Bonds are pieces of paper which are offered to the financial sector for investment purposes by two types of institution. First is the private company who, if they cannot or do not want to raise money in any other way, offer a paper promise (the bond). The promise is to return a certain amount (the bond value) at a future date in return for some cash. In order for bonds to be bought, there must be large quantities of liquidity within the overall financial sector otherwise there would be no point in offering one to the bond-market. This cash the bond issuers can use in two ways. They can use it (as with any spare internal revenue they have on their books), to develop production or they can use it to speculate. In the case of government bonds (sovereign bonds) it is generally used for revenue.
One element of the existing crisis arose because bonds were issued by firms in the past and the funds used to speculate. Many, if not most of those speculations, went sour during different phases of the crash. In other words many of those companies and financial institutions now still have high levels of debt. As argued in a previous post (Bailouts and Banks) those companies are hardly likely in the present circumstances to issue more bonds for either purpose. On the other hand most of those companies which did not speculate and are still financially sound, are also unlikely to issue bonds for the reasons mentioned above. They are hanging on to their large positive balance sheet entries. A lack of present demand, and given a promised future of austerity, a probable lack of future demand, is highly unlikely to tempt these and other firms to increase production. But these are not the only source of bonds.
A second source of bonds are those issued by governments. These have been much in the media’s attention of late. The tax income of 20th and 21st century governments, from all sources, is insufficient to sustain their expenditures. The debt of governments has increased to such a level, that there is now a genuine possibility of a future series of sovereign debt defaults (ie a governmental failures to pay). For this reason, those who purchase them are insisting on the interest they effectively receive on these bonds, from governments deemed most likely to default, is high. In this way those governments most in debt, are getting even more in debt. Some governments are having to issue bonds just to pay the interest on previous and current bonds. Even the so-called strong Governments such as the USA, the UK and Germany, are heavily reliant on bond income for their survival.
An interesting fact about bonds is that those who purchase them in effect are giving very little money away. This is because in exchange for their money-capital, they are given a certificate (the bond) which can be – and is – traded and exchanged like any other asset or money. So in normal times buying a government bond for a capitalist or capitalist consortium is almost like doubling the quantity of money invested. It’s ’substance’ enables the bond to be sold and a second investment to be made with a asset value not much less than the first. All this without risking any further money. In this way at least two investment vehicles can be operating with the one advancement of finance-capital. Also because the government bonds are issued by the state and the ultimate payees of the bond are all the tax-payers, then every tax-payer, who cannot ‘dodge’ their tax is in debt to the bond-holders without ever having entered into that debt themselves. This is the bond-holders trump card, with pro-capitalist politicians in charge, sovereign bonds are financial instruments of mass destruction for communities.
This new twist has been designated as ‘collateral transformation’. One of the definitions of ‘transformation’ is ‘alter out of recognition’ which is apt in this case for this is exactly what is intended. Note here that this ‘transformation’ just continues previous business as usual and as before merely hides the flimsy nature of the paper-backed assets along with the considerable risk of default. At the same time it should be noted that these so-called ‘high-grade’ collateral assets which are to be ‘rented out’ in this way are nothing more than government bonds. Bonds, which we have seen are nothing more than paper promises to pay – issued by governments who have no possible way to repay them! How sensible is that? Guess who are already gearing up for this new ‘transformative’ trading? JPMorgan Chase, Bank of America, Barclays, Goldman Sachs and Deutsche Bank! Does this list ring any bells? Clearly nothing has been learned from the previous crash and the feeble efforts to hinder this practice have already been crudely subverted.
So much for the USA. Meanwhile across the pond! In Europe a so-called solution has been contrived by the political and economic elite, whereby the European central bank (ECB) will buy up the bonds, or guarantee them, providing the sign up to certain conditions (conditionality). It is hoped by this measure that the bond-market will continue to lend to government at more reasonable interest rates. ECB conditionality effectively dictates central-bank policies to governments. It is an attempt to overthrow European democracy by financial dictatorship. The conditions which will be demanded of course will comprise of cut-backs in government expenditure and the selling off of state (peoples collective) assets. These cut-backs, as those elsewhere, will of course not solve the underlying problem. They will as they are implemented, cause the destruction of working peoples standards of living and in some cases their lives, and of course, fight-backs. But austerity programmes also have further economic effects.
Cut-backs in government spending will also take further demand out of the market and so undermine any government activity trying to stimulate growth. But also note here the overall surreal nature of this crazy circuit. The central government prints money, via its central bank (ECB in Europe) and gives it to the banks. The banks lend it to financial investors and institutions, who give it back to governments in exchange for government bonds. The governments then spend it on their salaries and favoured war projects etc., but of course they are supposed to pay the value of the bonds to the investors. Just in case they cannot, the central banks guarantee to buy the bonds back if the individual governments can’t honour them. Think about it! Central Banks representing governments are printing money, practically giving it away in order to get it back again via the financial sector and paying interest for the privilege. In the process making the bond-holders, their ilk and their brokers even richer.
If it weren’t for keeping their buddies among the financial elite happy, it would make more capitalist sense to just print money and give it directly to the investors and cut out the middle-men? The full stupidity of this solution to the sovereign debt crisis is revealed by the fact that at no stage does this any phase of this money-printing circuit involve stimulating fundamental economic activity. But of course printing shed-loads of money tokens and handing them out to the rich individuals and institutions will enable some things and stimulate others. It will enable members of the political class to get jobs in the City of London and Wall Street (the revolving door between governments posts and jobs in the finance sector.) and importantly the extra financial assets will stimulate more bubbles.
The publicity around the toxic mortgage crisis of 2007 also revealed the tip of an iceberg of what are generally called ‘financial bubbles’. These bubbles are more frequent than is often assumed and they occur when large amounts of finance capital chase what is seen as sure thing, ’value-enhancing’ investments. In such cases, there is an expectation that the investment opportunity targeted will continue to rise in value and so more and more money chases assets tied to the target. This initially has all the symptoms of a self-fulfilling prophesy, for the sequence of purchases boost the price of the asset and therefore it seems indeed to be increasing in value by the ‘obvious’ fact of its increasing price.
However, price and value are not always the same thing. Indeed, they rarely are. Prices always fluctuate, for a variety of reasons, above or below the value of anything. In the case of bubbles the price is pushed up by chasing demand and is based upon hopes far more than reality. It continues until a point is reached when some investors, start to sell because they recognise this and fear a downward trend. This too becomes a self-fulfilling prophesy. As more people sell, the price continues to drop and eventually a virtual downward stampede occurs and the price drops catastrophically. As it did in the dot-com bubble of the 1990’s and again in the more recent housing bubble. When bubbles burst, as they always do, some of the rich investors lose all or substantial amounts of their investments.
So if the previously noted further printing of money will not stimulate economic growth in general, it will almost certainly stimulate further bubbles. How can it not do otherwise? With huge dollops of money available at low interest are the speculators, now accustomed to big returns and the brokers used to huge fees, simply going to stop at home and watch TV? No! Sooner or later, they are going to search frantically for something or somewhere to ‘put’ their money for safety or enrichment. Just watch Bloomberg TV for an afternoon, to see the amount of effort being put into the search. But even looking for safety is a form of competition which has the potential to produce its own bubbles as it has partially done in the case of gold and other metals.
According to some economic statisticians, the dollar value of Gold has increased by 460% from $250 per ounce in 2000, to almost £2,000 dollars per oz, in 2012. Over the same 12 year period, silver has increased by 650%, Copper by 450%, Iron by 760%, zinc by 169%, nickel by 170% and Uranium by 370%. These calculated percentage rises, accurate or not, are not all to do with the costs of production increases, for in some cases costs have come down or stayed the same. One part of this rise is due to the depreciation of money as a measure of value, but another is due to this abundant money supply as finance-capital chasing the relative safe harbours of essential raw materials. These increases are not all certain bubbles, but they are the thick froth of speculation fermented by the invasive spores of finance-capital greed.
As noted, when the bubbles pop, the bubble chasers lose, but these are not the only casualties, because those at the bottom of the capitalist pyramid, are dependent, – whilst it exists – upon the capitalist mode of production. The bubble losses, cause further contractions and dislocations in the value and surplus-value creating circuit of capitalist production, which only employs labour for the purpose of creating surplus-value and thus profits. If credit shrinks, debt increases and profits fall drastically, as they do in a financial crisis, then practically everyone is effected. If this triggers a general crisis, then production is also additionally curtailed, with further knock-on losses of jobs and income. But not everyone suffers. Even in a downturn or crisis, some of the super-rich can and will get richer.
With the callous commitment to austerity throughout Europe and North America, the last remnants of shame and conscience among the rich and their colleagues in politics has finally disappeared. The imposition of measures to reduce welfare expenditure for the average citizen comes at the very moment when the rich are at their richest for generations and who have made a profession of avoiding their tax obligations. Having previously tightened their belts through the gradual austerity period leading up to the capitalist crisis, the workers existence is now being further depleted by a general collapse across most segments of economic activity. Crucially, the indebtedness and contraction of capitalist private industry is in now in sync with governmental indebtedness. The two interrelated debt inspired contractions are already making the crisis a general one and it will continue to deepen.
All the policies so far suggested or recommended are aimed at dealing with symptoms, for that reason they will be to no avail. The underlying cause of the symptoms lies in the fundamental circuit of the production and augmentation of industrial capital and the accumulation and capitalisation of surplus-value. Poor tax collection, a popular symptom targeted by some, is only a part of the problem. It merely exacerbates the fundamental problem caused by the nature of large-scale surplus-value extraction and its augmentation into industrial capital. Taxation is a deduction from the surplus value created annually by the efforts of workers as they engage with the means of production. All the policies promoted and activated by all the pro-capitalist political parties, whether Conservative, Republican, Liberal, Democratic, or bourgeois pretend-socialist are dealing with symptoms. With these policies, there is no escape from the eventuality of a general and long-lasting crisis as occurred between the 1840-50’s, the 1920-30’s and 2008-14?
Sooner or later the mass of the people will have to engage with transforming the capitalist system or the capitalist system will continue to engage in transforming their standards of living. It will do so to a level much below the ones obtained during the 1960’s to 1980’s and even the depressed ones currently in existence. Sooner or later people will have to engage with the ideas and practices of anti-capitalism with a human face or they will be presented with the inhuman face of capitalist promoted nationalism, racism and neo-fascism. To paraphrase Marx; ’It is not enough that theory seeks people, people need to seek theory‘. It is not enough for educated people to use that education to intelligently moan or intellectually criticise the struggle of others. If they do not become part of the solution, they may become part of the problem. Or alternatively find themselves on the sidelines whilst the economic crisis is transformed into a political and social one. And it will be a crisis capable of ripping what is left of the heart out of even more defenceless communities
Roy Ratcliffe (October 2012.)