Bifurcations Continue

A few days, I wrote Part 8 of my series, A Tale Of Contradictions

“Similarly, house prices were repeatedly inflated because of the same cause. In 1997, as a result of the collapse of the Japanese bubble, property prices dropped around 80%. Elsewhere, I have set out why a similar drop is likely in the UK, and other economies with a similar housing market....

This process will be further enhanced as a result of a temporary but sharp rise in general inflation. I have previously set out that in conditions of high levels of debt, all governments throughout history, have resolved that situation by debasing the currency, paying back their creditors with devalued currency. In modern terms through inflation. The current situation is not likely to buck that millennia long historical precedent. Already we see, in the UK, the RPI persistently showing inflation at over 5%, as against the Bank of England target of just 2%. The Bank repeatedly predicts it will falls, repeatedly it doesn't. Even the CPI shows inflation at over 3%, whilst a working-class calculated index would probably show the true rate to be closer to 7 or 8%. The Bank on the basis of these figures should have been raising interest rates long ago, but stubbornly refuses to do so. In fact, even while inflation has been rising it has pumped additional liquidity into the system, being unable to lower rates further from their current 0.5% level without risking a liquidity trap. In part, it cannot do so, because of its fear of choking off the economy even more. But, that is largely a smokescreen. Although, the Bank charges 0.5%, the commercial banks are still charging more like 8% on loans! And, printing money, and holding interest rates low is counter-productive unless it is accompanied by either strong demand for that money via a thriving economy, or else stimulation from fiscal expansion. The first, certainly does not exist, and the Government is reversing the latter! The real reason that rates are kept low, and that money is printed, is to monetise the increased costs coming down the road....

Unless that cost increase is monetised the drain of Value that would imply would mean that the prices of other, domestically produced commodities or assets would have to fall even more significantly. Central Banks were established by Big Capital precisely to avoid such catastrophic falls in the nominal levels of prices for their goods. Higher rates of inflation will effect a number of things. Firstly, nominal wages can rise, whilst real wages are cut. What Keynes called Money Illusion, and what Mises and Schumpeter called “Forced Saving”. Higher nominal price levels means that the real levels of debt, because it is historically priced, fall. The 25% spending cuts being proposed could alternatively be accomplished by two years of 10% inflation.”

Figures out today show that, yet again, despite the Bank of England's predictions, despite the predictions of many financial forecaster, inflation has stayed high. As CNBC reports, forecasts were for CPI to fall to 2.9%, but it remained at 3.1%. RPI, fell negligibly from 4.8 to 4.7% as against forecasts of a fall to 4.6%. That means that CPI remains 50% higher, and RPI 150% higher than the Bank of England's 2% inflation target. Given that it has been consistently higher than this target now for so long without any action by the Bank, it makes you wonder why they bother with any target at all. As I wrote, in the above article, the Bank's predictions for it to fall are no more likely to be borne out over the next year either. In fact, further rises are more likely, as those increased prices of imported goods occur, the pound weakens against Asian currencies, food prices rise due to Asian demand, and the Government's VAT increase gets monetised, not to mention the above inflation rises in things like Council Charges, and Council Tax.

As nominal prices rise, so does the nominal tax take, which means that the Deficit falls automatically. Given that the Government has introduced a Pay Freeze in the Public Sector, and wages are stagnant are falling in much of the private Sector – which will continue as large numbers of Private sector jobs disappear as a result of the Cuts hitting contracts, and lower aggregate demand hits the retail sector hard, the immediate effect of his inflation will also be to reduce real wages i.e. it is the kind of “forced saving” described by Mises and Schumpeter, or put another way, a direct transfer from Labour to Capital. Even if workers were to manage to increase wages to compensate for rising prices the State would benefit. The State has managed to con workers into becoming dependent upon it for the provision of a large section of the wage bundle that makes up the determinants of the value of Labour Power. Like a huge Truck system, or a Mafia protection racket, the State forcibly deducts money from workers wages to cover its purchase of these services from the State Capitalist Monopoly. On average it takes around 40% of workers wages from them in the form of Income Taxes, (including National Insurance), and taxes on their consumption. So, if workers nominal wages rise, then again the State's nominal tax take increases accordingly, to the extent that they continue to consume with those higher wages its nominal tax take from VAT etc. rises too. Provided the State does not increase its borrowing, then the interest it pays on the original debt remains the same, whilst the tax it has taken in to cover it has risen by inflation.

But, in the short term the result is likely to be that the State's debt is partly inflate away, whilst workers real wages are squeezed. That is another reason that the fall in disposable income will play into the increasing collapse of property prices.

In a further piece of data out today The Royal Institute of Chartered Surveyors has reported that its House Price Index has fallen to the lowest level since March 2009! As the BBC reported. As I've written before these kinds of effects also play into the general sense of confidence which determines economic activity, as consumers reign back, and businesses hold back on hiring and investment. No wonder that top cops are warning that the Government should not cut their funding, because otherwise they won't be able to deal with the social unrest that will result from the Cuts!

A further indication of the bifurcations, and heightening of contradictions was given in the economic data coming out of Germany. Although, the ZEW indicator came out with a remarkably good reading for current conditions, its overall sentiment reading tanked from plus 14 last month, to minus 4.3! That was because the sentiment for future months has collapsed as has the indicators for German manufacturing output, which over the last year have been growing strongly. The fact is that Germany as the manufacturing hub of the Eurozone cannot detach itself from the economic fortunes of the rest of Europe, and as an increasing number of economists are now recognising, the austerity measures in Southern Europe appear more likely to kill than to cure the patient. As those economies get hit hard, it will rebound on Germany and other Northern European economies. It makes the Liberal-Tories scenario of a thriving private sector growing on the basis of higher levels of growth and exports than have ever been achieved look even more ludicrous.