The Ideal Industrial Cycle
Overproduction is initially disguised by the growing inflation of credit.
More & more commodities are being sold on credit.
Late payments increase & debts are ‘rolled over’.
Credit suddenly dries up (with a sudden decline in inventories as production declines faster than sales).
At the lowest point of recession aggregate prices are less than aggregate values.
Gold reserves increase & interest rates fall.
The gold industry moves counter-cyclically.
Some capitalists go bust & others buy their capital at low prices.
The low r doesn’t stimulate investment.
There is plenty of idle cash & governments can borrow at low r.
The rate of profit starts to increase as constant capital falls in value.
Also the fall in real wages increases the profit rate.
The recovery begins in Dept II & spreads to Dept I.
Investment increases & unemployment falls.
New technology increases labour productivity & decreases labour values.
Market prices increase so that aggregate prices exceed aggregate values.
Gold production begins to decline.
If token money growth doesn’t slow as well then it depreciates against gold.
The relative decline in gold (metallic money) means r increases.
An inverted yield cycle is where short-term r above long-term r & considered a sign of an approaching crisis.
Credit eventually dries up & the crisis begins again.
*Actual gold production tends to fluctuate on a longer time basis than the industrial cycle
How Recessions End
During recessions inventories (commodity capital) are run down as production declines faster than sales.
There is an overproduction of productive capital & the level of capital spending (investment) declines.
The increased purchasing power of money due to lower prices & wages, plus the rise in the Q. of money made possible by increased gold production, work together to increase liquidity.
The economy operates to a greater degree on cash than credit as debts are paid off (deleveraging).
The large amount of idle cash means that governments can engage in massive deficit spending without this leading to a rise in r.
As sales begin to increase so there is a rise in the turnover period of variable capital & a rise in the profit rate.
What Determines the Price of Shares?
1. The size of the dividend which is governed by profits made
2. Long term r
The price tends towards the total annual dividend divided by the long-term r.
The price increases with rising dividends & falling r.
Rising prosperity means rising profits & dividends can be expected, driving a ‘bull’ market.
And fall in a recession (Dow Jones fell 89% by July 1932, & didn’t recover until 1954).
The boom develops the contradictions inherent in capitalist production to the point where they can only be resolved by crisis.
Unemployment drops below its average level & demand for commodities pushes prices up as supply struggles to keep up.
As real wages increase the rate of sv falls & so does the profit rate.
As production increases faster than the amount of labour employed, labour productivity increases.
This increases the organic composition of capital.
But profit rates do not fall immediately as prices are still increasing, even if the underlying values are decreasing.
Prices & values move in opposite directions & aggregate prices exceed aggregate values – overproduction.
The longer the boom goes on the greater the level of overproduction.
Such overproduction on a large scale requires credit-financed trading.
There is a contradiction between money as a measure of value & as a means of circulation.
Relative to its value, gold becomes depreciated against commodities; i.e. the market price of commodities represents more labour time than what it takes to reproduce them.
A generalised crisis of overproduction of commodities relative to gold occurs.
The crisis then lowers prices in terms of gold.
The Quantity Theory of Money
The QTM does not apply to metallic (commodity) money.
As the Q of money declines, it is r that falls, not prices.
From Boom to Crisis
As the credit system is stretched so r rise putting downward pressure on profits.
And credit starts to dry up.
A financial panic can start.
The crisis often starts is residential property construction as when credit dries up & r increase, mortgages become more expensive & harder to get.
The fall in capital spending is a lagging indicator not the cause of recession as Keynes believed.
The recession is caused by the overproduction of commodities relative to monetary effective demand.
The overproduction occurs alongside over-investment.
Growing shortages of raw materials are one of the best indicators of an approaching recession.
When the crisis arrives the demand for gold soars.
Gold, as money, cannot be overproduced.