Friday 13 March 2015

Oil Price. Good For The Economy, Terrible For Financial Markets - Part 14

Another consequence of the fall in oil prices that will be completely at odds with the expectations of orthodox economics, is that the fall in oil prices may cause inflation to rise. The consensus view is that, because lower oil prices cause input costs to fall, including wages, this will result in lower prices. But, as Marx describes, prices are not just determined by the value of commodities. That presents only one side of matters. Price is an expression of exchange-value in money terms, and that means that it is influenced not just by the value of commodities, but the value of money.

If, the value of all other commodities, on average, remains constant, but the value of money falls, then prices, in general, will rise, and vice versa. But, as Marx sets out in “A Contribution To The Critique of Political Economy”, and in Capital I, Chapter III, the amount of money put into circulation is determined by the amount required to circulate commodities, as well as to ensure that payments can be made, plus the amount required as reserves, so that this circulation can flow smoothly. This also depends upon the velocity by which this money flows through the economy, which is a function both of the volume and rapidity of transactions, and of technical considerations that determine how fast payments can be processed. In short, the faster the velocity of money, the less of it that needs to be put into circulation.

One consequence, of conditions, in recent years, has been that, where more money has been pumped into the economy, besides a large part of it going to cause a hyper inflation of financial asset prices and property prices, whose effect on reducing real wages is not measured in the official inflation data, another large part of it has simply sat in bank accounts for longer – particularly the bank accounts of the banks themselves – rather than going into circulation to stimulate economic activity. In the US, the economic growth that has been seen, compared to the recession in Europe, after 2010, has been due to the use of fiscal stimulus, rather than to monetary stimulus.

One consequence of the fall in oil prices may be, therefore, to stimulate consumer demand for a range of consumer goods, and with the same fall in oil prices causing a rise in the rate of profit, and release of capital, this may also stimulate additional capital investment to accommodate this higher level of consumer demand. The increased economic activity, in a range of consumer products, along with increased investment activity, may thereby cause the mass and velocity of economic transactions to rise. If that then causes the velocity of money to rise, as the vast oceans of liquidity that have been pumped into economies, via quantitative easing, begins to flow out of bank accounts and into circulation, this may cause the value of money to drop, and commodity prices to rise, leading to a sudden rise in inflation.

With bond markets in a seeming fantasy realm, whereby, in large parts of the globe, yields are at very high levels, pushing up official interest rates – 17% in Russia, 19.5% in Ukraine, India 7.75%, Brazil 12.25%, Turkey 7.75%, South Africa 5.75% - whilst yields on US 10 Year Bonds have actually fallen to around 2.2%, and its official interest rates remain at 0.25%, any rise in inflation is likely to cause the long predicted bursting of the bond bubble, which will have rapid and widespread effects on global financial markets, sending stock, bond and property markets into a tailspin.

That would itself be good for the real economy in the longer term. A fall in the price of fictitious capital, would undermine the power of the money-lending capitalists and the conservative political forces it stands behind. It would mean the diversion of potential money-capital into speculation in those financial markets would be ended, freeing it up, for use in purchasing real productive-capital. The rise in stock bond and property markets, has itself caused a sharp increase in the value of labour-power. Astronomical levels of house prices significantly reduces the ability of workers to buy those houses without a large rise in wages. The huge rise in stock and bond markets has meant that workers pension contributions have bought fewer and fewer shares and bonds, to go into their pension fund, whilst the same process has caused the yield on those funds to be squeezed almost out of existence. Those pensions could only be maintained at previous levels, if workers pension contributions themselves increased substantially to buy these much more expensive stocks and bonds. But, workers could only afford these higher pension contributions if their wages increased substantially to fund it.

A fall in those financial markets, therefore, would mean that workers would be more able to buy the houses they need, and to fund their pensions without a rise in nominal wages.

In short, the fall in oil prices will be good for the economy, but terrible for financial markets.  

No comments: