Lehman's Plus Five - Part 4

The reason stagflation arose in the late 1970's was that as the economy entered a long wave downturn, Keynesian fiscal stimulus could no longer act in the way it had done in the previous period to simply cut short recessions that interrupted a longer term upward trend. Firms saw upturns only as the interruption. Rather than investing, therefore, they simply took the opportunity to raise their prices whenever such an upturn occurred. They were able to do so, because money was printed to facilitate it.

In the early 1980's, governments in the US and UK, influenced by the ideas of the Neo-Austrian School of Hayek and Mises, imposed limits on the money printing. It meant, businesses could no longer rely on raising prices to cover wage rises given to their workers. It forced them to confront their workers in increasingly bitter confrontations. The capitalist state stood behind these employers providing them with the resources of its “bodies of armed men” to ensure the workers were beaten. By the mid-1980's, the workers were defeated, and Thatcher and Reagan abandoned the ideas of Hayek, in favour of the Monetarist policies of Milton Friedman. The distinction between Mises and Hayek on the one side, and Friedman on the other is illustrated by their ideas in relation to the 1930's Depression.

Mises and Hayek believed that the Depression was the result of the market not being allowed to clear. That is, if workers were unemployed it was because their wages had not fallen enough. Wages and other prices had risen too much, they argued, in the previous period, because too much money had been printed, which had caused a “Crack-Up Boom”, which inevitably led to a bust. The necessary correction in prices could not occur, if more money was printed. By contrast, Milton Friedman argued that the 1930's Depression had been caused by the US Federal Reserve tightening monetary policy, at just the time when it should have been loosening it. Looser monetary policy he argued would have reduced interest rates, and led to renewed investment, and higher profits, which would have stopped the economy going into Depression.

In fact, both the Neo-Austrians, and the Monetarists and the Keynesians were wrong, but that is a matter for another post sometime. With workers defeated, the capitalist state was safe to print money to prevent deflation, because there was no way that employers would now voluntarily concede large wage rises. Instead, they could use the higher prices, to rebuild their profits. But, that could only be done, if workers were able to buy their commodities. In the US and UK, the means of achieving that was via the promotion of debt, collateralised on the back of inflating asset prices, primarily property. To facilitate this process, Thatcher and Reagan deregulated financial markets, which again was an essential component in the financial meltdown of 2008.

So, was put in place the foundations for building a low wage-high debt economy in both countries. That model fitted with the ideology of the membership and voter base of both the Tories and the Republicans, within the ranks of the nationally based, small capitalists, and their attendant social layers, as well as in the traditional links of such parties to the aristocracy of finance. That also found its reflection in the increasing dominance of “Neo-Liberal” ideology.

When the Stock Markets experienced their worst ever crash then, in 1987, it was fitting that the devotee of Ayn Rand, and Neo-Austrian sound money, Alan Greenspan, should become the advocate of money printing almost without limit. Whenever, the economy seemed to slow down, Greenspan was there to print more money, whenever the Stock Market sneezed, Greenspan rushed in with more money. In 1999, just as a precaution against an unforeseen crisis arising from the “Millennium Bug”, Greenspan threw a large amount of additional money into circulation.

The result was inevitable, with commodity price inflation subdued, because of masses of cheap manufactured goods, pouring in from China and other Asian economies, with interest rates falling, because the rate of profit had been rising, since the turn of the conjuncture, around 1987, all of the money went into pumping up huge asset price bubbles in shares, property and bonds.

As with previous conjunctures, the turn from the Winter phase of the Long Wave to the Spring phase of a new boom in 1999, was marked by yet another stock market crash, this time in 2000. Once again, the response was to print even more money, so as to reflate the burst bubbles. However, just as Keynesianism found its limit with the turn of the conjuncture in the 1970's, so Monetarism found its limit in the period of the 2000's.  That limit came as the rising rate of profit began to slow, as costs for producers in China and elsewhere began to rise sharply, in the way Marx describes in Volume III of Capital.  That meant the stage when money could be printed with abandon without causing consumer price inflation was ending, and along with it the 30 year fall in interest rates.  For five years, the Bank of England has presided over inflation way above its 2% target.  Even on the fiddled figures it has been more than double that figure on several occasions.  Today's RPI figure shows tht it has risen from 3.1% last month, to 3.3% this month.  A sign of things to come.

In reality, Monetarism had never provided a solution. It simply papered over the cracks. In the post-war period, Keynesianism, at least, had cut short recessions, so that a process of real capital formation could continue, as new industries such as motor cars, consumer electronics, and pharmaceuticals developed. But, monetary stimulation has occurred only to facilitate continued consumer spending. In doing so, it has only exacerbated the condition in which the old industrial economies continue to decline, whilst the new dynamic economies continue to grow, the latter selling to the former, who buy using borrowed money. As I've pointed out before - QE etc – the introduction of vast amounts of liquidity was necessary after 2008, to prevent the collapse of the banking system, and to ensure there was money in circulation so that a credit crunch did not continue to impact on commodity circulation and production. But, after that was achieved, continued money printing could not act to stimulate economic activity. It could only act as an alternative to dealing with the basic insolvency of the banks, an insolvency that itself rests upon the blowing up of those asset price bubbles over the previous 40 years. It means the real problem has not gone away, and as stated at the beginning has, in fact, simply been made worse. The real denouement is yet to come.

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