Capitalism at zero interest rates
Since 2014, the reference interest rate for safe investments in the euro area, the yield on ten-year Bunds, has been close to zero. It has even been slightly negative since 2019. The yield on 30-year bonds is only minimally positive. This means that market participants expect zero interest rates for the next 25 years or so, and even significantly negative real interest rates, i.e. interest rates after the inflation rate is subtracted. The situation has been similar on the US bond market, albeit at slightly higher yields.
What does it mean for a capitalist system if the safe interest rate – the standard yield – has to be zero or even negative for the system not to collapse? And permanently, that is, for longer than the positive effects of the decline in interest rates on balance sheets last?
The trick is that the drop in interest rates initially helps the financial sector and the wealthy enormously, because the lower interest rate increases the balance sheet value of bonds, shares and other assets.
But there is a snag. At some point, the old bonds with the high interest rate promises will have matured and been repaid, and there will be no more interest on the new bonds. Stocks will also cease to rise reliably in price unless interest rates continue to fall permanently. This explains why the German financial sector initially cheered the ECB’s interest rate cuts, but for some years now has been calling for a return to normal interest rates.
However, this is easier said than done without stalling the economy and causing share prices to plummet. After all, if interest rates were to rise, the reverse would be true: for quite some time, the damage to capital in the form of falling asset prices would be greater than the benefit in the form of higher interest income.
Therefore, if the economy fails to gain sustained momentum, there is no way to raise interest rates substantially. For a long time, central banks could make do by signalling that zero interest rates would last longer than expected. But even here there is hardly any room for maneuver when thirty-year bonds are yielding almost zero percent.
For a state that wanted to leave capitalism behind, a situation in which capital on average no longer expects interest would be a dazzling opportunity. (We will look at how this could be done in part four of this book.) But this is not the intention of the ruling politicians and parties, and certainly not that of the powerful owners of capital.
Thus, they are faced with a dilemma: There is no longer any interest on borrowed capital, and for the economy as a whole there will not be much profit to be distributed, if the economy can only be kept halfway going with permanent zero interest rates.
What applies on average, however, need not apply to everyone and certainly not to the largest corporations. And indeed, despite the extremely low interest rates that have persisted for a long time, corporations continue to generate good profits and pay out high dividends. This is partly because many corporations are currently still posting high valuation gains due to the decline in interest rates, as their assets have risen in value. But this advantage will run out if interest rate cuts do not continue.
Then the only option left is redistribution. Capital, in the unconditional pursuit of profit, increasingly eats its peers and feeds off the base that supports it.
Big eats small and runs for higher grounds
“JP Morgan and Goldman each boost profits by more than 450 percent” – read a newspaper headline on April 14, 2021, on first-quarter earnings reports from major U.S. banks. JP Morgan reported a quarterly profit of 14.3 billion dollars, at Goldman Sachs it was 6.8 billion. A major reason was the reduction in risk provisions for loan defaults, which was made possible by the fact that generous government aid enabled borrowers to reliably service their debts to the banks.
In addition, the banks made high profits in asset trading for their own account and in investment banking, i.e. in trading in companies and parts of companies. This business, in which the major U.S. banks are dominant worldwide, regularly booms when interest rates are low.
By contrast, Deutsche Bank already had to rejoice that it was able to report a small profit in 2020 for the first time in five years. Commerzbank posted a loss of just under three billion euros, following a small profit in 2019. European banks have mostly become low-profit restructuring cases that are trying to shrink themselves back to health by cutting staff.
The positive effect of interest rate cuts is over; their privilege to print money is worth little with zero and negative interest rates. Unlike the large, internationally active U.S. banks, they do not have the ability to print the world’s reserve currency and use it to buy and trade securities and companies internationally. Thus, the concentration of market share and power among the large U.S. financial institutions is proceeding apace, at the expense of everyone else. The profits of the U.S. houses are the missing profits or losses of the others.
The same thing is playing out in the rest of the corporate world. Big eats small is the basis of the profits still bubbling up at the big corporations. Taken together, Germany’s 30 DAX-listed corporations raked in record earnings before interest and taxes of nearly 42 billion euros in the first quarter of 2021, in the midst of the deepest Corona crisis and with gross domestic product falling sharply, nearly six billion more than in the best-ever first quarter in 2017.
Crises always provide opportunities for the powerful to exploit the difficulties of others. The Corona crisis was and is no different. And at the top of the power hierarchy are the U.S. and its major corporations.
The U.S. government banned all vaccine exports until the end of April 2021, ensuring that the majority of the U.S. population was already vaccinated by April. With the imposition of several large stimulus programs, the last announced in spring 2021 and worth $2,000 billion, combined with equally huge securities purchases by the Federal Reserve, the government ensured that the economy was in prime position for a stormy recovery in 2021 and that the financial industry had enough fresh dollars to finance the conquest of international markets.
The 2020 budget deficit of $3,100 billion was equivalent to 15 percent of GDP, and the debt-to-GDP ratio is projected to rise above 130 percent in 2021. But the huge budget deficit does not matter as long as it is virtually guaranteed that the new dollars spent, even if they flow out of the country, will all be reinvested at extremely low interest rates in U.S. Treasury bonds or other U.S. securities. The status of military and political leader with the world’s reserve currency gives its holder great freedom of action and thus the opportunity to profit from crises.
Another way to keep profits and dividends flowing despite a weak economy is to continue cutting interest rates well into negative territory. In the U.S. financial industry has been pushing for this for more than five years, often in connection with the elimination of cash needed for this purpose. This would result in ever new valuation gains for securities and real estate.
In such a scenario, the big investment banks and private equity funds would even get interest for borrowing money to buy and trade in companies and securities all over the world. For the small and especially non-U.S. banks, on the other hand, it would mean ruin, sooner or later, unless they can find a larger institution to buy them.
The upper middle class of households, which mostly owns the houses they live in, bank deposits and interest-bearing securities, must expect their assets to melt away over time. They may invest more heavily in stocks, but their prices will eventually only be prevented from crashing by falling interest rates. Unlike the rich and institutional investors, the upper middle class does not have the alternative of investing in hedge funds or private equity funds, with which it is still possible to make a profit from unusual interest rate constellations, front running on other investors and the use and abuse of financial and political power. Continuing interest rate cuts into negative territory are thus a variant of “big eats small.”
(…)
When all this takes place in a stagnating or shrinking economy, capital lives on its own substance. The increasing concentration of income and wealth leads to a decline in the purchasing power and creditworthiness of the mass of consumers and the states. Bankruptcies or the shrinking away of small or medium-sized businesses mean that the basis for further economic growth is lost.
Upward redistribution is indeed a model that has been in use for several decades and can continue for a while longer. But it is not a model that will work permanently. At some point, there is so little left at the bottom that it cannot suffice to significantly increase the already huge incomes and wealth at the top in percentage terms.
In fact, before Corona, the power gains of the largest corporations already appeared to be slowing significantly. Between 2000 and 2018, the multiple by which the profits of the 200 largest U.S. corporations exceeded the average for all U.S. corporations increased by barely ten percent: from 15,000 times to 16,300 times. By comparison, from 1984 to 2000, this multiple increased more than threefold, from 4,500 to 15,000.
Of course, the big capitalists are not unaware of the problem they are heading for if they can only maintain and increase their power and wealth through increased upward redistribution. A way out of this dead end of capitalism is not obvious. No one can want a great war with extensive destruction of production potential and of assets on the part of the losers, when every great war could be the last. The opening up of large new markets and sources of raw materials, as through colonialism or other forms of globalization, is hardly still possible in view of the extent of integration of almost all world regions into the international division of labor.
The strategists in the think tanks of capitalism have realized many years before me that the most serious financial crises and the total loss of power of the capitalist elite were imminent. They have been working on possible ways to avoid such a development and they have come up with some ideas.
In addition to individual methods of wealth protection, there are also systemic approaches to bring about a post-capitalist world in which the highly privileged position of today’s moneyed aristocracy is preserved. We will look at individual wealth preservation first, before moving on to the strategy of elite power preservation by transforming society.
Save yourself if you can
A tried and tested method of safeguarding one’s assets when one fears a collapse of the financial system is to shift into real assets. This may explain the report in Forbes magazine that Bill Gates, one of the richest people in the world, has become the largest private owner of farmland in the U.S., owning at least nearly 100,000 acres in 18 states.
If it all collapsed, Gates would still be one of the most powerful people in the U.S., at least as long as he wasn’t expropriated. Other billionaires are doing the same as Gates. (..)
