Britain Is Headed For Stagflation - Part 1 of 3

The British economy appears to be headed for a period of 1970's style stagflation. The inflation half of that condition is already becoming apparent. The CPI rose from 0.6% to 1.00% during last month, a rise of 66.6%. If it continues rising at that pace, it will exceed the Bank of England's 2% target by January. The RPI, has already reached the 2% inflation target of the Bank of England. The NIESR are suggesting that inflation could be above 4% next year.

The stagnation part of the condition may not be so immediately apparent, because, as the government and the Brexiteers have not failed to point out, the UK economy has been growing more rapidly than many other economies, and than the Bank of England and Treasury forecast would be the case, in the event of a vote for Brexit. But, not only is that growth also slowing – the NIESR forecast a slow down to just 1% for next year – but the growth that is occurring is not solidly based. In fact, many of the causes for a rise in the rate of inflation, are also related to the reasons that growth will be stagnant.

Of course, even a 4% inflation rate is nothing like the double digit inflation of the 1970's, which rose to well over 20% in the early years of Thatcher's government. But, the NIESR's 4% estimate may turn out to be wildly optimistic, and one reason for that would itself arise from stagnation. The monetarists proclaim that inflation is a monetary phenomenon. In essence they are right. The Keynesians argue that it is a consequence of demand exceeding supply, which can be adjusted by regulating the various components of aggregate demand – C + G + I = Y. In other words, consumption, government spending, and investment equals National Income. Likewise, therefore, low inflation or deflation arises due to low levels of economic activity and a lack of demand.

The Keynesians point to Keynes' comment that, in a situation of low levels of demand, increasing money-supply is like pushing on a piece of string. They point to the vast amounts of money printing along with low levels of inflation and economic growth to back up their argument. Of course, there has been massive levels of inflation, as a result of money printing, but it has been an inflation of asset prices not consumer goods prices. In fact, by creating a fantasy world in which central banks keep asset price bubbles expanding forever, the policy of QE has itself created the conditions of slow growth and low consumer price inflation, by draining potential money-capital away from real capital accumulation, and into financial speculation.

But, the idea that low levels of economic activity necessarily leads to low inflation is itself false, as was seen in the period of stagflation of the 1970's. As economic growth slows down, and utilisation rates fall, so productivity levels fall, and unit costs rise sharply. Productivity levels in the UK are already abysmally low – French workers produce as much in four days, as UK workers produce in five. In conditions where monetary policy is tight, such as was introduced by Thatcher in the early 1980's, the result of these rising costs is either that wages get slashed, profits get slashed, or firms go bust, taking out the most expensive surplus production, leading to large scale unemployment, which then leads to big falls in wages.

But, now isnot the 1980's. We have a situation where unprecedented quantities of liquidity have been put into circulation, for no other reason than to keep asset prices inflated, and thereby to protect the fictitious capital of the capitalist class, whose private wealth is now almost exclusively held in this form. Any attempt to prevent a rise in consumer price inflation, and subsequently of wage inflation – the Tories are already proposing to cut the triple lock link for pensions – by curtailing liquidity, will be resisted for as long as possible, because it will spark a collapse in the prices of shares, bonds and property. Its why both the US Federal Reserve and the Bank of England has kept official interest rates near zero for so long, even as the clear indication of rising inflation has been seen in the data.

This is not the 1980's for other reasons. In the early 1980's, following the long period of post-war growth, between 1949-1974, wages had risen, as the demand for labour-power continued to grow. As wages rose, profits got squeezed as Glyn and Sutcliffe described (Workers and The Profits Squeeze), but also two generations of workers – the baby boomers and their parents – were able to accumulate a certain amount of wealth.

The parents, who bought houses in the 1950's and 1960's, saw the mortgages they had taken out on those properties shrink, in real terms, as wages rose throughout the 1950's, 60's, and 70's. Their children, who bought houses in the 1960's and 70's, had a similar benefit, and both thereby saw a rise in disposable income, that could be saved and was sometimes accompanied by the build up of occupational pensions.

It meant that in the 1980's and 90's, there was scope to reduce wages and boost profits, and there was an unprecedented ability to do that whilst simultaneously dispossessing many of those workers of the assets they had built up. It meant that these assets that were appreciating massively, in nominal terms, could be used as collateral for borrowing, so that falling or stagnant wages were supplemented by a huge explosion of private debt.

Unlike the 1980's, therefore, we now have a situation where wages are already low, and profits are high; despite a prolonged period, from around 1985, when a revolution in technology made possible rapid growth in productivity, the UK economy, as a direct result of the policies of Thatcher and her heirs, has low levels of productivity, exacerbated by the large amounts of hidden unemployment and under-employment amongst the self-employed and casually employed. In place of the reservoir of savings and assets held by workers in the early 1980's, we now have unprecedented levels of household debt, even amongst those yet to form a household (student debt etc), which leaves millions dependent on the use of credit cards, or payday lenders, just to get to the end of the month, not to mention all those dependent on food banks etc.

On top of that, we have around 160,000 zombie businesses. They only survive because they can pay low wages to their workers, and because the banks allow them to just pay the interest on their loans, with no prospect of them repaying the capital sum borrowed. They are able to pay low wages to their workers, because state welfare benefits have exploded in payments of child benefits, tax credits, and housing benefits to cover the actual inflation of real living costs, such as the massive rise in the cost of shelter. That explosion in benefits means that large amounts of tax is then deducted from other workers, and sections of the middle class, and ultimately, from the surplus value they produce for capital. It is a direct diversion of potential capital that could be used for more profitable investment and growth, simply to keep in existence this large number of inefficient small capitalists, but who also form a large part of the membership and electoral base of the Tories.

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