Wednesday, 21 February 2018

Its Not Inflation Driving Interest Rates Higher (4/10) - Interest Rates and The Demand and Supply of Money-Capital

Interest Rates and The Demand and Supply of Money-Capital 

If we look at what would be expected if inflation were the real reason for rising interest rates, now, we would expect to see longer-term interest rates rising more quickly, or what is called a steepening of the yield curve. Yet, we see the opposite. US 10 Year Treasury yields have risen significantly over the last few months, but shorter dated Treasuries have risen even faster, causing a flattening of the yield curve. It's not higher inflation that is the reason for interest rates rising sharply, but the sharp rise in global economic growth, and its effect on wages and profits. According to Mark Carney in his recent speech, 90% of the the world's economies are now growing at rates above trend. The world's economies are now growing at their fastest pace since the start of the new long wave boom in the early 2000's, which also caused interest rates to spike, and which led to the 2008 financial meltdown. 

When the financial pundits talk about rising inflation, what they are really talking about is that 2.9% rise in US wages. They are referring to the 4.3% pay rise, and 28 hour working week that IG Metall has won for 1 million German workers, and again it was the winning of similar pay rises in 2008 that sparked anxiety amongst the ranks of conservative social-democrats, and saw interest rates rise. For Keynesians, this kind of pay rise leads to inflation on the basis of higher input costs. But, Marx explains why that is not the case. The rise in wages leads to a fall in surplus value, and the consequence is that the production of wage goods rises, whilst the production of luxuries consumed by capitalists and other exploiters declines. However, in modern economies, central banks tend to respond to these higher wages and the squeeze on surplus value, by increasing liquidity, so that commodity prices rise, and consequently real wages rise by less than nominal wages. This always brings with it the potential for a price-wage spiral, as happened in the 1970's. 

But, the fundamental point is that wages had risen for a reason. Wages (at constant money prices) rise for one of two reasons. Either, social productivity falls, so that the value of wage goods rises, and so the value of labour-power rises, or else, wages rise, because the demand for labour-power rises faster than the supply of labour-power. Ricardo saw the former as the cause of higher wages, flowing from his theory of diminishing returns, as increasing output, to feed a growing workforce, led to a resort to less fertile land. It was the basis of Ricardo's theory of the falling rate of profit. But, Marx showed that this theory was wrong. Social productivity rises so that the value of commodities, including all those that constitute wage goods, continually fall. That means that the value of labour-power continually falls, so that the rate of surplus value, and mass of surplus value rises.   Wages, therefore, rise, in practice, because, at times, the demand for labour-power rises faster than its increased supply from either increased population or increased productivity.  As productivity rises, more slowly, the value of labour-power falls, more slowly, whilst the demand for labour-power rises more quickly.  These conditions are consistent with that phase of the long wave cycle where there is more extensive rather than intensive accumulation of capital.

Adam Smith believed that wages rise, because capital accumulates faster than the growth of the working-class, and so the excess supply of labour-power, which he thought was the basis of profits, is gradually removed, wages then rise, and profits fall, until eventually, he thought, they must disappear. In terms of the long run tendency for the rate of profit to fall, Smith was also wrong, because, as Ricardo and Marx recognised, whenever these periods arise when the demand for labour-power starts to exceed the supply, causing wages to rise, and profits to be squeezed, capital responds, by introducing a new wave of technological developments, of new labour-saving machines that restore the excess supply of labour-power, and thereby push wages down, and surplus value up. 

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