Not much more than 6 months ago Central Banks and Governments around the world were worried about mounting inflation. Workers were being warned not to try to ask for wage increases that would keep up with rapidly rising prices, because that would mean second round inflation setting in. Dire warnings were in the media everyday about people starving from rising food prices, people freezing to death due to rapidly rising energy prices, about people being unable to travel because of rapidly rising petrol costs. Today, its not inflation that is the talk of the media, but deflation. Whichever kind of flation there is, its workers that are asked to pick up the tab by Capitalism.
According to Mervyn King, Governor of the Bank of England, as a result of statistical anomalies, price indices are almost certain to show falls in coming months. Whether, that becomes outright deflation as happened in Japan during the 1990’s is not yet certain. Certainly, Ben Bernanke is taking the possibility of deflation in the US seriously as he stated in his testimony yesterday. He is looking at a number of measures that the Fed could take to pump even more liquidity into the system to counter the possibility. He famously said some years ago that the fed could always prevent deflation, by simply printing dollar bills, and dropping them from helicopters. In fact, the Fed has many more tools it can use before such a drastic solution was required. Prominent Hedge Fund Manager, Hugh Hendry, who runs the Eclectica Fund in the UK is also betting on deflation here. According to a report on Bloomberg yesterday he is seeking to protect himself by buying WWI Debt!
In fact, as I predicted a few weeks ago in Where We Are Going it was highly likely that western economies would suffer a deflation, but the deflation is unlikely to be the kind of consumer price deflation suffered by Japan. It will be a deflation of over-inflated asset prices – of Shares, Property and Bonds. I predicted that these would fall by as much as 50%. Already the DOW has fallen from a high of 14,000 to below 8,000. All other asset prices are following a similar trajectory.
The same causes which led these asset prices to bubble up are now sending them down despite the huge amounts of liquidity pumped into the system. Anyone that saw “The Ascent of Money” on Channel 4 last night will understand the process. The programme focussed on John Law’s infamous Mississippi Scheme. Law had offered the French Monarchy a way out of their economic problems. He promoted the idea of a paper money printed by the Government, and with the full authority of the absolutist Monarchy. By increasing liquidity into a depressed economy economic activity was stimulated. In addition Law set up his Mississippi Company which sold shares in a Company that was to exploit the supposed wealth of Louisiana. It was a classic Ponzi scheme that relied on taking in new money in investments in order to raise the value of shares that made existing shareholders believe that their investment was successful, that their shares had increased in value. The more the shares went up the more the company appeared a certain bet, and the more therefore, other investors thought they had to get in on the deal. Its just like when house prices are rising very rapidly everyone thinks that their house has become more valuable, and those without houses think they must buy before its too late, when in actual fact it’s the last time to be buying, better to wait for them to fall and buy them cheap. As things bubbled away Law printed even more money. The consequence was inevitable. Eventually, the economic reality had to assert itself. As Marx sets out in his “A Contribution to a Critique of Political Economy”, with a paper currency, the more you print of it the less that paper becomes worth. Once any potential stimulus effect has run its course the only consequence can be inflation.
Its amazing that in a recent article the AWL could come out with the same kind of economics as John Law. They wrote,
“It blows a hole in the "not enough money" argument as used a million times to justify social cuts and wage cuts.. If the Government can find £1107 billion in credit for the banks, it can find credit for any social goal you can imagine. Some social goals may be unrealistic because there are not enough real productive resources to realise them; but the arguments about "not enough money" are just top-dressing from the argument about real productive resources.”
See: The Bailouts
In other words workers needs could be easily accommodated by Capitalism if only it printed more money as Law had advised the French Monarchy. Amazing!!! Once again the message the AWL give to workers is that their needs can be met within the confines of Capitalism, that the way of meeting those needs is not via independent working class action, via the development of workers property, or co-operatives etc., but via the good graces of the bourgeois state to whom they make their grovelling appeals.
The AWL ask “who pays for the bail-outs”, for the Banks. But, the answer belies their naïve, liberal solution to workers problems. As I set out in my three-part analysis of the crisis linked to above, initially, it will be the Capitalist class that will pay for the measures to save the system in the short term. As Marx demonstrated, Tax is a deduction from Surplus Value. Whether the State pays for its intervention via Tax now, or by borrowing now paid for by Taxation later that necessarily means a greater deduction from Surplus Value on a global scale – as I argued part of the solution to the recapitalisation of the Banks etc. is being found through mobilising vast reserves of Surplus Value held in Asia, the Middle East etc. But, Capital is being forced to pay that cost now, in order to stabilise itself. It is choosing that option rather than the option of open class warfare, of the 1930’s or 1980’s, to throw the cost on to the workers, precisely because the current Long Wave Boom has created the conditions – has created those vast reserves of available Surplus Value – that enable such a solution as its best option. However, no Marxist can be under any illusion that Capital, once it has stabilised itself, – and the Long Wave Boom means it will quickly stabilise itself – will attempt to claw back that cost from the working class. And the way it will do that will be precisely through the consequences of the huge increase in liquidity used for that stabilisation, the same consequecnes there would be if the AWL’s solution to workers problems were adopted – massive inflation, which always depreciates wages, and even more depreciates the icnomes of those on fixed incomes such as pensioners, those in Benefits etc.
Who will pay for the bail-outs – the workers. Who would pay for the AWL’s suggested solution – again the workers. The AWL will no doubt tell us that their answer also involves workrs being protected by a Sliding Scale of Wages, but these are the people who tell us that you can't raise slogans whose consequences will be the opposite of what you seek. The reality is that workers have no way of forcing such a Sliding Scale on the bosses state. To bring about such solutions - let alone the amazing notion that workers are going to establish a Workers Government! - would require effectively a situation of dual power to exist, and clearly that is not the case, and everything the AWL say and write tells us that they really don't believe its likely either. Even were it likely the AWL's soluiton amounts to a maximalist call for "Socialism Now".
The reality is that whilst asset prices have and will have a huge deflation, commodity prices are likely to rise, and before long rise very rapidly. The prices of primary products such as Oil, metals etc. have fallen sharply in recent weeks. There are a number of reasons. The Long Wave Boom, as in all previous manifestations caused prices to rise sharply as Supply could not be expanded fast enough to meet demand. Seeing, what appeared to be a one-way bet, Futures Traders engaged in speculative buying. The financial crisis led some institutions to have to sell profitable Long positions in energy and raw materials in order to obtain cash to shore up their Balance Sheets. The more this took the form of forced selling, the more Futures prices fell, dragging spot prices down with them. Eventually, all of this feeds through to the real economy, which slows down, and leads to further falls in Futures prices as demand is seen falling away rapidly. Similar, forced selling of the shares of Mining and Energy companuies shares had a similar effect, and now the general gloom means that no one wants to buy these assets despite the huge amounts of liquidity being pumped into the system, just as no one wanted to buy shares in Law’s Mississippi Company once confidence had been lost, no matter how much money was printed.
But, a considerable amount of Euro and North American centricity has been going on. China has slowed considerably from its 12% p.a. GDP growth. It is now estimated to be around 8%. But, this is 8% in the world’s 4th largest economy, rapidly approaching becoming the world’s largest economy. Other Asian economies continue to grow rapidly, and the bilateral deals done by China and other Asian economies with some African Lion economies, and with Latin American economies mean that they too have continued to grow. China has engaged in the kind of huge State directed economic intervention that only a centrally planned economy can effect. It now expects to grow next year by 10%.
Even after, the recent falls in primary product prices, they remain considerably above the levels of even just a few of years ago. As the Chinese RMB, and other Asian currencies appreciate against the dollar the home currency prices of these resources will not rise so fast for them as for the US, and Europe. This will stimulate their demand for these products, and provide addiitonal competitive advantage in the production of manufactured goods made from them. It is Chinese and Asian demand that is determinant for the world prices of energy and raw materials and foodstuffs, and even with a slow down there is no sign that the growth in this demand is going to even reduce much let alone go into reverse.
But, herein also lies another reason that consumer prices are bound to rise in the US and Europe. Not only will the rise in primary product prices resume in the not too distant future, a rise that will be more marked as a result of falling currencies, but that same destruction of currency values against the RMB and other Asian currencies will mean that all of those imported Chinese and Asian manufactured goods will also be rising in price.
The Capitalists and Stalinists of the East and Middle East might come to the rescue of Anglo-Saxon Capitalism in the short-term, but only to draw out a greater cost in the longer-term. The Capitalists might bear the cost of resolving the crisis now out of reductions in their Surplus Value, but only to claw back that cost from the working class in the longer-term. The Capitalists of the East and Middle East who draw their Surplus Value from the workers, and the Stalinists who draw their revenue from the wealth created by the workers will become richer and more powerful. The workers of the East and Middle East will become better off compared to the workers of the Anglo-Saxon economies.
That is the reality of the working of the Capitalist economy on a global scale. The solution to the problems of workers that arise from it cannot be provided by solutions such as “printing money”, nor even of redistributive taxation, or any other measure that counts on the bouregois state. Those solutions can only be provided by workers themselves, through the establishment of workers Co-operatives, and other forms of worker owned property, and ultimately on the establishment on an international scale of an economy based on co-operation not competition.
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