Sunday, 15 September 2013

Lehman's Plus Five - Part 2

The credit crunch that began in 2007 was the inevitable result of 40 years of money printing by central banks. The Spring Phase of the post-war, long wave boom, ran from 1949 to around 1962. The conjuncture was marked by the peak in the price of gold relative to other commodities in 1960. The price of copper peaked shortly afterwards in real terms. The other indicator of the change in conjuncture was the Stock Market crash of 1962. In the Summer Phase of the long wave cycle that followed, the rate of profit declined, as it always does in that phase.

Industrial capitals benefit from the fact that that new supplies of raw materials come on stream, at lower prices. But, another consequence of that, as Marx describes in Capital III, Chapter 6, is that the suppliers of those raw materials themselves face falling rates of profit, having benefited from high prices in the preceding period. As many of these materials are now sourced from emerging economies across the globe, the effect is to reduce their revenue streams, which in turn causes a restriction of markets for manufactured goods, thereby impacting market prices for those commodities too. Those emerging economies that today still rely heavily on exports of raw materials will face a similar problem over the next period, as the global economy transitions into the summer phase of the cycle. Already peaks in raw material prices are evident, bringing an end to what traders call the super-cycle for commodities.

But, industrial capital also finds that although raw material prices cease rising so fast, the gains in productivity it enjoyed over the previous phases of the cycle, which meant that the unit costs for these materials fell, are harder to achieve. If they are to be achieved at all, they require the application of greater quantities of capital. The same cause results in relatively more labour-power being employed, and the result is that the share of total output going to wages rises. The classic analysis of that was Glyn and Sutcliffe's “Workers and the Profit Squeeze”, which analysed the extent to which the wage share rose during the 1960's. Marx sets out precisely this process in Capital III, Chapter 15 describing the situation that leads to a crisis of overproduction of capital, as costs of production rise, at the very point where rising market prices begin to choke off demand.

The United States, with the dollar as global reserve currency dealt with this situation, and the costs imposed on it of the Vietnam War, by printing dollars, thereby essentially shifting the burden on to its competitors. Because the dollar was pegged at an artificial exchange rate of $30 to an ounce of gold, and because all other currencies were similarly pegged, the US was able to pay for its imports with devalued dollars, as though they still had their original value. That continued until General DeGaulle called the US bluff, and demanded to be paid in gold rather than dollars at the official exchange rate. US President Nixon responded by ending dollar convertibility into gold, and making it illegal for US citizens to own gold itself – Nixon Shock.

But, the application of Keynesian policies across the globe in the 1970's to counteract the increasing signs that the long wave boom was ending, required increasing amounts of money to be circulated in every country to finance the additional fiscal stimulus. In a period of rapidly declining productivity, the consequence was not just a rise in inflation, but the creation of asset price bubbles in shares and property, though not in Bonds, as the supply of money-capital relative to the demand for money-capital fell, pushing up interest rates. Bond prices also fell as investors shied away from fixed rate investments in a climate of rising inflation. By, the end of the 1970's, the global currency system was in crisis, gold rose from $30 an ounce at the start of the decade, to $800 an ounce in 1980, as faith in paper money evaporated. At that point also, the inflation of the start of the decade, that had been seen as a trade off against high unemployment, became combined with high unemployment and recession, resulting in stagflation. 

In Britain, the start of many similar bubbles began in 1970 with the easy money policies of Tory Chancellor, Anthony Barber – actually the first application of the policy is probably attributable to Tory Chancellor, Reggie Maudling, who tried to win votes for the Tories at the next election by goosing the property market in 1960, just as George Osborne is trying now. It failed.   Labour won the 1964 General Election and the 1974 General Election anyway.

However, many of the problems that the British economy faces today date back 40 years to that point.

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