A fictitious boom

At the end of February, the S&P 500 stock index closed at a record high and the Nasdaq Composite (an index of hi-tech companies) briefly rose above 5000, the level last achieved in the dot.com bubble back in 2000.

equity markets

But we may well be near the end of this stock market bonanza, six years after the S&P embarked on a bull run, resulting in a rally of 250%, including the reinvestment of dividends.  Profits for US companies are expected to decline over two consecutive quarters for the first time in six years.  Not since the aftermath of the financial crisis have S&P 500 companies recorded two straight quarters of falling profits on a year-over-year basis.

world indexes

The profits of the S&P 500 multinational companies with significant global operations are now being pressured by a record high dollar, which results in lower foreign revenues. And energy companies have been hit hard by significant reductions in their earnings as oil prices have halved since the summer.  Deflation in energy and fuel prices may help consumers a little, but it is real bad news for the profitability of energy multinationals.

Analysts are forecasting a decline of 4.6% in Q1 2015 S&P 500 earnings compared with the same period a year ago, with those for the second quarter are seen falling 1.5%. That would represent the first back to back quarterly decline since the second and third quarters of 2009 at the depth of the Great Recession.

And it is not just energy companies.  Utilities, materials, telecom services, consumer staples and information technology corporations are forecast to record negative year-over-year earnings growth for the first quarter.  And since the early 1990s, the only times that earnings per share have fallen in the US have been at the onset of recessions, in 2000 to 2002 and 2007 to 2009.

And it’s not just earnings of the top companies that are set to decline.  Profits for the whole US corporate sector have now stopped rising.

US corporate profits


Increasingly, the stock market has been supported simply by an injection of billions in credit by the Federal Reserve.  Financial firms and non-financial corporate have been flush with cash that they have raised from the issuance of corporate bonds at extremely low rates of interest.  This cash has then been invested in the stock market and in paying out dividends and buying back stock, so encouraging others to buy stocks.  Only a small proportion has been used to invest in new technology and more labour

And profits have also been artificially sustained by significant cuts in corporation tax and other exemptions from tax.  For example, Warren Buffett’s investment company, Berkshire Hathaway has been able to defer $62bn in taxes, that’s eight years of taxes, because the company has bought capital intensive businesses like railways and power utilities.  That has given the company even more funds to invest in the stock market.   Berkshire’s Energy unit receives tax credits for renewable power generation — reporting $258m of wind energy tax credits in 2014, and $913m of investment tax credits in 2012 and 2013 for opening new solar power plants.  This is interest-free borrowing made possible by the taxpayer because of the business-friendly government.

But as I have argued in previous posts
the days of low interest borrowing and investment speculation are about to come an end.  It seems that the Federal Reserve is going to start raising the floor on interest rates this summer, leading to rising mortgage and corporate bond rates.  That could spark a significant drop in stock market prices and even kick off a new recession.

Back in 1937 during the Great Depression, it appeared to the US authorities that the slump was over and it was time to ‘normalise’ interest rates. On doing so, the economy promptly dropped back into a new recession that was only overcome when the US entered the world war in 1941. The reality was that the profitability of capital and investment had not really recovered and raising the cost of borrowing tipped the economy back

But why would the Fed do this if there is such a danger?  Precisely because it wants to cool a speculative stock and bond market and, most important, avoid a sharp rise in wages that could squeeze profits as the labour market tightens.

If the Fed does move later this year, it could start to expose just how much fictitious capital (as Marx called stock and bond investment) has built up in the US and other economies and see it go up in smoke.

13 thoughts on “A fictitious boom

  1. Hallo Robert,

    you are right, but I think economic anlysis without politic strategies are not useful, Economic responses are insufficient, because economics can also tolerate enviroment’s waste, waste of human being, corruption and war.
    Economics is useful for administering, not for changing the world, also Marx saw the misunderstanding, that economic thinking can produce.

    1. True, and he also said it is up to all of us to decide and labor for the society that we want to see. Technology gives us this capacity in new ways that I think previous incarnations of socialist states could only dream of.

  2. GD allover again. That is a sad thing. It’s even worse that we are not thinking about alternatives blinded by the neoliberal theory, at least the “advanced” western part of the world

    I have to admit that I can’t understand this because i am just to dumb, just like that advanced west probably thinks Marx was too

  3. Is a 10 year bond with a 3% coupon issued by IBM fictitious capital? All the time? Or some of the time? And if it’s all the time, then what difference does it make? If it’s some of the time, then we know “fictitiousness” is derivative of some other condition, some other relation, and we need to explore that relation.

    Is the 10% of the maritime container fleet that winds up at anchor as haul capacity outraces trade growth fictitious capital or real capital? Both? Why one, and then why the other?

    The point is that all capital is fictitious when it cannot revalorize itself, and assigning a fictitious quality to the disembodied exchange value of commodities kind of misses the point. .

  4. I don’t know anybody who has characterized the last 6 years as a “boom.” Certainly, this qualifies as a bull market; and just as certainly the bull market has benefited from the weakness in the economy as interest rates have remained low. Likewise the bond markets. But who thinks the “recovery” since 2009 amounts to a boom? Other than Boffy I mean?


    Like previous bull markets, this one will come to an end. And so what? Does that make capitalism any less “real” than it was during its bull market? The emphasis on “fictitious capital” is just so much nonsense. What counts is capitalism. It’s just as real today as it was 6 years ago, or 20 years ago.

    1. I think the reference is to a boom in stock prices only, not to a boom in capitalist production. This is likely the context for the use of the term “fictitious”, of course a different one from Marx’s use of the word in Capital.

      That said, I’ve been thinking along parallel lines on the so-called “fictitious capital” as Marx used it. Keep in mind this was a residual category Marx deployed in Capital in order to exclude it from his consideration of the interest rate on money capital advanced for productive investment. Marx never explicitly thoroughly analyzed what was inside this residual black box. So that leaves it to us to do.

      Seems to me that a sum of money that draws any kind of yield for any reason qualifies as “real” capital by definition, as it really appropriates a portion of the total surplus value defined for any arbitrary production period. To do so this sum of money is typically advanced in some securitized credit form, for which the owner receives some certificate specifying that owner in the form of stocks, bonds, and so forth, in a commercial process where these securities can be traded with no necessary connection to production.

      Such securitized credit money is a form of what Marx called capital in its *commodity* form. That’s a clue. Capital in its self-identical form as yield-bearing securitized money circulates as a commodity, in an inverted mirror of the circulation of non-monetary commodity capitals as described in Parts 1 & 2 of Vol II of Capital. This inverted form wears its surplus value appropriation clearly marked on its forehead, unlike non-monetary commercial capital whose exact rate of appropriation is as of yet undetermined prior to sale. Yet this defines a special type of the circuit C’…C’ where this is identical to M’…M’ (and note not M…M’, the general form of the capitalist money circuit that also includes the circuit of productive capital P…P as well as the non-monetary commodity capital circuit). This also defines a branch of commercial capital (Part 4 Vol III) specialized in the trade in capital in its (self-identical) commodity form, and it is this commercial capital that mediates its relation to the general circuit of capitalist value production as a whole.

      In Part 4 Vol III Marx analyzes the relation between the mass of surplus profit appropriated by commercial capital *in its independent form* – and what could be more independent than that branch that deals in capital in its (money) commodity form? – and that appropriated by productive capital circuit, both at the average rate of profit. This is an inverse relation, according to Marx (who fails to investigate the possibility of *surplus profits* of commercial arbitrage, but that is another matter), such that greater appropriation by non-productive commercial capital depresses the average rate of profit, slowing the accumulation of capital, which of course can only be spurred on by capitalist production. Marx assumes that this dynamic will move in the opposite direction historically, as capitalist production advanced, but history has turned out differently, IMO.

      Well, money capital in its independent, self-identical form, circulating as a type of inverted commodity capital, will certainly also have this depressive effect on the average rate of profit on productive capital. I think that is what Alan Freeman had in mind in his theorization that Michael rejected as “double bookkeeping”. Whether or not this is really true depends on the degree of overlap between the money capital commodity circuit as defined above and the circuit of capitalist production as a whole as defined in Capital. The overlapping part *is* double bookkeeping, but not the independent and non-overlapping part, which constitutes a type of real (and not “fictitious”) non-productive circulating capital that must be factored into calculations of the average rate of profit, in precisely the same way (mathematically) as with independent, non-productive commercial capital, and *for the same reason*, because it is a specialized branch of commercial capital in its circulation in speculative trade, rather than as held as investment. The practical problem is of course determining the proportion of overlap given the opacity of commercial mediation.

      So I reserve the term “fictitious” in any scientific sense, to those money capitals whose basis is to be found in *fictitious commodities*, such as landed property, whose “yield” is actually rent, yet rent is what is capitalized in the principal that is represented in the “price” of land – a *real* fiction.

  5. Michael,

    I agree with most of your analysis and conclusions here. I’ve also set out similar conclusions in examining the nature of fictitious capital, as Marx defines it, as against real productive-capital here.

    1. Boffy,

      While your presentation parallels what I quickly outline above, with largely semantic differences in terminology, the homology drawn between constant fixed capital placed in production – the “lathe” – and land, is incorrect.

      Over on your blog.

      1. Matthew,

        I don’t think so, for the reasons I’ve set out in my brief reply to your comment on my blog.

        I think you misunderstand the issue of the lathe also. The point, was that Marx uses the example of the loaning of commodities as capital, for example, a lathe to emphasise that in his description of what fictitious-capital is, it does not have to be simply a loan of money-capital.

        The loan of fixed capital, or even of circulating capital, then simply translated into its current money equivalent, because its only on the basis of an equivalent money value that a rational calculation of interest can be made. In fact, lots of people fail to read carefully what Marx says, when he uses money equivalents for capital value, which leads to a lot of the confusion over the use of historic prices, whereas Marx always uses the current reproduction cost as the basis of capital values, and as I’ve described, and as Marx himself sets out, in his schemas of reproduction in Capital II, and his discussion of social reproduction towards the end of Capital III, that social reproduction cannot occur unless those values are based upon current reproduction costs, because they require the physical reproduction of the means of production and means of consumption provided from last year’s production, but consumed in this year’s production, to be physically reproduced out of current production, to be available for next year’s production.

        The physical allocation of the required means of production and consumption, out of current consumption to ensure social reproduction can only be done at current production costs, taking into consideration current levels of productivity and technology, or else there is a disproportion between the value allocated to capital and revenue and that required for the purchase of the required proportions of means of production and consumption.

        But, returning to the main point it doesn’t matter whether I loan you a lathe worth £10,000 or loan you £10,000, which you use as capital. As Marx sets out, in both cases, it is a loan of £10,000 worth of capital value, and the use value of that capital. Its on that capital value that the interest is calculated. The only difference, as Marx sets out, is that the lender of the lathe, would also expect compensation for wear and tear of the lathe itself, as well as interest on the loan of capital.

        In both cases, the loan certificate now in the possession of the lender, and the same thing goes for bonds, or share certificates, which are merely different forms of loans, is purely fictitious capital.

        The relation between the loan of capital and the loan of land is clear. As Marx describes neither have value. A lathe has value as a lathe, but not as capital, because as a lathe it is a commodity that has been produced, but the use value of capital – to be able to self-expand – as Marx describes is not produced by labour, and so has no value. The same is true of land. Both land and the use value of capital can be loaned out, and as marx sets out, when land becomes something that is regularly bought and sold by capitalists in order to obtain a return on their loanable money-capital, they see both in the same way, so that the capitalised value of land is then a function of the average rate of interest, as well as the level of rent.

      2. Boffy writes: “A lathe has value as a lathe, but not as capital, because as a lathe it is a commodity that has been produced, but the use value of capital – to be able to self-expand – as Marx describes is not produced by labour, and so has no value.”

        The above statement is so opaque as to almost, but not quite, conceal its ignorance.

        Of course the lathe has value as capital. It’s what we call “constant capital.” As a fixed instrument of production, as fixed capital, it gives up, transfers, its value, its exchange value, only incrementally in the production process to the commodities it is engaged to produce. Loaning the instrument does not extinguish its embodied value.

        Consequently, we can see that the lathe’s value as capital can only be made manifest to the degree that it commands, absorbs, new supplies of labor-power, thus expanding the value of the total capital.

        The self-expansion of value is NOTHING OTHER than that produced by labor power.

        Counterposing the existence of the lathe as a commodity produced (by capital) to the existence of the lathe as capital is a distinction that cannot exist. The lathe cannot be a commodity, i.e. produced for the purpose of exchange, without being capital, realizing that exchange value through the aggrandizement of labor power.

      3. Matthew,

        Just to further emphasise the point I was making earlier in our discussion, the relevant analysis is made by Marx in Chapter 21. As Marx makes clear all the way from the beginning of his analysis in Volume I, and as he emphasises and stresses time and again, capital as capital has no value. What has value are the commodities that comprise capital, i.e. the constant capital and variable capital. As he stresses, in these earlier volumes, it is not CAPITAL that is sold, but commodities.

        “But in so far as they actually function, i.e., actually play a role in the process, commodity-capital acts here only as a commodity and money-capital only as money. At no time during the metamorphosis, viewed by itself, does the capitalist sell his commodities as capital to the buyer, although to him they represent capital; nor does he give up money as capital to the seller. In both cases be gives up his commodities simply as commodities, and money simply as money, i.e., as a means of purchasing commodities.”

        The difference here that Marx introduces, and can only now introduce on the basis of his analysis of the general rate of profit is the fact that capital itself can be sold as a commodity. It can be so, precisely because as a result of the formation of a general rate of profit ALL capital possesses the use value of being self-expanding value, i.e. ALL capital makes profit irrespective of whether it produces surplus value.

        “And since this rate is the same for mercantile, as well as industrial, capital, it is no longer necessary, so far as this average profit is concerned, to make a distinction between industrial and commercial profit. Whether industrially invested in the sphere of production, or commercially in the sphere of circulation, capital yields the same average annual profit pro rata to its magnitude.”

        Consequently, ALL capital possesses this use value of being self-expanding value, and it is THIS Use Value that is sold by the money lending capitalist.

        “Money — here taken as the independent expression of a certain amount of value existing either actually as money or as commodities — may be converted into capital on the basis of capitalist production, and may thereby be transformed from a given value to a self-expanding, or increasing, value. It produces profit, i.e., it enables the capitalist to extract a certain quantity of unpaid labour, surplus-product and surplus-value from the labourers, and to appropriate it. In this way, aside from its use-value as money, it acquires an additional use-value, namely that of serving as capital. Its use-value then consists precisely in the profit it produces when converted into capital. In this capacity of potential capital, as a means of producing profit, it becomes a commodity, but a commodity sui generis. Or, what amounts to the same, capital as capital becomes a commodity.”

        And Marx says, because it possesses this use value it is similar to labour-power, which also creates self-expanding value, via the production of surplus value.

        “Money thus loaned has in this respect a certain similarity with labour-power in its relation to the industrial capitalist. With the difference that the latter pays for the value of labour-power, whereas he simply pays back the value of the loaned capital. The use-value of labour-power for the industrial capitalist is that labour-power creates more value (profit) in its consumption than it possesses itself, and than it costs. This additional value is use-value for the industrial capitalist. And in like manner the use-value of loaned capital appears as its faculty of begetting and increasing value.

        The money-capitalist, in fact, alienates a use-value, and thus whatever he gives away is given as a commodity. It is to this extent that the analogy with a commodity per se is complete.”

        “The use-value of the loaned money lies in its being able to serve as capital and, as such, to produce the average profit under average conditions.”

        But, this use value possessed by capital has no value, because it is not a use value that has been produced by labour. Like land, the price of this use value of capital is derived solely on the basis of demand and supply for it, i.e. the demand and supply for loanable money-capital, which thereby determines the interest rate.

        “What the buyer of an ordinary commodity buys is its use-value; what he pays for is its value. What the borrower of money buys is likewise its use-value as capital; but what does he pay for? Surely not its price, or value, as in the case of ordinary commodities.”

        As Marx says, what is bought when capital is bought as a commodity is not the value of the money borrowed, which is in any case irrational, because a sum of money, as Marx says can only be equal to itself, and this is true whether the loan of this money-capital is in the form of the loan of commodities, such as a lathe, or money, but this use value of being able to act as capital to create profit. That is why the price paid for this use value, the rate of interest varies in accordance with the use value that can be obtained. So, when the rate of profit rises, and so every piece of capital is enabled to self-expand by a greater extent, the demand for loanable money-capital rises, and the rate of interest rises with it – unless the supply of loanable money-capital rises even more.

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