The current media discussions on what is described as the ‘cost of living crisis’, have been a confused mix of sense and nonsense. The sources of this confusion have been politicians and so-called financial experts, most of whom clearly do not know the difference between sense and nonsense in economics and finance. This article will hopefully dispel at least some of the confused platitudes which currently dominate media thinking. The nonsenses and examples are emphasised in bold.
That governments are powerless to effect prices and interest rates set by the financial markets. I have heard such blatant nonsense several times. Although the complete capitalist system needs ending it is still the case that the whole history of the capitalist mode of production, is littered with successful attempts by governments to regulate and limit what people dominating the money market could do to manipulate financial transactions. Furthermore, it was only the deliberate de-regulation of financial ‘services’ in 1989 that allowed a small number of well situated individuals to collude in a) setting a wider range of interest rates, b) to more freely speculate on future commodity prices, c) to issue as much leveraged credit as they saw fit. d) to set up more tax havens and launder money from dodgy sources. Consequently, in a monetised economy, the cost of living or the cost of buying things we need, including loans and mortgages, are not the results of some unstoppable natural force, like tides, gravity or seasons. In fact they are the results of manipulations and price setting by groups of key people located in various financial markets.
These key people can be prevented from doing this fixing and insider trading anytime governments want to. And indeed, when a crisis is big enough they do in fact curtail them. For example, no government would allow the economic, commercial or finance sectors, to negatively effect their own country if an enemy (human or virus) was preparing to invade. In such circumstances everything and every person would be subject to severe restrictions and controls from buying and selling to moving about. Just recall the Covid19 personal, occupational and transport lock-downs? It was the same in Europe during the two world wars of 1914-18 and 1938-45.
In crises of sufficient magnitude, financial markets as well as production in general are heavily regulated and controlled by governments. The reason why the elites controlling capitalist governments are choosing not to regulate and control the activities of the financial manipulators now, is obvious. The current stage of crisis, engulfing the working and lower middle classes, does not sufficiently inconvenience them. If it did, as it did for example in the 2008 financial crash and in the early days of the Covid19 pandemic, they would act decisively. In another example, during the 2008 run on the banks they stopped all financial manipulation dead by closing the financial markets and freezing all transactions except those designed to bail out their friends in the banking sector.
Our economy and finances are rather weak now, therefore we we cannot do as much as we would like to. I have also heard this a couple of times just recently from prominent politicians in the advanced capitalist countries of UK and US. I expect this pathetic rubbish will be repeated in other countries across the globe so let’s also tackle this absolute nonsense. First of all, the advanced capitalist countries are among the richest in the entire history of the human species. They are richer and more productive than ancient Egypt, Persia, Greece and Rome. Secondly, the modern elites have extracted wealth from their own working populations for hundreds of years. Secondly, during the colonial and imperial stages of expansion they extracted exorbitant amounts of wealth, raw materials and slaves, from numerous countries around the world. Thirdly, their countries now contain means of production which are the most efficient and productive in the entire history of humanity.
Fourthly, even during a period of the most deep recession and international economic and financial crisis, (between 1910 – 1945) the countries of Europe and America tooled up and produced enough food, materials and sophisticated machinery to fight two long wars, by air, sea and land. This latter example proves that abundant production is not determined by the so-called health of the financial sector, (which had totally collapsed in 1929,) but from the application human labour to the materials provided by nature. In 2022, the only thing lacking in UK, Europe and America etc., in order to provide everyone with decent sustainable food, clothing, housing, education, warmth and safety, is the will of the elite to employ people and available material to mass produce these basic ‘goods’.
The interest rates have increased and commodity prices have suddenly shot up causing cost of living increases. Political and media phrases such as above, are also being uttered as if such rapid ‘market changes’ are similar to an inevitable act of nature, like the jet stream affecting the weather. But of course market changes are not natural. What has recently happened is that some (usually male) combination of influential financial or commodity dealers and brokers in key positions have decided that interest rates or commodity prices should be higher. Such unchallenged and unregulated decisions can depend upon irrational panic, rational calculation or blaming an unconnected event, but either way they are deliberate human choices. The motivation for them has a direct relationship to how the finance sectors short or long term investment strategies are meant to pan out. Thus in reality;
“The risk of market collapse is amplified by regulatory incompetence and banker greed…Derivatives serve practically no purpose except to enrich bankers through opaque pricing and to deceive investors through off-the-balance-sheet accounting.” (‘The Death of Money’ J. Rickards. Introduction.)
In other words interest rate fixing, commodity price fixing, currency exchange rate offers and acceptances (swaps, etc.), are not inevitable like the sunrise and sunset, neither are they are necessary like food, water or heating. Indeed, they are not even desirable for the vast majority of citizens within capitalist societies. They are the results of deliberate manipulation by a few collegiate individuals located in key positions in a relative few financial institutions. Yet as we are now seeing again, the personal motives of these financial ‘dealers’, ‘brokers’ and ‘bankers’, are having crippling effects upon the mortgages, rents and heating costs of the rest of society. For those too young or who may have forgotten the last high profile austerity inducing ‘fixing’ and ‘trading’ episode during the years 2007 and beyond, below is a reminder.
The 2007 to 2009 financial crisis. Banks and other financial institutions, had been constantly leveraging borrowed money at one rate and lending it out at another rate, both of which the financial sector had decided was appropriate. Different forms of debt, credit cards, mortgages, student loans, were bundled together by a select few who estimated their yield and sold them to unsuspecting punters (institutional and otherwise) for an estimated value plus commission. These were particular instruments of greed, bearing no relationship to the actual production of new useful products. But then this is the case for most things in the financial sector. As an author and former employee of the Bank of England informed his readers;
“In real life financial markets, market makers are the parties that that are always ready to deal….Market makers are willing to quote prices (bids and offers) at which they will buy and sell”. (’The Bank of England and Government Debt’. W. A. Allen. NIESR. Pub.Cambridge University Press. Chapter 2.)
These ‘parties’ are actually privileged persons in the financial markets and are the market ‘fixers’ and have been so all through the 20th and 21st centuries. Although for much of that post war period, their manipulations were regulated and the scope of their activities was limited by law. It was the Big Bang changes and deregulation of this sector in the Reagan and Thatcher era of 1986, which allowed the proliferation of futures and massive debt speculation to mushroom. It was that which led to the spectacular and disastrous bubble-bursting’, banking crisis of 2008. And in this way;
“The collapse of the housing market (bursting of the housing bubble) and its crucial impact saw the end of the five largest US investment banks…..Lehman Brothers collapsed completely due to the same mistakes of too high leverage and an over reliance on unrealistic real estate assets. “ (’Financial Crisis: Bear Stern and Lehman Brothers’. L. Brinkmann. Introduction.)
Note, they caused the collapse of the housing market due to setting their own unrealistic assessments and leveraging (multiplying) the amounts at what they considered was an acceptable ratio. Soon after the collapse a partial remedy or ‘bail out’ was concocted by the political and financial elite called a ‘Troubled Asset Recovery Programme’. This programne cost the task payers colossal amounts of money and also ruined many ordinary peoples lives from businesses closures and job losses. The troubled asset programme was implemented to save the livelihoods and statuses of high-paid financial elite and their ‘too big to fail’ ‘money market’.
And then there was Libor. Libor stands for the ‘London Interbank Offered Rate’. This was manipulated by means of late night discussions and early morning phone or email contacts between certain privileged individuals in various banks who then suggested (offered) what the interest rate should be for borrowing between them for the coming days trading period. Once this interest rate was agreed by the most influential of the 16 or so key ‘insiders’, everyone else simply adopted the same rate throughout the global network. Here is a précis of how it then functioned. If a big trader has nominal control of billions of pounds or dollars and can use this to buy options at one price knowing it would go up by even only 1% or less and then sell it when it did, then quick profits would be made.
For example, a one percent gain on a million is 10,000, when it is of ten million it is 100,000 etc. This Libor rate setting not only enabled big monetary profits and commissions for traders, but since it was used elsewhere in the global finance sector it also negatively effected millions of people. A one percent rise in a loan or mortgage created by a handful of traders and brokers, might not seem too bad but a four or five percent rise prompted by such an internal clique could spell a knock on disaster for millions of people. This could only happen because;
“Libor was set by a self-selected, self-policing committee of the world’s largest banks. The rate measured how much it cost them to borrow from each other. Every morning, each bank submitted an estimate, an average was taken and a number was published at midday.” (’The Fix’. L. Vaughan & G. Finch. Chapter 1)
The above is a statement which hides as much as it reveals. In one particular case, which became transparent after the crash, one of these select people who was active in manipulating and fixing the market rate of Libor (in this case setting it low) to support his investment strategy, emailed one influencer friend as follows.
“I need you to keep it as low as possible, all right?”……“I’ll pay you, you know, $50,000, $100,000, whatever. Whatever you want, all right?” (quoted in ‘The Fix’ above.)
More often than not such ‘help me out buddy’ worked. If anyone doesn’t think this type of up and down price manipulating and palm greasing is still going on (out of sight and out of mind) in the offices and at the City desks in London or those of Wall Street New York, it can only be because they are naive or complicit in some way. Our elected officials with all their ‘revolving door’ access to information and research assistants can also only be one or the other – naive or complicit. Otherwise they could not suggest that our low-paid troubled human assets (ie. working class people) must now suffer rising prices and falling standards of living because some few in the ‘market’ want it this way. After the evidence provided above, that is obviously a lie.
Roy Ratcliffe (November 2022)