Thursday, 2 July 2015

Contradictions Heighten

There is so much going on that its impossible at the moment to cover everything in the detail I would like, given other commitments. But, I wanted to just give a brief summary of how things seem to be playing out, and how the contradictions I have described previously appear to be heightening.

I believe that events continue to support the narrative I have set out before. That is that we have entered the Summer phase of the long wave cycle. It is marked by a squeeze on profits. This is not the same as thetendency for the rate of profit to fall, which is most marked in the latter part of the Autumn phase, and start of the Winter phase. The squeeze on profits that begins in the Summer phase, and becomes most acute in the Autumn phase, is in fact accompanied by a rising mass of profit, and a rising annual rate of profit.

The parallel isn't really accurate, but it can be though of like this. Take a small shop, it sells 10,000 items during the year. Each item costs the shop £1, and it has a 10% rate of profit on each item. It then makes £1,000 of profit. A large supermarket sells 10 million items during the year, again costing £1 each. It has only a 2% rate of profit on each item, so its profit amounts to £200,000, or 200 times the amount of the small shop. But, also if the small shop only turns over its 10,000 items (£10,000 advanced capital) once a year, its annual rate of profit is 10%. On the other hand, the large supermarket may turn over its capital 10 times during the year. In other words, it sells 1 million items, and thereby recovers its capital, which it then advances again.

In that case, the supermarket has only advanced £1 million in capital, but it has made £200,000 of profit from it. Its annual rate of profit is then not 2%, but 20%; double that of the small shop.

In fact, its these very conditions that exacerbate the squeeze on profits. If capital turns over more quickly, a given amount of capital will set a greater quantity of labour-power in motion, and it will likewise process a greater quantity of material. That is why, the Summer phase of the cycle is marked by continued expansion. But, this expansion means that labour supplies start to get used up more quickly. That is more so, because during this period the growth of productivity slows, as where in the previous period, new machines replaced older less efficient machines, now the expansion is based simply on more of these newer machines being added to the ones already deployed. These are the conditions that Marx discusses in Capital III, Chapter 6.

We can already see this in the data. Productivity in the UK was low anyway, because of the economic model developed by Thatcher and Major in the 1980's and 1990's, as previously discussed. But productivity growth seems to be slowing globally. It becomes manifest in rising demand for labour, and is also manifest from that in the effect of rising wages. Some of it is also being demonstrated in an increase in workers confidence as witnessed by a growth of strikes for higher wages.

In China, wages are rising by 12% a year, wages are rising in Japan, and in fact rising wages are part of the strategy of Abenomics. Wages are now rising faster than prices in the UK, and in some areas skill shortages, are causing wages to rise even faster. In the US, Wal-Mart and other large employers have raised their minimum wages to try to attract and retain workers, and several states have raised the Minimum Wage by significant amounts. Last week, on the same day that the conservative politicians running Europe were trying to force more austerity and wage cuts on Greece, President Obama, and President Roosseff of Brazil were holding a news conference where they announced, new programmes of fiscal expansion to rebuild the infrastructure of their economies, and Obama announced that millions of US workers would now get a legal entitlement to overtime pay, which they previously have not enjoyed, and which will again result in a sigificant increase in wages.

This is the same kind of conjunctural shift as was seen in the 1960's, which was an equivalent Summer phase of the long wave cycle. Even bourgeois strategists and financial analysts have picked up on this shift, as set out in Moneyweek.

They quote Hugh Hendry of Eclectica Asset management,

“All the things I mention above are signs that this is happening again. Power is beginning to shift to workers — and to tenants — just as it did then. Hugh Hendry of Eclectica Asset Management picks up the story in his latest letter to his investors. You could, he says, interpret this shift as the re-emergence of the “Henry Ford” option at the corporate and government level.

Back in 1914, Ford confounded everyone by doubling his workers’ pay. He did it mostly to bring the best workers to his business, but it also established the idea that it was reasonable “for the economy’s workers to capture a larger slice of the period’s surging productivity”. That in turn “produced highly remunerated consumers with a higher propensity to consume than their elite ‘Gatsby’-like predecessors from the 1920s.” GDP rose. Everyone was happy.”

One of the clearest manifestations of that shift is China, which is trying to move from its reliance on an export driven economy to one in which its own domestic consumption acts as the driver. But, this process leads to a series of contradictions.

The squeeze on profit margins means increasingly that any sudden event can lead not just to squeezed margins but the elimination of those margins causing a crisis of overproduction. But, the US also shows another contradiction. Its now clear that underlying growth in the US economy is strong, if the weather an other anomalous effects are removed.

As I write, the US payrolls data is awaited. Its anticipated to be around 230,000. On the basis of survey data, and what I see from wage growth, and labour shortages in various sectors I think this is probably an underestimate. I would not be surprised to see the figure come in at over 300,000 new jobs, and I could even see the figure being as high as 357,000. 

That poses problems for the US federal Reserve, which should have started raising official interest rates long ago, as the Bank for International Settlements has warned recently.

As I said, recently, I think the Federal Reserve at its last meeting should have given notice of its intention to raise rates in July, with a further 2 rises in the rest of the year. Higher jobs growth, which is already showing through in higher wages, will begin to force the Federal Reserve's hands.

Rising inflation, as productivity growth slows, rising wages, and squeezed profit margins will cause capital to have to devote a greater portion of realised profits to productive investment. That means the demand for loanable money-capital rises relative to its supply pushing interest rates higher. That is already being seen in bond markets, and Bill Gross has been just the latest fund manager to point out that the bond markets are a catastrophe waiting to happen due to a lack of liquidity.

Robert Schiller on CNBC the other day, said that the US stock market is at the highest level it has been on his CAPE index other than for 1929, 2000 and 2007. When interest rates rise in the bond markets that makes equity prices even more expensive on a valuation basis.

For 30 years, the conditions have favoured the money lenders, and the conservative political forces based upon them. Those material conditions are changing. As wages rise, aggregate demand in the economy will rise, and provide a stimulus for additional investment to meet the consumer demand – Hugh Hendry, and Henry Ford's point referred to earlier. But, it will mean that the period of low interest rates that fuelled stock, bond and property market bubbles of proportions never seen before in history will burst.

1 comment:

Boffy said...

The US Jobs number came in at 223,000, somewhat below what I expected. However, there seems to be some peculiarities once more in terms of the timing of when the data was collected, which may have affected it. The better picture will come in with the later revised data.

However, the point remains that the US needs to create 125,000 jobs per month to absorb the natural increase in the labour force, and it is creating on average around 250,000 or double the number required. That is why the unemployment rate is falling, and wages are rising.

In fact, as wages and employment rise faster, that will push up aggregate demand, which will have a further stimulative effect on investment and job creation.