Monday, 9 March 2015

Oil Price. Good For The Economy, Terrible For Financial Markets - Part 13

The value of variable capital is reduced for the reasons described already. Firstly, workers costs for travelling, of heating their homes and so on, are significantly reduced, if the cost of fuel falls in half. Secondly, that same reduction in fuel costs, cuts the transport costs for all other commodities, including all those that constitute wage goods. It also reduces the transport costs for all those commodities that constitute constant capital, which in turn is used in the production of wage goods. Finally, it directly reduces the value of the constant capital used in the production of wage goods, for all those commodities in which oil enters as either raw or auxiliary material, and again in the production of the constant capital, itself used in the production of wage goods. For example oil used in the production of plastics, which in turn, are used in the production of wage goods, or used for the packaging of such goods.

A fall in the value of variable capital, does not cause a fall in commodity prices – as orthodox economics believes – just as a rise in wages does not cause a rise in inflation. The value of commodities is determined by the value of the constant capital used in their production plus the added value created by labour. A rise or fall in wages merely brings about a different distribution of this new value created by labour between labour and capital, i.e. it causes surplus value to rise or fall, depending upon whether wages fall or rise.

But, a fall in the value of labour-power, does not immediately translate into a fall in wages. Wages will tend to fall, because money wages will not rise in line with changes in commodity prices, and because firms in taking on new labour will gradually reduce the wages offered. If nominal money wages remain constant, therefore, but the value of labour-power falls, because the cost of its reproduction falls, i.e. the wage goods workers need to buy fall in value, real wages will rise. Workers will be able to buy more commodities, with the same amount of nominal money wages.

Under current conditions, this may have unforeseen consequences. Its estimated that the effect of the fall in oil prices will have put an additional $1 trillion into the hands of US consumers alone, because this is money, which previously they had to pay for commodities, part of the revenue from which went to oil producers, many of which would have been outside the US. Of this additional $1 trillion that US consumers then had to spend, we have seen that this resulted in an approximate 8% rise in the demand for oil in the US, considerably less than the 60% drop in oil prices.

That means that US consumers had a considerable portion of that $1 trillion to spend on buying additional commodities, other than just driving their car more, or heating their homes more. But, it also means that those consumers, many of whom have high levels of debt, built up over the last 30 years, of falling real wages, may decide instead to use their lower outgoings to pay off some of that debt hangover.

To the extent that they choose to do the latter, there is no current noticeable increase in consumer spending, because paying off your credit card debt does not show up as retail spending, whereas your original purchase of commodities with that card does. However, paying off credit card debt, or any other form of debt, in this way, does have further ramifications. If the average rate of interest on credit cards is 20%, and the average amount of debt is $5,000 (US credit card debt stands at $1 trillion), then consumers are handing over $1,000 a year, not for the purchase of commodities, but simply to service this debt. This again is spending by consumers that does not appear in the Retail Sales data.

There are approximately 200 million adults in the US, though not all these will have credit cards, or credit card debt. With an additional $1 trillion, therefore, on average, each of these individuals would have $5,000 to spend. If they used it to clear their average credit card debt, this would have no immediate effect on the retail sales figure, but it would save them a further $1,000 a year, which they currently spend simply to service their debt. Put another way, they might spend $5,000 from the oil windfall now, as a once for all addition to their consumption, or by paying off their debt, they would have $1,000 a year extra to spend every year on such additional consumption.

The $5,000 a year for each consumer, resulting from the fall in oil prices, amounts to just over $400 per month. Some of this may find its way into the purchase of additional consumption goods, as well as the paying down of debt, but it may also be saved in other ways, to be used to finance larger purchases at some point down the road. Only time will indicate how this plays out.

A paying down of debt, will provide workers with released revenue to spend on future consumption, but it may also act to reduce the demand for loanable money-capital, thereby causing interest rates to fall. On the other hand, to the extent this saving in interest payments by workers, then acts to increase their consumption of commodities, this will cause an expansion of productive-capital to meet this additional demand, which in turn will cause the demand for loanable money-capital to rise, thereby causing interest rates to rise.

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