Dr. Copper and Inflation

As the global economy surges, the price of primary products is also surging, as physical demand rises sharply, and also sucks in the huge amounts of liquidity that central banks have pumped into the global economy over decades, but which has previously gone to hyperinflate asset prices, as those banks used the additional liquidity to buy up paper assets, whilst governments imposed austerity to hold back economic growth. Now, that liquidity is combining with rising physical demand to give an even greater boost to monetary demand for goods and services. There is a shortage of computer chips, which is already impacting producers of huge numbers of commodities that today use them as standard, from toasters to excavators. One of the primary products often looked to as a gauge is copper, often referred to as Dr. Copper, because it is such a good predictor of future economic activity. In 1999, as the new long wave uptrend began, the price of copper and other primary products soared. It is soaring again.  For twenty years from the 1980's to the early 2000's, copper languished at around $0.50-1.00 per lb.  It went from $0.50 per lb. in 1999 to $3.89 per lb, in 2008, when it crashed, as a result of the global financial meltdown.  It rose again as the global economy grew after 2008, and like gold peaked in 2011, reaching $4.46 per lb., and as with all other primary products, whose supply increased as a result of large scale new investments after 1999, its price then fell to $1.95 by November 2015.  But, now, it has spiked once more rising to a new high of $4.52 per lb.

In fact, as with computer chips, the sharp rise in the price of copper is already causing some firms in China to reduce their demand, and even shutter some of their production of commodities. This is an example, of what Marx describes in Capital III, Chapter 6, of a situation where an economic boom causing demand for raw materials to rise sharply, causes their prices to rise, sharply. Normally, a rise in such prices of constant capital results in the price of the end product rising. That means that, although it does not affect the amount of profit produced, it does reduce the rate of profit. It also results in a tie-up of capital that superficially looks like a reduction in the amount of profit, but isn't. However, as Marx says, in these specific conditions, firms may not be able to pass on the actual sharp rise in raw material prices, because to do so would affect demand for their products. As firms, especially large firms, using large amounts of fixed capital, depend on producing to the maximum of their capacity, so as to produce efficiently, they cannot simply reduce their level of output, and so have to absorb some of the higher material cost from their profits. The fact that some producers, in China at least, are shuttering some of their production means that they could not absorb the higher material cost out of profits, without making losses, but cannot yet, pass on the higher cost in their own final prices.

But, global inflation is rising fast, and so that is likely to be a temporary affair. Demand for a whole range of consumer products is rising, and as shortages arise, the prices of all these products is going to rise fast, meaning that producers will also then be able to pass on the higher material costs. The US data released on Friday showed a 21% month on month rise in personal incomes, which is a result of the checks the US government has been sending out to households as part of its fiscal stimulus programme. US personal spending rose by 23% month on month. The PCE deflator, which is a measure of inflation, came in with a rise of 0.5% month on month, or 2.3% year on year. That is up by 2.3% as against the level a year ago. But, with inflation rising rapidly, looking at this figure over a year ago, is misleading because it looks backwards, not forwards. In other words, if we take the 0.5% month on month figure, and assumed a similar figure for each subsequent month over the next year, it would produce a figure of more than 6% for inflation in the year ahead, and that is assuming no increase in inflation in coming months, which seems unlikely as both physical and money demand for goods and services surges.  And, as set out in previous posts this inflation is understated, because of the distorting effects of lockouts on the actual spending patterns of consumers.

Let's look at what prices and inflation are. Price is simply the exchange-value (or under capitalism the price of production) of commodities expressed in terms of money or money tokens. The price of any commodity can be expressed as a quantity of any other commodity. This is what Marx calls the equivalent form of value. So, for example, I can express the value of wine in terms of corn. Assuming here that commodities sell at exchange-values not prices of production, then if the value of a litre of wine is 10 hours of social labour, and the value of a kilo of corn is also 10 hours of social labour, in other words, the identity of these two commodities can be expressed in the third term of their value, measured in labour-time, the corn price of a litre of wine is 1 kilo. A kilo of corn will buy 1 litre of wine, provided the seller of wine will accept the corn in exchange for it. As Marx says, therefore, all commodities are money.

“That it is labour that manifests itself in the product already implies that the product is equal to a definite quantity of general social labour. As against the Physiocrats, Adam Smith re-establishes the value of the product as the essential basis of bourgeois wealth; but on the other hand he divests value of the purely fantastic form—that of gold and silver—in which it appeared to the Mercantilists. Every commodity is in itself money.”

(Theories of Surplus Value, Chapter 4)

Money is, in fact, nothing more than the universal equivalent form of value, the representation of exchange value in terms of some physical manifestation, be that a money commodity such as gold, or simply a token, which gives the owner a claim on a quantity of social labour-time. Money took the form of a physical commodity, a money commodity, simply because, in early trade of commodities, it was the only means by which the seller could ensure that what they received in exchange for their commodities was something that actually possessed an equal amount of value, i.e. that gave them a claim on an equal amount of labour-time, as that they were giving up in selling their own commodity. Once a state stands behind the currency, this is no longer necessary, and so even precious metal coins themselves became only symbols or tokens for the amount of the money commodity they represented, which, in turn, only fulfilled that function because its a material embodiment of a given amount of social labour-time. It was not the value of the actual gold or silver contained in these coins that gave them their value, but purely their nominal value as representatives of a given amount of gold, which, in turn, was only a physical representation of a quantity of social labour-time.

It was this fact, that enabled gold and silver coins to be replaced by base metal coins or paper banknotes. As Marx says above, the idea that gold or silver had some magical property that made them money, was simply a form of commodity fetishism, they represented merely a “purely fantastic form”, of the kind that was seen by the Mercantilists and Monetary School as some quintessential manifestation of value. There are some today who still want to assign this fantastic role to gold. As currency, the value of the coin, or paper note, was determined not by its own physical composition, but by the quantity of social-labour-time it represented, and this is a function of the quantity of this currency put into circulation, in relation to the total social labour-time it represents.

In other words, suppose the total value of commodities to be circulated in the economy is equal to 1 million hours of social-labour-time – total social labour-time is simply the total amount of actual labour hours expended, so that it is reduced to an average, abstract labour hour, divested of its particular concrete form, as building labour, spinning labour and so on. Assume that 1 ounce of gold is also equal to 1 hour of social labour-time. If coins of 1 ounce of gold are put into circulation, and each coin performs just one transaction, then 1 million of these coins are required in circulation, as the equivalent form of value of these commodities. Each coin gives its owner a claim on 1 hour of social-labour time. However, suppose that 2 million such coins are put into circulation. Each coin continues to contain 1 ounce of gold, equal to 1 hour of social labour-time. Now, all of this currency gives its owners the same claim on 1 hour of social labour-time per coin, yet its clear that this cannot happen, because only 1 million hours of value exists in the form of commodities. The result would be that each coin would fall in value to half its nominal value, and this would be initially manifest as a rise in the nominal prices of all commodities.

However, this would lead to a ridiculous conclusion. Gold itself remains a commodity, used for making jewellery and so on. Now, in order to buy 1 ounce of gold, it would be required to hand over 2 gold coins, each containing 1 ounce of gold! It would obviously make sense for any owners of these coins, to simply melt them down for their gold content, which would be twice as valuable. As Marx describes, in A Contribution To The Critique of Political Economy, this is what happened in such circumstances. First of all, coins perform far more than one transaction per year, and so one of the first reactions is that this velocity of circulation slows down. People who get gold coins from selling commodities, keep them in their cash boxes and purses for longer. But, also, if the value of the coins falls, as a result of too many of them being put into circulation, so that their value declines relative to gold bullion, they simply melt the coins down and convert it to bullion, thereby taking currency out of circulation. Some of it gets used as gold for jewellery, some of it gets hoarded, and some gets used as bullion to pay for imports of foreign commodities.

Its not the value of the gold in the coin that is determinant of the extent to which it can act as currency, but the quantity of the currency put into circulation, relative to the value of the commodities to be circulated, i.e. relative to the total social labour-time that the coins are to act as equivalent form for. That is why, so long as the currency is backed by the state, it is not necessary to use gold or other precious metals as money, or as currency. The only determinant required remains that only as much currency is put into circulation as is required by the total social labour-time it is to act as equivalent for, given the velocity of circulation. If far too much currency is put into circulation, as happened in Weimar, then society will stop seeing it as currency, or as money, because its value will depreciate from minute to minute. Reflecting Marx's comment that all commodities are money, they will revert to hoarding up other commodities, as stores of value, as well as using them as currency.

In the example above, 1 ounce of gold had a value of 1 hour of social labour-time, and its this which also gives it a claim on 1 hour of social labour time. Let's give it a name, and call it £1. So, using the example above, £1 million of social labour-time exists in the form of commodities to be circulated. If there are 1 million commodities, each has an average value of £1. As seen, if 2 million gold coins, each of full weight were put into circulation, this would represent a claim on 2 million hours of social-labour-time, and the consequence would then be that the price of commodities would rise to an average of £2. Two gold coins would have to be given in exchange for them. With gold coins, this results in some of the coins being withdrawn from circulation, melted down and so on, so that the correct quantity of currency is restored. But, with paper money tokens this is not possible, because the paper they are made of has no significant value that can be realised by using it as paper.

So, as Marx says, the paper notes remain in circulation, and the inevitable result is that the prices of the commodities they represent rises. That is inflation. But, let's look at that, because its also important to distinguish between prices, or the general price level, and inflation. Its the same kind of difference as between the speed of a car, and the acceleration of a car. If I push my foot down on the accelerator of a car, the speed of the car will increase, it will accelerate, and the rate at which it accelerates will be higher or lower depending upon on how much I push down on the accelerator, which means how much more fuel I pump into the engines cylinders to be ignited. But, if I keep my foot in the same position, having pushed it down, eventually, the car, having accelerated, will stop accelerating, and will settle at a constant, but, now, higher speed.

There tends to be a misconception that when inflation starts, it must continue, and this is because of a misconception between inflation, and the general price level. As described above what determines prices is the relation between the quantity of currency put into circulation, and the quantity of social labour-time, it is to act as equivalent for, as represented by the value of all the commodities to be circulated. If £1 is the name given to 1 hour of social labour-time, and 1 million £1 notes are put into circulation, then assuming the velocity of circulation is 1, then this will circulate 1 million hours of value embodied in commodities. This value itself is objectively determined, by the social labour-time required to produce these commodities. So, if instead, 2 million notes are put into circulation, this does not at all change the value of those commodities, but it means that the prices of those commodities, their exchange value as represented by this currency must double. Put another way, their average price will rise to £2, and £1 will now be the equal of just 0.5 hours of social labour-time.

As with the car, which accelerates when the accelerator is depressed, and more fuel gets pumped into the engine, the prices of commodities will not rise to this new level all at once, but will rise to this new general price level at a faster or slower pace, depending upon how quickly the additional currency becomes fully absorbed. Inflation, the pace at which prices accelerate, will be higher or lower, but, just as with the car, if the quantity of currency is then kept constant at 2 million notes, eventually, the rise in prices will stop, when the general price level has doubled from its initial level. Inflation itself, would stop.

Keynesians don't see this, because they do not see inflation as a monetary phenomenon, but as a consequence of demand and supply, of either demand rising, or supply declining, in relative terms. So, they then think that, if wages rise this must result in higher prices, and higher prices results in higher wages. What this actually confuses is that, higher prices tend to lead to higher wages, because it means a higher value of labour-power, which causes wages to rise, and these higher wages, actually mean not higher prices, but lower profits. However, businesses do not want to accept lower profits, and the state, whose job it is to protect capital, then responds by printing more money tokens, and increasing the currency, so that firms can increase their prices, so as not to reduce their money profits. Its that which leads to a price-wage inflationary spiral, and as the state prints more and more money tokens to appease the needs of capital, so it can turn into hyper-inflation.

But, we have already had huge oceans of currency poured into the global economy, and more is being added by the second. It was pumped in for the purpose of inflating asset prices, because these assets are the form in which the top 0.01% owns its private wealth, and each time those prices have crashed the central banks have pumped more liquidity into the system, buying them up to inflate their prices once more, but as they have simultaneously diverted money from the real economy, from the use of profits to accumulate real capital, and as governments have used austerity to also constrain the real economy, so profits have not grown in the same proportion as asset prices, meaning that the yields on those assets, the revenues as a proportion of the price of the asset, have continually declined, in many cases, now even becoming negative.

What distinguishes the current situation is that this has been reversed. Governments are borrowing vast sums to either hand to citizens directly, as reflected in that 21% rise in personal incomes, or else they are using it to fund infrastructure spending or to bail-out companies hit by the consequences of lockouts. All of this additional borrowing causes interest rates to rise, especially as those same lockouts have cratered the profits of many companies, and it is profits that are the source of new supplies of money-capital. When central banks now print money to buy up these additional bonds used to finance the borrowing, the additional money they print goes directly into the economy, and so acts to pump up the monetary demand for commodities, and leads to commodity price inflation, just as previously, the use of that liquidity to pump up monetary demand for assets caused asset price hyper inflation.

What is more, Europe has still not joined this jamboree. Even at a rise of more than 6% in GDP, the US was still suffering the effects of its lockouts in the first quarter. It is going to rise much more in the next quarter, just as China which ended its lockouts earlier has seen its GDP rise by more than 18% in the last quarter. But, Europe is still mired in its lockouts. Only France, which has resisted imposing the same kinds of lockouts as other European countries in recent months saw its GDP grow, in the last quarter. All the others saw GDP decline in a double-dip as a result of their self-inflicted wounds caused by the imposition of lockouts. Yet, that too is backward looking data. The future is represented in the various Purchasing Managers Indices, and all of those are indicating rapid growth, even before those lockouts are fully lifted.

As vaccines aid the development of herd immunity that was already progressing as a result of natural infections, so, governments will be forced to end the self flagellation they have imposed via lockouts, and the Eurozone economy will also grow strongly, feeding into that existing surge in the global economy. It will add to the extent to which all of that liquidity previously pumped into circulation goes into increasing monetary demand for goods and services, and for all of the primary products required for their production, as well as in the demand for labour to process it all. Inflation and interest rates are set to soar, and those rising interest rates mean that asset prices are set to crash, itself meaning that speculators who for the last 30 years have been entranced by making paper capital gains, will face big capital losses if they keep their money in those assets, rather than using it to engage in real productive activity, where money profits will be soaring.

The rise in the copper price itself is an indication not just of the surging global economy, but also of the shift within that global economy. In part that is seen in the geographic shift, in the rise of China and Asia, as manufacturing centres, but in the new types of production that are being undertaken. The energy revolution means that electric is replacing fossil fuels, and that means a huge rise in the demand for electric motors, and so on. All of that requires vast amounts of copper for wiring. But vast new spheres of commodity production are also opening up, for example, the use of gene technologies for new therapies and treatments for wide ranges of different illnesses. This means that the demand for skilled labour of specific types is going to rise rapidly, even as large pools of unskilled, poorly educated workers remain on the sidelines.