A Combined And Uneven Recovery

Last year, I argued that, by the middle of 2021, the global economy would be opening up from lock-outs, as populations developed herd immunity against COVID, and that the result would be a sharp increase in economic activity. That is what has happened. I also argued that this development would be combined and uneven, because, the sharpness of the economic growth, in the given conditions, would see large numbers of small businesses that had gone bust, and employees left unemployed, whilst other businesses would be unable to get the workers and materials they require, as they sought to expand to meet the demands of a rapidly growing market. That has happened too, though, again, as I suggested, the continuation of furlough schemes means its not fully apparent yet.

High street retailers, who were disappearing anyway, have disappeared at an even faster pace, as a result of the lockouts. The lockouts have simply accelerated many of the trends that were already in place, such as the shift to online retail, the increase in home working and so on. Although supermarkets were allowed to stay open, they saw a huge shift to people buying their weekly shopping online. Someone who worked as a shelf-stacker in a supermarket, cannot readily become a web designer, network administrator, or software engineer for the company, as these jobs increase, as part of the shift to online retailing. Although, the warehouses from which such online deliveries are made also require shelf-stackers, they require far fewer in proportion due to economies of scale, and use of robots.

Many of those that have been laid off, and existed on furlough are young people employed in catering, restaurants, bars and hospitality. The continuation of furlough schemes means we don't know yet how much damage has been done to employment in these areas, as a result of lockouts. Only when that ends, and people start to be made redundant, will we really know. The ending of lockouts means that there has been a sharp rise in trade in some of these areas, but it is coming at the same time when many venues have closed down. Where pubs, restaurants and so on have closed, the sharp rise, now, in demand simply manifests itself in the survivors getting an even bigger boost. They need to take on additional workers to cope, but again, economies of scale means that for every ten workers put on the dole from bars and restaurants that have closed, perhaps only 2 are taken on by the survivors that now need the additional staff.

The consequence is that, across economies, the rapid pace of the increase in activity is what is causing bottlenecks. That's not true just in Britain, but across the globe. Britain suffers worse, because of the damaging effects of Brexit, which means that the workers it needs, who would have come from Europe, are no longer available, and Brexit has also broken supply chains, increased delivery times and costs etc. As businesses seeing sharp rises in demand seek to get both labour and materials, and equipment, they are finding that either they are not available, or else they are having to pay much higher prices for them. That is one of the factors causing inflation to surge across the globe, as the rising demand is fuelled by all of the liquidity that central banks have put into the system over decades, and which governments have also been channelling, in the last year, to feed unproductive consumption.

In a global economy in which the Dollar acts as world currency, the vast amounts of liquidity that the Federal Reserve has pumped out, over the last thirty years, this rise in demand shows up in the rapid increase in demand for primary products such as copper, iron ore, as well as foodstuffs, all of which have seen prices rise by at least double, and in many cases treble or more. Timber prices, in the US, went from $200 to $1400 dollars. Marx defines raw materials not just as these primary products, but any material used in the production of some other commodity, for example, steel is not a primary product, but is defined by Marx as a raw material, because it is used in the process of making cars, trains, ships, machine and so on. The prices of all these raw materials has increased massively too, and, for some, even with huge price rises, there remains physical shortages, as, for example, with computer chips.

The consequence of these price rises, and physical shortages is to create a feedback loop. Physical shortages of computer chips, means that production of many commodities that require them, including vehicles, has not grown as fast as it would have done, or has even had to be slowed, with production lines closed, until supplies were located. Huge demand for copper, in China, partly spurred by the shift to electric vehicles, and development of alternative energy systems, away from fossil fuels, such as oil and gas, fed into the global surge in copper prices. But, when copper prices rose so fast, and to such high levels, it meant that consumers of copper had to scale back their own production, because they could not sustain demand for their output at prices that covered their increased costs, which would have led to losses.

Marx discusses such conditions of sharply rising input prices, and their effects of this kind in Capital III, Chapter 6. He also deals with it, in Theories of Surplus Value, Chapter 9, in examining the determinants of what would now be called the long wave cycle. We saw it after the new long wave uptrend began in 1999, in which these sharply rising prices led to an upsurge in development of new sources of primary products, which began to come fully on stream in 2012-14, and led to the sharp falls in prices of 2014. All of those new sources are still available, and so increasing production to meet the new upsurge in economic activity, is less problematic, it involves, more, the employment of additional circulating capital, and to an extent fixed capital, rather than a wholesale development of new mines, farms and so on. For example, oil prices, which had fallen as low as $25, have now risen to nearly $70, but they are not going to go back to their previous high levels of over $100, because all of the additional supply previously established, from shale and so on, can now be brought into play, as well as alternatives to oil playing an increasing role.

What it demonstrates is the way the excess liquidity, put into circulation by central banks, washes through the global economy, so that it is not simply a matter of a secular rise in prices and activity, but a process of combined and uneven development. Sharply rising demand from commodity producers causes primary product prices to rise sharply, as supply cannot be increased immediately. When prices rise too high, industrial consumers cut back demand, but the prices of primary products remain at their new high levels, with only minor pull backs. For example, recently, on Bloomberg, Cathie Wood, of Ark Investments, was keen to point to the fact that there had been, in recent days, a fall in some primary product prices, such as for timber. The reason for the keenness is due to the fact that Wood is a promoter of Bitcoin, whose price had crashed earlier that day. Part of the reason it had crashed, is that sharply rising global inflation is undermining the attempts of central banks to keep inflation low, and money printing high. Rising interest rates cause asset prices to crash, and for worthless speculative assets such as Bitcoin, that means the crashes are that much more spectacular.

Wood even talked about a “deflation” in primary product prices. Lets put that in context. The price of timber had risen from $200 to $1400, and the pull back in its price was merely to $1200. This “deflation” was, therefore, one in which the price of timber rose by 600% rather than 700%. In fact, after a pull back, the price of timber is rising again, just as pull backs in the prices of other primary products has been followed by their prices starting to rise again. Wood is correct that the role of technology means that the value of many commodities will continue to fall, but the main effect of rising productivity, for many established commodities, is already behind us. The big increases in productivity for those commodities occurred in the 1980's, and 90's. The main effect of new technologies in raising productivity, and reducing values is going to be in the realm of new consumer products and services. For example, she is correct in pointing to the role of AI, and further development of computing power in the development of genome sequencing, and development of genomic medicine, and so on. But, here, the main effect is going to be to develop whole new areas of the economy, for consumer spending, where none currently exists, and, thereby, to stimulate faster, more extensive, economic growth, and the consequent demand for capital, which will cause interest rates to rise, which will burst the speculative bubbles in all those speculative assets such as crypto currencies, financial assets and property.

The effect of the sharp rises in primary product prices is to swill huge waves of that liquidity, created by central banks, into those economies that produce those commodities, and so to increase economic activity in those areas. That means additional demand for end consumer goods and services. Higher wages for workers, in developed economies, means that demand for consumer goods and services also rises, and with liquidity continuing to swill into the economy, so firms find that they can charge higher prices for their output, so that input prices that were previously prohibited can now be accommodated, even if firms have to absorb some of the increased cost out of their rising money profits.

So, as with a rising tide, the waves wash in, and wash out again, but each time as they wash in, on average they wash just a bit higher, and as they wash out, they retreat just a bit less. Rising consumer prices feed into additional demand for inputs, which leads to rising input prices, until they cause a reaction in demand, but the additional demand for inputs and higher prices for them, washes through into rising monetary demand for end goods and services, which raises their prices further, creating additional demand for inputs, and so on. That continues until the increased liquidity has been absorbed and the general price level reflects the depreciation of the currency. But, currently, central banks continue to claim that the inflation that their liquidity injections have created, is only transitory, and so they are committed to injecting even more of it, like a junky, and so there appears no end, yet, in sight, to the continued rise in the inflation caused by that liquidity. That means that when the ending of the liquidity injections comes, it will be forced on them, and will be dramatic.