Wednesday, 4 July 2018


In the 1930's, when governments introduced tariffs on imports, the effect was to cause a further restriction of global trade, which deepened the condition of stagnation that already afflicted global economies. That meant that unemployment rose further, causing additional pressure on wages, and a further reduction in aggregate demand. Falls in aggregate demand, in conditions where prices were already falling, caused prices to fall further. Those are not the conditions that exist today, and into which Trump's Trade War is imposing additional costs, via the imposition of tariffs. 

The reason that prices were falling in the 1930's, is that after 1914, the global economy entered a crisis phase of the long wave cycle. The US was out of synch with that cycle, by about ten years, entering that phase in the late 1920's. In these crisis phases of the long wave, capital faced with relative labour shortages, and rising wages that squeeze profits, begins to develop and introduce new labour-saving technologies. These technologies reduce the value of commodities, and its this that causes prices overall to fall. By the 1930's, these new labour-saving technologies, are being rolled out to replace existing technology, and with aggregate demand stagnant that means that rather than being used to increase output levels, these new technologies simply produce the same output levels with less labour. 

It means that whilst gross output rises slowly, net output, i.e. the amount of surplus value rises quickly. Indeed, its this which eventually provides the basis for the next upswing of the long wave. By introducing tariffs in the 1930's, the effect was simply to restrict trade, and thereby cause economic activity to slow further, which put further pressure on employment, and wages. 

But, today, the global economy is in a long wave upswing that began in 1999. It was that upswing that led to sharply rising levels of employment in the early 2000's, which started to put upward pressure on wages, which began to squeeze profits, and cause interest rates to rise. For thirty years, central banks had fuelled asset prices, by reducing official interest rates, increasing liquidity, and easing credit whenever stock or property markets began to falter. Every time interest rates began to rise, for example, in 1994, it caused asset prices to tumble, because a major determinant of those asset prices is interest rates, because the price of such assets is the capitalised value of the revenue they produce. 

Because central banks had goosed asset prices for such a prolonged period, and to such an extent it meant that at every stage, after each one of these corrections 1987, 1990, 1994, 1997, 2000 the amount of liquidity required became larger and larger, and the astronomical prices of the assets became more and more detached from reality. There is a thirteen year cycle of stock market corrections going back a long way, and this cycle is connected itself to the long wave cycle, being more or less synchronous with the conjunctural phases of the cycle, and at which point underlying changes in the rate of profit, and the rate of interest occur – both of which are the basis for the determining of the capitalised value of revenue producing assets. 

The 1962 financial crash occurred, as the post- war long wave cycle moved from its Spring Phase (1949-62) to its Summer Phase (1962-74), as wages began to rise, and profits began to be squeezed. The 1974 crash came as that Summer Phase came to an end, and the Crisis Phase (1974-87) began, and interest rates rose sharply. The 1987 crash occurred, as the Crisis Phase came to an end, and the Stagnation Phase (1987-1999) got underway. The 2000 crash occurred as the new Fifth Long Wave cycle began in 1999. On this basis, the next crash should have been expected around 2013, but, in fact, it happened in 2008. The reason is that, the period of the last 30 years has been unique. In the past, whenever asset price bubbles burst, they remained burst, prices only recovering gradually. In real terms, the Dow Jones only regained the value it had prior to the 1929 crash, in the 1950's. This time, however, each time, after 1987, central banks and governments acted to reflate asset prices not just to their former levels, but way beyond them. 

In 1987, stock markets dropped overnight by 25%, but a year later they were already at higher levels. The Dow Jones, which stood at around 800 in 1980, had soared to 10,000 by 2000, a rise of 1300%, which was seven times greater than the rise in US GDP, in the same time. By continually inflating asset prices, by continually reducing official interest rates, and increasing liquidity, the authorities made those asset prices more and more susceptible to any increase in interest rates. So, when in 2007, workers across the globe began to get large pay rises, like the 14% rise that UK tanker drivers obtained that year, and firms began to respond by rising prices, and interest rates began to rise, asset prices responded violently, leading to the 2008 financial crash. 

The reason that has been different this time is also clear. The global top 0.01% now own all of their wealth in the form of fictitious capital – shares, bonds, property. Its from this wealth they obtain their power and influence. But also governments from the 1980's also began to think that wealth was simply a question of rising asset prices providing them with a magic money tree. Instead of the need to produce new value, which generates revenue, they began to think that everything could simply be paid for out of magically rising asset prices, without ever considering what it was that causes asset prices to rise, in the first place. In the same way that governments thought that things such as elderly social care could be financed by the elderly out of their magically rising house prices, so pension funds thought that pensions could be provided out of magically rising share and bond prices. And, by encouraging speculation into those assets in order to obtain the capital gains arising from these magically rising prices, they diverted resources away from the very productive activity and capital accumulation required to produce the additional value, and surplus value that could have sustainably provided the revenues to fund those things. They created a condition where to use Andy Haldane's phrase, “Capital began to eat itself.” 

But, they put themselves in a position of that of a heroin addict who is faced with a crisis, or of going cold turkey. They have tried to avoid both, by continuing to inject themselves, only to delay and intensify the crisis. The 2008 financial crisis came 5 years early, because over the previous years, central banks and governments, by continually reflating asset prices rather than allowing them to crash, have made them ever more susceptible to any rise in interest rates. The top 0.01% that comprise the dominant section of the global ruling class has sought to achieve that, because its wealth is now held exclusively in this form of fictitious capital rather than real productive capital. It has been prepared to destroy the latter, in order to keep the paper price of the former inflated. The state has tried to accommodate them in that goal. 

The policies adopted after 2008, of pumping out even more astronomical levels of liquidity, which has led to the Dow Jones trebling from its 2009 low, whilst imposing draconian measures of austerity to limit aggregate demand, have been geared to that end. All of the polices of central banks and governments have been geared to encourage financial and property speculation, and to discourage real productive investment, so as to limit the demand for labour-power, and growth of economic activity, which in 2007 led to rising interest rates and caused asset prices to crash. 

Objectively, Trump's imposition of tariffs, and the reduction in trade and economic activity that might be expected to flow from that, could be seen as just another extension of that attempt to restrict economic growth, and so enable interest rates to stay low and asset prices inflated for a while longer. Trump, in many ways, is a last gasp of what some call neoliberalsim, and what I call conservative social-democracy

But, the reality is that it will, and is having the opposite effect. This is not the 1930's, and the effect of tariffs today is not the same either. Trump's imposition of tariffs on steel and aluminium are nothing new. George W. Bush attempted the same thing. The effect was that it increased the cost of constant capital, for US car makers, which thereby reduced their rate of profit, whilst simultaneously increasing the costs of production, and so the price of their cars. That not only meant that US built cars became even less competitive in the global market, it meant that US consumers who bought those cars had to pay more for them. In the 1930's, with unemployment rising, the effect would be for workers to simply cut back their demand for cars, in face of the higher prices. In the 2000's, it increasingly meant that workers sought higher wages to maintain their living standard. 

So, now. As central banks and governments have tried to restrict economic activity over the last ten years, so as to reflate asset prices, employment grew slowly, and wages were restricted. But, its now clear that the global long wave boom that began in 1999, and was trapped in a hiatus after 2008, is once more asserting itself. Across the globe, 90% of economies are growing at above trend. The US has continued to enjoy above trend increases in employment that started under Obama, and has continued, though at a slightly lower rate, under Trump. 

Trump's imposition of 25% tariffs on steel and aluminium has already caused the prices of washing machines, and other such consumer goods to rise by 19%, in the US. With steadily increasing employment in the US, those US workers are still likely to buy those consumer goods, even at these higher prices, but they will now begin to demand higher wages to compensate. US consumer price inflation is already at the 2% level the Federal Reserve has as its target, and the effect of Trump's tariffs will be to cause it to rise even faster. Higher US inflation, alongside higher US wages will lead to a further squeeze on profits, and rise in interest rates, which will bring back the conditions that led to the 2008 crash with a vengeance. 

A fall in US rates of profit will not cause investment to fall in the US, because the cause of the squeeze on profits is a rise in wages, and the rise in wages is fuelling a rise in the consumption of wage goods. Every firm is then led to have to respond to the higher demand for wage goods, by increasing its output, for fear of losing market share to its competitors. The rise in investment – even if its just to employ more workers – at a time when the rate of profit is squeezed, is what causes the demand for money-capital to rise relative to its supply, which results in higher market rates of interest. 

But, higher US interest rates are also now providing the basis for a higher Dollar. A higher Dollar leads to the export of inflation to other economies who have to import commodities in Dollar denominated prices. That is already affecting a range of emerging economies, and causing them to have to raise their own official interest rates. The UK, which had seen its rising inflation moderate in recent months, as the Dollar had been falling since the Federal Reserve stopped underpinning US bond prices, has now changed course. The Pound which had been trading at over $1.40 is now trading at around $1.30, and that is having a consequent effect once more on UK inflation, especially as the renewed growth of the global economy is pushing primary product prices higher. 

The response of the EU and others in imposing retaliatory tariffs on a range of US goods is not likely to have a similar effect. Because the EU is the largest economy in the world, it can fairly easily find substitutes for the US commodities it has imposed tariffs on. That should be a lesson to the delusionary Brexiteers, who seem to think that the tiny British economy would somehow be in a better position than the US in such a situation. The actual consequence of Brexit, and tariffs imposed by the EU has been indicated not just by Airbus, Siemens, and BMW, but also now by the US's Harley Davidson, which faced with the imposition of EU tariffs has decided to shift its production out of the US. 

But, the fact remains that the global economy today, unlike the 1930's, is growing, and the pace of growth is rising. Employment is also rising, as we are in a period of extensive rather than intensive accumulation of capital. The effect of tariffs overall, rather than causing a slow down in trade and economic activity, will be to cause a rise in costs, thereby further reducing the rate of profit. Given the increasing demand for labour, and the extent of liquidity sloshing around the global economy that is likely to result in rising levels of inflation, putting further pressure on interest rates, which are likely to rise at a much faster rate than markets or central banks are currently factoring into their calculations. The rise in interest rates will bring with it the completion of the financial crash of 2008. As asset prices crash, the conditions will be created for an even greater acceleration of real productive investment, and period of economic growth.

No comments: