Wednesday, 11 May 2011

Economic Notes

CNBC, report that the UK's Trade Gap widened more than expected in March to $11.19 billion. Imports grew at five times the rate of exports. In addition the trade data for February was amended to show a wider gap than previously reported.
This is significant. Firstly, a major plank of the Liberal-Tory Government's economic hopes - I was going to say strategy but it hardly qualifies for that term - rests upon the idea of the private sector growing by rapidly increasing exports. Indeed, it would require a faster rate of export growth than Britain has achieved in decades. The first two months of 2011 suggested that there had been an increase in exports. The problem is that even during those months there was a significant increase in imports too, which effectively neutralised the effect. March's figures suggest that even that flicker of hope is being snuffed out.

Its not surprising, because the Liberal-Tories hopes of an export led strategy, is being put forward at a time when, not only is their increasing global competition, for export markets, when dynamic economies, in Asia and Latin America, are undercutting older economies within the global marketplace, but when problems,
in Europe, which is the UK's major trading partner, and particularly in Ireland, are mounting due to the implementation of austerity measures, which are not only cratering economic activity in the periphery, but are creating the conditions of a new Credit Crunch, as heavily indebted countries and individuals are pushed over the edge into default.

It will be interesting to see what effect the actual trade data has on the revisions to growth. GDP is measured by totalling up the total amount spent on goods and services. However, a revision of this figure is required to account for exports and imports. Exports increase the GDP figure and Imports reduce it, because Imports mean that money spent goes as income not to UK firms and individuals, but to foreigners.
The ONS will have made an estimate of these figures in the first calculation of first quarter GDP. That estimate takes into account the first two months of the quarter. But, the fact that the February trade deficit has been revised upwards, and that the March deficit is much worse than anticipated, means that the estimate is likely to have to be revised considerably to take account of this data.

Meanwhile, the Bank of England in its press conference, today, announcing its current Inflation Report, seems to be in the process of arguing for the abolition of the MPC, because in its answers today, it appears to be unable to have any credible influence over inflation.
For the last few years, the inflation rate has remained above the Bank's target rate. It has been unable to achieve its objective, not just in the short term, as it admits, but even in the medium term, which is what the Governor, repeatedly tells us is its true measure. Today, the Governor repeated this mantra, admitting that in the next few months inflation would rise to over 5%. In fact, inflation is already above 5%. It has been above 5% on RPI, which is what affects the majority of people, and measured against the prices of the goods and services that the majority of working people have to pay, it is even higher than that.

But, David Smith, of the Sunday Times, asked the Governor a pertinent question. He pointed out that, according to the Report, the Bank expects, with a constant interest rate, that, in two years time, inflation will be above 2%. He asked if that meant that the Bank will be increasing interest rates soon.
The Governor, effectively swerved the question. He said he was happy to confirm that the current low interest rates could not continue indefinitely, and that the Report only talked about IF interest rates remained constant for two years. But, this contradicts the Bank's normal argument. That is that there is no point raising interest rates NOW to combat current inflation, because it would only affect price levels two years down the road. But, on that basis, Smith is right, if the Bank beleives that inflation in two years time will be above 2%, it should raise interest rates now to combat it, because waiting 6 months, a year or whatever, would again mean that it would be too late!

The other part of the Bank's argument also seems to undermine its raison d'etre. The Governor repeatedly spoke about current inflation being a result of rising costs, be it the costs of imported goods, fuel, and raw materials, or costs imposed by higher VAT and other taxes. But, the argument that inflation is due to rising costs - cost push - has long been discredited, not least by the Tories in the 1980's.
Long ago Marx demonstrated, for example, in his debate with Weston, in Value, Price and Profit, that increased costs, particularly wage costs, do NOT cause inflation, but merely result in a shift, via the interaction of Supply and Demand, in the distribution of income. The only time that increasing costs could result in higher prices would be if the costs (average labour time required for production) of the majority of commodities rose compared to that of the money commodity. For example, when new Gold discoveries in America, and Australia reduced the labour-time required for the production of Gold, which acted as the money commodity, this meant its Value fell compared to other commodities, such as agricultural products. Given the rise in the price of Gold its clear that is not currently the case.

Of course, in modern economies where it is not the money commodity, which circulates, but paper tokens and credit, which circulate as its representatives, the issue comes down, as Marx pointed out, to what quantity of these paper tokens, and of credit are put into circulation.
It is the fact that over the last 20 years or so, huge quantities of paper money and credit have been released into the global economy that is the cause of current inflation. Within that context, the extent to which any particular economy is affected by that inflation is a function of the extent to which trade forms a significant portion of its economic activity, the extent to which the paper money and credit is circulated within its own borders, and the extent to which it has devalued its own currency relative to other global currencies.

In a world of floating exchange rates, the value of a currency is determined by Supply and Demand. Demand for a currency is determined by how much foreigners need it to pay for their imports. The Dollar always then has a certain level of demand because much global trade is denominated in dollars. But, where a European company wants to buy British goods, it has to acquire Pounds to pay for them. Trade surpluses, then stimulate demand for currency. In addition, a currency can be demanded as a result of Capital flows. A country that has a higher rate of interest than its competitors, will see foreigners seek to place their money on deposit with it. But, the Supply of that currency is entirely a matter of how much of it is printed by the country's Central Bank, and its control over the creation of Credit by private banks and institutions.

So, under current conditions, the inflation being incurred is not at all something that is outside the control of the Bank of England. At a global level inflation has risen due to the vast amounts of money tokens and credit released into the global economy over the last 20 years or so, including the vast amounts of money printing done by the British Government, starting back in the days of Thatcher.
The extent to which that affects Britain, is a function of the degree of foreign trade as a component of the British economy. That has always been high, and as the current trade figures show, high levels of Imports are bound to transmit that inflation into the domestic economy. Moreover, the low level of UK interest rates means that the pound becomes weak, compared to the currencies, of countries with higher interest rates. The lower the level of the pound, the higher the effective Import costs.

In other words, the current inflation has been in the making for more than 20 years, but its current level is a direct result of the decisions taken by the Bank of England two years ago, and to some extent today. Of course, a weak pound means that UK manufacturing companies have an advantage in that global market place. If they are not doing well now they never will. Yet they are not doing THAT well, as the current trade data shows. At the same time, the low pound means that the raw materials that manufacturing industry needs, are more expensive. And, of course, manufacturiong now accounts for only about 12% of the UK economy. For those sectors, which are the main foreign currency earners, such as Financial Services, it is not clear that a weaker pound is a significant factor.
Economies such as Germany, have thrived with a strong currency, precisely because, instead of trying to compete globally on the basis of cheapness - which seems to have been part of the strategy of Thatcherism in the 1980's, which sought to create a low wage economy to a certain extent - it has focussed on competing on the basis of high, value, quality products. It has worked. Until very recently it was the world's largest exporter, only being surpassed in the last few months by China.

Britain's problem is that it cannot compete globally as a low cost producer, because the fall in living standards that would be required to compete with China or India are not achievable. It has not used the time available during the 1980's and 90's, to restructure Capital - it would have had a perfect opportunity to do so by using North Sea Oil and Gas revenues, had Thatcher not squandered them in order to defeat the working class in order to try to drive down wages - and as a result became over reliant on one sector where it was globally competitive - Financial Services.
It is reliant on large quantities of Imports, both for manufacturing, for food, and also for many wage goods. It developed that reliance on imported wage goods as a strategy for getting through the Long Wave downturn - as did the US - because, cheap Chinese clothes and other goods, enabled the Value of Labour Power to be kept down or even reduced, thereby limiting the rise in nominal wages, and facilitating a rise in the rate of profit. It is not possible to provide a substitute for those goods, and as Chinese inflation rises, the price of those goods being imported to Britain will continue to rise, whatever, the Governor hopes to the contrary.

Meanwhile, although it is clear that Greece will have to restructure its debt, EU politicians continue to bury their head in the sand, and refuse to accept reality.
In other words, the same kind of slow motion train wreck that has been seen over the last year in Europe is unfolding again.

3 comments:

Marxist Ferri said...

Nice to know you, C.de Ferri here, an italian Marxist from India.
Interesting article!
Noteworthy is your reference to what Marx said in Value, Price and Profit about the absurdity that 'price inflation' is caused by wage increases
[an absurdity also held by the apologists of Capital and Mr. Proudhon.]

Even in Poverty of Philosophy, Marx points out that an increase in the price of labour (wage) can only reduce the profit of the Capitalist and little more:

"It is impossible, I declare, for strikes followed by an increase in wages not to culminate in a general rise
in prices: this is as certain as that two and two make four." (Proudhon, Vol.I, pp.110 and 111)
We deny all these assertions, except that two and two make four. In the first place, there is no general rise in prices. If the price of everything doubles at the same time as
wages, there is no change in price, the only change is in terms.
Then again, a general rise in wages can never produce a more or less general rise in the price of goods. Actually, if every industry employed the same number of workers in relation to fixed capital or to the instruments used, a general rise in wages would produce a general fall in profits and the current price of goods would undergo no alteration.
(Karl Marx - Poverty of philosophy)

On the other hand, Liberal economics is so wretched that even a 'Misesian' like R.P.Murphy admitted no long run relationship exists between wage increases (achieved through Trade Unionism) and inflation.

That's the link!
http://mises.org/daily/2839

Thank for posting this article, C.de!


Marxist Ferri

Boffy said...

Thanks for your comment. I've added you to my blogroll after a brief look at your blog. I was reading your article on Marx and the Two Stage Theory. Although I agree that Marx did not have a unilinear view of historical development, I'm not sure I agree that his position as set out in the writings you quote is actually an argument against the stages theory.

My post Marx And The Progressive Role of Capitalism, which was a continuation of a debtae over at The Commune, which started as a debate on Libya, sets out why.

In short, Marx only beleived it was possible to by pass Capitalism because it already existed elsewhere, and so a Socialist Revolution in advanced countries could extend its benefits directly to pre-Capitalist societies. Lenin argues something simialr in the Theses on the National And Colonial Question, arguing that such societies could only achieve salvation by allying themselves with the USSR.

The real argument against the Stages Theory is provided by Trotsky in Permanent Revolution, and in his concrete analyses in relation to China, France and Spain. But, he would not have beleive it possible for, particularly a backward country, to go straight to Socialism on its own. That would be to support the idea of "Socialism In One Country".

Finally, the concrete truth of development since WWII has shown that it is possible for such countries to emerge from Colonialism or feudalism and to develop into industrialised, bourgeois democracies as can be seen in Latin America and in Asia. Indeed, India is a good example of that.

Glad you liked the above item. It reminded me that I'd started writing a detailed blog post on Inflation some time ago that I need to return to.

Marxist Ferri said...

Yes, of course. Marx and Engels simply suggested an alternative path for the Russian praxis; and Marx outlines the word 'metamorphose' in his letter to the Russian journal.

It goes without saying that the development of productive forces is necessary, no doubt on it.
Also the thesis of 'socialism in one country', more in line with Stalinist and Maoist 'thinkers', is definitely anti-marxist; it's sufficient to have a look at Marx and Engels' Address of the Central Committee to the Communist League to realise that.

On the other hand, the a-priori stagist approach of the Maoists beyond being dogmatic in itself is very distant from Marx's stances.
It is certainly more in line with the quasi 'romantic' experience of bureaucratic Maoism in the People's Republic of China, where with the excuse of developing the productive forces the workers' could not achieve economic and political decisional power; oppressed by the bureaucratic machine.
Not to mention that this bureaucratic machine still exists, after changing the 'content' of the PRC; its mode of production (as it occurred in the USSR).

It must be said that the formation of a bureaucracy in the New Democracy phase advocated by Maoism is certainly dangerous and by no means in line with what Marx pointed out in the 1850 'Address'.
By balancing interests between the 'tolerated' national bourgeois and the proletariat, the bureaucracy risks to grow!

Happy to know you, C.de!


C.de Ferri