Saturday, 12 June 2021

Michael Roberts and Inflation - Part 8 of 16

When Roberts comes to argue against the Keynesian cost-push theory of inflation, he basically refutes many of the lines of argument he has just previously used against the Monetarist theory. He defines the Keynesian cost-push theory as essentially a theory of wage push inflation.

“The usual Keynesian way to estimate likely changes in inflation is to use the so-called Phillips curve: the curve of the statistical relation between unemployment rate and the price inflation rate. Again, however, this theory has proven to be false. The ‘curve’ does not hold or is so ‘flat’ as to provide no guide to inflation. Indeed, since the great recession of 2008-09, unemployment rates in the major economies have dropped to near all-time lows - and yet wage rises have been relatively moderate and inflation rates have slowed. This is the mirror image of the 1970s, when unemployment rates rose to highs, but so did inflation, and we had what was called ‘stagflation’. Both examples show that the Keynesian cost-push theory is false.”

This assumes that high levels of employment do not mask high levels of underemployment, which the low levels of productivity indicate exists.  It also assumes that measures of unemployment are accurate, when, in fact, in the 1980's as unemployment soared, governments modified these measurements to minimise it.  Thatcher's government introduced more than 20 modifications to the calculation to reduce the headline numbers.  Moreover, in the 1960's, as wages began to rise on this basis, the UK unemployment rate was between 1-2%, even on today's heavily modified measurement, it has not fallen below 4%, the level it was at in the 1970's, when the economy first began to suffer the kinds of levels of unemployment not seen since before WWII.

In Theories of Surplus Value, Marx describes two causes of rising wages. The first, is essentially that identified by Ricardo, in which rising costs of wage goods, primarily of agricultural products due to diminishing returns, causes the value of labour-power to rise, leading to rising wages. Ricardo saw this as a secular trend, resulting from the continued growth of capital, placing demands upon agriculture that it could only meet by drawing into cultivation less fertile soils, leading to diminishing returns. It is his explanation of the tendency for the rate of profit to fall. Marx demonstrates that although this definitely occurs in the short-run, it does not establish the secular trend that Ricardo assumed, because, it provokes a response from capital to raise productivity in agriculture/primary production, as well as the opening up of new lands. Marx describes the latter process in Theories of Surplus Value, Chapter 9, and it is a fundamental component of explaining the periodicity of the long wave cycle, and, thereby, of the cycles of prosperity, boom, crisis, and stagnation.

The second cause of rising wages, described by Marx, is that identified by Smith, which is the fact of labour shortages causing wages to rise, as capital bids up the price of labour. Again, for Smith, this is a secular trend. He argues that the reason that the price of labour is lower than its value – which he equates to the value created by labour (which he recognises resolves into necessary labour and surplus labour) – and that the price of capital is greater than its value, is that capital is scarce, whilst labour is plentiful, and so the effects of demand and supply enables capital to obtain a higher price, and labour has to accept a lower price. Profit is obtained because capital, thereby appropriates the surplus value created by labour. He thinks that capital will accumulate faster than the supply of labour, and so this initial condition will slowly reverse with the price of labour rising, and so squeezing profits. It is his explanation of the tendency for the rate of profit to fall.

Again, Marx shows that this happens in the short-run, and is indeed the cause of crises of overproduction of capital, but, here, he agrees with Ricardo, in demonstrating that Smith's belief in the idea that capital would accumulate faster than the labour supply, in the long-term, was wrong. Capital responds to these crises of overproduction, again, by engaging in technological developments that replace labour with capital, and so create a relative surplus population. But, the important points in both these cases, is not that, they break down in the longer-term, as a result of technological development by capital, being induced by crises, but that they are real phenomenon in the short-term, that, indeed does cause capital to be induced to seek resolution of them.

Northern Soul Classics - Porgy and The Monarchs - My Heart Cries For You


Friday, 11 June 2021

Friday Night Disco - Cleo's Back - Junior Walker & The All Stars


A Characterisation of Economic Romanticism, Chapter 1 - Part 4

But, these arguments are based on several misunderstanding of what Marx actually says, both in Capital, and more specifically, in Theories of Surplus Value. And, what Marx actually says, also demonstrates what is wrong with Sismondi's argument, and its adoption by the Narodniks and other modern day catastrophists. Sismondi followed Adam Smith in his “absurd dogma” that reduced the value of commodities to revenues. That dogma was followed by all the economists that followed Smith, except Marx, and, to an extent, Ramsay and Richard Jones. It is the same absurdity that is taught to students of orthodox economics down to today, i.e. that the value of commodities, and so of national output, resolves into wages, profits, interest, rent and taxes, i.e. into factor incomes. 

Its on this basis that Keynes formulates his theory, which starts from this false assumption that the value of national output is equal to the value of national income, and similarly that the value of national income equals the value of national expenditure. The assumption is wrong, because the value GDP is equal only to v + s, i.e. only to the new value created by labour during the year. However, the value of output is equal to c + v + s, and the value of c, here, represents an income for no one. This value of c (constant capital) is the value of materials consumed in production, as well as the wear and tear of fixed capital (which has to be distinguished from depreciation). 

The value of all those things produced in previous years is simply transferred into the value of current production. It does not form a revenue for anyone, and its replacement, required so that production can continue on the same scale, is not bought from revenue either. Rather, this value, required for reproduction, is simply realised in the value of total output, and, thereby, provides the fund for its own reproduction out of capital. All of the commodities that comprise c, the raw and auxiliary materials, the wear and tear of fixed capital, are bought out of capital, not out of revenue. Indeed, the value of c transferred to the output value must tautologically be the same as the value of c reproduced out of the output or else it would not be “constant” capital. It would be capital that either adds to or detracts from the new value created, meaning that labour was no longer the only source of new value, and so surplus value. It would mean the end of the labour theory of value. As Marx sets out in Theories of Surplus Value, this was the error that Ramsay fell into as a result of using historic prices rather than values. 

Ramsay takes the historic price paid for inputs as the basis for the calculation of profit and rate of profit, but as Marx shows, if the value of these inputs changes, this necessarily leads to false conclusions about both the mass of surplus value, rate of surplus value, and rate of profit. Ramsay confuses capital gains/losses with surplus value, and confuses releases of capital with profit, and vice versa. If the value of inputs fall, compared to historic price, this leads to a release of capital that creates the illusion of additional profit, but as Marx points out, the labour theory of value says that additional profit can only be created by additional surplus value. If, in fact, the amount of new value created, and the amount of surplus value created by labour remains the same, this would necessitate the conclusion that this additional value, and surplus value had been created, not by labour, but by the constant capital itself, thereby destroying the labour theory of value. 

“In other words, therefore, the rate of profit depends on the excess of the value of the product over the sum of circulating and fixed capital; hence on the proportion which, firstly, the circulating capital, and, secondly, the fixed capital bear to the value of the whole produce. If we know where this surplus comes from, then the whole matter is very simple. But if we only know that the profit depends on the ratio of the surplus to these outlays, then we can acquire the most inaccurate notions about the origin of this surplus, for example we can, like Ramsay, imagine that it originates in part in fixed (constant) capital.” 

(Theories of Surplus Value, Chapter 21) 

The physical commodities, the materials and elements of constant capital, are simply a component of this year's current production, and, thereby, replaced out of it, but they form no part of GDP, no part of society's consumption fund, no part of society's revenues, no part of National Income. It is only out of revenues that consumption is funded, i.e. out of v + s, the new value created by labour during the year, equal to GDP. Out of that also arises that part which is set aside not for consumption, but for saving, for productive consumption via the accumulation of capital, or what Keynes calls net investment.

Bond Market Manipulation

For the last month, global bond markets have been slowly selling off, meaning that bond yields have been rising, as the reality of rising global inflation began to sink in, despite central banks trying to convince everyone that the inflation is only transitory. Then, on Wednesday, the day before the release of the latest US inflation data, bond markets rallied sharply, reducing yields. Why?

The US 10 Year Bond Yield was over 1.60%, and headed higher. But, part way through Wednesday, it dropped sharply, not just by a few points, but all the way down to 1.50%, and then below. That is, to say the least, odd. What drives real market rates of interest is the demand for and supply of money-capital. In short, that demand consists of businesses demand for money-capital to finance their expansion; the demand of government for money to finance their activities, including investment in infrastructure and so on; and the demand of consumers for money to finance any borrowing to pay bills, buy large items and so on. The supply consists of the realised profits of companies thrown into the money markets, plus any additional savings mobilised from other revenues, or unused money hoards. This indicates the difference between this supply of money-capital, as against merely an increase in liquidity, via the printing of additional money tokens. The latter simply depreciates the money tokens, and so inflates the values on each side of the demand and supply equation, leaving the rate of interest, as the fulcrum, unchanged. As Marx puts it in Theories of Surplus Value, Part 1, Addenda,

“Hume attacks Locke, Massie attacks both Petty and Locke, both of whom still held the view that the level of interest depends on the quantity of money, and that in fact the real object of the loan is money (not capital).” (p 373)

“Massie laid down more categorically than did Hume, that interest is merely a part of profit. Hume is mainly concerned to show that the value of money makes no difference to the rate of interest, since, given the proportion between interest and money-capital—6 per cent for example, that is, £6, rises or falls in value at the same time as the value of the £100 (and. therefore, of one pound sterling) rises or falls, but the proportion 6 is not affected by this.” (p 373)

In other words, as Marx says, printing more money tokens depreciates the tokens, and inflates money prices. So, if £100 of money is demanded by borrowers at an interest rate of 6%, and the owners of money-capital are prepared to supply £100 at that interest rate, so that demand and supply balance, if more money tokens are printed, depreciating them, and causing money prices to rise by say 10%, then the borrowers now need to borrow £110 in order to buy what previously cost £100, whilst the additional liquidity increases the nominal supply of money-capital to £110, whilst the rate of interest that balances these two amounts remains constant at 6%, i.e. both sides of the equation have simply been inflated by 10%.

Ultimately, the yields on bonds have to accede to this determination too, but even in Marx's day, they were subject to significant manipulation by the Bank of England. That is why Marx said that in examining the real rate of interest we should not use the official policy rates, but those applying in the real economy.

“For instance, if we wish to compare the English interest rate with the Indian, we should not take the interest rate of the Bank of England, but rather, e.g., that charged by lenders of small machinery to small producers in domestic industry.”

(Capital III, Chapter 36, p 597)

The policy rates of central banks are often a fiction when it comes to the real economy, but so too are the yields on bonds, especially in more recent times, when they have been simply depressed as a result of central banks policies of QE, to buy them up in huge volumes so as to increase the prices of the bonds, and so reduce the yields. So, what actually moves these bond prices, and so inversely yields, in the short term, is the action of the central bank, which also then encourages speculators to jump on board in the expectation of making capital gains, as the price rises. But, what also would generally affect that would be expected levels of inflation, because if inflation rises, the expectation is that central banks will not loosen monetary policy further, but will, if anything tighten it. If the central bank tightens monetary policy by buying fewer bonds, or selling them, or if it increases its policy rates, so that banks and financial institutions have to pay more for the money they use also to speculate in the purchase of financial assets, then the prices of those assets will fall, and yields will rise.

So, in an environment where global inflation has been continuing to rise, month on month, why suddenly would the demand for bonds rise on Wednesday, causing their price to rise, and bond yields to fall, especially by such a sizeable amount? Well one reason could be that speculators made a big gamble. In the world of financial speculation, there is a strategy based upon “buy on the rumour, sell on the fact.” The principle is that what many think is going to be bad always turns out to be not so bad, and vice versa. For example, if there is likely to be a war, many people imagine the bad effects on the economy that will result. Asset prices sell off, but the professional speculator buys, on the rumour, taking advantage of these low prices. When the war actually starts, its seen that war production boosts the profits of armaments companies and so on, the share price of these companies rises, the speculator makes a large gain, and so sells on the fact of the war, taking this gain with them.

So, the sharp rise in bond prices could have been an example of buy on the rumour, sell on the fact. In other words, as the world worried about rising inflation, the professional speculators bought on the rumour of higher inflation, expecting to sell on the fact when the data came out, suggesting that inflation was not as bad as predicted, and so possibly transitory. As a side point, this shows that what the business channels refer to as investors are nothing of the kind, but merely gamblers. In other words, they do not invest money in the purchase of real capital, i.e. means of production that would increase social wealth, but merely gamble in the short-term over whether the price of this or that asset will rise or fall. They are like gamblers at a roulette wheel betting on red or black, if the ball lands on red, inflation undershoots, they win, if it lands on black, inflation overshoots, they lose. Nearly all activity in financial markets is of this kind of gambling, with a tiny proportion going to actually fund real investment in new productive capacity.

But, if this was the reason that bond prices rose, its hard to understand the extent to which they rose. Even harder to understand is why they then continue to rise after the data was released, and showed that the actual inflation was much higher than had been the estimates for it. Immediately after the data release, bond prices did fall, taking the US 10 Year Yield up to 1.53%, but then the yields started to fall again, coming down to 1.44%. Given the extent to which the inflation data exceeded the estimates, and given all of the other data, this seems wholly irrational. Its true that the June non-farm payrolls data was not as hot as had been predicted, but with 650,000 new jobs created, it was still pretty good, especially as the reason it was not higher seems to be that workers are resisting taking jobs at current wages, in the expectation of being able to get better jobs at higher wages, by being more choosy. And, the weekly unemployment claims data on Thursday also showed the 6th weekly decline, indicating that the US economy is romping away at a rapid pace. It has already recovered the position it was at before concern over the virus began to effect it.

The prices of some raw materials appear to have hit a short term peak, but others continue to rise, including food prices, and energy prices. Another is aluminium, which is used in the production of all sorts of things from cans to motor cars. Everything in the data suggests that inflation is going to continue to rise for months to come, and the liquidity being pumped into the system makes that more likely than ever. Nor is it just in the US. The EU economy has been a laggard in coming out of the lockouts, but it is now emerging, and that will feed into increasing global growth too.

According to the Bundesbank, the German economy is on the brink of a strong upsurge with it likely to recover to pre-pandemic levels as soon as this Summer. Where Germany leads the rest of the EU shortly follows.

Thee seems to be only one rational explanation for the rise in bond prices on Wednesday, and their continued rally after the release of the inflation data, and that is coordinated intervention by central banks to buy bonds, as they try to sell the narrative that inflation is transitory. It is the central bank equivalent of the front running of meme stocks on social media platforms. Of course, such manipulation is not new, as QE demonstrates. What is significant, however, is that the argument given for QE has always been that it was required in order to provide liquidity to economies to encourage economic growth. What can be seen in this manipulation, if anyone still doubted it, is that the true purpose of QE had nothing to do with stimulating the real economy, and everything to do with inflating asset prices.

If the purpose of QE had been to actually stimulate the real economy, then it would not have been accompanied by fiscal austerity, which acted more directly and effectively to reduce aggregate demand, and so economic activity. It would not have been accompanied by measures to encourage further speculation in assets, including the stoking of a house price bubble, once more. Instead, in line with the ideas of MMT, any money printing would have gone directly to finance government spending, which feeds directly into stimulating the economy, whether by employing more teachers, healthcare workers and so on, or by spending on infrastructure, building roads, railways and so on, which stimulates demand for bricks, concrete, steel, timber, and so on, as well as for all of the workers required for that production. Of course, the reason it was not used for that purpose, is the same reason that MMT is a fraud. If the purpose of QE was to stimulate economic activity then this kind of spending would have done it, but precisely in doing it, it would have increased the demand for labour causing wages to rise, and profits to get squeezed, it would have fed liquidity directly into the commodity and labour markets, causing prices to rise, and interest rates to rise. Rising interest rates would have crashed asset prices, in the same way this process did in 2008.

The purpose of QE was not to stimulate economies, but was to inflate asset prices, the form of wealth of the top 0.01%. And, if the current rise in bond prices is the consequence of concerted manipulation by central banks, it also clearly has nothing to do with stimulating the real economy, which is already surging back to and beyond the levels it had reached prior to the pandemic and government imposed lockouts, but is instead, simply the use of public funds to goose the wealth of the top 0.01%, as rising inflation and interest rates again is about to crater the asset price bubbles, and put a flame to the paper wealth of the ruling class.

Thursday, 10 June 2021

US Consumer Price Inflation Surges To 5%

The May Consumer Prices index for the US, has surged to 5%. It is the biggest increase since August 2008, excluding food and energy prices, it rose by 3.8%, the biggest increase since May 1992, when prices rose by 5.3%! The figures not only explode the 2% inflation target of the Federal Reserve, but also hugely exceeded the current predictions.

Yet, central bankers continue to push the line that this inflation that has been rising month after month, and looks set to continue to rise month after month, is only “transitory”, or is accounted for only by “base effects”, because it is being compared backwards to a year ago, when lockouts and lock downs seized up economic activity, and caused prices to drop, as demand was artificially curtailed. The problem with that argument is that, for the last year, they were happy to ignore that effect in reducing the headline price inflation, whilst ignoring the fact that large numbers of commodities that consumers switched their spending to, and whose prices rose sharply were not included in the official inflation estimates! The other problem is that, its not just against the year ago figures that inflation continues to rise, but month on month too, so that, for example, May's US inflation data showed a rise in prices compared to April's prices. Its true that month on month the rise in May as against April was not as big as April against March, but that is because April represented the first month when lockouts were being lifted to a large extent, and so all of the pent up demand was surging out into the market, washing all of the oceans of liquidity into every corner of the economy.

A look at the upward slope and extent of the curve of CPI, shows it far exceeds that of previous recent periods. To coin a phrase, ubiquitously, and mostly erroneously used during the pandemic, it begins to look as though it is rising “exponentially”. Such rises in prices tend to be self perpetuating, as consumers see prices rising week after week, and rationally assume that it will continue. They adjust their behaviour accordingly. In the 1970's inflation, I remember going to the Co-op each week, and loading up with large numbers of cans of baked beans, and other such items, buying vinegar, ketchup and brown sauce in 5 litre catering containers, in the certain knowledge that the price paid then would be much lower than the price a week or two later. The same behaviour is seen with people buying houses.  The difference is that when house prices subsequently crash, you end up still with the mortgage debt.

But, the resultant increase in demand means that suppliers, also facing rising prices from their suppliers, act in a similar manner, and all of the resultant demand, fuelled by large amounts of liquidity provided by central banks pushes up prices, so that the expectation of rising prices becomes self-fulfilling. In the 1970's, the government having seen workers also do the obvious thing and demand wage increases they thought would cover them for coming price hikes, and so who demanded pay rises above current inflation, for example the 27% pay rise won by miners in 1972, followed by their 35% claim in 1973, decided to try to head it off, by introducing a sliding scale of wages linked to inflation.

Looking at the month on month data, for the US, the headline figure rose by 0.8% as against predictions of just 0.5%. The core inflation index rose by 0.7% again versus an estimate of 0.5%. So, the pace of inflation continues to defy the expectations that it is somehow transitory. In April the figures were 4.2% for the year on year headline inflation, 0.9% for core inflation, and 0.8% for headline inflation, month on month. In response to the central banks claims about base effects, therefore, if we take these month on month figures, and project them forward a year, then we would have averaging out the last two months figures arise of 1.6% x 6 = 9.6% (actually more than that when compounded), and the same for the headline figure. A look at the data in greater detail shows why this 10% inflation figure in a year's time, is not that difficult to imagine. Already, indices of inflation that are “COVID adjusted” taking into consideration the effects on the basket of goods actually consumed, all come in at around that figure, and one estimate for the BBC of food price inflation, for the UK, came in at around 23%, since the beginning of the year!

Drilling down into the US data we see that used car prices that surged in the previous month's data, also rose again sharply, by 7.3% on the month, and 29.7% over the last year. The reason for that is fairly obvious that, as consumers have come to replace vehicles, they find that producers have run down stocks during the period of the lockouts. They are unable to ramp up production quickly enough to meet demand, especially as surging global demand has caused a worldwide shortage of microchips, which looks set to last for another year, and which has already caused some car makers to have to stop production until they have the required supplies. So consumers switch to buying a limited supply of used vehicles, pushing their prices sharply higher.

Similarly, prices for car and truck rentals surged by 12.1% on the month. That compares to a rise of 16.2% the previous month, and over the year it is up 110%! In a country where air travel is common to cover the large distances, the opening up of the economy, has seen the prices of tickets rise by 7% month on month, and 24% as against a year ago. The rise in the price of oil has still not fed through into energy prices, which means that is a factor that will be pushing inflation higher in the months to come, but petrol prices are up 56.2% over a year ago, whilst energy in general is up by 28.5%.

I recently commented on the fact that the rise in timber prices alone had increased the cost of building the average US house by $24,000. The rise in the price of copper used for electrical wiring, and for plumbing will also have played into a rising cost of new houses, and so of the cost of shelter. Timber and copper prices, along with the prices of some other primary products, seem to have hit a short term limit, as the consumers of them, can no longer pass on the cost in their own final prices, and cannot absorb the cost without wiping out their profits. But, as global demand for consumer products continues to rise, and as the oceans of liquidity continue to wash out in waves, driving final product price higher, they will again find they have headroom to cover those higher costs, and the demand for the primary products will surge again, moving prices higher once more. As the effects of rising wages, as firms have to bid for available labour supplies, also raises costs, firms will raise their own final prices in each sector, and central banks will respond by increasing liquidity to facilitate it, so as to prevent profits being squeezed.

On that score, the weekly jobless claims data also came out at the same time as the inflation data, and again showed a continuing trend of falling jobless claims as the economy opens up. It was the sixth consecutive weekly drop in claims, which came in at 376,000 compared to 385,000 in the previous week. As I reported recently, there continue to be numerous accounts of firms with large numbers of job openings unable to recruit workers, as workers now feel themselves able to pick and choose over which jobs to take rather than being desperate to take the first one on offer, as they see the potential for getting better jobs, and a higher starting wage, in a week or so from now, in the same way that consumers see the inevitability of rising prices.

The curve is clearly steepening in its decline, though still some way from the pre lockout levels of around 200,000.  Hourly earnings rose by 0.5% on the month, but real hourly earnings fell by 0.2%, as a result of the increase in prices, which exceeded it.  That illustrates the point that workers will begin to demand wage increases ahead of current inflation levels to protect themselves in the year ahead against even bigger price increases. 

Today, also, the ECB had its monthly meeting and decided to keep its policy rate at zero, whilst continuing to flood the Eurozone economy with liquidity. The EU has not yet had the strong recovery seen in the US, as a consequence of it bungling the purchase and roll out of vaccines, which has held back the lifting of the lockouts and lock downs that have artificially cratered the EU economy over the last year. But, its inevitable that the EU will have a similar trajectory as that seen in the US. That in itself will have its effect in increasing the demand for primary products, and pushing up global inflation. Rising demand from the EU, as it reopens will also provide further stimulus to the Chinese and US economies, as it sucks in imports, and trade increases, which is likely to be at a greater pace under Biden, than under the cretinous Trump, as Biden seeks to rebuild the bridges with Europe that Trump blew up.

Indeed, the slowdown in the global economy in 2019 was a consequence of Trump's global trade war, as well as the effects of Brexit. It fulfilled a useful function for the owners of fictitious capital, in that it slowed the growth of wages, and of interest rates, which in 2018, had caused a 20% drop in financial markets. The effects of the lockouts and lock downs in global economies, which curtailed GDP by around 20%, had an even more pronounced effect on constraining wages, and demand for capital, so reducing pressure on rising interest rates. The opportunity for central banks to use it as a pretext for yet more QE, was the basis of the surge in financial markets in 2020, that rose to new record highs, illustrating vividly that the performance of financial markets is in inverse correlation to the performance of the real economy.

As, economies open, and all of the liquidity pumped into economies over the last year, now begins to wash out into consumer spending, and inflation that is beginning to rise “exponentially”, central banks and governments are keen to downplay the inflationary consequences, because as economic activity surges, and the demand for capital rises, whilst profits have all but disappeared, and balance sheets have been reduced, the consequence must inevitably be rising interest rates. Add to that the astronomical level of debt of states, and their commitments to spend trillions of Dollars more in programmes of fiscal expansion, and the stage is set for interest rates to rise much faster than financial markets are going to be happy with. Add in rising inflation, and so the fact that anyone lending at fixed rates today, will see both their return, and their capital reduced massively in value, over the term of the loan, and the stage is set for bond markets to go into meltdown, which will take down the stock and property markets with it. The central banks are keen to avoid that, which will make 2008 look like a sideshow.

Yet, there is little they can do about it. The liquidity is already out there. They are not going to repeat the exercise of Paul Volcker in the 1980's and sharply tighten monetary policy, which, then and now, would create a credit crunch, and sharp recession. Governments are committed to massive fiscal expansions, and they are not going to withdraw them, if only for their own short-term electoral reasons. Either all that borrowing pushes up interest rates immediately, or else its funded by money printing by central banks, which then simply feeds even higher inflation, as that liquidity then washes out into the real economy via the spending of the state, and then leads to rising interest rates, because the higher prices of goods and services means that both firms and government have to borrow even larger nominal sums to buy the goods and services they require, either for productive or unproductive consumption.

So, all the central banks continue to lean on the narrative that inflation is transitory, and they put forward the argument that the current surge in economic activity is merely a rebound from the reduction in activity caused by the lockouts and lock downs. In fact, the US economy is already back to the level it was at, before the lockouts began, and before fears over the virus began to affect economic activity. There appears to be a concerted effort, therefore, to continue to hold back the opening up of economies, and surge in economic activity. That is seen in the UK and Europe in particular. It comes from a variety of sources of groups with different interests.

The strategy of lock down was always an idiotic one for dealing with the virus. It sought in theory to isolate 100% of the population, which was always impossible, rather than isolate the 20% of the population that was actually at any kind of serious risk from it. So, it inevitably was unachievable, failed, and despite, in Britain, a lock down that lasted, in one form or another, for more than 15 months, saw nearly 130,000 deaths of people with COVID, though the ONS data suggests only around 13,000 deaths from COVID. More than 90% of those deaths were of people in the 20%, who should have been isolated, and protected. Indeed, the majority of those were people aged over 80, and, in turn, a majority of those people aged over 90! Showing the lunacy and hypocrisy of the lock down strategy, the majority of those dying were people in NHS hospitals (around 9,000 of those dying being people the NHS itself had infected after they went into hospital, with 25% of those it treated being so infected) or else people in care homes, again many of whom were infected as a result of infected people being sent back to them from NHS hospitals!

Throughout this period, as attempts were made to justify the lock downs, the lie was presented that everyone was at more or less equal risk from the virus, despite the fact that the data showed the opposite was true. Only when vaccines became available, and so in deciding who to vaccinate first, the government had to admit that it was the elderly who were at risk, and the young at virtually no risk, was that lie acknowledged, though not openly, of course. But, then having been acknowledged, the argument was shifted. When actually challenged on the facts about vulnerability, one line of defence had started to be, “what about long Covid?” But, the nature and details of “Long Covid” are shrouded in mist. The term covers a whole spectrum of symptoms from mild to severe, and even a proven link of these conditions to COVID itself is far from clearly established. Estimates suggest that up to 1 million people might suffer from Long Covid, but as with the figures of people who died with Covid as against from COVID, its likely that this figure is somewhat inflated. There were similar accounts of children taken ill with conditions that were supposed to be related to COVID, but further investigation showed the number was statistically insignificant. What Long Covid provided was an argument for those that wanted to promote lockouts and lock downs to do so, despite the fact that the data showed the virus as only a serious risk to the elderly.

Similarly, we now see arguments put forward by Christine Lagarde in the ECB press conference, as she tried to dampen talk of rising economic activity, that the pace of reopening of the EU economy was not certain because of rising pockets of infection, of people with new variants of the virus. The same argument is being made in Britain. In Britain, news reports focus on infections having risen five fold from around 1,000 to 5,000 per day, but that 5,000 is tiny compared to the number of infections that were being seen in previous months, moreover, with 80% of the population now estimated to have COVID antibodies, even according to the government, the chance that any infection, even with new variants is going to lead to any sizeable number of serious illnesses or deaths is remote.

Given the extent of vaccination, and of antibodies from natural herd immunity, there seems no reason why economies should not be fully reopened, including the full opening up of foreign travel. Talk of infections and new variants, now seems to be fulfilling the role of “Long Covid” in past months to justify a continuation of measures to slow down reopening, or at least to dampen expectations of rapid economic growth that would lead to rising interest rates, and crashing financial markets. But, that appears like trying to plug the dyke with your fingers. At best it might dampen sentiment for another week or two, but, across the globe, economies are rebounding, workers are getting back to work, and demand is rising. The liquidity put into circulation is flooding out stimulating demand, but also causing prices to rise. Surging demand, and a surging demand for capital is going to push up interest rates sharply, leading to a sharp reduction in the capitalised value of financial and property assets. No amount of additional liquidity, and certainly no amount of front running of meme stocks is going to stop it.

Michael Roberts and Inflation - Part 7 of 16

The Miseans argue that those closest to the source of the additional liquidity are, thereby, able to benefit from it. They obtain the additional liquidity, and are able to spend it, before the effect of this increased liquidity results in higher prices. Roberts' argument that increased supply of money tokens does not result in higher inflation, is really a reversal of the Monetarist argument. They argue that it must result in inflation, because they assume that the velocity of circulation is unchanged, whereas, Roberts argument is that there is no inflation, because the increased liquidity is simply compensated by a fall in the velocity of circulation. Both fail to take into account the wider economic conditions prevailing during which these changes in liquidity occur.

For example, take the 1970's. During the 1970's there were repeated economic crises and recessions. According to Roberts' argument, “it is changes in prices and output that drives money supply.” Then, in the 1970's the reduction in output, during those crises, and the, at least, slower pace of growth, should have resulted in reductions in money supply. Although, some slow down, or even decline in social productivity might be expected to result in the value of commodities not falling as fast as they tend to do over time, or even rising as a result of loss of economies of scale, any such change would be minor. So, the result should have been that the increase in liquidity was minor or even negative. Was it? No, of course, not. Money supply increased rapidly, and instead of simply being absorbed in a slow down in the velocity of circulation, as Roberts assumes, it was instead absorbed, as Marx suggests, by a rise in the other of those terms in the equation, i.e. the nominal prices of commodities. Inflation rose, during the 1970's, and early 1980's in double digits rising at its highest to well over 20%, in the UK, and to around 15% in the US.

In the 1970's, M2 increased despite economic slowdown and recessions, inflation soared.  In the 1980's, M2 declined, and inflation fell sharply.  From the mid 90's, M2 rose, asset prices rose until the Tech Bubble burst in 2000.  M2 rose again from early 2000's, asset prices and commodity prices rose, until the 2008 bubble burst.

In fact, look at the chart above.  On each occasion there is a contraction of money supply in the years preceding a recession.  During the recession, the money supply increases sharply!

The difficulty with Roberts' argument is that, once additional liquidity has been put into circulation, it is difficult to remove it. Friedman himself saw a correlation between money supply and prices only after a two year lag. In the 1980's, it required a very sharp rise in official interest rates, and curtailment of liquidity, with the consequence that it led to a deep recession. The reason for that is that, the job of the central bank is to protect the interests of the ruling class. When prices rise workers are led to seek higher money wages. The higher money wages squeeze money profits, if firms are not able to raise prices. So, central banks tend to increase money supply so as to accommodate those higher prices.  So, although additional liquidity does not result in an immediate rise in prices, it always does so eventually, as this liquidity feeds into circulation.

Increasing nominal interest rates cannot deter firms from increasing investment in a period of rapid economic expansion, because what firms are concerned with is not nominal interest rates, but real, i.e. after inflation interest rates.  The consequence of this currently is dramatic. Take a large corporation able to issue 10 year bonds with a 2% coupon. In other words, a company might issue £1 million in bonds, which will cost it £20,000 a year in interest. Suppose that, as a result of higher interest rates, it rises to 4%, so that the company would now face an additional bill for interest of £20,000. However, given the rapid pace of growth of economies as they rebound from the lockouts, and as the masses of liquidity flows out into circulation over the coming years, and results in higher inflation, how much would this doubling of its interest burden actually deter it? If the increased economic activity resulted in a rise in the company's profit from £100,000 to even just £150,000, the additional £20,000 of interest is covered 2.5 times over by the additional profit. If inflation increases by 10%, then the money profit will rise to £165,000, whilst the interest on the bond would remain at £40,000. So, unless interest rates were raised very significantly, as a result of central bank action, it would be unlikely to deter economic activity.

What it would do, however, in current conditions, is to crater asset prices. The price of revenue producing assets is determined by the capitalised value of their revenues (rent on land, coupon on bonds, dividends on shares). The price moves in inverse relation to the change in interest rates. So, if interest rates were to go, as above, from 2% to 4%, whilst this would have little impact on deterring economic activity, it would have a dramatic effect on asset prices, essentially halving them. In other words, the Dow would lose around 17,000 points, the FTSE 100 around 3,500, property prices would fall by half, and so on. This is a major problem for central banks, as they see economic activity growing rapidly, causing inflation to rise, and leading to pressure for market rates of interest to rise, whilst any such rise, will crater the asset prices they have spent the last thirty years, and particularly the last ten years, trying to keep inflated.