Lockdown
The lock down of social activity has caused an economic slowdown far greater than was provoked by the 2008 financial meltdown. It is the biggest slow down for 300 years, according to the Bank of England, and others. The immediate effect, as it appeared that all production would stop, was to see stock markets sell off massively. Falls of up to 10% a day started to become common. Then central banks pumped even more liquidity into circulation to reflate asset prices. The state intervened to say it would become employer of last resort, taking responsibility for wages off companies. Although the smallest companies were abandoned, the state made clear it would stand behind all of the biggest companies, once again demonstrating that the future of the state continues to depend on that big capital, and that the state will protect it, whatever the conservative representatives of small capital might hope.
Indeed, it soon became clear that the lock down was a lock down of social activity not economic activity. The latter only got hit as a consequence of the former. The Dow Jones which had been over 27,000 before the sell off, dropped to below 20,000 (still 50% more than where it had been prior to the 2008 crash), but, as the reality that production for many big companies continued, with the state bankrolling others, and with central banks again destroying currencies to buy financial assets, the Dow Jones has risen to over 27,000 once more, and other stock indices have followed suit. This shows how much speculators believe the state has their back. They believe that central banks will continue to print money tokens and buy up assets. Its even been proposed that the Federal Reserve might buy shares as well as bonds, to that end. In addition, they believe that the state will bail out all of the big companies whose profits and markets have been hit, as well as spending trillions of Dollars to restore levels of demand.
After 2008, the British state spent £2 trillion bailing out the banks. Bailing out all of the big companies will cost more like £20 trillion, especially as Brexit means Britain will be harder hit than elsewhere. Many big companies will simply decide to relocate to the EU, unless they are given big bribes to stay. Already, Britain has seen its borrowing, for the last month, rise to as much as for the whole of last year. What makes the situation today different to the last thirty years is this. In the last thirty years, money printing was used to buy financial assets and so inflate their prices, which squeezed yields. Austerity was used to suppress economic activity, reduce demand for capital and lower wages, so as to sustain profits and the supply of capital, so as to depress interest rates. All of that was designed to inflate asset prices.
Now, states have printed money on an even vaster scale, whilst the artificially induced economic slowdown, created by the lockdown, has reduced the demand for capital, lowering interest rates, and boosting asset prices, but that cannot last. In the US, there is an ironic position in which many very low paid workers have seen their incomes rise as a result of the state taking over the payment of wages, sometimes by significant amounts. It has meant, combined with reduced spending, because many forms of consumption have been banned, that some household debts have been paid down, especially as mortgage repayments were suspended. In the latest US Jobs number, one interesting fact was that, alongside the 2.5 million jobs increase, as laid off workers were brought back, hourly incomes fell, because these workers were no longer getting the higher payments that were being paid out by the state! As the social lockdown ends, consumption of all those things currently shut down will rise. Firms whose profits and cash reserves have gone will have to borrow to take on staff, buy in materials and so on. Many households, even when they have had 80% of wages paid by the state, will have dipped into savings. They will also increase borrowing on credit cards and so on, as they return to normal consumption patterns. But, the biggest borrowing is that of the state; it has ballooned, and will continue to rise, as it introduces measures of fiscal stimulus. The US has introduced fiscal stimulus already amounting to around $4 trillion, more or less equal to the Federal Reserve's already inflated balance sheet; the EU is proposing €750 billion of fiscal stimulus as a start that will come out of a central fund, marking the start of the EU creating a fiscal union, alongside its monetary union, and single market, which is just one step away from the creation of a federal European state.
All of this fiscal stimulus, combined with the increase of liquidity, in conditions of existing masses of liquidity, means that devalued currency will go into general circulation, causing commodity prices to rise at the same time that increased demand for money and money-capital is met by a reduced supply as profits disappear, and savings are ransacked, leading to rising interest rates. By the state printing money to hand to workers for them not to work, it inflates monetary demand at the same time as reducing the supply available to meet that demand, which must result in higher prices, much as happened in Weimar. In fact, as I reported recently, this paper, published by the IFS, shows that commodity price inflation is already rising sharply, having risen as much in a month as it would normally have risen in a year. States cannot respond to this in the way they have in the last thirty years by printing even more money tokens, as that simply causes inflation to rise as this liquidity is now being sucked into general circulation. That inflation then means that households, businesses, and government need to borrow even more to cover the higher prices of the commodities they now buy.
Given the destruction of large spheres of production, what we have is situation similar to that of the Weimar republic in the 1920's. Then, a smashed economy could not quickly increase production and supply. It had debts to cover and did so by deliberately printing money tokens so as to pay its creditors in devalued currency. But, the devalued currency also created inflation. The inflation increased the costs to households, who sought higher wages, and to businesses which sought higher prices, as well as the government, whose debts also thereby rose, leading it to print more money tokens, leading to hyperinflation. Today, many economies across the globe are in a similar situation, creating a global Weimar. As the lock down ends, this will become manifest. First will come higher interest rates, as demand for money-capital exceeds supply, causing asset prices to fall sharply. Then will come rising prices, causing borrowing to rise further, and interest rates to rise higher, causing asset prices to crash further, and giving an incentive for money to go into actual production, where at least money profits will be rising as a result of inflation, and then, as the state, using the weapons of the previous war, prints even more money, will come the hyperinflation.
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