Archive for the ‘capitalism’ Category

The top 1% own 48% of all global personal wealth; 10% own 85%

December 4, 2018

Every year, I refer to the Credit Suisse Global Wealth Report 2018 for an update on the level of inequality of household wealth globally.  Last year, the bank’s economists found that top 1% of personal wealth holders globally had over 50% of the world’s personal wealth – up from 45% ten years ago. In the US, the three richest people in the US – Bill Gates, Jeff Bezos and Warren Buffett – own as much wealth as the bottom half of the US population, or 160 million people.

This year’s report showed some interesting variations.  In the report, personal wealth is measured by the value of property and financial assets after deducting any debt  held by adults. During the 12 months to mid-2018, aggregate global wealth rose by $14 trillion to $317 trillion, representing a growth rate of 4.6%. This was sufficient to outpace population growth, so that wealth per adult grew by 3.2%, raising the global mean average wealth to $63,100 per adult, a record high (but remember this in nominal dollar terms, before inflation).

Switzerland (USD 530,240), Australia (USD 411,060) and the United States (USD 403,970) again head the league table according to wealth per adult. The ranking by median average wealth per adult favours countries with lower levels of wealth inequality and produces a slightly different table. This year, Australia (USD 191,450) edged ahead of Switzerland (USD 183,340) into first place.  So Australia has the highest median wealth per adult in the world.

As the reports says, top wealth holders benefit most from the rise in financial wealth (stocks, bonds, cash etc), leading to rising wealth inequality in all parts of the world. In contrast, since the end of the Great Recession, median wealth has not risen and in many places declined.

In the last 12 months, however, wealth inequality has stabilised.  There are 3.2 billion adults with wealth below $10,000.  So 64% of all adults have just 1.9% of global wealth. In contrast, 42 million millionaires, comprising less than 1% of the adult population own 45% of household wealth. China is now firmly established in second place with respect to the number of dollar millionaires (behind the United States and above Japan) and in second place also (above Germany) with respect to the number of ultra-high net worth individuals.

In the global wealth pyramid, there are 3.2m adults (64%) with just 1.9% of global wealth; another 1.3bn adults (27%) with 14% of global personal wealth; and 430m (about 9%) with 39%.   That leaves at the top, just 42m (0.8%) with a massive 45%.  About 30% of adults in so-called rich countries are in the bottom layer – due to business losses or unemployment, for example or a life-cycle phase associated with youth or old age. In contrast, more than 90% of the adult population in India and Africa falls into this category. In some low-income countries in Africa, the percentage of the population in this wealth group is close to 100%!

$10,000–100,000 is the mid-range band in the global wealth pyramid, covering 1.3 billion adults and encompassing a high proportion of the so-called ’middle class’ in many countries. The average wealth of this group is sizable at $33,100.  This sector has grown by a staggering 300m in the last year and there is one explanation for that: China (with 48% of this segment).  The huge growth in real GDP and living standards has allowed hundreds of millions of Chinese to accumulate a modicum of personal wealth – but nowhere else. “The contrast between the number residing in China (641 million, 59% of Chinese adults) and India (73 million, 8.6% of Indian adults) is particularly striking.”

The top tiers of the wealth pyramid – covering individuals with net worth above $100,000 – comprise just 9.5% of all adults.  So if you have $100,000 or more in property and financial assets (after debt), then you are in the top 10% of wealth holders globally.  How is that possible?  Because everybody below you, especially the bottom two-thirds, have no wealth to speak of at all.

This top 10% are concentrated in the so-called ‘global North’, with 79% of this group. Europe alone hosts 156 million members (33% of the total), roughly double the number in China (81 million). However, only five million members (1.1% of the global total) reside in India, and only three million (0.6%) in Africa.

The US has by far the greatest number of millionaires: 17.3 million or 41% of the world total. The number of millionaires in China has now overtaken the number in Japan and stands at 3.4 million (8.2% of the world total) compared to 2.8 million (6.6%) for Japan.

Then there are the super-rich.  In mid-2018, the report estimates there are 42.0 million adults with wealth between USD 1 million and USD 50 million, of whom the vast majority (37.1 million) fall in the USD 1–5 million range. And there are just 149,890 adults worldwide with net worth above USD 50 million. Of these, 50,230 are worth at least $100 million, and 4,390 have net assets above $500 million. Most of these people are in the US. If China continues to expand, then the middle segment of wealth holders will expand too.  But the number of ‘super-rich’ looks set to rise too over the next five years, to reach a new all-time high of 55 million.

At the bottom of the pyramid, the number of adults with wealth below $10,000 is expected to fall from 64% of the total to 61%, but this is mainly because of the rise in inflation and China.  Around two-thirds of the world’s adults remain basically without any personal wealth worth speaking of.  So no change there.


G20, trade and financial stability

December 2, 2018

The G20 summit meeting in Buenos Aires, Argentina ended with an agreement to disagree.  They agreed to disagree about maintaining multilateral trade rules and they agreed to disagree about the need to combat global warming by reducing carbon emissions and greenhouse gases.  And they agreed to disagree on dealing with the major world problem of migration.

The Trump administration claimed that the US was being scammed by China and other countries over trade because multilateral organisations like the World Trade Organisation were allowing America’s trade competitors to take advantage of US technical know-how and subsidising their industries at America’s expense.  And the Trump administration was determined to avoid having their energy industries and resources restricted by any caps on fossil fuels and the resulting carbon emissions.  So the US will stay out of the Paris climate agreement while the others will stick to it (although only in words not action).

The hyped up meeting between Trump and China’s supreme leader Xi Jinping turned out to be a ceasefire. The US agreed not to impose its planned hike in tariffs on Chinese exports for three months, while the Chinese agreed to buy more US agro goods (which it would do anyway).  As for controlling China’s supposedly ‘unfair’ exports to the US or reducing its restrictions on US corporate capital in China, everything was put on pause for negotiation.  The trade war may well resume in spring 2019.

The G20 itself showed that there will be no pause in the increased rivalry between a hegemonic economic power in relative decline (the US) and the rising technological and trading might of China (and other Asian economies).  As long as the world economy crawls along at no more than a 3% real GDP pace and world trade growth slows to a trickle, this will be just first chapter in the new 21st century economic battle.

The IMF, supposedly providing an objective view on behalf of global capitalism (and not any one nation or group of nations), is clearly worried.  IMF general secretary Christine Lagarde expressed her concerns: “I emphasized that global growth remains strong, but that it is moderating and becoming more uneven. Pressures on emerging markets have been rising and trade tensions have begun to have a negative impact, increasing downside risks. Choosing the right policy is therefore critical for individual economies, the global economy, and for people everywhere”.

What to do?  Lagarde said that “the choice is especially stark regarding trade. We estimate that, if recently raised and threatened tariffs were to remain in place and announced tariffs were implemented, about three-quarters of a percent of global GDP could be lost by 2020. If, instead, trade restrictions in services were reduced by 15 percent, global GDP could be higher by one-half of a percent. The choice is clear: there is an urgent need to de-escalate trade tensions, reverse recent tariff increases, and modernize the rules-based multilateral trade system.”

The G20 summit showed that these aims stand little chance of happening.  For Trump “modernising rules-based multilateral trade system” means getting rid of the WTO and doing everything by bilateral trade deals where the US is not outnumbered.  For the others, it means just that: outvoting the US.  So the US tariff increases are not going to be “reversed” – on the contrary, it is very likely that Trump will block any role for the WTO in future trade deals.

So the end of ‘globalisation’ and ‘free trade’ is over as Trump’s America looks to reverse its loss of trade share and, even more important, its weakening returns from international capital flows. I said back in July that it was “a threshold day” for the global economy when Trump first imposed his tariffs on China’s exports and the retaliation from China began.

And the impact of these measures is already being felt.  If energy (oil) exports are excluded, the world trade in goods has ground to a halt.  As the OECD-G20 researchers put it: “Excluding large oil exporters, such as Russia and Saudi Arabia, G20 trade was flat, suggesting that the steady expansion seen over the last two years may have stalled as recent protectionist measures begin to bite.”  In the United States, exports contracted by 1.7%. Although exports grew in China (by 2.4%) – partly reflecting the exceptional sale of an oil platform to Brazil, which helped push up Brazilian imports by 18.0% – this only partially offset the significant contraction of Chinese exports (down 4.9%) in the previous quarter. Exports also contracted in the European Union as a whole (minus 0.8%), for the second straight quarter, and in Australia (minus 2.0%), Japan (minus 2.0%), South Africa(minus 0.8%), Turkey (minus 0.6%) and India (minus 0.3%).


The WTO announced after the G20 meeting that world trade growth would slow even further.

China’s export growth has slowed and economic activity as measured by the so-called purchasing managers index (PMI) has paused (ie the PMI in November was 50).

Everywhere the PMIs are dropping and Germany, a key industrial trading nation and the main European exporter to China, suffered a fall in real GDP in Q3 2018. Indeed, real GDP growth over Q3 2017 plunged to just 1%.

In Italy, another G7 economy, where exports are also very important, the situation is even more dismal.  Real GDP fell in Q3 and the growth over the same quarter last year dropped to just 0.7%

In contrast, the US economy expanded by 0.6% in Q3 and year-on-year growth in real GDP was 3%, but Q3 growth slowed from Q2 and Q4 is most likely to show a further slowing.

So with global real GDP growth set to slow going into 2019 and world trade no longer expanding at all, the rivalry between competing capitalist economies, and between the US and China will intensify.

And trade is not the only worry for the world capitalist economy.  Only last month, the IMF exclaimed its concerns about the risks of ‘excessive debt’, particularly in the corporate sector globally.  And then just before the G20 meeting, US Fed Chairman Jay Powell in his speech to the Economic Club of New York, seemed to suggest that he might not hike the Fed policy interest rate as much as he and the market expected in 2019. What’s he worried about, given that US real GDP growth is sliding along at 3% a year (latest Q3 2018 data) and corporate profits are up 20% after tax (thanks to Trump’s corporate tax cuts)?  The answer appears to be in the Fed’s new Financial Stability Report.

The report cites four indicators to monitor for a financial crash and concludes that the current risk is only “moderate”.  But the Fed report noted that that “debt owed by businesses is historically high, and risky debt issuance has picked up recently.” and “credit standards for some business loans appear to have deteriorated further”, while “leverage of some firms is near its highest level seen over the past two decades.”  Along with “Brexit and euro-area fiscal challenges pose risks for U.S. markets and institutions” and “problems in China and other emerging market economies could spill over to the United States.” It seems that the risk of a new recession is not ‘negligible’ but indeed ‘moderate’.

The risk of a corporate debt bust was also echoed in Financial Stability Reports of the Bank of England and the European Central Bank, also released this week. The ECB put it this way: “A large stock of legacy debt continues to weigh on the euro area non-financial corporate sector. On aggregate, the indebtedness of euro area NFCs remains high by both historical and international standards. The falling trend observed since early 2016 appears to have come to an end, with the consolidated NFC debt-to-GDP ratio stabilising at 82% for the euro area aggregate – a level that is still above thresholds associated with a debt overhang”.

But things are ok because 1) “debt-to-total assets and debt-to-equity ratios for euro area NFCs point to more favourable developments though, having approached or even fallen below the levels observed at the start of EMU given higher share prices and the related positive denominator effect”; while 2) debt servicing costs remain very low.  In other words, as long as interest rates do not rise too much, stock markets stay high and corporate profits continue to rise, then there will be no crisis. But “A sudden deterioration in economic growth prospects or a cost shock could, however, undermine corporate profitability, while rising trade protectionism may hamper the profit-generating capacity of export-oriented firms.”  Exactly.

It was the same story in the Bank of England FSR.  Corporate debt relative to profits is back to pre global crash levels of 2008, in non real estate sectors (non-CRE).  The BoE concluded “Higher corporate leverage could amplify economic downturns.”

The huge rise in corporate debt in the so-called emerging economies is well documented.  And in many previous posts, I have shown that this debt creates conditions for a sharp downturn in investment and growth in emerging economies when the dollar strengthens or the Fed hikes its interest rate (Turkey, Argentina).

The underlying basis for economic growth in capitalist economies is the profitability of capital.  Using the EU AMECO database, we can measure the net return on capital stock (NRC) for many economies.  The G7 weighted average NRC peaked in 2005, well before the Great Recession.  The G7 rate of profit only got back to the 2007 level ten years later  in 2017 – and only because of improved profitability in the US and Japan.  The other five economies still have lower rates of profit.

Indeed, it has been a long depression in global profits growth since the Great Recession. Between 1997-2007, global profits growth averaged 15% yoy. Since 2008, it has averaged only 6.3% and from 2011, only 4% a year.

After the Great Recession in 2008-9, global profits recovered sharply before falling back in the Euro debt crisis of 2011-2.  Another modest recovery took place until oil prices and energy profits collapsed in 2015.  Then energy prices recovered along with energy investment.

As long as global profits continue to rise, a new slump in global investment and production will not emerge. But in the last few months, oil prices have slumped again and with trade in the doldrums, the prospects for profit growth in 2019 are dimming fast.

Financialisation or profitability?

November 27, 2018

Financialisation, like neoliberalism, is the buzz word among leftists and heterodox economists.  It dominates leftist academic conferences and circles as the theme that supposedly explains crises, as well as a cause of rising inequality in modern capitalist economies particularly over the last 40 years.  The latest manifestation of this financialisation hypothesis comes from Grace Blakeley, a British leftist economist, who appears to be a rising media star in the UK.  In a recent paper, she presented all the propositions of the financialisation school.

But what does the term ‘financialisation’ mean and does it add value to our understanding of the contradictions of modern capitalism and guide us to the right policy to change things?  I don’t think so.  This is because either the term is used so widely that it provides very little extra insight; or it is specified in such a way as to be both theoretically and empirically wrong.

The wide definition mainly quoted by the financialisation school was first offered by Gerald Epstein.  Epstein’s definition was “financialization means the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies.” As you can see, this tells us little beyond the obvious that we can see in the development of modern, mature capitalism in the 20th century.

But as Epstein says: “some writers use the term ‘financialization’ to mean the ascendancy of ‘shareholder value’ as a mode of corporate governance; some use it to refer to the growing dominance of capital market financial systems over bank-based financial systems; some follow Hilferding’s lead and use the term ‘financialization’ to refer to the increasing political and economic power of a particular class grouping: the rentier class; for some financialization represents the explosion of financial trading with a myriad of new financial instruments; finally, for Krippner (who first used the term – MR) herself, the term refers to a ‘pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production’”.

The content of financialisation under these terms takes us much further, especially the Krippner approach.  The Krippner definition takes us beyond Marx’s accumulation theory and into new territory where profit can come from other sources than from the exploitation of labour.  Finance is the new and dominant exploiter, not capital as such.  Thus finance is now the real enemy, not capitalism as such.  And the instability and speculative nature of finance capital is the real cause of crises in capitalism, not any fall in the profitability of production of things and services, as Marx’s law of profitability argues.

As Stavros Mavroudeas puts it in his excellent new paper (393982858-QMUL-2018-Financialisation-London), the ‘financialisation hypothesis’ reckons that “money capital becomes totally independent from productive capital (as it can directly exploit labour through usury) and it remoulds the other fractions of capital according to its prerogatives.” And if financial profits are not a subdivision of surplus-value then…the theory of surplus-value is, at least, marginalized. Consequently, profitability (the main differentiae specificae of Marxist economic analysis vis-à-vis Neoclassical and Keynesian Economics) loses its centrality and interest is autonomised from it (i.e. from profit – MR).”

As Mavroudeas says, financialisation is really a post-Keynesian theme based on a theory of classes inherited from Keynes that dichotomises capitalists in two separate classes: industrialists and financiers.” The post-Keynesians are supposedly ‘radical’ followers of Keynes from the tradition of Keynesian-Marxists Joan Robinson and Michel Kalecki, who reject Marx’s theory of value based on the exploitation of labour and the law of the tendency of the rate of profit to fall.  Instead, they have a distribution theory: crises are either the result of wages being too low (wage-led) or profits being too low (profit-led).  Crises in the neoliberal period since the 1980s are ‘wage-led’.  Increased (‘excessive’?) debt was a compensation mechanism to low wages, but only caused and exacerbated a financial crash later.  Profitability had nothing to do with it.

As Mavroudeas explains, the hypothesis goes: “The advent of neoliberalism in the 1980s transformed radically capitalism. Liberalisation and particularly financial liberalization led to financialisation (as finance was both deregulated and globalized). This caused a tremendous increase in financial leverage and financial profits but at the expense of growing instability. This resulted in the 2008 crisis, which is a purely financial one.”

Linking debt to the post-Keynesian distribution theory of crises follows from the theories of Hyman Minsky, radical Keynesian economist of the 1980s, that the finance sector is inherently unstable because “the financial system necessary for capitalist vitality and vigor, which translates entrepreneurial animal spirits into effective demand investment, contains the potential for runaway expansion, powered by an investment boom.” The modern follower of Minsky,Steve Keen, puts it thus: “capitalism is inherently flawed, being prone to booms, crises and depressions. This instability, in my view, is due to characteristics that the financial system must possess if it is to be consistent with full-blown capitalism.” Blakeley too follows closely the Minsky-Kalecki analysis and offers it as an improvement on or a modern revision of Marx.

Many in the financialisation school go onto argue that ‘financialisation’ has created a new source of profit (secondary exploitation) that does not come from the exploitation of labour but from gouging money out workers and productive capitalists through financial commissions, fees, and interest charges (‘usury’).  I have argued in many posts that this is not Marx’s view.

Post-Keynesian authors and supporters of financialisation like JW Mason refer to the work of mainstream economists like Mian and Siaf to support the idea that modern capitalist crises are the result of rising inequality, excessive household debt leading to financial instability and have nothing to do with the failure of profit ability in productive investment.  Mian and Sufi published a book, called the House of Debt, described  by the ‘official’ proponent of Keynesian policies, Larry Summers, as the best book this century! In it, the authors argue that “Recessions are not inevitable – they are not mysterious acts of nature that we must accept. Instead recessions are a product of a financial system that fosters too much household debt”.

For me, financialisation is a hypothesis that looks only at the surface phenomena of the financial crash and concludes that the Great Recession was the result of financial recklessness by unregulated banks or a ‘financial panic’.  Marx recognised the role of credit and financial speculation.  But for him, financial investment was a counteracting factor to the tendency for the rate of profit to fall in capitalist accumulation.  Credit is necessary to lubricate the wheels of capitalist commerce, but when the returns from the exploitation of labour begin to drop off, credit turns into debt that cannot be repaid or at serviced.  This is what the financialisation school cannot explain: why and when does credit turn into excessive debt?

UNCTAD is a UN research agency specialising in trade and investment trends. It published a report on the move from investment in productive to financial assets.  It was written by leading post-Keynesian economists. It found that companies used more of their profits to buy shares or pay our dividends to shareholders and so less was available productive investment.  But again, this does not tell us why this started to happen from the 1980s.

In the current issue of Real World Economics Review, an on-line journal dominated by post-Keynesian analysis and the ‘financialisation’ school, John Bolder considers the connection between the ‘productive and financial uses of credit’: “up until the early 1980s, credit was used mostly to finance production of goods and services. Growth in credit from 1945 to 1980 was closely linked with growth in incomes. The incomes that were generated were then used to amortize and eventually extinguish the debt. This represented a healthy use of debt; it increased incomes and introduced negligible financial fragility.”  But from the 1980s, “credit creation shifted toward asset-based transactions (e.g., real estate, equities bonds, etc.). This transition was also fuelled by the record-high (double-digit) interest rates in the early 1980s and the relatively low risk-adjusted returns on productive capital”.

‘Financialisation’ could be the word to describe this development.  But note that Bolder recognises that it was fall in profitability (‘low risk-adjusted returns on productive capital’) in productive investment and the rise in interest costs that led to the switch to what Marx would call investment in fictitious capital. But this does not mean that finance capital is now the decisive factor in crises or slumps. Nor does it mean the Great Recession was just a financial crisis or a ‘Minsky moment’ (to refer to Hyman Minsky’s thesis  that crises are a result of ‘financial instability’ alone). Crises always appear as monetary panics or financial collapses, because capitalism is a monetary economy.  But that is only a symptom of the underlying cause of crises, namely the failure to make enough money!

Guglielmo Carchedi, in his excellent, but often ignored Behind the Crisis  states: “The basic point is that financial crises are caused by the shrinking productive base of the economy. A point is thus reached at which there has to be a sudden and massive deflation in the financial and speculative sectors. Even though it looks as though the crisis has been generated in these sectors, the ultimate cause resides in the productive sphere and the attendant falling rate of profit in this sphere.”

Despite the claims of the financialisation school, the empirical evidence is just not there.  For example, Mian and Sufi reckon that the Great Recession was immediately caused by a collapse in consumption. This is the traditional Keynesian view.  But the Great Recession and the subsequent weak recovery was not the result of consumption contracting, but investment slumping (see my post,

Recently Ben Bernanke, former head of the US Federal Reserve during the great credit boom of the early 2000s, has revived his version of ‘financialisation’ as the cause of crises.  For him, crises are the result of ‘financial panics’ – ie people just lose their heads and panic into selling and calling in their credits in a completely unpredictable way (“Although the panic was certainly not an exogenous event, its timing and magnitude were largely unpredictable, the result of diverse structural and psychological factors”)In his latest revival, Bernanke considers empirically any connection between ‘financial variables’ like credit costs and ‘real economic activity’.  He concludes that “the empirical portion of this paper has shown that the financial panic of 2007-2009, including the runs on wholesale funding and the retreat from securitized credit, was highly disruptive to the real economy and was probably the main reason that the recession was so unusually deep.”

But when we look at the evidence provided, Bernanke has to admit that “balance sheet factors (ie changes in debt etc) do not forecast economic developments well in my setup.” In other words, his conclusions are not supported by his own empirical results. “It may be that both household and bank balance sheets evolve too slowly and (comparatively) smoothly for their effects to be picked up in the type of analysis presented in this paper.”

And yet there is plenty of evidence for the Marxist view that it is a collapse in profitability and profits in the productive sectors that is the necessary basis for a slump in the ‘real’ economy.  All the major crises in capitalism came after a fall in profitability (particularly in productive sectors) and then a collapse in profits (industrial profits in the 1870s and 1930s and financial profits at first in the Great Recession).  Wages did not collapse in any of these slumps until they started.

In a chapter of our new book, World in Crisis, G Carchedi provides compelling empirical support for Marx’s law of profitability showing the link between the financial and productive sectors in capitalist crises.  From the early 1980s, the strategists of capital tried to reverse the low profitability reached then.  Profitability rose partly through a series of major slumps (1980, 1982, 1991, 2001 etc).  But it also recovered (somewhat) through so-called neoliberal measures like privatisations, ending trade union rights, reductions in government and pensions etc.

But there was also another countertendency: the switch of capital into unproductive financial sectors. “Faced with falling profitability in the productive sphere, capital shifts from low profitability in the productive sectors to high profitability in the financial (i.e., unproductive) sectors. But profits in these sectors are fictitious; they exist only on the accounting books. They become real profits only when cashed in. When this happens, the profits available to the productive sectors shrink. The more capitals try to realize higher profit rates by moving to the unproductive sectors, the greater become the difficulties in the productive sectors. This countertendency—capital movement to the financial and speculative sectors and thus higher rates of profit in those sectors—cannot hold back the tendency, that is, the fall in the rate of profit in the productive sectors.”

Financial profits have claimed an increasing share of real profits throughout the whole post–World War II phase. “The growth of fictitious profits causes an explosive growth of global debt through the issuance of debt instruments (e.g., bonds) and of more debt instruments on the previous ones. The outcome is a mountain of interconnected debts. ….But debt implies repayment. When this cannot happen, financial crises ensue. This huge growth of debt in its different forms is the substratum of the speculative bubble and financial crises, including the next one. So this countertendency, too, can overcome the tendency only temporarily. The growth in the rate of profit due to fictitious profits meets its own limit: recurring financial crises, and the crises they catalyze in the productive sectors.”

What Carchedi finds is that “Financial crises are due to the impossibility to repay debts, and they emerge when the percentage growth is falling both for financial and for real profits.“ Indeed, in 2000 and 2008, financial profits fall more than real profits for the first time.

Carchedi concludes that “It is held that if financial crises precede the economic crises, the former determine the latter, and vice versa.  But this is not the point. The question is whether financial crises are preceded by a decline in the production of value and surplus value…The deterioration of the productive sector in pre-crisis years is thus the common cause of both financial and non-financial crises. If they have a common cause, it is immaterial whether one precedes the other or vice versa. The point is that the (deterioration of the) productive sector determines the (crises in the) financial sector.”

By rejecting Marx’s law of value and the law of profitability, the post-Keynesian ‘financialisation’ school opts for the idea that the distribution between profits and wages; rising inequality and debt; and above all, an inherent instability in finance that causes crises.  Actually, it is ironic that these radical followers of Keynes look to the dominance of finance as the new form of (or stage in) capital accumulation because Keynes thought that capitalism would eventually evolve into a leisure society with the ‘euthanasia of the rentier’ ie the financier, would disappear.  It was Marx who predicted the rise of finance alongside increasing centralisation and concentration of capital.

The rejection of changes in profits and profitability as the cause of crises in a profit-driven economy can only be ideological.  It certainly leads to policy prescriptions that fall well short of replacing the capitalist mode of production.  If you think finance capital is the problem and not capitalism, then your solutions will fall short.

In the Epstein book, various policy prescriptions for dealing with the evil of “excessive financialisation” are offered.  Grabel (chapter 15) wants “taxes on domestic asset and foreign exchange transactions – so-called Keynes and Tobin taxes – reserve requirements on capital inflows (so-called Chilean regulations), foreign exchange restrictions, and so-called trip-wires and speed bumps, which are early warning systems combined with temporary policies to slow down the excessive inflows and/or outflows of capital.” Pollin reckons that by “taxing the excesses of financialization and channeling the revenue appropriately, governments can help to restore public services and investments which, otherwise, are among financialization’s first and most severe casualties.”  This is no more radical than the policy prescriptions of Joseph Stiglitz, the ‘progressive’ Nobel prize winning economist who said, “I am no left-winger, I’m a middle of the road economist”.

Most important, if ‘financialisation is not the cause, such reforms of finance won’t work in ending rising inequality or regular and recurring slumps in economies.  The financialisation school needs to remember what one of its icons, Joan Robinson once said: “Any government which had both the power and will to remedy the major defects of the capitalist system would have the will and power to abolish it altogether”.

Corporate debt – the IMF gets worried

November 16, 2018

The IMF does not pull any punches in its latest post on the IMF blog.  It is really worried that so-called ‘leveraged loans’ are reaching dangerous levels globally.  These loans, usually arranged by a syndicate of banks, are made to companies that are heavily indebted or have weak credit ratings. They are called “leveraged” because the ratio of the borrower’s debt to assets or earnings significantly exceeds industry norms.  The level of these loans globally now stands at $1.3trn and annual issuance is now matching the pre-crash year of 2007.

With interest rates extremely low for years and with ample money flowing though the financial system, yield-hungry investors are tolerating ever-higher levels of risk and betting on financial instruments that, in less speculative times, they might sensibly shun.” says the IMF.  About 70% of these loans are in the US; so that is where the risk of a credit crunch is greatest.  And more than half of this year’s total involves money borrowed to fund mergers and acquisitions and leveraged buyouts (LBOs), pay dividends, and buy back shares from investor—in other words, for financial risk-taking rather than productive investment.

And even though corporate earnings in the US have risen sharply in 2018, the share of companies that have raised their debt to earnings above five times has reached a higher level than in 2007.

New deals also include fewer investor protections, known as covenants, and lower loss-absorption capacity. This year, so-called covenant-lite loans account for up 80% of new loans arranged for non-bank lenders (so-called “institutional investors”), up from about 30% in 2007.

With rising leverage, weakening investor protections and eroding debt cushions, average recovery rates for defaulted loans have fallen to 69% from the pre-crisis average of 82%. So any sizeable defaults would hit the ‘real’ economy hard.

Back in 2007, the debt crunch was exacerbated by the phenomenal growth in credit derivatives issued by non-banks, the so-called ‘shadow banks’, not subject to central bank controls.  Now again, it is in the shadow bank area that a debt crisis is looming.  These institutions now hold about $1.1 trillion of leveraged loans in the US, almost double the pre-crisis level.  On top of that are $1.2 trillion in high yield, or junk bonds, outstanding. The non-bank institutions include loan mutual funds, insurance companies, pension funds, and collateralized loan obligations (CLOs), which package loans and then resell them to still other investors. CLOs buy more than half of overall leveraged loan issuance. Mutual funds (which are usually bought by average savers through their banks) that invest in leveraged loans have grown from roughly $20 billion in assets in 2006 to about $200 billion this year, accounting for over 20% of loans outstanding.

All this debt can be serviced as long as earnings pour into companies and the interest rate on the debt does not rise too much.  Corporate earnings appear to be strong at least in the US.  In the latest quarter of reported company earnings, with 85-90% of companies having reported, US corporate earnings are up nearly 27% from the same period last year (although sales revenues are up only 8%).  US sales revenue growth is about 20% higher than in Europe and Japan but earnings growth is two to three times larger.  That tells you US earnings are being inflated by the one-off Trump corporate tax cuts etc.

Moreover it is earnings in the energy/oil sector that have led the way, as oil prices rose through the last year.  Recently, the oil price has taken a serious plunge as supply (production in the US) has rocketed. That’s going to reduce the contribution of the large energy sector to earnings growth.

Anyway, the reported earnings by companies in their accounts are really smoke and mirrors.  The real level of profits is better revealed by the wider data provided in the official national accounts.  And the discrepancy between the rise in profits as recorded there and the company earnings reports has not been as high since the bust of 2000, which eventually presaged the mild economic slump of 2001.  Reported US corporate earnings per share are rising fast, but ‘whole economy’ profits are basically flat.

The other moving part is the cost of borrowing.  The decade of low interest rates is over as the US Fed continues with its policy of hiking its policy rate.

The Fed policy sets the floor for all borrowing rates, not only in the US economy, but also abroad whenever borrowing dollars.

As I have explained in a number of posts, the Fed’s hiking policy will add to the burden of servicing corporate debt, particularly for those companies that have resorted to leveraged loans and junk bonds.  Herein lies the kernel of a future slump.

Not before the sun burns out

November 12, 2018

This year’s Historical Materialism conference in London seemed well attended and with younger participants.  HM covers all aspects of radical thought: philosophical, political, cultural, psychological and economic.  But it’s economics that this blog concentrates on and so my account of HM London will be similar.

Actually, there did not seem to be as many economic sessions as in previous years, so let me begin with the ones that I organised!  They were the two book launch sessions: one on the new book, The World in Crisis, edited by Guglielmo Carchedi and myself; and the second on my short book, Marx 200, that elaborates on Marx’s key economics ideas and their relevance in the 21st century, some 200 years after his birth and 150 years since he published Volume One of Capital.

In the session on The World in Crisis, I gave a general account of the various chapters that all aim at providing a global empirical analysis of Marx’s law of profitability, with the work of mostly young authors from Europe, Asia, North and South America (not Africa, unfortunately). World in Crisis

As the preface in the book says: World in Crisis aims to provide empirical validity to the hypothesis that the cause of recurring and regular economic crises or slumps in output, investment and employment can be found ultimately in Marx’s law of the tendential fall in the rate of profit on capital.  My power point presentation showed one overall result: that wherever you look at the data globally, there has been a secular fall in the rate of profit on capital; and in several chapters there is evidence that the causal driver of crises under capitalism is a fall in profitability and profits.

In the session, Tony Norfield presented his chapter on derivatives and capital markets.  Tony has just published his powerpoint presentation on his excellent blog site here.  Tony traces the origin of the rise of derivatives from the 1990s to the instability of capital markets. Derivatives did not cause the global financial crash in 2008 but by extending the speculative boom in credit in the early 2000s, they helped spread the crash beyond the borders of the US and connecting the crash in the home markets to mortgages, commodities and sovereign debt.  Tony argued finance is now dominant in the controlling and distributing value globally but that still does not mean that finance can escape the laws of motion of capital and profitability.  On the contrary, finance intensifies the crisis of profitability.  So, in policy terms, acting to regulate or take over banking and finance will not be enough to change anything.

Brian Green stepped in to fill the slot for my fellow editor Guglielmo Carchedi who was unable to make the session.  Brian offered an intriguing new insight on how to measure the rate of profit on capital that could include circulating as well as fixed assets.  Most Marxists consider that it is impossible to properly measure circulating capital to add into the denominator in Marx’s rate of profit formula (s/(c+v)  Brian offers a method using national accounts to achieve this and, in so doing, he argued that a much more precise measure of the rate of profit can be achieved that will enable us to see more accurately any changes in profits and investment that would lead to a slump.

Some important questions were asked by the audience.  In particular, how can we connect Marx’s law of profitability (the rate of profit) with crises based on a falling mass of profit?  In Chapter One of the book, Carchedi and I show just that: that a falling rate of profit eventually leads to a fall in the mass of profit (or a fall in total new value) which triggers the collapse in investment.

Indeed, contrary to the view of Keynesians that a fall in household consumption triggers a crisis, it is investment that swings down, not consumption.  In the Great Recession, profits led investment which led GDP; consumption hardly moved.  Here is a graph showing the change in investment and consumption one year before each post-war slump in the US.

Another question was: why do bourgeois economists find a rise in the rate of profit from the early 1980s if Marx’s law is right?  The answer is two-fold: first, while Marx’s law holds that there will be a secular fall in profitability, it will not be in a straight line and there will be periods when the counteracting factors (eg. a rising rate of surplus value) to the law as such (a rising organic composition of capital) will be stronger.  And second, this was the case for the so-called neoliberal period from the early 1980s to the end of the century.  So mainstream measures, which always start at the beginning of the 1980s, miss part of the picture.

In the session on the book Marx 200, in my presentation, Marx 200 HM, I again outlined what I consider are the key laws of motion of capitalism that Marx revealed in his economic analysis: the law of value, the law of accumulation and the law of profitability.  The latter flows from the first two, so Marx’s theory of crises depends on all three laws being correct.  At the session, Riccardo Bellofiore of the University of Bergamo, kindly agreed to offer a critique of the book and my approach.  Riccardo considered that my emphasis on using empirical data and official statistics bordered on a ‘logical positivist’, undialectical method.  As Paul Mattick, the great Marxist economist of the 1950 and 1960s argued, it was impossible to use official data based only in fiat money terms to ascertain the changes in value in Marxist terms.  Moreover, my emphasis on data and economic trends was too ‘determinist’ and failed to take account of the role of working class struggle.  Not everything can be decided by economic forces, there was also the subjective role of the class and I was dismissing this.

Naturally I disagree.  It seems to me that ‘scientific socialism’ is just that: a scientific approach to explaining the irreconcilable contradiction within capitalism and why it needs to be and must be replaced with socialism if human society is to progress or even survive.  Marx recognised the role of empirical data in his backing up his theories and often attempted with the limited resources at his disposal to accumulate such (in Capital and elsewhere).   We cannot just assert that Marx’s laws of motion must be right because there are recurrent crises in capitalism – we have to show that it is Marx’s laws that lie behind these crises and not other explanations.  If correct, other explanations might (and do) mean that capitalism just needs ‘modification’ or ‘management’ (Keynes) or even better left alone (neoclassical and Austrian).

It is not determinist to argue that economic conditions are out of the conscious control of both capitalists and workers (an Invisible Leviathan) and the law of motion of capitalism will override the ability of people in struggle to irreversibly change their lives – without the ending of capitalism.  Class struggle operates continually, but its degree of intensity and the level of success for labour over capital will be partly (even mainly) determined by the economic conditions. Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing” (Marx).

A number of other important issues were raised by the audience:  what about the three laws that Uno Kozo, the Japanese Marxist economist identified?  I cannot answer this one but there was a session at HM on just that with Elene Lange.

The other question that came up was again whether Marx’s law of profitability was really just a secular theory (ie long term) and basically irrelevant as offering any underlying cause of recurrent crises; or whether it was just a cyclical theory, explaining the ‘business cycle’ or ‘waves of capital accumulation’, and has nothing to say about the eventual demise or breakdown of capitalism.

It was Rosa Luxemburg’s view that it was the former – a very long-term tendency that was so long term that the ‘sun would burn out’ before a falling rate of profit would play a role in pushing capitalism into crises (Luxemburg made this remark sarcastically in reply to a Russian economist who suggested that Marx’s law of profitability might well be relevant).  On the other hand, many Marxist economists who do accept the relevance of Marx’s law of profitability in recurrent crises deny that it offers a prediction for the transient future of capitalism (ie capitalism cannot last forever).  In my view, the law is both secular and cyclical and I present arguments for this view in my book, The Long Depression.  And in the new book, The World in Crisis, there is evidence of both the secular view (Maito) and the cyclical view (Tapia).

Enough of my sessions, because it would be amiss not mention several good sessions on Latin America (Mariano Feliz, Angus McNelly); and looking back at Marx’s value theory
(Andy Higginbottom (Higginbottom2012JAPEpublished),
Heesang Jeon Value_Use_Value_Needs_and_the_Social_Div).
I shall be returning to these topics on my blog over the next period.

Finally, there was the Isaac Deutscher Memorial Prize awarded at HM for the best Marxist book of the year.  Last year’s winner was William Clare Roberts for his intriguing Marx’s Inferno: The Political Theory of Capital (Princeton UP).  For my initial thoughts on this work, see here. But last week, after hearing my namesake speak on the subject of the nature of freedom under socialism, I shall be returning to this subject in a future post.

The shortlist for 2018 was:

Sven-Eric Liedman, A World to Win: The Life and Works of Karl Marx (Verso)
Kim Moody, On New Terrain: How Capital is Reshaping the Battleground of Class War (Haymarket Books)
Kohei Saito, Karl Marx’s Ecosocialism: Capital, Nature, and the Unfinished Critique of Political Economy (Monthly Review)
Ranabir Samaddar, Karl Marx and the Postcolonial Age (Palgrave Macmillan)

America’s halfway house

November 7, 2018

The mid-term Congressional elections saw a swing to the opposition Democrats in the Lower House and the Republicans were ousted as the majority party.  This is a blow to President Trump who mounted a campaign based on fear of immigrant caravans flooding into the US from Latin America and supposed rising crime provoked by the Democrats. This line of attack did not work.  But the perceived strong US economy seems to have had the effect of consolidating Trump’s position in the Senate.  There the Republicans gained seats. Losing control of the lower house means that any further tax and financial handouts to big business and the rich are likely to be curtailed. But as the Republicans increased their hold on the Senate,Trump can expect to continue with his wild foreign policy outbursts and his ‘trade war’ with China.

Although there are more ‘progressive’, Sanders-type Democrats elected to Congress, the Democrat party remains a stalwart supporter of (and funded by) Wall Street and big business. As Democrat House leader Nancy Pelosi has made clear, “I have to say, we’re capitalist ― and that’s just the way it is”. She added that “However, we do think that capitalism is not necessarily meeting the needs with the income inequality that we have in our country.”  But she says nothing about how to reverse this income inequality (let alone wealth inequality).  Even the ‘left wing’ of the Democrats as led by Senator Elizabeth Warren, stay firmly in the capitalist camp – merely looking for ways to make it “accountable”.

So the Americans now face a second half of the Trump presidential term with little changed.  Except that there are increasing concerns that the supposed Trump economic boom is fast coming to an end. Back in August, I said that Q2 2018 would be the peak in US growth as the effect of Trump’s one-off cuts dissipate, with the impact of Trump’s protectionist policies on global growth to factor in.  “Economic activity is weakening again in Europe.  And then there is the emerging ‘emerging market’ debt crisis – Argentina, Turkey, Venezuela onto Brazil and South Africa.  So the last quarter is not going to be exceeded this quarter.”

And so it has proved.  Ex-Goldman Sachs chief economist and now writer for the UK’s Financial Times, Gavyn Davies delivered his latest global economic forecast.  Headlining the piece as “Global slowdown begins to look more troublesome”, Davies reckons the recent stock market ‘correction’ was “remarkable for its extent, the frequency of consecutive negative days, and the synchronised decline in all the major markets.”  Investors were becoming increasingly worried about a new global economic recession.

Davies goes on that “the flow of economic data suggest that there was indeed a decline in world activity in October.”  And he agrees with my own April conclusion that “the global growth rate clearly peaked late in 2017”.  He concludes that “the period of above trend average growth that was so powerful last year proved short-lived and now seems to have been mainly cyclical, rather than secular, in nature.”  Exactly.

Davies estimates that global economic growth has slowed from 5% in 2017 to just a 3% rate now, about 0.7% below the long-term trend.  China is slowing, Europe is slowing, only the US has been holding up.

Davies reckons the US is set to slow from here as Trump enters the next two years of his presidency.  However, Davies is still confident that world capitalism will be fine because “a significant slowdown in the US should be offset by rebound in China, Japan and the Eurozone” so that growth will get back on trend.

This optimistic view (which probably remains the consensus among mainstream economic views) is not supported by others.  John Mauldin put it simply in a recent post on his blog: “All good things come to an end, even economic growth cycles. The present one is getting long in the tooth. While it doesn’t have to end now, it will end eventually. Signs increasingly suggest we are approaching that point. Whenever it happens, the next downturn will hit millions who still haven’t recovered from the last recession, millions more who did recover but forgot how bad it was, and millions more who reached adulthood during the boom. They saw it as children or teens but didn’t feel the full impact. Now, with their own jobs and families, they will. Again, there’s no doubt—none, zero, zip—this will happen. The main question is when.”

Mauldin’s main argument for a fast approaching new recession is one spouted by the Austrian school of economics, represented in official circles by the Bank for International Settlements (BIS), an international research agency for the world’s central banks.  And the cause of the next recession for the BIS?  Burgeoning global debt and the cost of servicing that debt.  Mauldin points out the huge rise in public sector debt levels that Trumps tax cuts and big business handouts are creating. We are one recession away from having a $30 trillion US government debt total. It will happen seemingly overnight. And deficits will stay well above $1 trillion per year every year after that, not unlike now.”

I too have emphasised the rising level of debt both before the global financial crash and the Great Recession and after – contrary to the perception that I am just a ‘monocausal’ rate of profit man!  The high level of debt was a trigger for the crash of 2008-9; has been a depressing factor on the ability of the major capitalist economies to recover to previous rates of growth; and will be an important trigger in the next recession.

But it is corporate debt that is much more important as the motivator of a crash than the public debt that the neoclassical supporters of ‘austerity’ always look at.  Household and corporate debt is growing fast, too, and not just in the US.  Mauldin explains that US companies are significantly more leveraged now than they were ahead of the 2008 crisis. “We saw then what happens when the commercial paper market seizes up, and that was without a Fed in tightening mode. Now we have a central bank both raising short-term rates and slowly ending its crisis-era accommodations. Recent comments from FOMC members say they have no intent of stopping, either. A few high-profile junk bond defaults could ignite fears quickly.”  Everywhere now central banks are tightening liquidity (graph below of the top four central banks rate of money ‘printing’).

Mauldin warns: “There are trillions of dollars of low-rated corporate debt that can easily slide into the junk debt category in a recession. Since most public pension, insurance, and endowment programs are not legally allowed to own junk-rated debt, I can see where it could easily cause a debt crisis along the lines of the previous subprime crisis.”  

What the Austrians don’t explain is why rising corporate debt could become a trigger for a new crisis – apparently it is just a fact of life in capitalist expansion like having a wild party one night eventually turns into a long and painful hangover the next morning.  The Marxist explanation is that when the profitability of capital in the productive sectors of the economy falls away, then credit is no longer the handmaiden of investment-led growth but turns into an oppressive squeeze of profits and production. Credit helps to fuel a rising economy but increases the degree of the crash when it comes, and then slows the recovery as credit becomes debt that weighs down on revenues and profits.  Below is a table that shows how increased debt since the end of the Great Recession no longer helped real GDP growth but hindered it.

And that is the danger ahead.  As the BIS showed in a September report, there is a large number of what are called ‘zombie’ businesses in the major economies which do not earn enough profits to cover the interest on their existing debt.  So they cannot invest and grow but just become the ‘undead’.  Around 12-15% of all quoted companies in the major economies are in this position – and this before interest rates on debt have risen significantly.

So can Trump and the US economy avoid a recession in the next two years?  Davies reckons that the US can because the rest of the world will recover to faster growth.  But there is no evidence that profitability, investment and production are likely to pick up in 2019 in Europe, Japan or the rest of Asia.  On the contrary, look at the latest measure of business activity in the Eurozone – the so-called PMI.  The composite PMI came in at 53.1 in October 2018, the weakest growth rate in the private sector since September 2016 as manufacturing expansion eased to a near four-year low (PMI at 52.0 vs 53.2 in September) and services output rose the least since January 2017 (PMI at 53.7 vs 54.7 in September).

And just look at the state of the Italian economy, as Italy’s budget with the EU takes on a Greek-style battle.

Then there is the UK.  British capital is suffering from the uncertainties of Brexit.  British small and medium-sized British factories are braced for the worst profits outlook in at least nine years, according to a recent survey that showed companies putting investment plans on ice ahead of Brexit.

Globally, manufacturing output growth is dropping back fast to 2016 levels.

According to JP Morgan economists and their model, overall global growth slipped back to a 3% annual rate in October, after peaking at about 3.7% at the beginning of 2018.

And there are increasing signs that US economic growth has also peaked.  The latest real GDP report for Q3 2018 showed a 3.5% annual real GDP growth rate (or 3% up from the same period in 2016).  But 2.1% of that GDP growth was actually inventory building, ie stock not sold.  Eventually production will have to slow so that this stock can be run down. And the Atlanta GDP Now forecast for the fourth quarter of 2018 is 2.9%, a further slowing.

Also in Q3. US non-residential business investment grew only 0.8% annualized, a sharp deceleration from the first quarter’s 11.5% rate.  Capital spending had accelerated from a slump in 2015 because mining, oil and gas investment rebounded as energy prices rose. Excluding mining, oil and gas, business spending on structures such as offices, factories and stores did jump in the first quarter, perhaps because of the Trump tax cut, but then cooled.

Moreover, non-financial profits remain below 2014 levels and, as I showed in a recent post, the rate of profit on capital in the US last year was flat at best over 2016, and well below the level of 2014.

The slower the US economy grows and the more the Federal Reserve hikes interest rates, the more the squeeze will be on the capitalist corporate sector and its ability to service their debts. Economists at Goldman Sachs, who have compiled ‘financial conditions’ into a single index, estimate that easier financial conditions helped bolster growth throughout 2017, led by surging stocks. In 2018 that contribution ebbed, as stocks plateaued and then in recent weeks dropped. Combine flat to lower stocks with higher bond yields and a generally firm dollar, and Goldman estimates financial conditions are now subtracting from, rather than adding to, growth, and that drag will peak in mid-2019.

There is a simple macro accounting identity for Marxists (the opposite of the Keynesian):  Profits + Government surpluses = Investment and the Current Account. If profits are set to fall while Trump runs huge government deficits (6% of GDP), then investment must fall and the current account deficit (3% of GDP) must narrow. That means a collapse in production and imports – a slump.

Timing a recession is notoriously hard (I’ve tried!).  And this long, crawling depressive ‘recovery’ has defied the odds; as only one recovery on record (from 1991-2001) has lasted as long as a decade. But there will be no escape for American capitalism as Trump enters the second half of his presidential term.

The US rate of profit in 2017

November 2, 2018

Official data are now available in order to update the measurement of the US rate of profit a la Marx for 2017.  So, as is my wont, I have updated the time series measure of the US rate of profit.  If you wish to replicate my results, I again refer you to the excellent manual for doing so compiled by Anders Axelsson from Sweden,

There are many ways to measure the rate of profit (see  As in last year, I have updated the measure used by Andrew Kliman (AK) in his book, The failure of capitalist production.

AK measures the US rate of profit based on corporate sector profits only and using the historic cost of net fixed assets as the denominator.  AK considers this measure as the closest to Marx’s formula, namely that the rate of profit should be based on the advanced capital already bought (thus historic costs) and not on the current cost of replacing that capital. Marx approaches value theory temporally; thus the price of denominator in the rate of profit formula is at t1 and should not be changed to the price at t2.  To do the latter is simultaneism, leading to a distortion of Marx’s value theory.  This seems correct to me.  The debate on this issue of measurement continues and can be found in the appendix in my book, The Long Depression, on measuring the rate of profit.

What are the results of the AK version of the rate of profit based on the US corporate sector?

There has been a fall in the rate of profit in 2017 from 24.4% in 2016 to 23.9% in 2017. Indeed, the US rate of profit on this measure has now fallen for three consecutive years from a post-crash peak in 2014.  This suggests that the recovery in profitability since the Great Recession low in 2009 is over.  The AK measure confirms Marx’s law in that there has been a secular decline in the US rate of profit since 1946 (25%) and since 1965 (30%).  But what is also interesting is that, on AK’s measure, the rate of profit in the US corporate sector has risen since the trough of 2001 and the Great Recession of 2009 did not see a fall below that 2001 trough.  Thus the 2000s appear to contradict the view of a ‘persistent’ fall in the US rate of profit.  I consider the explanation for this later.  But it is also true that the US rate of profit has not returned to the level of 2006, the registered peak in the neo-liberal period on AK’s measure. Indeed, in 2017 it was 17% lower than 2006.

Readers of my blog and other papers know that I prefer to measure the rate of profit a la Marx by looking at total surplus value in an economy against total productive capital employed; so as close as possible to Marx’s original formula of s/c+v.  So I have a ‘whole economy’ measure based on total national income (less depreciation) for surplus value; net fixed assets for constant capital; and employee compensation for variable capital – a general rate of profit, if you like.

Most Marxist measures exclude any measure of variable capital on the grounds that it is not a stock of invested capital but a flow of circulating capital that cannot be measured from available data.  I don’t agree that this is a restriction and G Carchedi and I have an unpublished work on this point.  However, given that the value of constant capital compared to variable capital is five to eight times larger (depending on whether you use a historic or current cost measure), the addition of a measure of variable capital to the denominator does not change the trend in the rate of profit.  The same result also applies to inventories (the stock of unfinished and intermediate goods).  They should and could be added as circulating capital to the denominator for the rate of profit, but I have not done so as the results would be little different.

On my ‘whole economy’ measure, the US rate of profit since 1945 looks like this. As for 2017, my results show a slight rise over 2016.  But the 2017 rate of profit is still 6-10% below the peak of 2006 and below the 2014 peak (as it is in the AK measure).

I have included measures based on historic (HC) and current costs (CC) for comparison.  What this shows is that the current cost measure hit its low in the early 1980s and the historic cost measure did not do so until the early 1990s.  Why the difference?  Well, Basu (as above) has explained. It’s inflation.  If inflation is high then the divergence between the changes in the HC measure and the CC measure will be greater.  When inflation drops off, the difference in the changes between the two HC and CC measures narrows.  From 1965 to 1982, the US rate of profit fell 21% on the HC measure but 36% on the CC measure.  From 1982 to 1997, the US rate of profit rose just 10% on the HC measure, but rose 29% on the CC measure.  But over the whole post-war period up to 2017, there was a secular fall in the US rate of profit on the HC measure of 28% and on the CC measure 28%!

There are many other ways of measuring the rate of profit.  And this was raised in an important and useful discussion in a workshop on the rate of profit (my rough notes on this are here) organised by Professors Murray Smith and Jonah Butovsky during my visit to Brock University, Southern Ontario, Canada two weeks ago.  Murray and Jonah have contributed to the new book, World in Crisis, edited by Mino Carchedi and myself.  In their chapter, they argue that a clear distinction must be made between the productive sectors of the capitalist economy ie where new value is created and the unproductive, but necessary, sectors of the economy.  The former would be manufacturing, industry, mining, agriculture, construction and transport and the latter would be commercial, financial, real estate and government.

Following the pioneering work of Sean Mage in the 1960s, Smith and Butovsky consider these socially necessary unproductive sectors as ‘overheads’ for capitalist production and so should be included in constant capital for the purposes of measuring the rate of profit. On their current cost measure, the US rate of profit has actually risen secularly since 1953.  However, looking at only the non-financial sector, Smith and Butovsky find that the US rate of profit peak of 2006 was some 50% below the peaks of the 1950s and 1960s, confirming Marx’s law.  Moreover, the strong rise in profitability recorded in all measures above can be considered as anomalous and based to a considerable extent on ‘fictitious profits’ booked in the finance, insurance, and real-estate sectors, and perhaps also by many firms operating in the productive economy.”  This is a similar conclusion reached by Peter Jones. He found that if you strip out ‘fictitious profits’, then the US corporate sector rate of profit actually fell from 1997 – see his graph below.

Recently, Lefteris Tsoulfidis from the University of Macedonia separated the rate of profit for the whole economy into a ‘general rate’ for all sectors and a ‘net rate’ for just the productive sectors.  Lefteris kindly sent me his data.  And this shows the following for the US general and net rate of profit from 1963 to 2015.

As in other measures, the US rate of profit is around 30% below 1960 levels but bottomed in the early 1980s with a modest recovery to the late 1990s in the so-called neoliberal period.  But interestingly, on Tsoulfidis’ measures, there was a decline, not a rise, in the rate of profit from 2000 leading up to the Great Recession.

I looked at the US non-financial corporate sector (which is not strictly the same as the Marxian definition of the ‘productive’ sector), using data from the Federal Reserve.  The net operating surplus over net financial assets is the measure I used for the rate of profit here.

This Fed measure shows that the US rate of profit peaked in 1997 to end the neo-liberal period and since then that rate has not been surpassed even in the credit-fuelled fictitious profits period from 2002 to 2006.  Indeed, after peaking post the Great Recession in 2012, the Fed measure has fallen consistently right up to mid-2018.  The Fed measure is quarterly and so provides a more up to date result.  On this measure, the US rate of profit remains 32% below its ‘golden age’ peak in 1966, again confirming Marx’s law.

Marx’s law is also confirmed because the driver of changes in US profitability depends on the relative movement of the two Marxian categories in the accumulation process: the organic composition of capital and the rate of surplus value (exploitation).  Since 1965 there has been the secular rise in the organic composition of capital of 21%, while the main ‘counteracting factor’ in Marx’s law, the rate of surplus value, has fallen over 4%.  Conversely, in the neo-liberal period from 1982 to 1997, the rate of surplus value rose 16%, more than the organic composition of capital (7%), so the rate of profit rose 9.5%.  Since 1997, the US rate of profit has fallen over 5%, because the organic composition of capital has risen over 14%, outstripping the rise in the rate of surplus value (5.4%).

One of the compelling results of the data is that they show that each economic recession in the US has been preceded by a fall in the rate of profit and then by a recovery in the rate after the slump.  This is what you would expect cyclically from Marx’s law of profitability.

Clearly a significant fall in the rate of profit is an indicator for an upcoming slump in investment and production in a capitalist economy.  Marx argued that a falling rate of profit would, for a while, be compensated for by an expansion of capital investment, so that the mass of profits would continue to rise.  But that could not last and eventually the fall in the rate of profit would lead to a fall in the mass of profits, which would engender ‘absolute overproduction’ of capital and a slump in production.  Marx explains all this clearly in Volume 3 of Capital, Chapter 15.  And that is what occurred in the Great Recession.

What is the situation now in the middle of 2018?  Well, US corporate profits are still rising, although non-financial profits are below the level at the end of 2014.

In a recent paper, G Carchedi identified three indicators for when crises occur: when the change in profitability; employment; and new value (v+s) are all negative at the same time.  Whenever that happened (12 times since 1946), it coincided with a crisis or slump in production in the US.  This is Carchedi’s graph.

My updated measure for the US rate of profit to 2017 confirms the first indicator is in place.  However, ‘new value’ had two quarters of decline in 2015 and one in 2017, but in the first two quarters of 2018 it has been rising; and employment growth continues.  So, on the basis of these three (Carchedi) indicators, a new recession in the US economy is not imminent as 2018 moves into the last quarter.

In sum, Marx’s law of profitability over the long term is again confirmed.  I am reminded that back in 2013, Basu and Manolakos did a highly sophisticated econometric analysis of Marx’s law for the US rate of profit, controlling for all the counteracting factors in the law like cheapening constant capital and a rising rate of surplus value.  They say “We find weak evidence of a long-run downward trend in the general profit rate for the U.S. economy for the period 1948-2007.”  By which they mean that there was evidence but it was not decisive. But they also found that a decline in the US rate of profit was “negative and statistically significant” ie the fall in the rate of profit was not random.  So “we find statistical evidence in favor of Marx’s hypothesis regarding the tendency of the general rate of profit to fall over time.”  Basu and Manolakos reckon there was an average annual 2% fall in the US rate of profit over the period.  In my own cruder calculations, I find exactly the same result for the period 1947-07 in the historic cost measure.

In conclusion, there has been a secular decline in US profitability, down by 28% since 1946 and 20% since 1965; and by 6-10% since the peak of 2006.  So the recovery of the US economy since 2009 at the end of the Great Recession has not restored profitability to its previous level.  Also, the driver of falling profitability has been the secular rise in the organic composition of capital, which has risen around 20% since 1965 while the main ‘counteracting factor’, the rate of surplus value, has fallen.

In 2017, the US rate of profit fell compared to 2016 on some measures (2%) or rose slightly on mine (1%).  All measures show that the US rate of profit in 2017 was 6-10% below the level of 2014.

Brazil’s Tropical Trump

October 29, 2018

The victory of Jair Bolsonaro as the new President of Brazil puts in the most far-right administration in the top 20 nations of the world.  Bolsonaro says he wants to crush ‘communism’, and restore ‘law and order’ by putting the military in control of the streets and stuffing the Supreme Court with his appointed judges.  He wants to loosen gun controls, crack down on gays and other ‘criminal’ elements, support President Trump’s policies and open up the economy and the Amazon forests to ‘proper exploitation’.

How was it possible that Bolsonaro won this election?  Well, his support was to be found in the burgeoning religious evangelical movement in Brazil, among the rich and small business sectors who have been militantly opposed to the rule of the Workers Party since 2002 under Lula and then Dilma, who they saw as taxing and regulating business for the benefit of low income families, and destroying family values.  But the biggest reason was that most Brazilians are fed up with rising crime, high unemployment and corruption by all politicians.

Bolsonaro is seen as the man to end corruption (of course that will turn out to be the opposite).  To the middle classes, the Workers Party is seen as ‘stealing’ the country.  Lula is still in custody for corruption (probably on trumped up charges and mainly to ensure he could not run in the election).  But Bolsonaro won mainly because of the disillusionment of the working class with the Workers Party.  After the collapse of commodity prices in resources and agriculture, the economy went into recession. The blame for this and corruption has been laid at the door of the Workers Party.

But Bolsonaro did not get the majority of the 147m Brazilians entitled to vote.  Although it is compulsory to vote in Brazil, around 30% spoilt their ballots or entered blank papers.  Also the Workers Party is still the largest party in the lower house of the Brazilian Congress, which has 30 different parties represented.  So it won’t be easy for Bolsonaro to get his most authoritarian measures passed democratically.

Most important remains economic policy.  As I have explained in previous posts, the Brazilian economy is in trouble.  Economic growth is stagnating at best.

Unemployment is near post-global crash highs.

Because the rich do not pay taxes and inequality of income and wealth is one of the highest in the world, the government does not raise enough revenue to avoid huge annual deficits.

As a result, Brazil’s public sector runs the largest debt to GDP among all emerging economies.

The solution of the rich and the Bolsonaro administration will be ‘austerity’, namely yet further cuts in public spending (many Brazilian state governments are already bust and starved of funds), privatisations and deregulation of industry and the banks – but, above all, the destruction of Brazil’s state pension scheme.

Stock and bond markets have risen on hopes Mr Bolsonaro will deliver on this.  These ‘neo-liberal’ policies will be pursued by Bolsonaro’s likely finance chief Paulo Guedes.  This University of Chicago-trained economist is co-founder of BTG Pactual, once the country’s biggest home-grown independent investment bank. Markets expect Guedes to maintain a freeze on fiscal spending introduced by current President Michel Temer. They also see him introducing formal autonomy for the central bank and allowing state-owned oil company Petrobras to set fuel prices at ‘market levels’.

On Sunday evening, following the victory of his putative future boss, Guedes said pension reform as well as slashing the “state’s privileges and waste” would be a priority for the new government.   So just as in the US, Brazilians will have ‘populist’ law and order talk from the President supposedly to stop crime, while introducing strident ‘neo-liberal’ reforms to help big business in Brazil and cut the share of income going to labour.

As I said in a post one year ago, the international agencies, foreign investors and Brazilian big business want an administration in power for four more years from 2018 to impose austerity, labour ‘flexibility’ and privatisations. That will drive up inequality further. Ironically, it won’t reduce the public sector debt because economic growth and tax revenues will be too low.  Indeed, the IMF forecasts debt will be much higher by 2020.

At the same time, more than half of Brazil’s population remain below a monthly income per head of R$560.  To cut this level of poverty to under 25% would require productivity four times as fast as the current rate. And there is no prospect of that under capitalism in Brazil.  That’s because the profitability of Brazilian capital is low and continues to stay low.

The profitability of Brazil’s dominant capitalist sector had been in secular decline, imposing continual downward pressure on investment and growth.

Brazil’s ruling elite face a difficult task in imposing control over its working class and cutting public spending and wages, and thus attracting significant foreign capital.  Brazilian capitalism will be stuck in a low growth, low profitability future with continuing political and economic paralysis.  And that is without a new global recession coming over the horizon.

Socialism and the White House

October 27, 2018

The Trump White House research team have issued a very strange report.  It’s called “The Opportunity Costs of Socialism,”.  It purports to prove that ‘socialism’ and ‘socialist’ policies would be damaging to Americans because the ‘opportunity costs’ of socialism compared to capitalism are so much higher.

What is strange and rather amusing is that the White House advisers to Trump deem it necessary to explain to Americans the failures of ‘socialism’ in 2018.  But when you delve into the report, it becomes clear that what is worrying the Trumpists is not ‘socialism’, but the policies of left Democrat Bernie Sanders for higher taxes on the rich 1% and the increased popularity of a ‘single-payer’ national health service for all.  The popularity of these policies threatens the Republican majority in Congress and also the wealth and income of big pharma corporations and Trump’s billionaire supporters.

What the White House means by socialism is apparently a national economy that is dominated and controlled by the state rather than the market. “Whether a country or industry is socialist is a question of the degree to which (a) the means of production, distribution, and exchange are owned or regulated by the state; and (b) the state uses its control to distribute the economic output without regard for final consumers’ willingness to pay or exchange (i.e., giving resources away “for free”).”

So the report has a wide and all-encompassing definition of ‘socialism’ that includes Maoist China (but not modern China it seems), the Soviet Union, Cuba and Venezuela and the Nordic ‘social democratic’ states.  The latter are bunched together with the former because Sanders lauds the latter and not the former.  Naturally this raises the question of whether any of these countries can be called ‘socialist’ ie a peasant-dominated Soviet Union in 1920 or China in 1950; or the family-owned corporate dominated economies of Sweden, Denmark and Norway.

The White House definition is not socialism or communism as proclaimed by Marx and Engels in the Communist Manifesto.  For them, Communism is a super-abundant society with no role for a state but only for the free association of individuals in common action and ownership of the products of labour.  Of course, such a world system does not exist and so cannot be compared with capitalism.  Instead, in effect, the White House is really trying to compare a planned national economy with a capitalist-dominated national market economy. But we should not be too harsh on the White House researchers: they are not going to know what socialism is; and their definition (that they got from the dictionary, apparently) is probably most people’s view.

Leaving that aside, what is wrong with all these ‘socialist’ states?  Well, “they provide little material incentive for production and innovation and, by distributing goods and services for free, prevent prices from revealing economically important information about costs and consumer needs and wants.”  In Maoist China and Stalinist Russia “their non-democratic governments seized control of farming, promising to make food more abundant. The result was substantially less food production and tens of millions of deaths by starvation.”  Thus socialism was a disaster.

From their definition, the White House report concludes: “The historical evidence suggests that the socialist program for the U.S. would make shortages, or otherwise degrade quality, of whatever product or service is put under a public monopoly. The pace of innovation would slow, and living standards generally would be lower. These are the opportunity costs of socialism from a modern American perspective.”

The White House report also claims that “replacing U.S. policies with highly socialist policies, such as Venezuela’s, would reduce real GDP at least 40 percent in the long run, or about $24,000 per year for the average person.”  And replacing the current US tax regime with that of the Nordic countries would increase the tax burden on Americans by $2,000 to $5,000 more per year net of transfers. “We estimate that if the United States were to adopt these policies, its real GDP would decline by at least 19 percent in the long run, or about $11,000 per year for the average person.”

The first argument of the White House report is that living standards are higher in the US compared to the ‘socialist’ Nordic states.  A most hilarious case study is presented for this claim: the cost of buying a pick-up truck in Texas compared to the cost in Scandinavia!

Well, a pick-up truck may be much more useful in Texas than Stockholm and, given that taxes on vehicles are lower in the US and fuel taxes are substantially lower, the argument that a pick-up truck costs much less than in the Nordic countries is irrefutable!  But does the more expensive truck in Norway compared to Texas prove that there is a higher ‘opportunity cost’ of living in ‘socialist’ Norway?  What about public transport, public services, health and education, unemployment and welfare benefits – things that the richer part of any capitalist country does not need or use as a ‘social wage’?  These things are not compared by the White House report.

The report points out that real GDP per capita is higher in the US than in the Scandinavian economies and in the non-oil part of Norway.  The data show this is true.  But all this shows is that Northern Europe started at a lower level when Marx wrote the Communist Manifesto.  Actually, if we look at real GDP growth per capita since 1960 (when Americans are told that they live in the greatest place on earth), US growth has fallen behind the most Nordic economies and for that matter, most European economies.  Indeed, since the early 1990s, real GDP per capita growth has been faster in Sweden than in the US.

And as for China, the growth rate has outstripped that of the US many times over since the 1990s, taking 800m people out of World Bank defined poverty.  No doubt the White House researchers would argue (although they don’t) that China turned ‘capitalist’ in the 1980s and this is why the economy has rocketed.  But this would be inconsistent with their view that a ‘socialist’ state is one where the state dominates and controls the free market economy.  For China must be the most state-directed major economy in the world, way more that the so-called ‘mixed economies’ of the Nordic countries.

Overall income is one thing but the distribution of that income is another.  Here the White House has to admit that “though the Nordic economies exhibit lower output and consumption per capita, they also exhibit lower levels of relative income inequality as conventionally measured.”  What is interesting here is that the US still has much higher inequality of wealth and income, but Nordic inequality has also risen much in the last 30 years as governments there adopted pro-business polices of reducing corporation and personal taxes (ie pro-market policies).

Indeed, as the White House report says, on some measures, the Nordic tax system is more accommodating to the top 10% than the US system – at least for personal tax: Lower personal income tax progressivity in the Nordic countries, combined with lower taxation on capital and on average only modestly higher marginal personal income tax rates on the right tail of the income distribution, means that a core feature of the Nordic tax model is higher tax rates on average and near-average income workers and their families. That is, contrary to the misperceptions of American proponents of Nordic-style democratic socialism, the Nordic model of taxation relies heavily not on imposing punitive rates on high-income households but rather on imposing high rates on households in the middle of the income distribution.”

This may be an attack on Sanders’ praise for the Nordic economies, but it seems to me that it proves how far away the Nordic states are now from ‘social democracy’, let alone ‘socialism’.  On the one hand, the White House report claims that ‘socialist’ states want to tax the rich harder (a la Sanders) but in reality they tax them less hard than in the US!

Of course, this is all smoke and mirrors.  All the data on inequality of wealth and income in the major advanced economies show that the US is the most unequal, both before and after tax; and that real disposable incomes for the average American family have hardly risen in 30 years while the top 1% have seen substantial rises.

The share of wealth held by the top 1% of earners in the US doubled from 10% to 20% between 1980 and 2016, while the bottom 50% fell from 20% to 13% in the same period.

But the main part of the White House report is to argue that privately-funded education and healthcare is more cost-effective than publicly-funded state schools or a national health service.  The report argues that paying for a US college education will bring a much bigger return in future earnings than it will in Norway, where there are no college fees.  What this implies, however, is that people in the US without higher education qualifications have no chance of earning decent incomes, while those without degrees in Norway do not earn much less than those that do!  So actually the opportunity cost of not having a college education in Norway is much lower.

Then there is healthcare.  According to the White House, ‘single payer’ health systems, as applied in nearly all advanced economies, are not as efficient and beneficial to health as America’s free market insurance company schemes, especially if Obama-care is excluded.  The proof? Well, old people in the US have to wait less time to be seen by a specialist than in single-payer systems, says the report.

Actually, American ‘seniors’ mostly receive Medicare, so they are on a single payer scheme when they get to see a specialist!

All healthcare systems are under pressure as people live longer and develop more illnesses in later life.  And they are under pressure because healthcare is not funded sufficiently compared to defence, business subsidies and tax cuts.  This applies to the US system too.

And if we look at an overall comparison of the efficacy of healthcare systems, the US scores badly.  The US health-care system is one of the least-efficient in the world.  America was 34th out of 50 countries in 2017, according to a Bloomberg index that assesses life expectancy, health-care spending per capita and relative spending as a share of gross domestic product.  “Socialist” Sweden is 8th and “Socialist” Norway is 11th.

Life-expectancy is a way of measuring how well, overall, a country’s medical system is working, which is why it is used in the index.  In the US, health expenditure averaged $9,403 per person, or a whopping 17.1% of GDP and yet life expectancy was only 78.9.  Cuba and the Czech Republic — with life expectancy closest to the US at 79.4 and 78.3 years — spent much less on health care: $817 and $1,379 per capita respectively. Switzerland and Norway, the only countries with  higher per capita spending than the US — $9,674 and $9,522 — had longer life expectancy, averaging 82.3 years.  Why? Well, the US system “tends to be more fragmented, less organized and coordinated, and that’s likely to lead to inefficiency,” said Paul Ginsburg, a professor at the University of Southern California and director of the Center for Health Policy at the Brookings Institution in Washington.

So the opportunity costs for the average American seem to be higher at least for basic public services like health and education than for the average Nordic ‘socialist’.


October 25, 2018

The US stock market turned volatile this week and has now erased all the gains made up to now in 2018 in just a week or so.  So much for Trump’s boast that things for rich investors have never been better.  The fall in the US market has been matched by similar drops in the European and Asian stock markets.  The all-world index has had its worst performance since the Euro debt crisis of 2012.

Now this fall could just be what market traders call a ‘correction’ and not a full ‘bear market’, when the prices of shares enter a long and deep decline.  But it could be that investors are beginning to fear that the boost to profits and sales that the Trump tax cuts generated is soon to be over, while interest rates (the cost of borrowing to invest or buy back shares to boost prices) are rising significantly.

CitiBank’s ‘global economic surprise index’ — which measures how often data comes in better or worse than expected — has been in negative territory since April. That is the longest sub-zero stretch in four years.

A slowdown in growth is pretty clear in Europe, where the measures of business activity are showing a significant drop in the pace of expansion.  The IMF in its latest report has already signalled the coming slowdown but lowering its forecast for global growth by a couple of notches.  And within sectors, there are serious declines; the global materials sector (manufacturing basic inputs for production) is down 20%.  ECB chairman Mario Draghi said in his press conference yesterday that there was a “weaker momentum” in Europe, but this was just temporary and really just to do with German car sales and Italy’s budget.  Next quarter will be better.

And it is not just Europe that is slowing.  China’s growth rate has been slowing since 2014, as the government tries to reduce debt in local authorities and industrial firms.  In Q3 2018, the real GDP growth rate slowed to 6.5 per cent, the slowest reading since the 2009 post-crisis nadir.  Falling profitability and the trade war with the US is beginning to have some effect.

And South Korea also appears to be slowing down with Q3 real GDP growth of 2% being the slowest expansion rate in nine years.  Investment dropped 6.5%.

However, unlike the rest of the world, the US economy still looks better.  The latest business activity surveys showed steady expansion.

And globally, the price of copper – a good leading indicator of global activity – remains above the ‘recession’ level it fell to in the growth trough of 2015-6.

However, investors are beginning to fret that the corporate profits growth seen earlier this year is as good as it will get, given rising wage costs, interest bills and materials prices. Moreover, the impact of the 2018 tax cut will make this year’s results hard to beat in 2019.  The third-quarter results of 3M and Caterpillar, two US industrial bellwethers that reported last Tuesday, feed this concern. 3M cut its earnings forecasts. While Caterpillar’s profits beat forecasts, its warnings of rising materials costs rattled investors.

The US may have reached a new trade agreement with Mexico and Canada to replace the Nafta deal reviled by President Trump, but Washington remains at loggerheads with China, slapping $250bn of tariffs on Chinese goods and demanding sweeping changes to the country’s economic policies. After occasional hints of a thaw, the imbroglio appears to have reached an impasse. If there is no progress in the coming weeks, the Trump administration is expected to introduce another $200bn worth of tariffs — perhaps sanctioning all Chinese imports.

And investors remain on edge about the impact of rising interest rates on both fixed-income and equity markets. The Federal Reserve is expected to lift rates for a fourth time this year in December, and is slowly but surely shrinking its balance sheet, which has been stuffed with bonds acquired when combating the financial crisis.  Former Fed chair Janet Yellen sounded a warning that the planned hikes could cause a new financial bust as many companies have taken out what are called ‘leveraged loans’ which are subject to sharp changes in interest rates.  Yellen commented that “If we have a downturn in the economy, there are a lot of firms that will go bankrupt, I think because of this debt.  That would probably worsen a downturn.”  Indeed, it is estimated that nearly 20% of US firms are already finding the cost of servicing their debt greater than the earnings to cover it.

Yellen also pointed out what current Fed Chair Powell has observed, that it was not clear what the appropriate Fed policy interest rate should be to ensure full employment and moderate inflation; there was “genuine uncertainty”.  In other words, the Fed has no idea what it was doing in raising interest rates.

Other central banks are also trying to ‘normalise’ monetary policy and turn off the money flow. The European Central Bank plans to end its own bond-buying by the end of the year, and even the Bank of Japan is easing back on its monetary pedal. The net effect of this is what investors have dubbed “quantitative tightening”, a sea change in the global monetary environment since the financial crisis that bodes ill for markets in 2019.

Back at the beginning of October I wrote that if the Fed is wrong and the productive sectors of the US economy do not resume ‘normal growth’ (the average real GDP growth rate since 1945 has been 3.3% – so growth is not back there yet), the rising costs of servicing corporate and consumer debt could lead to a new downturn.  The first estimates of real GDP growth figures for the US in the third quarter to September are out tomorrow.

Most important, corporate profits, after a stellar two quarters are beginning to fall back.  If you strip out financial sector profits, then corporate profits are still below levels of 2014, even after Trump’s tax boost. And in the productive sectors of the economy, like manufacturing, they are falling quite sharply – as measured per employee.

The stock market is not always a harbinger of what happens in the ‘real’ economy, but it may be this time.