Much is being reported of late regarding the present state of banks, as well as the monetary policies of the US Federal Reserve and other central banks throughout the world. This post is an effort to apply a Marxist lens to the ongoing activity of the liquidity injections, negative interest rates, and other tools of monetary policy currently being deployed to mitigate the rising issues of bank insolvency and the tension between trading volume and asset liquidity. This is by no means meant to be comprehensive, but simply exploratory. I have included hyper-linked analyses throughout that may be helpful.
To begin, we need to understand that the repo market, this kind of trading in money-lending and re-purchasing, is a form of interest-bearing capital. According to Marx, interest-bearing capital does not confront labor, but instead has as its opposite functioning capital, that is, capital that functions in the production process and undergoes a process of valorization that produces a surplus value and thereby a profit. Interest-bearing capital appears as self-valorizing, capital taking on an autonomous appearance, through the accumulation of debts as collateral in these forms of money dealing. However, it is not. Interest is merely a division of the profit, afforded to a party that possesses a title to that share of the profit as the payment on principal of a loan that was made. In the ideal scenario, we understand profit as only originating from surplus value, as the product of a production process that valorizes capital in the reproduction of the value of products of past labor coming in contact with living labor. Interest here, as a division of the profit, is only so in a real sense insofar as it is directly gathering a share of profit from a production process, and then, as capital in the money form, can be loaned out once again for the purposes of financing capital outlays of a production process.
What happens in the case of interest-bearing capital, as these demands for loans in the form of money capital increase and this process of credit creation further unites the discontinuous parts of capital’s circuits of reproduction, is that increasingly banks and lenders take on liabilities of those that they loan to, and create a debt that must be repaid. This function of debt, here, is not merely an obligation, but functions as an asset, as the money loaned out to be paid on interest (here acting as a prior title to a share of the profit as interest). It is not actually fully the property of the capitalist taking out the loan and incurring the debt. The debt functions as an asset because it is, to the lender, a title to a claim on future profits. In the case of profit from interest as a result of direct investment into a productive sector of capital, this would be a share of the surplus value. The incurring of debt here would then effectively be a claim on the fruits of future surplus labor. By its nature then, Marx has a particularly gothic passage in Capital, Vol. 3 on this:
“All wealth that can ever be produced belongs to capital in its capacity as interest-bearing capital, and everything that it has received up till now is only a first instalment for its ‘all-engrossing’ appetite. By its own inherent laws, all surplus labor that the human race can supply belongs to it. Moloch.” – Capital, Volume 3, Chapter 24
But this is merely the implication of interest-bearing capital, if we are to see it as being tied to the reproduction of capital value, which it must be if it is to actually be of any reproducible value. This is often not the case. From the standpoint of the money-dealing capitalist that profits from interest, the claim to all future surplus labor is taken as given, and with the growing concentration of power in financial markets, the ensuing recovery of crises in this sphere is carried out in a wave of brutally violent accumulation and dispossession, this being the only way to produce new surplus value and recover profitability. Where interest-bearing capital breaks and takes on the autonomous appearance is due to the money form with which this form of the trading of capital is mediated. Money, as the ideal, representative of abstract wealth, becomes the fetish construct mediating exchange, and obscuring the social relations which construct value. Within this sphere, the realm of the money markets that see only capital flows as money day-in and day-out, all traces of the social relations of production are obliterated, all that is seen is value as a self-replicating, self-valorizing thing.
This is where an error of perception of asset trading often comes in. It is not that money becomes purely false that does it all in, it is that this money is still concretely reliant on, at some point, proving itself to be a representative measure of value. We then must look to the real processes of the bank in making loans that governs this process of credit and/or money creation. Banks creating new loan assets must also create an equal and opposite liability, in the form of a new demand deposit. This demand deposit, like all other customer deposits, is included in the banks’ measures of broad money. Banks appear to “create money,” but what has actually happened is that this new money is fully backed up by a new asset, a loan. What is crucial, however, is the source of profit that pays back the interest on the principal of these loans. If it is from an investment of the loaned out money capital into productive capital, then the expanded reproduction of capital proceeds accordingly. Increasingly today, however, in the era of finance capital, productive investment has stagnated, and much of the profits from these investments using loaned out money capital are in unproductive sectors. Profits generated, if any, are largely fictitious.
These fictitious profits are often financial assets such as stocks, bonds, derivatives, but can also be economic sectors such as insurance or real estate. Increasingly as well tech companies are a looming figure in this crowd, as almost 80% of tech-based companies making IPO’s are reporting negative earnings, no profitability. Just take two giants of this wave, Uber and Lyft, as examples. Neither of those have ever made a profit. This can be attributed to the fact that none of their means of generating a profit comes from a direct production process, but merely the capture of wages for the rented time of the driver. In the case of financial assets and the trading of these, which can also be comprised of the debt owed in these banks as liabilities, profit is largely extant as what is recorded on the books of these companies, based on the expectation of future claims from their returns. The vast majority of these investments made with loaned out money capital from banks in the past decade have not been in productive sectors, those parts of the economy that produce commodities through the exploitation of labor-power, but instead in speculation on unproductive sectors. Profitability in the US productive sector is well below that of the peaks in 1997 and 2004. Profits these days are made in money dealing and the appearance of autonomous self-valorization that capital takes on in the trading of interest-bearing capital.
As a result, there is a massive amount of corporate debt in the US economy. Lifting this from Michael Roberts and the IMF:
In its latest Global Financial Stability report, the IMF expressed its worry that: “corporations in eight major economies are taking on more debt, and their ability to service it is weakening. We look at the potential impact of a material economic slowdown—one that is as half as severe as the global financial crisis of 2007-08 and our conclusion is sobering: debt owed by firms unable to cover interest expenses with earnings, which we call corporate debt-at-risk, could rise to $19 trillion. That is almost 40 percent of total corporate debt in the economies we studied, which include the United States, China, and some European economies.”
And emerging countries’ economies are also increasingly burdened by corporate debt. This is itself a result of stagnation in production, which is thus a stagnation and decline in real profits. Roberts has a great full breakdown of this so I will just post the link to that:
So what does this all have to do with the bank repo markets article in Financial Times and the activity that it has documented? Well, repo markets is shorthand for repurchase agreement markets. This is a type of agreement that refers to short-term borrowing of government-backed securities, like T-Bills or T-Bonds. A dealer sells the government-backed security to an investor with an agreement to repurchase the bond the next day (overnight) or at some later date at a higher price. These are short-term, interest-bearing loans, and the practice of engaging in this repo market has the aim of generating capital in the money form in the short-term. It should be clear here that we are seeing Marx’s observation of this autonomized money fetish in action. The goal of raising this capital in the short term is to stabilize financial markets with liquid assets (cash) that can provide a degree of solvency in their reserves and keep the market afloat for the time being, but at the expense of doing so with inflated fictitious profits.
The end result of this, however, is a dangerous dead end for banks and financial markets. All of this also relies on continually structuring debt assets as collateral for these trades. Already there is a serious and unsustainable level of corporate debt. To once again bring up the Roberts analysis cited above:
“The debt owed by corporations in the major economies has risen since the end of the Great Recession in 2009. With global growth slowing and the prospect rising of an outright global recession recurring ten years after the last one, the debt held by corporations may soon become so burdensome to a sufficiently large number of companies that it triggers a round of corporate bankruptcies. The banks will then see a sharp rise in non-performing loans. That could lead to a new credit crunch as banks refuse to lend to each other.
Such a credit squeeze briefly erupted last month, when the US Federal Reserve was forced to inject over $50bn into the banking system in order to reverse a very sharp rise in inter-bank interest rates as cash-flush banks refused to help out weaker ones. The cause of that squeeze was a rise in the supply of government bonds as the Trump administration issued more to cover its rising budget deficit. Some banks were not able to fund the purchases they were committed to without borrowing. So, as bank reserves held with central banks in US, Europe and Japan have surged, interbank money market volume has declined.
As a result of this shock to the credit markets, the Fed has returned to the market to buy short-term Treasury bills to restore bank liquidity. So, having ended quantitative easing (buying bonds) and started to hike its policy interest rate last year, the Fed has had to backtrack, cut rates and re-introduce QE again. More than half of central banks are now in easing mode, the biggest proportion since the aftermath of the financial crisis. During the third quarter of 2019, 58% of central banks cut interest rates.”
The cutting of Federal Reserve interest rates here is an important development in this stage of capital managing its motion towards recession, and a potential crisis that will deepen the Long Depression in which we currently reside. Interbank interest rates in the US, typically monitored via the federal funds rate that assesses the interest rate at which banks are lending to each other, saw a major spike in September of this year, prompting the Fed to intervene. Liquidity injections in the form of repurchase agreements up to $60 billion a month have been set, and are to continue indefinitely into 2020. (It is also worth mentioning here that China has been engaging in similar measures to relieve bank insolvency with quarterly liquidity injections since last year, upwards now of $260 billion US since October 2018). As banks seek to raise interest rates for lending money capital and credit amongst each other and their prime creditors, they move to balance out their reserves with a share of these industries’ profits. But this requires on the part of those receiving the loans an expansion of productivity and their capitals, something we will discuss below which is also in trouble at the moment. To mitigate this issue of rising debt and insolvent bank reserves, the Fed’s liquidity injections aim to provide banks and financial markets with a stabilizing measure of liquidity, and their slashing of interest rates for deposits with the Fed a measure to keep that liquidity out of deposits and still circulating within the markets to accommodate the present, inflated trading volume.
Europe and Japan have both been dealing with negative interest rates imposed to stimulate economic growth, and it has been gaining the ire and alarm of investors as well as major banks like Deutsche Bank, all who recognize this unstable position in the global economy and who would prefer to keep their money deposited at the Fed rather than lend to each other. The ostensible aim of the negative interest rate is to incentivize investors away from depositing money or locking it up into long-term investments and instead keep it circulating in order to prop up the financial markets with the cash flow that these speculatively inflated trading volumes demand. The adverse effect of this is that it increasingly pushes these investors into shorter-term, higher-risk and higher-yield investments, which severely increases the risk of inflating speculative bubbles in this sector of the economy. There is also the growing adverse effect in Europe on retirement pensions, as many are already having their pensions gutted, as pension fund investments in illiquid assets hamper the amount of circulating capital in these markets.
The bourgeois economist sees the retirement pension as an obstruction, a saving that damages the economy by not engaging in enough consumption to meet the demands of value realization in that sphere. What they do not see is that the rate of profit forms a general limit to the rate of interest, and that the plunge taken by interest rates this year is largely due to the massive contraction in productive capital reproduction. This contraction in production is the root of the frenzied burst of rate cuts in the US and all central banks (remember, 58% of central banks globally cut interest rates this year) and the corporate debt burdening the US economy, because there is a growing possibility that there will be rise in bankruptcies and thus a rise in non-performing loans.
To understand this, we have to turn back to the crisis of profitability happening in direct production processes that is exacerbated by the current trade war. Interest-bearing capital only captures a share of the surplus-value as profit if this surplus can be recapitalized productively as a renewed investment. The money-form of capital loses its potential as capital if this continuous motion in the reproduction process is disrupted. This disruption has its foundation in the immanent contradiction in the relation of the organic composition of capital (the ratio between constant to variable capital in production) and the rate of profit (the surplus-value produced over the total capital invested in production, the sum of the constant and variable capitals). Organic composition rises as capital’s expanding reproduction has a tendency to continually invest in technological innovations that revolutionize the production process by increasing the productivity of labor (constant capital), while at the same time shedding this living labor (variable capital) from production to maintain profitability. Since 1997, the organic composition of capital has risen 17% while the rate of profit has declined 5%. The stagnation in production in global industry that is being well-documented in the bourgeois press now should be readily apparent as a clear reason for why interest rates are plummeting. With the decline of profitability in productive sectors of the global economy, there is also a reduced demand for loans, for how will profit be made on interest? The negative interest rate thus becomes a forcing of a demand for loans and the liquidity injections an induction of some type of supply for the money capital to sustain this activity. But behind it all, there is increasingly less profitability to be found, and monetary policy is in no position to ameliorate this crisis.
The only action global capital can take within the financial and money dealing market sphere is to push circulation and consumption harder and faster to accommodate for this crisis. Though it must be stated that this is not a real countertendency to crisis, but is merely a measure of market stabilization. This is also where we see the Fed’s intervention into the repo market playing a role. The repurchase agreements here function solely to, through interest-bearing capital, inject some form of cash liquidity into central banks for their trading volume, generating more than before through interest. Trump has recently called for the introduction of negative interest rates by the Fed as part of his economic agenda for 2020. What this will effectively do is force more money from lenders into circulation and discourage any sort of productive investment. It is merely treading water in a violently thrashing motion while the current draws in the coming hurricane. Absolutely none of this makes up for the productive stagnation and declining profitability, and the contraction in foreign trade from the trade war has merely accelerated this latent crisis in production. At some point, if it is to survive, capital will have to go under.