The Rates Of Profit, Interest and Inflation - Part 10

Inflation (2)

Having described the underlying basis of values and prices, in Part 9, we can then understand what has happened over the last 30 years, and what the changed conditions now suggest will happen in the coming period. Over the last 30 years, there has been a revolution in production. Not only have massively more productive means of producing been introduced, that have slashed the labour-time required for the production of many commodities, but whole new dynamic economies in China and elsewhere have developed, which have had access to vast reservoirs of labour-power.

The latter does not, in itself reduce the value of commodities. If the labour-time expended in production of new value is 10 hours, then that is the amount of new value added. It does not matter whether this new value is made up of 5 hours of necessary labour (paid out as wages), and 5 hours of surplus labour (paid out as surplus value), or whether it is divided 2 hours and 8 hours. However, in practice, as Marx described in Volume I, under certain conditions, provided commodities can be sold at a profit, the seller can sell the commodity below its value, thereby benefiting from gaining market share. With very low wages, and high levels of profits, that is precisely what capital in China, and other low-wage economies were able to do. That does then have a depressing effect on price levels.

Yet, despite these downward pressures on prices, there has been no massive global deflation. The rise in the circulation of commodities has been phenomenal in line with the massive increase in productivity, and output of use values. In the first decade of the 21st Century, the equivalent of a quarter of all the goods and services produced in man's entire history, were traded. The reason this astronomical increase in production, and reduction in values arising from the growth in productivity did not cause a huge fall in nominal prices is quite clearly that set out by Marx above – it was offset by an even more massive increase in the amount of money tokens, and credit thrown into circulation.

That meant that consumer goods prices not only did not fall, but rose slightly, which is a basic requirement of the giant oligopolistic producers, for whom falling nominal price levels are lethal. That is why capital established central banks to operate monetary policy to prevent such deflation. But, the other consequence was as stated in an earlier part, that large amounts of surplus value that was not used for capital accumulation, was converted by this money printing into even more money tokens that then sloshed around in the circuit of money. It bought things whose value – in so far as they have value – could not have been reduced by the same processes that reduced commodity values.

A share, for example, does not have value. It is not something that is produced by labour. It has a price, because it is bought and sold, and because it is in reality a claim on something that does have value – the capital of the firm a share of which it is. But, the prices of these shares rose, not because the value of the capital they represented had risen. In fact, because that capital is made up of commodities, whose value had fallen, the value of the capital itself had fallen. The same is true of Bonds, be they Government Bonds or Corporate Bonds. They are only claims on a share of future income either of the state or of a company. Similarly, with land. Land has no value. It is not produced by labour, any more than air, or water. Land has a price, only because some human beings have laid claim to it, and because being in limited supply, those individuals can then exercise a monopoly over it. The price of land should be merely the equivalent of its capitalised rent.

But, the vast amount of money printing, along with the money hoards created by the huge rise in the rate of profit, meant that all of this money then competed after these limited assets, pushing their prices up to astronomical levels in classic bubbles such as those seen in the past. Because sitting behind those bubbles, and at the centre of the web of the circuit of money sits the banks, the potential collapse of those bubbles in 2008, meant that it would bring the banks down with it. Especially given the political influence that the banks had obtained over the last 30 years across the globe, it is no wonder that the State everywhere intervened to save the banks at the expense of the workers and middle class.

In 2008, as in 1847, all that was needed to overcome the credit crunch was the provision of liquidity. There was no real underlying economic crisis in 2008 any more than in 1847. That can be seen by the typical “V” shaped recover that took place. The continuance of money printing since then has had nothing to do with preventing an economic crisis, therefore, but has been solely a matter of saving the banks themselves. 

In the economies of Europe and North America, there are undoubtedly a large number of zombie companies that were only established, and have only continued because of the low interest rates, and low wages that were established over the last 30 years. But, these companies are rather peripheral. They are the kind of small company that continually is thrown up and quickly disappears in the general ebb and flow of the capitalist cycle. Usually, as they go bust, their capital is picked up on the cheap by bigger or more effective owners, who can use it more effectively. But, in general there is no crisis of solvency for capital in these economies. On the contrary, although they are overall in relative decline compared to China and elsewhere, the rates of profit of companies in these economies, particularly for those companies engaged in high value production, have benefited over the last 30 years from the same massive rise in the rate of profit that has occurred globally. That is why these companies themselves have huge cash reserves.

That is not the case with the banks. Because the banks engaged in all of this speculation to a massive degree, they are more or less all insolvent. That is why in 2008, states stepped in to provide capital for the banks, not just liquidity to the system. The example of Anglo Irish Bank shows how the banks have hidden the extent of their debts, and thereby obtained capital from the state. The collapse of the banks in Cyprus was another example. But, what happened in each of these cases is true of pretty much every bank across Europe. It is only a matter of what particular circumstances bring to light the insolvency of any particular bank, or group of banks.

I've described the extent to which Deutsche Bank is exposed to derivatives reported to be €55 trillion, or equal to the global GDP. But, I've also pointed out that there are several countries across Europe, most notably Luxembourg, whose banks are in an even more precarious position than were those in Cyprus. Even in the US, where large amounts of additional capital were put in, they are still susceptible because the level of student debt alone in the US stands at $1 trillion, more than the total credit card debt. Meanwhile, in the US, its housing market, which has shown signs of the same kinds of speculation that blew up the crisis in 2008, last month showed signs of weakness. Existing homes sales dropped, and the immediate cause seems to be that interest rates are rising.

Across Europe, the banks are exposed to vast amounts of private debt, largely related to property loans. With interest rates rising property prices are set to be hit across Europe, including the UK once again, and that poses a major threat to the banks. That is why George Osborne has been trying to prevent a house price collapse in Britain, by pumping even more money into it, exposing taxpayers to a substantial risk, and encouraging people to go into even more debt. But, Britain's banks are one of the most exposed to such property debt not just in Britain, but across Europe, as was highlighted in Moneyweek .

As interest rates inevitably rise, for the reasons previously discussed, this makes the banks once more susceptible to widespread insolvency. Central Banks are trying to prevent that by continued money printing, and Government's, like that in Britain, are trying to protect them by goosing the property market to prevent a collapse, even as they then put the solvency of the state itself at risk, as happened in Ireland and Portugal, and Greece, and Cyprus, and as looks likely in Spain, and possibly France. But, the conditions that allowed that to continue have ended. In the next part, I will examine what a continuation of this policy means for inflation, and what a collapse of the policy will entail.

Back To Part 9