Yesterday, the Bank of England raised its policy rates by 100%, from 0.25% to 0.50%. Four of the nine members of the Monetary Policy Committee voted against, wanting instead to increase the rate by fifty basis points, to 0.75%. Further increases at the next, and subsequent, meetings are inevitable. It comes after the Federal Reserve announced that it is stopping QE, and will be raising its policy rates by fifty basis points at its next meeting, and after the ECB has made clear its intention of raising rates.
At the start of last year, I said that the claims of inflation being transitory, and forecasts that rates would not rise until 2023 (some were even saying 2024) were nonsense. So it is. Inflation clearly is not transitory, but is rising at an increasing pace, similar to the 1970's. The US is forecast now to raise rates at every Fed meeting, seven rises in all, and if it raises by half a point at each meeting, that will take it to over 3.5%. The ECB is now forecast to make four rate rises in 2022, compared to predictions that there would be none. Its pretty certain there will be more than four, or that some of those hikes will be more than just half point rises.
The hikes, will actually do nothing to rein in inflation. It takes two years for such measures to have any effect on prices, unless central banks act so aggressively as to provoke a serious recession, as they did in the early 1980's. Even then its not certain it would be effective, because this is not the 1980's. With economic expansion rising sharply, now that the ridiculous lockdowns are being lifted, firms can expand their circulating capital simply on the basis of commercial credit, as Marx describes in Capital.
That is each firm needing to expand its output to meet demand from rapidly expanding markets, buys more inputs from suppliers, on the basis of paying for them later. These suppliers do the same with their suppliers, and each supplier does this, because they know that the economic expansion means they will get paid, and don't want to lose the sales to a competitor. None of that requires bank credit, and so changes in interest rates, or liquidity does not affect it, and that is even more true in an era of electronic banking transfers. They can take on more labour, because wages are paid in arrears.
Even if hourly wages themselves did not rise, therefore, the very fact that lots more workers become employed, that all those in part-time employment get full-time employment, and so on, means that the economy's total wage bill rises, and all of these additional wages then flow back into creating additional demand, which grows the economy more, and leads firms to need to employ even more workers and so on. So, the tiny absolute, even though large relative, increases in rates are not going to slow economic growth, let alone inflation. In fact, the initial effect of rising rates will be to push inflation higher. For years, the manipulated lower mortgage rates gave the impression of falling housing costs, even though house prices themselves were being driven sky high. But, now, higher bank rate means higher mortgage rates, and higher monthly mortgage bills. So housing costs will now be seen as rising sharply, even as house prices are sent significantly lower by the same cause.
The fact that many people have fixed rate mortgages doesn't change that. In terms of monthly bills, there are always large numbers coming out of their fixed rate period – about 1.1 million this year – and they will face much higher mortgage rates as they come to try to renegotiate those deals. Some of them will not be able to afford the new monthly amounts. In addition, all those taking out new mortgages face immediately higher mortgage payments. Its notable that the Bank of England is looking at scrapping the current requirements that lenders assess whether new borrowers will be able to afford the monthly payments if rates rise, because they clearly see the likelihood that many will not, and so that will cause demand for houses to fall, causing house prices to drop precipitously.
The effect of higher rates will be on these longer term forms of spending, and its there that the effect will be to depress prices, i.e. in all of those spheres where excess liquidity, in the past, has caused huge rises in prices, be it property, or other assets such as shares, and bonds, and other types of speculation. The effect of that is already being seen in bond markets. Excess liquidity led to the ridiculous situation of lenders accepting negative yields on the bonds they bought. They did so, because they saw the potential for making capital gains on the bonds, as their prices continued to rise, driven ever higher by central banks buying them whenever they fell. By 2018, there were $7 trillion of government bonds across the globe that had negative yields. As global growth increased, and interest rates began to rise that began to change, especially as central banks were again led to begin to raise rates so as not to be behind the curve. US and other stock markets fell by 20%. Then Trump started his global trade war, and Brexit also led to a curtailment of global trade. Chinese growth, that depends a lot on global trade, slowed. That enabled the Fed to stop its QE tapering, and stop raising its rates, leading to asset prices rising again.
That was followed by the curtailment of trade and economic activity induced by lockdowns and lockouts, just as economic activity had started to rise again in 2019. Central banks again began pumping liquidity into the market, inflating asset prices, and sending bond yields again into negative territory. The quantity of bonds with negative yields went up to $18 trillion. But, the economic expansion following even the partial lifting of lockdowns has sent bond yields sharply higher, and bond prices lower. The quantity of negative yielding bonds is back down to around $7 trillion, and falling fast, as markets have to get used to the idea of increased economic activity, and increased demand for money-capital, and so rising market rates of interest, as well as rapidly rising inflation, as all of that excess liquidity now flows into the real economy, not into speculation in asset markets.
Increased interest rates affects long-term borrowing for things like house purchase or the purchase of fixed capital by businesses. But, even in respect of the latter, it does not affect all businesses equally. A small firm, even if it has a high rate of profit, may not produce enough mass of profit to finance large-scale fixed capital spending. It will have to borrow from the bank, and higher interest rates makes that less profitable or affordable. But, a large company, even if it has a much lower rate of profit, will have a much larger mass of profit, and may easily finance fixed capital spending out of that profit. It will simply mean that it then throws less of its money profit into the money markets for others to borrow. It reduces the supply of money-capital, causing interest rates to rise further, which again them impacts the small businesses, and others who need to borrow to cover these larger, long-term forms of spending. It also means that as the yields on assets rise, this manifest as lower asset prices.
So central banks clearly see a serious problem, in terms of the policies they have pursued over the last 30-40 years, which were designed to keep asset prices inflated, and so protect the paper wealth of the ruling class. Those asset prices now seem certain to suffer a catastrophic crash, much bigger even than 2008, and yet that is taking place alongside a strengthening economy (indeed as I've set out its precisely the strengthening economy that brings about the crash in asset prices), and a strengthening in the demand for labour, which in turn is causing liquidity to flow into the real economy leading to commodity price inflation, against which the central banks are almost powerless to act.
Yesterday, Bank of England Governor, Andrew Bailey perfectly illustrated that problem, his powerlessness, and almost palpable fear, was apparent when, on the one hand, he outlined these conditions, and the inevitably of inflation and interest rates continuing to rise, but then pleaded with workers not to seek pay rises to compensate for that rising inflation. That is a direct parallel with the same pleadings from Alistair Darling in 2008, just at the time that UK lorry drivers won a 14% pay rise, after just a 2 day strike. Bailey in his report forecast that living standards were likely to face their biggest decline in more than 30 years as inflation rose, but wages failed to keep pace. But that prediction is likely to be as false as the previous predictions that inflation was only temporary. It is hope not reality.
The argument is based upon this still being the same conditions as those of the 1980's and 90's, when labour was still in excess supply, and when the technological revolution of the late 70's and early 1980's meant that a relative surplus population continued to be created, as output could be expanded by increasing amounts with smaller and smaller amounts of labour required to do so. But, its not the 1980's any more. That technological revolution has run its course, as far as productivity is concerned, other than at the margin. The relative surplus population has largely disappeared, and as output is increased, more and more labour is required for it. There is still some scope, but it is disappearing fast.
The sharp rise in economic activity, and demand for labour means that many of these elements will find that they will be much better off in full-time employment as a wage worker, than they are scraping a living as a self-employed petty-bourgeois. That provides a pool of several million such workers that can be drawn into the workforce, to meet the needs of larger scale capital. In addition, there are several hundred thousands workers in precarious employment on zero hours contracts, and so on, who will find that they can now get full-time, less precarious employment.
So, although we see that, in certain areas, the rapid increase in he demand for labour has led to large pay rises, such as the 30% rise in wages for HGV drivers, the 18% rise in wages in hospitality and so on, capital still has some reserves to fall back on, as it seeks to expand the labour force. In the process, by taking large numbers of workers out of the grossly inefficient areas of self-employment and precarity, productivity levels themselves will rise. But, even as this happens, its clear that the demand for labour is such that wages are already rising.
This morning on Sky's Ian King, I heard, Nick Hewer saying that in order to avoid the reduction in living standards, many workers could look to supplement their incomes by starting up some kind of business of their own. Again, that is the kind of petty-bourgeois mindset that took hold in the 1980's. Its also to be seen in the arguments of proponents of a Universal Basic Income. But, it simply reflects the fact that such people have not realised that this is no longer the 1980's. As Marx describes, in Theories of Surplus Value, in periods of initial expansion, its also common to see the demand for labour by capital being expressed first in more workers being employed, then in the working day being expanded, by first unpaid, and then paid overtime. But, a point is reached, when the demand for labour means that wages rise, and workers do not need to supplement their basic income with overtime or additional jobs, but instead, begin to demand reduced hours, more holidays, and higher hourly wages. That is the condition we are now entering.
As I noted, yesterday,
“Even bourgeois-liberal pundits seem to know this is inevitable. In an article in Moneyweek, Merryn Somerset-Webb wrote,
“In today’s Times the first headline in the business section is headlined “Factory pay deals soar as inflation accelerates.” Turns out that manufacturers in the UK have agreed pay settlements of “up to 14%” in an attempt to mitigate the intense pressure caused by acute staff shortages”.
That makes the highest settlements more than double those of last year. It also reflects the fact that there has been very little salary freezing this time around: a year ago one third of firms were freezing salaries, now 2% are.”
The idea that workers and unions are not going to see what is happening, and respond accordingly, by demanding higher wages, is simply no longer realistic. Rather than seeing living standards fall, as Bailey predicts, on the basis of a hope that workers will not get higher wages, the almost inevitability is that wages will exceed current inflation, and, because central banks will facilitate firms passing on those additional wage costs, that will again pass through into yet higher inflation. An inevitable price-wage spiral already exists.
As I have described before, its not higher unionisation, and more militancy that somehow springs out of thin air into the heads of workers that leads to higher wages and living standards, but the opposite. It is increased economic activity, a higher demand for labour, and potential for higher wages, including better prospects of strikes being short and successful, that leads to workers joining unions, rebuilding organisation and taking action. Again, even sections of the bourgeois-liberal punditry understand that. In an interview with The Market, last July, financial historian Russell Napier noted,
“People always say unionisation caused inflation. The statistical evidence suggests that it was the other way around, that inflation caused unionisation. People banded together and joined unions to protect themselves from inflation. When there is no inflation, you don’t need to be in a union. I think we will see more unionisation again.”
As I've described before, the same thing is being seen elsewhere, for example, in the US, where large numbers of workers at McDonalds and elsewhere are starting to see some advantage in unionisation, and are demanding recognition, as well as taking action for higher wages. That is typical of what happens when economies enter an expansionary phase, as against the demoralisation that exists during times of stagnation.
The basic message to workers currently is clear. Far from looking for additional work to do, workers should, where they can, join a union, and simply demand a pay rise. With firms desperate to expand to meet sharply rising demand, and rising profits, they are likely to agree without a lot of argument. But, having a union means that, where employers do argue, workers can have a louder voice. Of course, its not always possible to join a union, or possible for unions to organise in certain workplaces. In times of stagnation that makes it hard to get around, but in periods of economic expansion, the simple answer is to move to a job in a larger company where it is possible for unions to organise, and where, in any case, the employer is better able to pay higher wages, and provide better conditions.
Where that isn't possible, in times of economic expansion, its possible to simply look for other jobs paying higher wages. In the US there has already been a large rise in the quit rate, i.e. the number of workers simply leaving their jobs to take up a job in another company paying higher wages. In 1972, when I was working for a small firm, I asked the employer for a pay rise, and when they didn't immediately offer, I looked for another job, and within a couple of weeks, I found one, which doubled my wages overnight! Marx and Engels, as part of the First International argued for creating large databases on wages and conditions for workers so as to make comparisons for levelling up. Today, the TUC should create an equivalent of Uswitch for jobs, so that workers can simply compare their wages, and begin to move to where they can immediately get a better deal.
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