According to Morgan Stanley more than 40% of the world's population now live in economies where inflation is in double digits. Part of the reason is that these economies, mostly in Asia, have currencies pegged to the dollar. Over the lsat twenty years that currency peg enabled those countries to shield themselves from the US's attempt to shift the burden of its economic weakness on to its capitalist rivals. The role of the dollar as world reserve currency meant the US was in a privileged position. Most of the world's trade was conducted in dollars, important commodities such as oil were priced in dollars. If you wanted to trade these commodities you had to buy dollars. On the one hand that gave the dollar a sign of strength which the underlying fundamentals of the US economy did not warrant.
In the 1970's, as the end came for the Kondratiev Long Wave boom, whch had existed since 1949, and as the US had racked up huge costs in fighting the Vietnam War, that underlying weakness of the US economy began to show itself. De Gaulle aware that US imperialism was screwing the European capitalist states responded by demanding payment from the US in Gold rather than a devalued dollar. NIxon responded by closing the Gold Window. He said that from then on the dollar would no longer be convertible into Gold, and made it illegal for US citizens to possess Gold itself. Te US was using the size of the US economy, and the power of US militarism to once again say "Up Yours" to the other Capitalist states. It could so both because of the size of the US economy into which those Capitalist states sold their goods, and because in the 1970's and 80's those other Capitalist powers relied on the US nuclear umbrella for protection against possible blackmail by the world's other superpower - the USSR. But, the fact that the US had to resort to such measures was a sign that the US economy was rapidly weakening even then.
As Ernest Mandel set out in his book "The Second Slump" even though the world economy had been in a Long Wave boom since 1949, that did not mean that the normal business cycle did not continue during that period. There were periods of slower growth and even recession during the Long Boom. But such slowdowns and recessions were mild both because of the Long Boom, and because capitalist governments used Keynesian intervention to cut off any downturn before it could become serious. Consequently, even those economies that had not had the huge expenses the US had in fighting the Vietnam War had over the years pumped more and more liquidity into their economies, because each time the dose required became greater. Moreover, as marx points out the fucntion of a crisis under Capitalism is not just to restore proportionality to the economy, to destroy the overproduced Capital, it is also to clear away the dead wood, to remove the least efficient Capitalists, and transfer Capital into the hands of the more powerful, and the more dynamic Capitalists, thereby providing the basis for a more vigorous upswing.
By the mid 70's as the Long Boom came to an end those chickens began to come home to roost. The first reaction to the icnreasing economic weakness was to reach for the Keynesian medicine once again, but now outside the confines of the Long Boom, its effectiveness was more limited. Keynes had argued that economic crises were a result of underconsumption. The answer was then for the Government to increase consumption, which it could do by either cutting taxes to give consumers more money to spend, by spending more money itself without raising taxes to cover the spending, or by encouraging firms to spend more on investment. Such methods can work if the economy goes into a short slowdown or recession. If they encourage more economic activity then the deficit created can be made up from the extra income generated by that increased activity. But, under conditions of more persistent slowdown things are different. If taxes are cut consumers might decide to play safe in uncertain times and increase their savings. Firms seeing economic slowdown are not likely to invest Capital. Moreoever, Government Spending financed by a deficit which itself is financed by borrowing will raise interest rates, if it "crowds out" demand for that Credit by private Capitalists, and those higher interest rtaes will themselves act to slow down the economy.
Instead of the Keynesian medicine bringing about a quick turnround as it had been able to do during the period of the Long Boom it now failed to raise economic activity whilst resulting in increased quantities of Credit and Money being pumped into the economy to finance the borrowing. The result was the stagflation of the late 1970's. Moreoever, the strength of workers whose militancy and oprganisation had built up over 30 years since the beginning of the Long Boom remained largely intact. Increasingly, workers were forced into defensive rather than offensive struggles trying to defend jobs, guard against real wage cuts through inflation, oppose attempts to cut welfare and other spending, but they remained strong enough not to suffer any major defeats. Rather the defeats were insidious brought about via the co-operation of the Trade Union bureaucracy with often Social Democratic governments, for example the Prices and Incomes Policy agreed between the TUC and the Labour Government - the Social Contract - in Britain. BUt Lenin had once said the quickets way to destroy a Capitalist economy is inflation. Now capitalist economies were suffering not just rampant inflation, but rowing economic retrenchment too.
The Capitalists had no alternative but to resolve the crisis in the way they had done before, by an open assault on Labour. That was the backdrop to Thatcherism and Reaganism, and the economic policies they adopted. Having, slashed Money Supply, and forced the economy into a more severe crisis than there had been since the 1930's the basic material conditions were established to smash the organised power of Labour. That too had its consequences. Had the full consequences of the crisis been loaded onto workers backs then its likely that greater widespread social unrest would have erupted than actually did. Instead, some of the cost was borne by the State through a large rise in Welfare payments. That bought off some of the anger and social unreast that would have arisen, whilst having the added bonus of tying large sections of the working class into a dependency culture, that sapped and undermined workers self-confidence and self-respect, and left them like drug addicts dependent on the capitalist state for regular fixes of handouts.
Having destroyed the power of organised Labour the task for the Capitalist State was then to act to restore the Rate of profit. Joseph Schumpeter and Ludwig Von Mises had once talked about "forced saving". What they meant was that the resources society needed to invest had to come from society consuming less than it produced, the difference then being free for investment. It is what Marx refers to as the creation of a Surplus Product, and in its Capitalist form Surplus Value. In the writings of the Bouregois economists this is achieved thrugh the class neutral term "saving", implying that this new Capital is the result of abstemious behaviour by Capitalists, or at best the frugality of workers whose savings are mobilised by Capitalists in order to create profits which then flow back to those workers as interest payments. But, in fact this is bunkum as marx demonstrated 150 years ago. Much of the initial Capital accumulation in Britain for instance came not ffrom such moral behaviour, but from the activities of Merchants sanctioned by the Crown to engage in piracy. By, similar sanction it came from the huge profits of the slave trade. The first industrial Capitalists, men like Wedgwood, who had been themselves workers did often raise their Capital through their own savings, and marx describes how these men often lived more poorly than their workers in order to save and accumulate Capital. But this was a short lived phenomenon. After the peasants were driven from the land by the 1801 General Enclosure Act, a huge working class was created as those former peasants were forced into the towns to look for work. Now Capitalists did not have the problems they had formerly encountered of a shortage of labour. Now, those capitalists were able to employ workers at wages which guaranteed a good profit. Now, it was this profit which brings about what Marx called secondary accumulation, which is the basis of investemnt and Capital formation not savings.
When Schumpeter and Mises talk of "forced saving" then what they mean is the raising of the rate of exploitation of increasing profits at the expense of labour. But, economists describe wages as being "sticky" downwards. Even with a decimated Labour Movement workers will still attempt to maintain wages against nominal reductions. It is far easier to cut real wages than nominal wages. That is what the Capitalists did. Wages continued for the most part to rise in nominal terms, but from the late 80's onwards the Capitalist State increased the Money Supply so that prices could rise - and thereby protect profits - faster than wages. The difference was "forced saving". Glyn and Suttcliffe in their work "Workers and the profits Squeeze" showed how during the Long Boom the demand for Labour, and the ability of workers to demand and obtain pay rises had resulted in a relative squeeze on the Rate of profit. Another analysis of different theories of this relationship is given by King and Reagan in "Relatve Income Shares". Now, at least from the late 80's this relationship was turned upside down. The Rate of profit began to rise, even though at least in some economies such as the US the share of profits in National Income fell or remianed static.
As I have set out elsewhere. This was a conscious policy which was facilitated after the fall of Stalinism. It meant that Industrial Capital could begin to expand into areas overseas that had previously been too risky, under cover of the US hegemon. It meant that this transfer of productive Capital could be accomplished and the deindustrialisation it left behind could no longer be resisted by decimated workforces, and it meant that Capital in those old economies could restructure around new service industries etc.
For the US there was a certain advantage from the newly developing Asian economies pegging their currency to the dollar. It meant that as those economies grew on the back of increasing output large amounts of which were exported to the US the US economy benefitted from a supply of low priced consumer goods for its consumers. Had those Asian currencies risen as their economies strengthened relative to the dollar then those consumer goods would have become more and more expensive raising inflation in the US. Moreoever, in order to peg their currencies these economies had to sell their own currency and buy dollars. The people who were geting really squeezed in this process was the US's main capitalist rivals in Europe. Finally, the huge dollar reserves that these newly developing economies were amassing had to go somewhere, and the obvious palce was for them to be ivested back into the US whose Stock Market had been in a secular Bull Market that lasted from 1982 until 2000, driven partly by the rising Rate of profit, and for the last 10 years of that largely driven by the increasing amount of liquidity pumped into the economy by the Federal Reserve, particularly whenever a falling market looked like it might badly affect the big Capitalists - what came to be known as "The Greenspan Put".
The double digit inflation in those same Asian economies is the consequence of all that. From around 1982 - when the secular Stock Market Bull began - the US had falling interest rates - there were increases but the trend was downward - until 2007 - the spark for the crash of US house prices, and commencement of the Credit Crunch. For the same period the dollar had been flling steadily against a basket of currencies - the dollar index. But, for most of that period the world was still suffering under the Long Wave downturn. Inflation remained subdued. What changed was the end of the Long Wave downturnand the commencement of the new Long Boom at the end of the 90's. That boom saw economic growth in those newly developing economies shift into a new gear, it saw growth in Europe, particularly in the economies of the new EU entrants begin to rise sharply, even Japan which had been mired in deflation and depresion for 15 years began to revive.
In China and India rapidly rising living standards resulting from the new boom meant that whilst their industries were demanding vast quantitities of raw material, consumers were demanding new consumer goods, and more and better food. Raw material and food producing countries having been faced with low prices for more than 20 years during the Long downturn could not increase output fast enough to meet rising demand. Raw materials and food prices began to rise. That in turn stimulated the economies of these countries. Such is the upward spiral of the new boom.
But under those conditions the curency peg of the newly developed economies has become a hindrance. The weakness of the dollar has a reinforcing effect. All those raw materials and foodstuffs traded on the world market in dollars become even more expensive as the dollar falls. From its high point again the Euro of 1 e = $.80 the dollar has fallen to 1e = $1.58. In other words it has halved in just a few years. That means that Europeans buying oil in dollars have not seen the price rise nearly as much as Americans, or those living in countries whose currency is pegged to the dollar. But, the more those prices rise, the bigger becomes the US trade deficit,a nd thereby the weakness of the dollar. In countries like India and China, some commodities such as oil are subsidised to consumers, and as the price rises the more the State is burdened by such subsidies. China has just cut the subsidy on fuel and thereby raised the price by around 24%. The obvious thing for these economies to do is to reduce their high inflation rates by increasing the value of their currencies against the dollar. The problem is that to do that would seriously undermine the value of the dollar, and thereby the US economy. Given the curent slowdown due to the Credit Crunch now would not be a good time to undertake such an operation.
That is the background to all of the media coverage of rising inflation, and food prices. But, we should guard against those who see in every situation some fatal crisis for Capitalism. A sentiment which largely derives from their own political impotence, and wishful thinking for soemthing to turn up to rescue them from it. Whilst, the rapid rise in food prices will undoubtedly cause some evere problems for the world's poor - but then what is new that has been the history of Capitalism for the last 200 years - the reason for those price rises has to be taken into account, and that reason is the current new boom, and the RAISING of living standards to undreamt of levels for millions of workers around the world, indeed the adding of millions of workers to the world working class rescuing them from the idiocy of rural life. And that same process will put in place the potential for the development and raising of the living standrads of millions more workers in thsoe very countries that will suffer from the immediate consequences.
On that note I read a comment somewhere from some dunderhead of the co salled Left who clearly had no idea of the way in which Capitalist markets work. A basic requirement according to Lenin and Trotsky. The comment was about a BBC programme the other week looking at food prices and their consequences. One thing the Programme didn't mention, and which our commentator failed to take up too was the fact that in Britain because we have been used to ridiculously low food prices for more than 20 years the average family THROWS AWAY a THIRD of all the food it buys. Some might say from an environmentalist and sustainability perspective then that a rise in food prices is overdue to reduce such immoral behaviour. However, our commentator from the "Left" was in the greatest moral torment over the comments of Hugh Hendry a Hedge Fund manager who frequently appears on CNBC and other Business Channels. Hendry had commented that in the current climate people like him were being picked out as the rogues of the piece, speculating on food prices and driving their prices higher. Our commentator completely misrepresented what Hendry said claiming that he had said that what he did was the equivalent of buying up several large barge fulls of grain, and then sinking them. IN fact Hendry said no such thing, and anyone that understood how Capitalist Markets work would not accuse him of doing so.
Their are in fact two prices for commodities such as Oil, or Food - the futures price and the spot price. The spot price is how much you would pay in the market here and now for the actual commodity to be delivered to you. The futures price is actually not a price that relates to the physical commodity itself at all. It is actually a price for nothing more than a piece of paper. Futures traders speculate on what they think the price of a commodity will be at some point in the future. Suppose you beleive that the prie of oil in 6 months time will be $200 on the spot market. In that case if you buy oil futures for 6 month delibvery at the current price of $140 you stand to make a profit of $60. You will be able to exercise your futures option to buy the oil at $140 rather than $200. At any price over $140 dollars you will have "hedged" your bets against a future price rise. That is how Ryanair has been able to keep its fares down. It bought oil futures. If the price is actually below $140 then the trader simply takes a loss on their futures option, and buys oil at the spot price. By this method of speculators gambling on whether the price of commodities will be higher or lower in the future the actual proiices paid in the market are made far more stable than would be the case if all prices were simply set on the Spot Market. It is a fundamental requirement for the way effient modern Capital markets work.
Moreover, as Hendry pointed out by operating in that way it acts to actually benefit farmers, because it provides the basis for the kind of stability in prices required for taking decisions on planting, and investment. The farmer, or groups of small farmers operating through a Co-operative can themselves take advantage of hedging on the Futures market by selling futures for the products they produce.
The reasons for rising prices at the moment have nothing to do with speculators. Inflation is the consequence of 30 years of increasing liquidity into the economy to offset economic weakness. The rises in costs of raw materials and foodstuffs are caused by a surge in demand that Supply cannot meet in th short run, costs which are being monetised by Capitalist governments thereby adding to inflation.
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