capital in relation to the export of Capital, it is not necessary for the opportunity for profitable investment in the home market to have ended to lead capital to be exported, as Lenin following Hobson seems to have believed, but only that the profits to be made in some other country are greater than those to be made in the home market.”

    If I recall correctly, Marx attributes this movement, the export of capital not simply to greater profit, but to that arbiter of all things capital that Boffy rejects, the RATE of profit. A bit more than a technicality.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: