“Liz Truss resigns after failed budget and market turmoil”; “more than 40% of mortgages withdrawn as market reels after mini-budget”; “Sunak says higher taxes and spending cuts needed to satisfy markets”. For a period of weeks last autumn, the news was full of updates on the upheaval gripping the UK financial system following the unveiling of the Tories’ ‘mini-budget’ at the end of September.
Many working and middle class people were left wondering why the cost of their mortgage or credit card had shot up by hundreds of pounds a month in some cases, simply due to one speech made in parliament by Kwasi Kwarteng.
Who are these ‘markets’? How do they have the power to dictate the actions of governments and force out prime ministers? And what role have they had in the cost-of-living crisis?
The ‘markets’ in the broadest sense of the term can cover a wide variety of ways capitalists move their money about in the hope of accumulating more. These include shares in publicly traded companies on the world’s stock exchanges, claims on government and commercial debt through bonds, and trading in currencies, insurance, precious metals and commodities.
Like many aspects of capitalism, the trading activity carried out on the financial markets came about not in a way that was thought through, but unevenly and chaotically in response to the needs of the capitalist class to fund their business activities and thereby increase their personal wealth.
As the emerging capitalist classes launched ventures in the 17th and 18th centuries, such as the South Sea and East India companies to exploit the natural resources and people of the Americas, Africa and Asia, they needed money to fund these expeditions and the armed men on them. Later on in the 19th century, the early industrial capitalists would need to finance the setting up of factories, sinking of mines and laying of railways.
To allow them to do this, they developed the practice of selling a large number of small stakes in their companies, with the promise of a share in its future profits through the payment of dividends to the shareholders. These shares could then be sold on by investors to third parties, the price going up and down with the perceived future profitability of the company.
This led to the establishment of stock exchanges in London, New York, Amsterdam and elsewhere for the trading of shares and bonds, the birth of the incorporated company, and with it the modern capitalist speculator.
Then and now, individual capitalists could increase their wealth not through work, or even the supervision of others working, but simply by providing the capital used to bring together workers, equipment and raw materials. The workers then create something of value – manufacturing goods, delivering services – that can be sold to generate a profit for the capitalist.
But this extra value generated on top of that originally invested doesn’t appear from thin air, or as a result of shares in the company being sold and traded. Rather it comes from the fact that the workers are being paid less in wages than the total value of what they produce.
Today, many workers for large corporations will go about their daily shift at the factory, shop or office unaware of the identities of those laying claim to the fruits of their labour as shares in their employer change hands by the minute.
Similarly, by outsourcing the management of their wealth to investment fund managers, the capitalist speculators do not need to directly concern themselves with which companies their money is invested in at any one time, let alone the day to day business of those they hold shares in. And thanks to the rise of software that can automatically trade stocks and other assets as market conditions change by the second, the active role played by traditional stockbrokers and fund managers themselves in managing flows of capital is decreasing.
As capitalist speculators have come to generate the greater part of their returns not through holding stock in companies and waiting to receive dividends, but by buying and selling the shares to other investors, the price of these shares has moved further and further away from the reality of the companies’ actual commercial activity and profits (or lack of them).
This is particularly true of the ‘tech giants’ such as Meta (formally Facebook), Amazon, Apple and Google which accounted for much of the growth in American stock markets in recent years.
At its peak at the start of 2022, the total price of shares in electric vehicle manufacturer Tesla in circulation was $1.2 trillion. This was larger than the rest of the global car industry combined at a mere $700 billion, despite Tesla making at best 2% of global passenger vehicle sales, with its shares trading at 88 times the price of its expected earnings.
This bubble has since burst, with Tesla’s total shares now being ‘worth’ only $397 billion at the time of writing. No wonder Marx described this money invested in shares and other financial instruments as “fictitious capital”, divorced from real capital spent on wages and machinery.
The stock market doesn’t create economic growth or crises by itself. However, as capitalist economies periodically run into difficulty, investors lose confidence, sell up, and share prices come crashing back down to a closer semblance of reality, as in the infamous Wall Street crash of 1929 or more recently in the financial crisis of 2008.
This is not just a problem for the capitalists, but for workers who can see the size of their pension pot decrease as the investments made by the pension fund lose money.
In recent years, trade union members in UK universities and Nissan and BMW car plants have taken strike action to defend their pensions against a move from the guaranteed pay outs of a ‘defined benefit’ system to one of ‘defined contribution’, where the amount they receive in retirement would depend upon the fluctuations of the markets.
The fluctuations of prices and dividends offered by shares in companies mean that many of those who manage investment funds smooth out changes in the value of their share portfolio by also holding other more reliable investments, particularly government bonds.
Bonds were pioneered by the British government during the 1690s to finance its military expenditure as the developing capitalist state loosened its ties to the crown, before being adopted by companies as a way of raising money on top of the sale of shares.
In effect, a bond is a loan made by an investor to a government or business for a fixed annual percentage payment of interest before the term of the bond expires and the original investment is returned.
A bond can then be sold on many times over before it ‘matures’ at the end of its term for more or less than the sum lent by the original bondholder. These changes in the price of bonds can depend on many factors, not least the confidence of the market that the government or company that issued it will be able to cover the cost of the remaining interest payments due, along with repayment of the original loan.
If there is the possibility that the bond issuer may go bankrupt before they can do this, the price of the bond drops and the ‘yield’ – the total remaining payments due divided by the price of the bond – shoots up. This in turn makes it more expensive for the bond issuer to borrow more money, as bond traders demand a higher return in exchange for taking on the supposed risk of lending.
When Kwasi Kwarteng announced a series of tax cuts to be funded by the UK government taking on further debt, and the yield on ten-year bonds issued by the Bank of England (gilts) shot up from 3.5% to 4.51% overnight, it was interpreted by many as the financial markets voting down the Tories’ mini-budget.
Though gilt yields have returned to the level they were at before the mini-budget (along with the relative strength of the pound against the dollar), capitalist politicians and their outriders in the media are already attempting to use the movements of the financial markets during one single month of 2022 to justify up to £60 billion worth of further austerity in the years to come.
Such situations give the unelected bond traders and the credit rating agencies which advise them significant influence over government policy.
This was demonstrated sharply during the Greek debt crisis of the 2010s. As the size of Greek government debt increased following the 2008 banking crisis (in no small part due to widespread tax evasion by the wealthiest Greeks), they increased the number of bonds issued to cover the shortfall between spending and income.
The large ratings agencies awarded these bonds ‘junk’ status in 2010, sending the yields on them ever higher and requiring still more government borrowing to service the debt. To be sure of being able to pay the bondholders without defaulting on the debt entirely, successive Greek governments negotiated a series of bailouts from the ‘Troika’ of the International Monetary Fund, European Central Bank and European Commission totalling over €300 billion.
With the ever-present threat of a Greek government default leading to further transfers of capital out of the country and the potential collapse in value and breakup of the euro, the capitalist institutions of the Troika demanded a heavy price for these bailouts. A series of austerity cuts totalling €72 billion – 40% of the size of the Greek economy – were imposed alongside looting of public property by the Greek capitalist class through a series of cut-price privatisations.
In a referendum on the third of these bailout packages in 2015, 61% of the Greek people voted ‘no’ to further austerity in the name of servicing the bondholders and remaining within the euro. However, the ‘radical left’ Syriza government refused to mobilise the energy behind this vote and take the necessary measures to defy the Troika including: capital controls and nationalisation of the banks and other big business, all under democratic workers’ control and management.
Instead, it implemented the package anyway, bowing to the demands of the financial markets as represented by the capitalist institutions.
Today in Britain, after 12 years of service cuts and pay stagnation in the name of controlling the government deficit to appease markets, workers here have also decided that enough is enough.
However, at a time when bond traders have forced up the cost of rent and mortgages for workers, and speculators on the commodities markets have driven up the price of everything from electricity to staple foods, Labour has rushed to show that it’s on the side of ‘the markets’ as much as the Tories are.
In the aftermath of September’s mini-budget, Labour leader Sir Keir Starmer said: “I’ll tell you what will stabilise the markets, it is an incoming Labour government, with absolutely clear fiscal rules and Rachel Reeves as chancellor,” code for further cuts to pay and services. Speaking in July he declared: “We need real partnership between state and market.”
If there’s a reason Tory and Labour politicians and the media seem both devoted to and fearful of ‘the markets’, that’s because these flows of money in stocks and bonds represent the mood and confidence of the capitalist class that both parties set out to defend the real material interests of.
They’re well rewarded for this, with businesses and individuals from the City of London’s finance sector donating £15 million to the three main parties in 2020 and 2021, as well as dishing out £2.3 million in payments to 47 individual MPs.
Despite the well-organised lobbying and influence over politics of big business and the finance sector in particular, these ‘masters of the universe’ have limited control over their own system. The markets themselves, as made up collectively of the traders and computer programs employed to maximise quick returns for investors, are capable of both irrational exuberance, and of panic selling at the first sign of trouble.
The wild swings that are a regular occurrence on financial markets, and the real-world consequences flowing from them, are signs of an increasingly chaotic and dysfunctional capitalist system. Today’s stock markets can no longer efficiently channel capital towards developing new technology and more productive ways of working than capitalism can take society as a whole forward.
Real socialist change would mean breaking the dictatorship of the markets by taking over the physical assets and cash reserves controlled by big companies that populate the world’s stock exchanges into public ownership. Rather than the management of the corporations that dominate the economy and our lives being left to directors chosen by shareholders, they could instead be run democratically by the workers who built them.
Then the fantastic riches currently trapped in financial markets could instead be used for the benefit of the real wealth creators – not capitalist investors, but the working-class majority.