Monday, August 29, 2016

Do Low Interest Rates Give Capitalists a Huge Subsidy?

We have historically low and sustained Interest rates, which are branded as the cure for the malaise of the high inflation in both the 70s and thw 80s. Yet is this situation actually a subsidy to capital, which drives ,assive hoasuing inflation and the erosion of standard of loivong for ordinary and even above average salaried workers?

Does the current low interest rates from central banks even cover the cost of managing and printing money? Let alone co tributing to the exchequor or things like national and private pension funds?

Low interest seems to shift the burden away from home owners in comparison to the high rates of the 1970s and the late 80s. However the reverse is true- house buyers are burdened with inflation levered way beyond wage rises in the post industrial, new white collar service slavery. Yes there are bigger capital gains in the metropolitan areas, but of course not for the first time buyer who is becoming ever older and shifting up the two income salary scale, with many workers facing exclusion from the general property market. Also people moving up the ladder for that baby room or suburb with better schools, face intense competition from everyone in the same, now middle aged ex yuppie boat.

The belief that housing is your be personal investment hand in hand with low interest rates and relaxed control over gearing to salary, fuels a cut throat market in most of the western metropolii.

On top of the competion between own-home owners of course, capital has shifted its focus from investing for ROI in industry, to real estate and the financial and banking structures which support this great house of cards. Also micro capitalists who have personal equity or high income, can cash in on the three times geared gains to be had in property while also covering much of their annual costs by renting property out.

Essentially this is all bad for the economy. It creates more jobs in centralised financial services and consumer services in the major metropoles to the expense of provincial cities and rural areas. As with all capitalist economies, this leads to more trickle up to both capital and to the monster finance capitals of NY, Singapore, London etc. and less trickle down- a larger proportion of total money is locked into housing capital circles and is no longer creating jobs.

Low interest rates sound really good for manufacturing industry in theory. They can invest in machine tooling and premises cheaply, and should face lower wage demands over time. However there are major issues because on the one hand we have glibalisation and freedom to disinvest in the old economies, while on the other we have competition from the monster of property.

Taking globalisation first. This has meant indeed that companies can operate and grow on a multinational basis, like Apple. It also means that they can find the lowest denominator cost base, regardless if that has the chinese ideology dicatatorship and market manipuøation behind it. Jobs in design and marketing also move inexorably to the new economies as  highly educated middle classes develope there, available at a fraction of the wages in the old west. The new eastern countries also become the main growth markets, attracting larger spends on marketing while the old west cuts back on sales forces and imports global advertising. We are left in the old west with some R&D, the super corporate structures, logistics and the financial diligence and profit optimisation accounting departments in the metropoles.

On the second point, manufacturing industry also competes with the property market and its financial circus. It actually competes for skilled workers, because more young people study or train and indeed re-train to work in the higher paid jobs around money flow into property, and the higher skilled working class become self employed handworkers serving the housing market. Of course manufacturing industry competes also for investment in order to grow and increase quality and productivity. Now we see though that very few companies with significant indigenous manufatcuring feature in the top 100 listings on old-west stock exchanges. Instead these are dominated by banks and financial institutions, consumer services and often privatised public utilities.

Many big product brand companies, like Apple, do very little manufacturing domestically. Worse than new industries setting up in the east though, or old industrues becoming unprofitable in the west and moving,  is that many profitable manufatcuring and primary extraxction companies give up in their western countries because profitability is even higher in low cost countries and there is no disincentive to disinvestment. ROI based on say a 20-30% gross margin and 5-10% profitability is no longer attractive enough for investors, nor accountants in multinationals. As i point out above, it is not just that costs are cheaper, but also that markets are growing faster in the east. It is a perfect storm for capital to move out of manufacturing in the west.

A higher proportion of western incomes now goes on housing than for a very long time in history. We to go back to times of poverty and social unrest to see so much of our wages going on putting a roof over our heads, bought or rented. Even in the 1970s period of high interest rates, we in the west used a lower proportuon of our income on hosuing.   This means we have less discretionary spend, use less in services and products, or have far higher high interest consumer debt, or have burnt equity and capital gains in our property to fund consumer spending. Many of my generation are facing eventually retiring still in significant debt on both housing and consumer debt. This is due to us maintaining the expectation of the materialist, middle class life style our parents enjoyed and that we expected to actually improve with our higher level of education.

In fact I propose that it is the university educated, western middle class who have come our relatively worst from low interest rates and our own growth in numbers and accompaning devaluation of degree skills. We have a lower standard of living now, and possibly quality of life over all by 2030 than our parents, the baby boomer generation who grew upo in boomijng economies, affordable housing, unionised industries and free education. The hand worker who is prepared to run their own business has perhaps seen the greatest relative growth in material life style, as they feed off the obsession with home improvement and personal ROI there in. The semi and unskilled working classes have seen a large scale return to pre-war working conditions, with little or no job security, unstable working hours and hence income.

Change is always going to happen, but we have seen the neo-conservative financial orientates power base resist the real need for change to which the 2008 "correction" was the symptom. Instead of allowing disease to teach the animal a lesson, they demanded corporate champagne socialism- bail outs to preserve the status quo: an unsustainable, property driven house of cards in the west. Higher interest rates are quite possibly no cure what so ever for the current wstern malaise, but they would choke the incessant, dangerous growth in housing and channel more investment into savings, bonds and quite possibly render ROI from manufatcuring more attractive to investors. What about inflation? Surely it always accompaniea higher interest rates?.

We have conquered retail price inflation in the west through more productive agriculture, super efficient logistics and the liberalisation of retail real estate meaning a saturation of outlets. Wage-rises are driven more by housing inflation now than any other personal costs or ambitions. We have replaced one demon of visible inflation, with another which the establisment has been able to dress up as a comfortable situation for average employees, when in fact the house of cards is anything but a sustainable position.

The finance crisis has in effect not really been cured, and the elements that created it in the first place are still looming in the private economy. Economic Growth in the west is rather pitiful, yet growth in capital wealth via real estate is at levels similar and locally even higher than pre 2008. We have a leverage effect as discussed before, where these modest gains in income and the relentless metropolitisation of careers feeds the ' three times' amplifier for capital gains from sale,  and what can be extracted from rentals. This is percieved as a safer and preferable investment by in large,  than that in manufacuring or other secondary value-multiplying industry.  With so many technocratic and judicial jobs in the public -governmental sector also metropolising, it means there are perhaps two sources of susbisdy to real estate- indirect champagne socialism and low central bank interest rates.

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