Inflation is Barrelling Towards Us

None of today's economic pundits, under 50, have seen inflation and interest rates at high levels. Those under 40 have not seen it at even moderate levels. For the last 40 years, rising productivity, caused by the technological revolution of the 1970's and 80's, led to falling commodity values and prices, and the sharp rise in the annual rate of profit it created, along with the massive release of capital it produced, led to continually falling interest rates. There is a tendency to take the conditions you have experienced, and are currently experiencing, and to see them as natural, and the way things will always be. But, its the mistake of the man who having fallen from a 30 story building thinks, as they fall past 29 floors, that they will never hit the ground.

In fact, the inflation seen over the last 12 years has been artificially low too, as have interest rates. When the new long wave upturn began in 1999, the prices of primary products like oil, copper, iron ore, steel, platinum and foodstuffs rose sharply, as demand increased much faster than supply. That happens with every new long wave uptrend. In the early 2000's this rise in primary product prices began to feed through into manufactured goods prices, particularly, as, over the previous ten years or so, central banks had been busy filling the global economy with liquidity as they tried to reflate asset prices that had crashed in 1987, 1994, 1997-8, and 2000. That liquidity now began to inflate all of these consumer goods prices. In parts of the world, where the sharp rise in global growth had created a large new working-class, it led to food riots, and strikes. In Britain, in 2007, oil tanker drivers won a 14% pay rise after just a two-day strike, and workers in Germany won big pay rises too.

The shadow of inflation began to emerge, and interest rates began to rise. With asset prices having been driven artificially high as a result of central bank money printing, even this slight rise in interest rates was enough to cause asset prices to crash leading to the crisis for lenders in 2007, and then the global financial meltdown of 2008. By 2010, having stabilised the global economy, states and central banks again began the job of restoring the paper wealth of the top 0.01% by reflating their asset prices, which involved printing even more money tokens, and buying up these worthless assets to raise their prices. Alongside it, they introduced measures of fiscal austerity to ensure that economies did not again grow faster, which would have simply caused inflation and interest rates to rise again, causing an even bigger asset price crash.

For the last ten years, they have continued to hold back economic growth, and to print money tokens and pump them into inflating asset prices. In so doing, they have also caused money-capital to be drained from the real economy, and into this speculation in assets. Share and bondholders have taken their revenues, and pumped it back into speculation in these assets. Companies have used their profits to buy back shares or speculate in other assets, rather than use those profits to accumulate real capital, which would have caused economic growth to rise, leading to rising interest rates and another crash of asset prices. Even ordinary citizens, seeing savings rates go to near zero, were, thereby, led to speculate in these assets, whether by becoming Buy-To-Let landlords, or just by stampeding into buying astronomically overpriced houses for themselves or their children, and so pushing those prices higher. They were encouraged to speculate in ever more risky assets, including, now, the fad for buying Bitcoin, or whatever some unknown person – probably a professional speculator employed by a big investment bank – suggests, in what amounts to a pure Pyramid Scheme, that will leave thousands having lost all their savings and more.

But, what all of that does, is to drain liquidity from general circulation, and drive it purely into monetary demand for speculative assets whose prices then rise, inflating that bubble. Inflation is a monetary phenomenon, and so, with liquidity drained out of general circulation, the market prices of commodities is constrained, whilst the prices of assets increases. That has been a deliberate policy of states and central banks. The slow down in global economic activity caused by government imposed lockdowns has been a godsend to them, as once again, after 2018, they began to see economic growth begin to rise significantly, and interest rates begin to rise with it, despite their best efforts. No wonder that, in the second half of 2020, and into 2021, stock and bond markets soared once more, the price of gold rose, and Bitcoin went from below $10,000 to now over $50,000. But, such inflation always precedes a crisis and a crash. Just look at Japan, where its stock markets and property markets soared, in the late 1980's, and then crashed by up to 90%. The Nikkei Index is only now getting back to the level it reached in 1990.

In the end, states and central banks cannot control the global capitalist economy. Even a socialist global economy cannot avoid the laws of economics, and particularly The Law of Value. Its hilarious that the biggest advocates of the free market have placed their faith in the ability of central planners, in central banks, to be able to do so, by controlling the most important price in the capitalist economy, the price of money-capital, or rate of interest. But, the fact remains that although the state and central banks are powerful institutions that can manipulate and corrupt the laws of capital for a time, they cannot abolish those laws, and eventually, those laws impose themselves, and come back to bite them the more they have been manipulated and corrupted.

The basic laws involved, here, are these. The main benefits of rising productivity from the technological revolution of the 1970's/80's, began to run out in the late 1990's, and early 2000's. Without those benefits of rising productivity, any significant increase in economic activity causes the demand for labour-power to rise, which leads to rising wage share. Even if unit wages themselves don't rise – which they tend to do beyond a certain point – wage share itself rises, simply because more labour is being employed, whilst the rate of surplus value falls, as a result of limits on the rise of absolute surplus value. As wage share rises, workers demand more wage goods. That was seen spectacularly after 1999, as the workforce expanded massively in China and the rest of Asia, as well as in the former Stalinist states.

When the demand for wage goods rises, capitalists, driven by competition for market share and profits, have to accumulate additional capital, at an increased pace. They must either use more of their profits for investment, putting less of it into capital markets, or they must go into the capital market to borrow additional capital. At the same time, as the rate of surplus value falls, they start to feel a squeeze on their own profits, if only slight. The rise in demand for primary products, especially at a time before any significant new investment in their production has occurred, means that the prices of these products rises, again as seen markedly after 1999. This increase in the value composition of capital causes their rate of profit to fall, but also causes a significant tie-up of capital. This is the opposite of the conditions seen after the mid-1980's.

Firms must then advance more capital for any given increase in the mass of profit. The demand for money-capital to finance this accumulation rises faster than the supply of new money-capital from realised profits, and so interest rates rise, and this causes asset prices to crash. Capital can only avoid this if the increase in economic activity, and consequent rise in aggregate demand is kept within limited bounds of a steady accumulation of additional capital, and the rise in supply made possible by annual increases in productivity. That is what capitalist states and central banks have tried to engineer in the last 13 years, so as to prevent a rise in interest rates, and new, even more massive collapse in asset prices, and global financial markets.

But, they inevitably fail. They fail because of the underlying characteristic of all generalised commodity production and exchange, the characteristic that itself drives all such economies to become capitalist in the first place, and which drives capitalist economies to become increasingly concentrated and centralised – competition. Whilst wages are relatively low, and not rising, there is no incentive for firms to spend heavily on innovation. To expand they make marginal changes in their technique, and improvements in their fixed capital, as and when it needs replacing. Generally, they expand by simply doing more of the same, and this is characteristic of a period of extensive accumulation. But, the consequence is that rises in productivity cease. If you replace old fixed capital with new more productive fixed capital, then your productivity will rise, but if you simply replace one machine with another of the same kind, it will not. Eventually, all your machines are the same. So, then, any rise in output can only be achieved with a relative increase in the amount of labour employed, compared to what was possible when increased output was achieved by introducing more efficient machines.

Extensive accumulation inevitably leads to a rise in the demand for labour-power. As the number of workers employed rises, so the demand for wage goods rises, and competition drives firms to accumulate to capture this increased market, as described above. Increases in population also drive such an increase in demand for wage goods, and from the late 1980's, as China and the rest of Asia industrialised more rapidly, large numbers of former peasants and direct producers came to rely on the market to meet their needs. Their wages, as industrial workers, far exceeded their ability to consume as subsistence peasants, and this drove a significant increase in the expansion of global markets.

For the last 13 years, capitalist states have tried to keep a cap on this expansion of demand, so as to prevent the inevitable rise in interest rates, and collapse of asset prices. But, now, it is breaking through once more. The freeze of economic activity due to lockdowns has simply delayed changes that were already apparent in 2018, and which again had only been modified by Trump's global trade war and Brexit, in 2019. Lockdowns have had an inevitably contradictory effect. On the one hand, they have immediately frozen economic activity. That caused the demand for labour-power to fall, and the demand for money-capital to fall. That immediately causes interest rates to fall back, and with huge new money printing and asset purchases, causes asset prices to zoom to even more surreal levels.

But, the state could not impose lockdowns without giving some financial support to those it had deliberately locked out of employment. So, now, the state is led to print even more money tokens simply to hand to those it has locked out, in order that they can live. This is qualitatively different money printing to that of the previous thirty years. That went to inflate asset prices, this now goes to inflate monetary demand for actual commodities. What is more, precisely because of locking out workers from production, the supply of those commodities is reduced at the same time that the monetary demand for them is increased, or at least maintained, as a result of these furlough and other payments. In fact, as a result of lock down, some of the main elements of consumer spending are prevented all together. The prices of these commodities and services drops, as demand is cut off, and this fall in prices severely distorts the general consumer prices indices. Meanwhile, the demand for other commodities and services, available online, increases substantially, and the prices of these rises sharply, though it is not reflected in the general consumer prices indices. So, the CPI and RPI data, already substantially understates the real level of inflation.

But, when economies come out of lockdown, this sharp rise in prices of those commodities that have been able to be bought will be replicated in all other commodities, and undoubtedly to an even greater degree, given that consumers have been denied access to them for so long. In fact, that was seen previously when lock downs were relaxed. People flocked to hairdressers, and their prices more than doubled; consumers flocked to car showrooms, especially as they feared using public transport, and with car stocks having been exhausted, demand exceeded supply and car prices rose.

As China resumed its economic activity last year, the same thing was seen. With US consumers also buying extensively online, Chinese suppliers quickly ramped up production to meet this increased demand. They filled container ships with goods headed for the US Pacific Coast ports, and the demand for shipping capacity drove up shipping rates massively. With China, and other Asian countries again increasing output, their demand for primary products is again rising rapidly. Oil prices that were around $40 in 2020 have risen by 50% to over $60 a barrel.

Copper, whose price was between $2 - $3 for much of 2020, has risen to nearly $4. Platinum, used in catalytic converters and other industrial uses, was below $800 for pretty much all of 2020, and as low as $600, has risen to $1300. Iron Ore, which was around $80-100 has risen to over $160, and so on.

In foodstuffs, wheat prices have risen from $500 to $650; Soybeans have risen from $800 to $1400; Beef has gone from $14 to $20, and so on.

What exists is completely different to the conditions that exist in a period of stagnation following a period of crises of overproduction. In the latter, the crisis is a consequence of the overproduction of capital relative to the available labour supply, i.e. the social working-day. It results in capital itself being destroyed. But, this economic slowdown is entirely artificial caused by government imposed lockdowns. There is no crisis of overproduction, capital has not been over accumulated, the annual rate of profit remains high, and apart from the effects of lockdown, the mass of profit continues to grow. There are innumerable spheres of capital investment available for businesses to enter, and currently, there is a lot of underemployed labour available for this capital to employ, and from which new masses of profit are available. In other words, as soon as the economy is released from lockdowns, there is a wall of monetary demand waiting to wash into circulation, creating a surge that, due to lockdowns, supply is not yet able to meet, which will cause prices to rise, leading to an inflationary spiral.

A look at the announcements on the energy price cap illustrates the point, with energy prices set to rise by nearly 9%. Nearly every economist now sees inflation rising in the period ahead. Most do not see it as a significant problem, given that the headline figures are currently below central bank targets of 2%. But, those headline figures do not take account of the distorting effects of lockdowns. However, look at how inflation rose quickly in the late 1960's and 70's. It went from around 2-3% in 1968 to 6% in 1969, and 10% in 1970, rising to 28% in 1975. Today, the amount of liquidity in circulation is much, much greater than it was at that time, and the potential for inflation to rise even more quickly is that much greater too.

The potential for this rise in inflation, and the effects of the increase in economic activity that it reflects, is also being reflected even in the heavily manipulated bond markets. The rise in economic activity causes interest rates to rise, and rising inflation also causes interest rates to rise as lenders demand protection against being paid back in greatly depreciated currency. US 10 Year Bond Yields have risen from around 0.5% back in August to 1.31%, thereby, almost trebling. The trend is strongly upwards, despite the attempts of the Federal Reserve to keep yields low via its bond buying programme. UK 10 Year Bond Yields have risen from 0.1% in August to 0.62%, thereby increasing six fold. Again the trend is strongly upwards. Even German 10 Year Bond Yields have become much less negative, having risen from -0.63% to -0.35%, or more or less doubling.

But, this represents only the picture in relation to these highly manipulated Bond Markets, where the central bank can massively affect the price of the bond, and so yield, via its own money printing and bond buying activities. The fact that bond prices are falling and yields rising despite those activities, shows the strength of what is going on in the subterranean channels of the global capitalist economy. It is a Leviathan that when it surfaces is going to consume all of the associated asset price bubbles that have been inflated on the back of this unprecedented increase in liquidity.