The fantasy world continues

The fantasy world continues.  In the US and Europe, stock market index levels are hitting new all-time highs.  Bond prices are also near all-time highs.  Investment in both stocks and bonds are delivering massive profits for the financial institutions and companies.  Conversely, in the ‘real’ economy, particularly in the productive sectors of industry and transport, the story is dismal.  The world’s auto industry is in serious decline.  Layoffs of workers are on the agenda in most auto companies.  The manufacturing sectors in most major economies are contracting. And as measured by the so-called purchasing managers indexes (PMIs), which are indexes of surveys of company managers about the state and prospects for their companies, even the large service sectors are slowing or stagnant.

The latest estimate of US real GDP growth was published yesterday. In the third quarter of this year (June-September), the US economy expanded in real terms (ie after inflation of prices is deducted) at an annual rate of 2.1%, down from 2.3% in the previous quarter.  Even though this is modest growth historically, the US economy is doing better than any other major economy.  Canada is growing at just 1.6% a year, Japan at just 1.3% a year, the Euro area at 1.2% a year; and the UK at just 1%.  The larger so-called ‘emerging economies’ like Brazil, South Africa, Russia, Mexico, Turkey and Argentina are growing at no more than 1% a year or are even in recession.  And China and India have recorded their lowest growth rates for decades.  Overall global growth is variously estimated around 2.5% a year, the lowest rate since the Great Recession in 2009.

And slowing capitalist economies can find little escape from weak domestic growth by exporting.  On the contrary, world trade is contracting.  According to data from the CPB World Trade Monitor, in September global trade was down by 1.1 per cent compared to the same month in 2018, marking the fourth consecutive year-on-year contraction and the longest period of falling trade since the financial crisis in 2009.

It’s true that unemployment rates in the major economies have plunged to 20-year lows.  That has helped maintain consumer spending to some extent.

But it also means that productivity (measured as output divided by employees) is stagnating because employment growth is matching or even surpassing output growth.  Companies are taking on workers at unchanged wages rather than investing in labour-saving technology to boost productivity.

According the US Conference Board, globally, growth in output per worker was 1.9 percent in 2018, compared to 2 percent in 2017 and projected to return to 2 percent growth in 2019. The latest estimates extend the downward trend in global labour productivity growth from an average annual rate of 2.9 percent between 2000-2007 to 2.3 percent between 2010-2017. “The long-awaited productivity effects from digital transformation are still too small to see. A productivity recovery is much needed to prevent the economy from slipping towards a substantially slower growth than what has been experienced in recent years.”

The Conference Board summarises: “Overall, we have arrived in a world of stagnating growth. While no widespread global recession has occurred in the last decade, global growth has now dropped below its long-term trend of around 2.7 percent. The fact that global GDP growth has not declined even more in recent years is mainly due to solid consumer spending and strong labor markets in most large economies around the world.”

The OECD reaches a similar conclusion: “Global trade is stagnating and is dragging down economic activity in almost all major economies.  Policy uncertainty is undermining investment and future jobs and incomes. Risks of even weaker growth remain high, including from an escalation of trade conflicts, geopolitical tensions, the possibility of a sharper-than-expected slowdown in China and climate change.”

The reason for low real GDP and productivity growth lies with weak investment in productive sectors compared to investment or speculation in financial assets (what Marx called ‘fictitious capital’ because stocks and bonds are really just titles of ownership to any profits (dividends) or interest appropriated from productive investment in ‘real’ capital).  Business investment everywhere is weak.  As a share of GDP, investment in the major economies is some 25-30% lower than before the Great Recession.

Why is business investment so weak?  Well, first it is clear the huge injection of cash/credit by central banks and driving of interest rates down to zero – so-called unconventional monetary policies- has failed to boost investment in productive activities.  In the US, the demand for credit to invest is falling, not rising.

And for that matter, so far, Trump’s cutting of corporate taxes, boosting fiscal spending and running higher budget deficits has failed to restore investment.

In the US, capital spending by S&P 500 companies rose in the third quarter by just 0.8%, or a combined $1.38 billion, from the second quarter, according to data from S&P Dow.  But even that modest increase can be chalked up to a few big spenders: Inc. and Apple Inc. alone raised capital spending by $1.9 billion during the quarter. Without them, total spending by the 438 other companies that have reported so far this quarter would have shrunk slightly. And overall spending would have shrunk by 2.2% absent increases from three others: Intel Corp. , Berkshire Hathaway Inc. and NextEra Energy Inc. Together, the five companies increased their capital budgets by $4.7 billion, or 30%, from the second quarter to the third, the SPDJI data show.

The mainstream/Keynesian explanation for low investment was expressed again in a recent blog in the UK Financial Times: “why is fixed investment declining?  One answer, dare we suggest it, is a dearth of demand. With no incremental demand for increased supply, why would a business invest in a new plant, shop or regional headquarters when the returns from buying back shares, or distributing dividends, is both known and higher?”

But this explanation is a tautology at best and wrong at worst.  First, in what area of demand is there a ‘dearth’?  Consumer demand and spending is holding up in most major capitalist economies, given fuller employment and even some rise in wages in the last year.  It is investment ‘demand’ that is floundering.  But to say that investment is weak because investment ‘demand’ is weak is just a tautology signifying nothing.

The more explanatory answer offered by Keynesian theory then comes forward.  The reason that central bank monetary policies and tax cuts have failed to boost investment “just boils down to risk appetite.”  This is the classic ‘animal spirits’ explanation of Keynes.  Capitalists have just lost ‘confidence’ in investing in productive activities.  But why? The previous quote above from the FT piece gives it away; why would a business invest in a new plant, shop or regional headquarters when the returns from buying back shares, or distributing dividends, is both known and higher?” But the returns (profitability) of investing in fictitious capital are higher because the profitability of investing in productive assets is too low. I have explained this ad nauseam in previous posts and papers, along with empirical evidence in support.

In Q3 2019, US corporate profits were down 0.8% from last year while margins (profits per unit of output) remain compressed at 9.7% of GDP – having declined nearly continuously for nearly five years.

But, of course, the failure to recognise or admit the role of profitability in the health of a capitalist economy is common to both mainstream neoclassical and Keynesian theory and arguments.

Low profitability in productive sectors of the most economies has stimulated the switch of profits and cash by companies into financial speculation. The main method used by companies to invest in this fictitious capital has been by buying back their own shares. Indeed, buybacks have become the biggest category of financial asset investment in the US and to some extent in Europe.  US buybacks reached nearly $1trn in 2018.  That’s only about 3% of the total market value of US top 500 stocks, but by boosting the price of their own shares, companies have attracted other investors to push stock market indexes to record highs.

But all good things must come to an end. Returns on fictitious capital investment ultimately depend on the earnings that companies report.  And they have been falling in the last two quarters.  So in the latter part of this year, corporate buyback spending started to plunge. According to Goldman Sachs, buyback spending slowed 18% to $161 billion during the second quarter, and the firm anticipates that the slowdown will continue. For 2019, total buybacks will drop 15% to $710 billion, and in 2020 GS sees a further 5% decline to $675 billion. “During full-year 2019, we expect S&P 500 cash spending will decline by 6%, the sharpest annual decline since 2009,” the firm says.

Anyway, buybacks are an arena dominated by major companies, many of them long-established tech titans. The top 20 buybacks accounted for 51.2% of the total for the 12 months ending in March, S&P Dow Jones Indices states. And more than half of all buybacks are now funded by debt. – “sort of like mortgaging your house to the hilt, then using it to throw a lavish party.” But once a recession inevitably arrives, the result may not be pretty for companies with lots of leverage, in no small part due to buybacks.

The market value of tradable U.S. dollar (USD) corporate debt has ballooned to close to $8 trillion – over three times the size it was at the end of 2008. Similarly in Europe, the corporate bond market has tripled to 2.5 trillion euros ($2.8 trillion) since 2008. From 2015-2018, over $800bn of non-financial high grade corporate bonds were issued to fund M&A. This accounted for 29% of all non-financial bond issuance, contributing to credit rating deterioration. And the ‘credit quality’ of corporate debt is deteriorating with low rated bonds now 61% of non-financial debt, up from 49% in 2011.  And the share of BBB-rated bonds in European investment grade has also risen from 25% to 48%.

And then are what are called zombie companies which earn less than the costs of servicing their existing debt and survive because they are borrowing more. These are mainly small companies.  About 28% of US companies with market cap <$1bn earn less than their interest payments, way up from the period before the crisis and this is with historically low interest rates. Bank of America Merrill Lynch estimates that there are 548 of these zombies in the OECD against a peak of 626 during the financial crash of 2008.

With corporate debt now higher than its peak in scary late-2008, Dallas Fed President Robert Kaplan has warned, overly leveraged companies “could amplify the severity of a recession.”

Nevertheless, the talk among many mainstream economists is that the worst may be over.  A trade deal between the US and China is imminent. And there are signs that the contraction in the manufacturing sectors of the major economies is beginning to stop.  If so, then any ‘spillover’ into the more buoyant and larger so-called ‘service’ sectors may be avoided.  Global economic growth may be at its slowest since the Great Recession; business investment is sluggish at best; productivity growth is falling; and global profits are flat, but employment is still strong in many economies, and wages are even picking up.

So, far from descending into an outright global recession in 2020, there may be just another year of depressed growth in the longest but weakest global recovery for capitalism. And the fantasy world may continue.  We shall see.

23 thoughts on “The fantasy world continues

  1. Is there causal evidence of dwindling profitability leading to financial speculation? It’s more common to hear the opposite, that increased financial speculation or ‘financialisation’ has led to lower investment/demand-led growth & thus profitability. Or is it endogenous and so effectively both…

  2. I was only 13 at the time of the Great Recession so I’ve got no first had knowledge of the build up – can anyone outline what the warning signs were in the previous 6 months that it wasn’t just another fluctuation?
    To me it seems right now that the economy seems only to be succeeding in avoiding recession, its stagnating along, but there doesn’t seem to be any obvious trigger for a crunch. What was the point that the contradictions of the 2007 expansion flipped in to crisis?

    1. Right before a crash, warning signs would most likely be in the financial markets. This year, the NY Fed has been giving billions in loans since September 17 (in a relatively unknown market called the “repo” market). They haven’t said why they are doing this and which bank is causing this. But there is a website that is keeping track called “wall street on parade”. I don’t know their underlying bias/ideology but they seem fairly neutral (perhaps a bit liberal). That site thinks Deutsche Bank is the troublesome bank much like how Lehman Brothers was the first one to go in 2008.

    2. ‘’obvious trigger for a crunch’’.
      No, there do not seem to be direct, obvious and immediate triggers for a crisis today. E.g. a price schok (70s oil price), real estate bubble, etc. What does seem to exist is a background trigger and not obvious at first sight, which does not generate a sharp and sharp crisis or fall in growth, but a long-term recession, a slow and smooth growth reduction. What is that trigger? M. Roberts argues, certainly, that this trigger is the fall in the global rate of profit of companies. And I add that this fall is that of the profits of non-monopolistic companies (small and medium enterprises), reduction of profits in a scenario of growth of a capitalist economy ONLY, growth only generated by private companies, as was the case growth in the nineteenth century no more than 1.5% per year (Agnus Maddison). Since the 80s, state companies (more than 600 in the OECD), and socialist companies disappeared. These state-owned companies are those that generated the growth of the so-called Golden Age of Capitalism in 1945-1975, with an average annual growth of 5.5% in the OECD and socialist countries. China has also grown socially with its state-owned companies. The next global growth, which will be scarce, permanent and unequal (only for large corporations: Dow Jones, etc.) is the MAXIMUM and ‘NATURAL’ growth of the capitalist mode of production.

  3. G.

    Good analysis.


    On Thu., Nov. 28, 2019, 4:03 a.m. Michael Roberts Blog, wrote:

    > michael roberts posted: “The fantasy world continues. In the US and > Europe, stock market index levels are hitting new all-time highs. Bond > prices are also near all-time highs. Investment in both stocks and bonds > are delivering massive profits for the financial institutions and” >

  4. Is it really possible that the current downturn in manufacturing etc can really be reversed now without a recession? It seems strange how this fantasy world, as you put it, can keep chugging along. Surely there has to be a recession at some point. Is eternal stagnation really a possibility in a capitalist economy?

  5. “but employment is still strong in many economies, and wages are even picking up.”
    That’s the key point. In Marx low profits go hand in hand with high unemployment. A crisis of profitability should be deflationary. Money should reflux, asset prices tumble.
    What Marx is missing, is a central bank ready to print money to secure full employment. Money printing can’t deliver profits, but it can deliver fictitious wealth (by raising the price of assets in limited supply) which pushes people into consumption and workers into low productivity jobs. There is no economic reason why this should stop. This could go on forever. Think about it: why should ever rising private or public debt be a problem if you have negative interest rates?
    Now, if austerity advocates like the Germans get control over the ECB and raise interest rates, then we would get a recession. It all depends on the central banks. Are they allowed to do what it takes? Quantitative easing, negative interest rates, helicopter drops?

    By the way, the flip side of fictitious wealth is that part of the rising inequality is also fictitious.

  6. “In Q3 2019, US corporate profits were down 0.8% from last year”

    According to S&P 500 earnings declined 2.2% in Q3:
    “The S&P 500 reported a decline in earnings (-2.2%) for the third straight quarter.”
    Yet according to consensus forecast for S&P is estimated to jump 10% in 2020. That’s about half the consensus forecast at the beginning of the year.

    Fantasy or hallucination?

  7. Hi Michael. Thank you for the excellent piece. I am still trying to wrap my head around the mechanics of falling profit rates, forgive me if my questions seem naive. You say:

    “Consumer demand and spending is holding up in most major capitalist economies, given fuller employment and even some rise in wages in the last year. It is investment ‘demand’ that is floundering. But to say that investment is weak because investment ‘demand’ is weak is just a tautology signifying nothing.”

    I am not clear on the purpose of the scare quotes on “demand” here. The purchase of productive goods is surely as real an instance of economic demand as the purchase of consumer goods, is it not? And if the purchasing of those goods falls off, that would cause the overall rate of profit to decrease ceteris paribus, would it not?

    “But the returns (profitability) of investing in fictitious capital are higher because the profitability of investing in productive assets is too low.”

    Is the profitability low because of an excess of value invested in constant capital in comparison to that of variable capital, per the classic Marxian formula? And is that what you mean when you say that the cause of lower profits is not reduced demand?

    “So, far from descending into an outright global recession in 2020, there may be just another year of depressed growth in the longest but weakest global recovery for capitalism. And the fantasy world may continue.”

    Nightmare world, more like. Here’s hoping next year is much worse, says my Accelerationist dark side.

    1. Ron 1) investment in producer goods drops off because profitability and profits drop off. Then the fall in producers goods will affect employment in that sector and spread to the consumer sector. 2) Yes you have it. Marx’s law of profitability operates to reduce profits and thus lead to drop in investment, production and employment. Then there is a drop in demand for all goods – a recession. I thought there woudl be such a recession some time around 2016 onwards but it aint happened yet.

  8. “Consumer demand and spending is holding up in most major capitalist economies, given fuller employment and even some rise in wages in the last year. It is investment ‘demand’ that is floundering.”

    This fact is a big problem for Marxists. According to Marx low investment demand should cause a crisis. In Marx consumer demand is a function of investment demand. Only because capitalists are making a profit by exploiting workers, have workers an income to consume. No profit -> no employment -> no income -> no consumption. For Marx it’s M-C-M’.

    C-M-C would be a society where commodities could be produced and exchanged only for their use value. In such a society profits wouldn’t be necessary, even capital goods are no necessity.

    Since we live in capitalism, ergo M-C-M’, Marxists need an explanation how low profits can sustain full employment.

    The best explanation, I see, is central banks printing money and pushing up asset prices creating fictitious wealth which in turn props up consumption. But if Marxist opt for this explanation then why should there be a crisis coming? Central banks don’t run out of money. What mechanism should trigger a future crisis???

    1. Alex, a) token money is not real money, and b) the absolute mass of surplus-value rises even as the rate of surplus-value decreases (for the simple reason that while investment in c may be proportionally increasing, investment in v is still higher than the previous turnover), meaning there’s in fact actually more profits to invest as the rate of profit falls. Regarding point a, the central bank can pump out greenbacks and thereby increase the quantity of loan money capital, but that can’t restore profitable production.

      1. “but that can’t restore profitable production”
        That’s precisely the problem. Why isn’t the low profit rate (not the same as low profits) causing a crisis? Why do we have high employment combined with low productivity? The only answer for Marxists is: fictitious wealth (high asset prices proped up by central banks). This wealth effects triggers consumption allowing for full employment through low productivity service jobs.
        But why should this end? Central bank can always prop up asset prices some more. There is no limit here.

        Marxists just like Austrians are very strong believers in a coming crisis (unsustainable private debt, public debt, inflation..). I’m missing an explanation why this has to happen. I agree with the falling rate of profit. But why should fictitious wealth be in danger as long as central banks are ready to do whatever it takes. Zombies don’t die.

        Instead of a coming crisis, why not even higher inequality combined with endless stagnation? More feudalism than capitalism.

      2. The reason there isn’t hyper-inflation and chronic depression is because the profit rate isn’t zero and it’s never going to be zero. Crises always result in the restoration of profitability relatively by devaluing capital and cheapening the cost of labor-power, albeit at a lower rate of profit than the previous cycle; and they likewise serve to restore the profitability of the production of the money commodity preventing hyper-inflation by serving to match newly printed token money with increased gold production.

        In fact, the function of QE was really to help lower the rate of interest relative to the profit of enterprise so as to encourage capital flowing out of the money markets and into production. That it didn’t ‘work’ is not because this never happened at all, but that it didn’t happen to the *extent* hoped because capital was not allowed to devalue. The boom that followed the Great Recession certainly was not consequently as real as someone like Mr. Trump would claim, but it was not as fake as you think it was either.

        Michael has never argued that all profits are fictitious. He’s all too well aware of high high the rate of exploitation is in the oppressed countries. The point is that they are increasingly fictitious, which makes the problem of devaluing capital all the more onerous in the next recession. The fact that this reckoning yet to occur does not mean capitalism can remain as it is indefinitely; we have history, like the years between 1914 and 1929, to suggest otherwise.

    2. There is no concept of supply and demand in Marxism. You’re projecting problems of bourgeois economics to Marxism.

      The capitalist system can survive with low profit rates because the working class depends on the mass of use values, not on profits, to reproduce itself. It only when the mass of profits also falls that a crisis ensues, because then the already existing capital cannot be reproduced.

      Capitalism’s survival is different from humanity’s survival. They are two completely different things.

      1. Capitalism isn’t about the production of use values. Workers are only employed as long it is profitable to exploit them.

        Does a crisis presuppose a falling rate of profit or a falling mass of profits? I think it needs only a falling rate of profit. The reason is that investment decisions are made with regards to the profit rate, not profit mass. Let’s assume that 1% is too low, then an investment of 100 000 making 10 000 will be made while an investment of 2 million making 20 000 (doubling the mass of profit) won’t be made.

        But my original point is this: if we have conditions of low profitability (that’s what Michael Roberts is claiming) but no crisis, because of inflated asset prices (fictitious capital gains), why isn’t that sustainable? Why should central banks run out of money? (I see political reasons, but no economic reason.)

      2. We must separate decline from collapse.

        Profit rates indeed tend to fall in capitalism (that is scientifically certain, so we can consider it a given), which triggers, when the cycles coincide (or most of them), in structural crises — when mass of profits also begin to fall.

        But structural crises are just big moments of degeneration of the capitalist system, not its collapse per se. An absolute collapse would happen when the mass of surplus value is insufficient to reproduce the already existing capital.

        Although falling profit rates are the vehicle which drives capitalist entropy towards its maximum level, it is not the very definition of the collapse of capitalism itself. Maximum entropy can be reached, theoretically, much before profit rates reach zero.

  9. Just to recapitulate: there is a tendency for profits to fall. This should create a crisis which then would devalue capital and restore profitability. Since profits are low and we don’t have a crisis, fictitious capital gains can (at least in part) explain why we have high employment but low productivity, instead of a crisis. Nevertheless this can’t go on forever, a real devaluation of capital has to come.

    I still miss a reason, why this can’t go on forever. There is on sentence in Michael Roberts post: “Returns on fictitious capital investment ultimately depend on the earnings that companies report”, which tries to give a reason. But at least in the case of asset which are limited in supply (like land, but also any kind of natural monopoly or economics of scale) this is not true. Returns can stagnate while the asset price rises higher and higher. If interest rates are pushed to zero (through central banks) the present value of an asset in limited supply with a non-zero return explodes. For an infinitely living organism like a family the capital value would be infinite. (One of the reason why in cities owners don’t sell their land anymore, you only get a land-lease contract.)

    If people accept ever rising asset prices, high inequality and low productivity jobs, what economic force should bring asset prices down, if central banks stand ready to push them up again. Central banks can’t run out of money.

    Someone like Andrew Kliman (who is close to Michael Roberts) claims that the last real devaluation of capital has been WW2. If this is right, we are waiting for 80 years now.

  10. Alex said “Someone like Andrew Kliman (who is close to Michael Roberts) claims that the last real devaluation of capital has been WW2. If this is right, we are waiting for 80 years now.”

    i would argue it was in 1971 when the link between the dollar and gold was cut. Since that time period capital as continued to grow in “value” while labor has been endlessly devalued. What 2008 showed those who lived thru it and capable of having thoughts other then what the media tells you is that everything is kabuki theater and the only thing that matters is power. Had capitalism worked the way the books tell us, assets go down in price in a correction, the people at the top of our society, the “masters of the universe” would have been completely discredited and lost all of their “wealth” and power. Every “fix” since that crisis has only been to keep the system on life support and prolong the current ruling classes power. Recessions have been outlawed, the crisis never ended and the quality of life of the majority of the population will continue to decline.

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