The narrative from bourgeois economists and financial pundits is one in which the most important price in the economy, the price of capital/rate of interest, is one wholly determined by the state, via its central bank. That such ardent proponents of the power and necessity of the market to determine prices should themselves become the advocates of a centrally planned economy, in this one regard, is again evidence of the degree of contradictions they now find themselves ensnared within. In fact, this power they give to the central bank is wholly misplaced. Not even in truly centrally planned economies, does the state and central bank have the power to determine the rate of interest, which continues to be determined, as Marx describes, by the balance of demand and supply for money-capital. As Trotsky pointed out, when the Stalinists in the USSR thought that they could “send the market to the devil”, by financing the demand for additional money-capital, for investment, by printing additional money tokens, the result was an increasingly runaway inflation.
“During the first period of the five-year plan, on the contrary, all the sluices of inflation were opened. From 0.7 billion roubles at the beginning of 1925, the total issue of currency had risen by the beginning of 1928 to the comparatively modest sum of 1.7 billions, which is approximately comparable to the paper money circulation of Tsarist Russia on the eve of the war – but this, of course, without its former metallic basis. The subsequent curve of inflation from year to year is depicted in the following feverish series: 2.0 – 2.8 – 4.3 – 5.5 – 8.4! The final figure 8.4 billion roubles was reached at the beginning of 1933. After that came the years of reconsideration and retreat: 6.9 – 7.7 – 7.9 billion (1935). The rouble of 1924, equal in the official exchange to 13 francs, had been reduced in November 1935 to 3 francs – that is, to less than a fourth of its value, or almost as much as the French franc was reduced as a result of the war. Both parties, the old and the new, are very conditional in character; the purchasing power of the rouble in world prices now hardly equal 1.5 francs. Nevertheless the scale of devaluation shows with what dizzy speed the Soviet valuta was sliding downhill until 1934...
In answer to the boast that they would send the market “to the devil”, the Opposition recommended that the State Planning Commission hang up the motto: “Inflation is the syphilis of a planned economy.””
(The Revolution Betrayed, Chapter 4)
A similar trajectory is, today being seen in Turkey, where Erdogan has insisted that the central bank continue to reduce its policy rates, and increase liquidity, despite soaring inflation, with the inevitable result that inflation continues to soar higher, imposing even higher costs on firms and households, requiring even higher levels of borrowing that pushes market rates of interest higher still, and has caused the Turkish Lira to drop through the floor relative to the Dollar and other currencies, which leads to even higher levels of imported inflation.
The US Federal Reserve has announced it is starting to taper its QE programme, and the Bank of England was expected to raise its policy rates last month. It didn't, as, especially given the added problems the UK economy faces, as a result of the self-imposed damage of Brexit, it clearly fears that, as soon as these official interest rates begin to rise, even by very small absolute amounts, it will spell the start of a crash in UK asset prices, because those small absolute rises in rates, amount to huge proportional rises. A rise from the current 0.1% to just the expected 0.25%, for example, represents a 150% increase.
But, these changes in official policy rates, are merely a reflection and grudging admittance of the fact that real market rates of interest are rising, for the reasons described above. Its why states and governments have been keen to try to use renewed lockouts and lockdowns to restrain economic activity, and even to begin to talk about a reintroduction of austerity measures, even, though, for many governments, including the Tories, in Britain, with their levelling up agenda, any such austerity measures would be political suicide.
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