The global debt mountain: a Minsky moment or Carchedi crunch?

During the current Chinese Communist party congress, Zhou Xiaochuan, governor of the People’s Bank of China, commented on the state of the Chinese economy.  “When there are too many pro-cyclical factors in an economy, cyclical fluctuations will be amplified…If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky Moment’. That’s what we should particularly defend against.” 

Here Zhou was referring to the idea of Hyman Minsky, the left Keynesian economist of the 1980s, who once put it: “Stability leads to instability. The more stable things become and the longer things are stable, the more unstable they will be when the crisis hits.”  China’s central banker was referring to the huge rise in debt in China, particularly in the corporate sector.  As a follower of Keynesian Minsky, he thinks that too much debt will cause a financial crash and an economic slump.

Now readers of this blog will know that I do not consider a Minsky moment as the ultimate or main cause of crises – and that includes the global financial crash of 2008 that was followed by the Great Recession, which many have argued was a Minsky moment.

Indeed, as G Carchedi has shown in a new paper recently presented to the Capital.150 conference in London, when both financial profits and profits in the productive sector start to fall, an economic slump ensues.  That’s the evidence of post-war slumps in the US.  But a financial crisis on its own (falling financial profits) does not lead to a slump if productive sector profits are still rising.

Nevertheless, a financial sector crash in some form (stock market, banks, or property) is usually the trigger for crises, if not the underlying cause.  So the level of debt and the ability to service it and meet obligations in the circuit of credit does matter.

That brings me to the evidence of the latest IMF report on Global Financial Stability. It makes sober reasoning.

The world economy has showed signs of a mild recovery in the last year, led by an ever-rising value of financial assets, with new stock price highs.  President Trump plans to cut corporate taxes in the US; the Eurozone economies are moving out of slump conditions, Japan is also making a modest upturn and China is still motoring on.  So all seems well, comparatively at least.  The Long Depression may be over.

However, the IMF report discerns some serious frailties in this rose-tinted view of the world economy.  The huge expansion of credit, fuelled by major central banks ‘printing’ money, has led to a financial asset bubble that could burst within the next few years, derailing the global recovery.  As the IMF puts it: “Investors’ concern about debt sustainability could eventually materialize and prompt a reappraisal of risks. In such a downside scenario, a shock to individual credit and financial markets …..could stall and reverse the normalization of monetary policies and put growth at risk.”

What first concerns the IMF economists is that the financial boom has led to even greater concentration of financial assets in just a few ‘systemic banks’.  Just 30 banks hold more than $47 trillion in assets and more than one-third of the total assets and loans of thousands of banks globally. And they comprise 70 percent or more of international credit markets.  The global credit crunch and financial crash was the worst ever because toxic debt was concentrated in just a few top banks.  Now ten years later, the concentration is even greater.

Then there is the huge bubble that central banks have created over the last ten years through their ‘unconventional’ monetary policies (quantitative easing, negative interest rates and huge purchases of financial assets like government and corporate bonds and even corporate shares).  The major central banks increased their holdings of government securities to 37 percent of GDP, up from 10 percent before the global financial crisis.  About $260 billion in portfolio inflows into emerging economies since 2010 can be attributed to the push of unconventional policies by the Federal Reserve alone.  Interest rates have fallen and the banks and other institutions have been desperately looking for higher return on their assets by investing globally in stocks, bonds, property and even bitcoins.

But now the central banks are ending their purchase programmes and trying to raise interest rates. This poses a risk to the world economy, fuelled on cheap credit up to now.  As the IMF puts it: “Too quick an adjustment could cause unwanted turbulence in financial markets and international spillovers … Managing the gradual normalization of monetary policies presents a delicate balancing act. The pace of normalization cannot be too fast or it will remove needed support for sustained recovery”.  The IMF reckons portfolio flows to the emerging economies will fall by $35bn a year and “a rapid increase in investor risk aversion would have a more severe impact on portfolio inflows and prove more challenging, particularly for countries with greater dependence on external financing.”

What worries the IMF is that this this borrowing has been accompanied by an underlying deterioration in debt burdens.  So “Low-income countries would be most at risk if adverse external conditions coincided with spikes in their external refinancing needs.”

But it is what might happen in the advanced capital economies on debt that is more dangerous, in my view.  As the IMF puts it: “Low yields, compressed spreads, abundant financing, and the relatively high cost of equity capital have encouraged a build-up of financial balance sheet leverage as corporations have bought back their equity and raised debt levels.”  Many companies with poor profitability have been able to borrow at cheap rates.  As a result, the estimated default risk for high-yield and emerging market bonds has remained elevated.

The IMF points out that debt in the nonfinancial sector (households, corporations and governments) has increased significantly since 2006 in many G20 economies.  So far from the global credit crunch and financial crash leading to a reduction in debt (or fictitious capital as Marx called it), easy financing conditions have led to even more borrowing by households and companies, while government debt has risen to fund the previous burst bubble.

The IMF comments “Private sector debt service burdens have increased in several major economies as leverage has risen, despite declining borrowing costs. Debt servicing pressure could mount further if leverage continues to grow and could lead to greater credit risk in the financial system.”

Among G20 economies, total nonfinancial sector debt has risen to more than $135 trillion, or about 235 percent of aggregate GDP.

In G20 advanced economies, the debt-to-GDP ratio has grown steadily over the past decade and now amounts to more than 260 percent of GDP. In G20 emerging market economies, leverage growth has accelerated in recent years. This was driven largely by a huge increase in Chinese debt since 2007, though debt-to-GDP levels also increased in other G20 emerging market economies.

Overall, about 80 percent of the $60 trillion increase in G20 nonfinancial sector debt since 2006 has been in the sovereign and nonfinancial corporate sectors. Much of this increase has been in China (largely in nonfinancial companies) and the United States (mostly from the rise in general government debt). Each country accounts for about one-third of the G20’s increase. Average debt-to-GDP ratios across G20 economies have increased in all three parts of the nonfinancial sector.

The IMF comments: “While debt accumulation is not necessarily a problem, one lesson from the global financial crisis is that excessive debt that creates debt servicing problems can lead to financial strains. Another lesson is that gross liabilities matter. In a period of stress, it is unlikely that the whole stock of financial assets can be sold at current market values— and some assets may be unsellable in illiquid conditions.”

And even though there some large corporations that are flush with cash, the IMF warns: “Although cash holdings may be netted from gross debt at an individual company—because that firm has the option to pay back debt from its stock of cash—it could be misleading”.  This is because the distribution of debt and cash holdings differs between companies and those with higher debt also tend to have lower cash holdings and vice versa.

So “if there are adverse shocks, a feedback loop could develop, which would tighten financial conditions and increase the probability of default, as happened during the global financial crisis.”

Although lower interest rates have helped lower sovereign borrowing costs, in most of the G20 economies where companies and households increased leverage, nonfinancial private sector debt service ratios also increased.  And there are now several economies where debt service ratios for the private nonfinancial sectors are higher than average and where debt levels are also high.  Moreover, a build-up in leverage associated with a run-up in house price valuations can develop to a point that they create strains in the nonfinancial sector that, in the event of a sharp fall in asset prices, can spill over into the wider economy.

The IMF sums up the risk.  “A continuing build-up in debt loads and overstretched asset valuations could have global economic repercussions. … a repricing of risks could lead to a rise in credit spreads and a fall in capital market and housing prices, derailing the economic recovery and undermining financial stability.”

Yes, banks are in better shape than in 2007, but they are still at risk.  Yes, central banks are ready to reduce interest rates if necessary, but as they are near zero anyway, there is little “scope for monetary stimulus. Indeed, monetary policy normalization would be stalled in its tracks and reversed in some cases.”

The IMF poses a nasty scenario for the world economy in 2020.  The current ‘boom’ phase can carry on.  Equity and housing prices continue to climb in overheated markets.  This leads to investors to drift beyond their traditional risk limits as the search for yield intensifies despite increases in policy rates by central banks.

Then there is a Minsky moment.  There is a bust, with declines of up to 15 and 9 percent in stock market and house prices, respectively, starting at the beginning of 2020.  Interest rates rise and debt servicing pressures are revealed as high debt-to-income ratios make borrowers more vulnerable to shocks. “Underlying vulnerabilities are exposed and the global recovery is interrupted.”

The IMF estimates that the global economy could have a slump equivalent to about one-third as severe as the global financial crisis of 2008-9 with global output falling by 1.7 percent from 2020 to 2022, relative to trend growth.  Capital flows to emerging economies will plunge by about $65 billion in one year.

Of course, this is not the IMF’s ‘base case’; it is only a risk.  But it is a risk that has increasing validity as stock and bond markets rocket, driven by cheap money and speculation.  If we follow the Carchedi thesis, the driver of the bust would be when profits in the productive sectors of the economy fall.  If they were to turn down along with financial profits, that would make it difficult for many companies to service the burgeoning debts, especially if central banks were pushing up interest rates at the same time.  Any such downturn would hit emerging economies severely as capital flows dry up.  The Carchedi crunch briefly appeared in the US in early 2016, but recovered after.

Zhou is probably wrong about China having a Minsky moment, but the advanced capitalist economies may have a Carchedi crunch in 2020, if the IMF report is on the button.

 

 

 

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5 Responses to “The global debt mountain: a Minsky moment or Carchedi crunch?”

  1. failedevolution (@failedevolution) Says:

    As G20 debt reaches record levels, the Global Financial Mafia is ready to orchestrate another big crisis
    http://bit.ly/2hHaH9N

  2. henry Says:

    Michael, excellent article which shows what is ahead of us. These financial institutions, especially the Central Banks, did not learn much of the Great Recession. I doubt that the crisis is over if one looks at the upsurge of fascism everywhere which is a real crisis indicator!

  3. Boffy Says:

    “If we follow the Carchedi thesis, the driver of the bust would be when profits in the productive sectors of the economy fall. If they were to turn down along with financial profits, that would make it difficult for many companies to service the burgeoning debts, especially if central banks were pushing up interest rates at the same time.”

    Its not necessary for any fall in profits to make it difficult for companies to service debt costs for such a bust to occur. As Marx sets out in describing the relation of the interest rate cycle to the business cycle, all that is required is that the supply of additional money-capital (mainly from realised profits – including its division into rents and interest payments, i.e. dividends, coupon etc.) falls relative to the demand for money-capital. That demand for money-capital can arise either because companies find it harder to finance expansion internally, (itself a consequence of relatively falling realised profits) or because they need to expand faster (because the expansion of the economy means more workers employed, possibly on higher wages, who then create a pick up in the demand for wage goods, with a carry through for materials etc.), both causes being a feature as Marx describes of the earlier periods of expansion, and finally the demand for money-capital expands fastest not to finance expansion, but to be able to pay bills, in other words a demand for currency rather than capital. This last is associated with the period of crisis, and is when interest rates reach their peak, as borrowers are prepared to pay any rate of interest to stay afloat.

    It is only necessary that the demand for money-capital relatively outstrips its supply, as a result of any of these conditions, for interest rates to rise. As Marx describes the movement of the prices of fictitious capital has its own dynamic separate from that of the real economy. The prices of fictitious capital and land is determined by the process of capitalisation of revenues. Marx describes that the movement of stock market prices is far more influenced by the movement of interest rates, which control this process of capitalisation, than by the revenues itself.

    In other words, in a period where interest rates are in a secular rising pattern this will be far more likely to cause share and land prices to be falling, even where dividends and rents are rising. A look at the performance of the Dow Jones from the mid 1960’s, in inflation adjusted terms shows that, it was declining, despite the fact that this was still within the period of the post war boom, when the mass of profits was still rising. The point being that they were not rising in the same proportion as the demand for money-capital, which led to rising interest rates, and so lower capitalised prices for the revenue producing assets.

    By contrast, in the period of the long stagnation of the 1980’s, and 90’s, interest rates began to fall from around 1982, as the rate of profit began to rise, and technological developments created a large moral depreciation of the fixed capital stock, and the value of large areas of materials etc. was reduced, whilst the labour-saving technology slashed both wages, and the amount of variable capital required. The 1300% rise in the value of the Dow Jones between 1980 and 2000 was way in excess of either the economic growth during that period, or the growth in profits or dividends. It was a consequence of the fall in interest rates, which then caused the capitalised prices of financial assets and land to rise.

    All that is required for a financial bust, as with the financial busts that have arisen in the past during periods of economic boom is that the demand for money-capital exceeds the supply causing interest rates to rise, and thereby capitalised asset prices to fall. That was what happened in 1847, for example, which was a time of rampant economic boom, and massive rises in profits, as Engels described. If as in 1847, with the Railwaymania, the preceding period has also seen the creation of financial bubbles, then this rise in interest rates is all the more likely to cause that financial bust to be even larger.

    That is the condition we are in now in spades, which is why a financial bust much larger than 2008 is inevitable, and the drops in house prices will be much larger than 9%, just as the drops in stock markets will be much larger than 15%. Unlike the 1960’s, we do not currently have the same high levels of general inflation which mask the real terms falls in stock prices.

    The fact that the recent BBC Open Data Institute analysis shows that the majority of UK house prices are lower today than in 2007, and that London house prices have had their biggest falls since 2007, in recent months, shows that even the very modest (in absolute terms) rise in interest rates can have a significant impact. In fact, the lower interest rates in absolute terms, the larger any rise is in relative terms, and so the larger its effect on capitalised prices.

    Take a piece of land that pays £1,000 a year rent, and with interest rates at 1%, its capitalised price is then £100,000. If interest rates rise by 1% point to 2%, the capitalised price of the land, thereby falls to £50,000. So, its capitalised price halves. If however, interest rates rise by a further 1% points to 3%, the capitalised price falls to £33,333, or just as 30% fall in its price. With global interest rates at such historically low absolute levels, even very small absolute rises in rates represent large proportional rises, with a consequently large proportional effect on the capitalised prices of assets.

    This has nothing to do with the fact, for example, that with these higher interest rates, and consequently higher mortgage rates, mortgage payers, who are also hugely indebted will find it increasingly difficult to finance their mortgages. That is an additional and secondary effect, which also leads to a bursting of that particular asset price bubble. Rather the primary effect described above, is only that described by Marx in relation to the process of capitalisation.

    Similarly, if interest rates rise, for example because rising employment and rising wages causes an increase in demand for wage goods, which leads to businesses needing to increase output, which squeezed profits make more difficult to finance internally, and so which increasingly has to be financed by resort to capital markets, then those higher interest rates will depress bond and share prices, via this same process of capitalisation.

    An existing bond with a face value of £1,000 which pays a coupon of £50, will fall in price to £500, if companies are led to issue new £1,000 bonds with a coupon of £100, for example. And the same applies to shares, the yield on which will be relatively diminished as against bond yields, and against rental yields on land, where land prices have fallen, as a result of this same process of capitalisation.

    Firms may have no problem meeting their debt burden to cover these higher interest payments, any more than mortgage payers might have difficulty in paying their increased monthly mortgage payment as interest rates rise. That is not the cause of capitalised prices of land, and other asset prices falling, as Marx demonstrates, which rather results directly from the rise in the rate of interest.

    In fact, it is only when as a consequence of an actual economic crisis, and particularly of what Marx calls a crisis of the second form, that is a payments crisis, as firms are unable to obtain payment for the goods and services they have sold on commercial credit, and where individuals then also may not receive payments of wages, rent, interest and profit, and so cannot meet their own personal bills that this leads to rampant borrowing to cover these liquidity requirements, which causes interest rates to spike further, and prompts a collapse in capitalised asset prices.

  4. ucanbpolitical Says:

    Boffy you are quite right about the importance of the interest rate cycle and Michael, as always, a well researched article. However there is a more important immediate concern – the mass of profits. FactSet analysis of the first 17% of S&P profit releases (Q3 – 2017) shows an annual increase of only 1.9% in the mass of profits. Factor for share buy-backs and inflation and that represents a fall in real profits compared to q3 2016. I have previously pointed out that current profit growth was flattered by the fall in the mass of profits during the first half of 2016. It is why I have not be overly enamoured by talk of a profit revival especially in China. Furthermore, banks like J P Morgan and Goldman Sachs are predicting a profit drought over the next five years internationally and advising their clients to cash in some of the gains from their stock dealing. Given that P/E are historically elevated, and given that these elevated P/Es depend on future profit growth, the next two weeks could be very interesting for the markets. At the very least a sharp contraction in the S&P possibly triggered by Apple would kill consumer spending in the USA.

    Will the coming crash be worse than 2008. The answer is yes for a number of reasons.Firstly it will be a primarily industrial, rather than a financial crash. Despite historically low rates of interest and a subdued interest rate cycle, industrial profits, so far, have been unable to scale their previous 2014 peak before declining once more. That is ominous for capitalism. It means that (secondly) capitalism has not fully recovered before it tips once again into a profit led recession (typical of a long wave of stagnation post 2014). Thirdly, factor in the indebtedness of governments and financial conditions which have depleted the armoury of the central banks and the counter-vailing factors themselves are diminished.

  5. Boffy Says:

    “At the very least a sharp contraction in the S&P possibly triggered by Apple would kill consumer spending in the USA.”

    Why?

    Firstly, the majority of consumer spending depends on revenues not capital values, particularly fictitious capital values. The latter has played a part, in acting as collateral that underpinned consumer borrowing to finance consumption, but the majority of the spending was still financed by wages, profits, interest and rent. I don’t see how a fall in the S&P affects that at all.

    In fact, the continued increase in US employment, which means even with constant wages, the mass of wages rises, but in conjunction with steadily rising wages also, means that the demand for wage goods is likely to continue to rise, and any firms not wanting to lose out to their competitors in meeting that increased demand will have to increase their accumulation of capital, in the first instance an accumulation of circulating capital, by increasing spending on materials and labour-power.

    That is also why this statement is wrong, where you say,

    “Firstly it will be a primarily industrial, rather than a financial crash. Despite historically low rates of interest and a subdued interest rate cycle, industrial profits, so far, have been unable to scale their previous 2014 peak before declining once more. That is ominous for capitalism. It means that (secondly) capitalism has not fully recovered before it tips once again into a profit led recession (typical of a long wave of stagnation post 2014).”

    That view about the role of profits is Ricardian not Marxist. Marx specifically argued against it in his analysis of rent, and what was wrong with the Ricardian view. Marx points out that whilst a sharp rise in profits, particularly in some sphere, may an often will cause an increase in capital accumulation in that sphere, and vice versa, capital accumulation is not at all dependent upon such rises or falls in the rate of profit as Ricardo claimed. I’ve set that out in my blog post – here.

    Marx says,

    “Finally, the extension of cultivation to larger areas — aside from the case just mentioned, in which recourse must be had to soil inferior than that cultivated hitherto — to the various kinds of soil from A to D, thus, for instance, the cultivation of larger tracts of B and C does not by any means presuppose a previous rise in grain prices any more than the preceding annual expansion of cotton spinning, for instance, requires a constant rise in yarn prices. Although considerable rise or fall in market-prices affects the volume of production, regardless of it there is in agriculture (just as in all other capitalistically operated lines of production) nevertheless a continuous relative over-production, in itself identical with accumulation, even at those average prices whose level has neither a retarding nor exceptionally stimulating effect on production. Under other modes of production this relative overproduction is effected directly by the population increase, and in colonies by steady immigration. The demand increases constantly, and, in anticipation of this new capital is continually invested in new land, although this varies with the circumstances for different agricultural products. It is the formation of new capitals which in itself brings this about. But so far as the individual capitalist is concerned, he measures the volume of his production by that of his available capital, to the extent that he can still control it himself. His aim is to capture as big a portion as possible of the market. Should there be any over-production, he will not take the blame upon himself, but places it upon his competitors. The individual capitalist may expand his production by appropriating a larger aliquot share of the existing market or by expanding the market itself.”

    (Capital III, Chapter 39)

    And, he shows that it is the very fact of competition between individuals for this expanding market that forces them to have to accumulate additional capital, often in the first instances an accumulation of circulating rather than fixed capital, which is also made possible because of the very “elastic” nature of capitalist production that allows existing fixed capital to be used more intensively, which in turn provides the wages to the additional workers, additional profits to the other capitals supplying the additional materials and so on, that provides the money incomes that in turn buy the increased supply of commodities.

    They are all forced to do this, contrary to the suggestion of Ricardo, even if the rate of profit on this additional output is lower than that enjoyed on their existing output. Indeed, it is ultimately that which leads to them continuing to increase output to an extent that a crisis of output arises, because either wages have been pushed up to such a level that the rate of surplus value is pushed down to zero, or because it has been pushed down to such a level, and consumption pushed up to such a level that any increased output causes market prices to fall below the price or even cost of production, because the elasticity of demand at that point is such that demand can only be pushed up to meet the level of supply by drastic price cuts, so that the capital consumed in production cannot be reproduced in that price.

    As Marx puts it above,

    “His aim is to capture as big a portion as possible of the market. Should there be any over-production, he will not take the blame upon himself, but places it upon his competitors.”

    And Marx, in Theories of Surplus Value extends this argument against Ricardo. Ricardo argues as Michael does that it is the rate of profit that is determinant. He sets out an argument whereby a farmer has £1,000 of capital to invest, but by investing it, in his land, he will only return say 8% rate of profit, as opposed to the 10% he currently enjoys. Consequently, Ricardo argues that the capitalist farmer would not invest this additional £1,000 on his land.

    Marx describes why this is wrong, and sets out a series of alternative uses for the £1,000 to show why the argument is wrong. Firstly, marx says if the farmer simply sits on the £1,000 it will be dead money, returning him nothing. 8% is worse than 10%, but it is much better than nothing! Secondly, the farmer might be able to employ the £1,000 on some other piece of land. But, then Marx says, this other piece of land might by separate and distant from his existing farm, making it costly to farm the two pieces of land together as one farm, so that the return would again be less than 8%.

    The farmer might employ the £1,000 in some other high profit sphere of production. But, £1,000 may be much too little capital to start production in this new venture. Moreover, if he knows nothing about this new line of production, he will have to employ professional managers and so on, who do. Either investing it in that way may be impractical or even less profitable for him than simply investing his £1,000 on his own farm, and settling for 8% profit.

    Or, he might put the money in the bank, or loan it out directly as money-capital. But, then Marx says, he will immediately settle for a return that is probably only a third of the 10% profit he currently enjoys, because the rate of interest must always be less than the rate of profit – though for short periods of crisis, as he sets out, that may not be true. If he could only obtain a 3-4% rate of interest on his money, by using it as money-capital, why would he do that, marx asks, rather than use it directly himself on his own farm, even if that new investment only provided him with 8% profit rather than the 10% he currently obtains?

    That is consistent with what Marx also says about the impossibility of money-capital continually being used to produce such interest/dividends etc. rather than being used for productive investment.

    “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, p 378)

    It also demonstrates the basic contradiction faced by capital, that Marx describes, which leads to the outbreak of crises of overproduction. That is in order to increase the rate of surplus value, capital seeks to drive down wages, but in so doing it undermines the potential to realise the produced surplus value. If wages are reduced, workers have less to use to buy the produced commodities. Capitalists, money-lenders, landlords may have more revenues to spend, but their higher levels of income mean that they quickly fulfil their consumption needs for basic items, so that their elasticity of demand for those commodities is low. It requires large drops in their prices to get them to buy significantly more of them.

    Andrew Kliman is correct when he says,

    “Companies’ decisions about how much output to produce are based on projections of demand for the output.”

    (Note 4, Page 16, The Failure Of Capitalist Production)

    As Marx puts it,

    “The conditions of direct exploitation, and those of realising it, are not identical. They diverge not only in place and time, but also logically. The first are only limited by the productive power of society, the latter by the proportional relation of the various branches of production and the consumer power of society. But this last-named is not determined either by the absolute productive power, or by the absolute consumer power, but by the consumer power based on antagonistic conditions of distribution, which reduce the consumption of the bulk of society to a minimum varying within more or less narrow limits. It is furthermore restricted by the tendency to accumulate, the drive to expand capital and produce surplus-value on an extended scale. This is law for capitalist production, imposed by incessant revolutions in the methods of production themselves, by the depreciation of existing capital always bound up with them, by the general competitive struggle and the need to improve production and expand its scale merely as a means of self-preservation and under penalty of ruin. The market must, therefore, be continually extended, so that its interrelations and the conditions regulating them assume more and more the form of a natural law working independently of the producer, and become ever more uncontrollable. This internal contradiction seeks to resolve itself through expansion of the outlying field of production. But the more productiveness develops, the more it finds itself at variance with the narrow basis on which the conditions of consumption rest. It is no contradiction at all on this self-contradictory basis that there should be an excess of capital simultaneously with a growing surplus of population. For while a combination of these two would, indeed, increase the mass of produced surplus-value, it would at the same time intensify the contradiction between the conditions under which this surplus-value is produced and those under which it is realised.”

    That could be resolved, if instead the capitalists used the additional surplus value/product to invest in additional capital, but at this point of crisis of overproduction, why would any capitalist do that, when they cannot even sell profitably their existing stock of goods? Malthus like Keynes proposed to resolve it by giving the state/landed aristocracy a bigger proportion of the surplus to consume unproductively, but as Marx says, he thereby undermines the basis of the capitalists’ profit.

    But, that is not the situation that exists currently. The mass of profit is not rising rapidly due to the fact that available profits,rents, interest, and even some portions of wages have been diverted into financial and property speculation, encouraged by government policies, rather than into productive investment, which as Marx says above is the fundamental basis of an expanded mass of profit – even if the rate of profit might fall. But, the fact that the mass of profit is not rising rapidly, does not mean that it couldn’t rise faster if additional productive investment occurs to meet rising demand, as more workers are employed, and wages rise. That doesn’t mean that this might not be accompanied by a lower rate of profit, but the current rate of profit is not particularly low. It is certainly not so low that it threatens a crisis of overproduction if additional workers are taken on, or to lead to masses of unsold goods that cannot be sold at prices that reproduce the consumed capital, particularly in an environment whereby employment is rising, and wages are rising creating the required demand for the additional output, and output of new ranges of commodities.

    If the mass of profit rises more rapidly, even with a lower rate of profit, because demand rises more rapidly, and capital accumulation rises to meet the needs of supplying this expanded market then this is all that is required, particularly if the current incentive to speculate in order to obtain more or less guaranteed capital gains is undermined by rising interest rates, and extensive capital losses on financial assets and property. As Marx puts it, particularly for the larger capitals that dominate the economy it is this mass of profit rather than the rate of profit that is in any case determinant.

    “Concentration increases simultaneously, because beyond certain limits a large capital with a small rate of profit accumulates faster than a small capital with a large rate of profit…

    The so-called plethora of capital always applies essentially to a plethora of the capital for which the fall in the rate of profit is not compensated through the mass of profit.”

    (Capital III, Chapter 15)

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