Today has been labelled “Bleak Friday”. It is the day that sees many people's energy bills rise by over 50%, as the energy price cap is raised. But, energy bills are not the only ones rising sharply. Food prices are rising by around 20% a year, Council Tax bills are rising by around 4%, mobile phone bills by around 10%, along with bills for broadband and so on. All of that is on top of the general inflation of over 8%, notched up last month, based on the old RPI, which itself understates the real rate of inflation for most working-class households, which is over 10%, and its without considering the effects of rising National Insurance costs, and rising mortgage payments, as interest rates inevitably rise sharply. None of it can be divorced from other things going on in the world, or the actions of governments.
The fundamental reason for the inflation is 40 years of excess printing of money tokens by central banks, as they tried to prevent crashes in asset prices, and to reverse them after they happened. In fact, as I have written before, that can even be traced back, in Britain, to as long ago as 1960. At that time, a struggling Tory government, looked to inflate asset prices to boost its standing. Tory Chancellor, Reggie Maudling, loosened monetary policy, causing a mini financial boom that was the start of a rise in house prices. In 1970, another struggling Tory government did the same thing, with then Chancellor Tony Barber loosening monetary policy that led to the so called Barber Boom, which again gave another twist upwards to property prices. In both cases, the bubble was short lived.
The real inflation came in the 1980's under Thatcher, in Britain, and Reagan, in the US. Both had defeated labour movements in their respective countries, as new labour saving technologies, introduced from the mid-1970's onwards, weakened the position of workers, creating a relative surplus population. The higher productivity meant that any given increase in total output could be achieved with less labour, and capital (a release of capital), so that less additional labour was required for growth. Employment grew at a slower pace than the growth in the social working-day, which meant that aggregate demand continued to grow, but at a relatively slower pace than during the previous periods of boom and crisis. Net output rose relative to gross output, causing the rate of profit to rise. This is the foundation of, and characteristic of all periods of long wave downturn.
Higher rates of profit, with relatively slower capital accumulation, and releases of capital due to moral depreciation, caused interest rates to start their long secular decline, also prompting asset price rises. By the late 1980's, conservative governments saw these asset price rises as more or less identical to rising national wealth. Indeed, for the ruling class, which now owns all its wealth in this form of assets – fictitious capital – rather than in the form of industrial capital, this was identical to rising wealth. Increasingly, they saw their revenues coming from the ability to take capital gains on these rapidly inflating assets, be it shares, bonds, or property. And, the rest of the population was encouraged to follow suit, going into massive debt to speculate in buying property, either to live in, or else to rent out, or else to speculate in buying privatisation shares, or into mutual funds and pension schemes.
Those attempts to prevent the dynamic of the long wave imposing itself, and so causing interest rates to rise, have become harder and harder. By 2018, they were already failing, as global growth rose, and interest rates rose, leading to a 20% drop in US financial markets, echoed across global financial markets. Only Trump's intensifying global trade war acted to reverse it, and give the US Federal Reserve the opportunity to restart its QE programme, so as to reverse the drops in markets. But, by 2020 that was again running out of steam as a means of keeping asset prices inflated. At that point, governments across the globe directly closed down economies, by imposing lockdowns and lockouts under cover of COVID19, though there was never any logical reason to do so as a response to a virus which had had no serious effect on 80% of populations, and was only lethal for a small proportion of the 20%, who were at any risk from it.
That artificially slowed economies for two years, though each time that the restrictions were even partially lifted, the underlying dynamics imposed themselves with a vengeance as economic activity and growth surged forward. But, illustrating the whole purpose of the QE, despite the large reduction in economic activity over the two years, as a result of the imposed lockdowns, asset prices surged, as liquidity was again pumped into circulation. Stock markets rose to record high levels, despite profits disappearing, bond markets reached even more ridiculous heights, with $18 trillion of bonds, across the globe, at its most insane, providing negative yields, and in Britain, the latest data shows the insanity of an already grossly inflated property market sending house prices up by a further 20% over the two years.
But, as I pointed out a year ago, this deliberate action to close down economies, so as to slow growth, and inflate asset prices, by printing more money tokens, would come back to bite with a vengeance. Unlike QE, used to only buy financial assets, governments were led to become the providers of variable capital, via furlough schemes etc., and to borrow vast sums to do so. They paid out wages and other revenues, whilst preventing that variable-capital from acting as capital, preventing workers from creating new value, let alone surplus value. Funding that from borrowing, inevitably meant higher interest rates, and funding the borrowing via printing money tokens inevitably meant higher inflation, particularly in conditions where monetary demand was being inflated, but actual supply was being contracted, and costs of production increased.
Unable to justify lockdowns and lockouts any longer, as 95% of populations now have immunity, either natural or from vaccination, economies started to open, and again to surge, with all of the liquidity now flooding into circulation, chasing after commodities, and pumping up inflation across the globe, not only to levels last seen in the 1980's, but having risen to those levels in a much shorter period of time than it required to reach them in the late 1970's, and 1980's. And, there is an obvious reason for that. In the late 1970's and early 1980's, it was a period of crisis, followed by stagnation, in the long wave cycle. Today, we are in a period of upswing in the long wave cycle, an upswing that has only been suppressed by the policies of austerity, and direct diversion of money into financial speculation since 2010.
In the late 1970's and early 1980's, labour saving technologies undermined workers, causing wages to fall, and limiting the rise in aggregate demand. When Volcker in the US, and Howe/Lawson in the UK increased interest rates to kill inflation, they were pushing on an open door. Not only was gross output set to grow slower than net output, but rising social productivity, meant that unit costs were set to fall, and the rate of turnover of capital was set to rise. Today, the opposite conditions apply. The peak of the Innovation Cycle that began in the 1970's, was reached in 1985. A new Innovation Cycle only begins when the conditions are right for capital to invest in the search for such new productive techniques, which is when, as in the 1970's, it faces a crisis because of a shortage of labour, and high wages squeezing profits.
No such conditions exist today. Although, the relative surplus population created by the last Innovation Cycle, and the drawing into the global working-class of tens of millions in Asia, Latin America, and Africa, is mostly used up, it is not entirely used up, with large numbers that are underemployed. Rapid increases in the demand for labour in specific geographic or industrial spheres, hits barriers, causing wages to rise, but still not yet to a degree that results in the kind of squeeze on profits and crises of overproduction of capital seen in the 1970's.
But, increased economic activity, is resulting in significant increases in employment, meaning that the total wage bill is rising, living standards across the globe are rising, and that is causing the demand for wage goods to rise, which creates demand for additional means of production. That is the underlying dynamic of the long wave that continually pushes through, despite the attempts of governments and central banks to hold it back, so as to keep interest rates subdued, and asset prices inflated. The speed of growth as lockdowns are lifted, whilst some frictions continue, has led to shortages of inputs causing input prices to rise sharply. The economic war between NATO imperialism and Russian and Chinese imperialism plays into that. For example, Italy has seen a 40% increase in its Producer Price Index in the last two months alone!
Again, this is a similar double edged sword that was experienced with lockdowns. Lockdowns had the effect of slowing economic growth significantly, and so of slowing the rise in wages and interest rates that would have led to asset prices crashing again, as in 2008. But, they did so only by fuelling a huge rise in commodity price inflation, and surge in economic growth as soon as those restrictions were lifted. NATO has no great interest in Ukraine. It certainly has no interest in defending “democracy” in Ukraine. It has no great economic significance for NATO imperialism, and represents something of a fiscal drag upon it. Nor is it particularly strategically important in relation to Russia. The US, which is really what NATO is, has huge unsinkable aircraft carriers in Central and Northern Europe that perform that strategic role in relation to Russia, just as it has huge unsinkable aircraft carriers in Asia/Pacific in Japan and South Korea to perform that function in relation to both China and Russia.
Ukraine does act to soak up Russian resources, and destabilise its borders, just as it destabilises the Eastern borders of the US's main imperialist competitor – the EU – and in the same way as the destabilisation of the EU's Southern border was achieved by the US's wars in Iraq, Syria, and Libya brought about. Its not the US whose borders are challenged by these conflicts and the refugees created by them, and its not the US that faces huge increases in energy costs and insecurity. On the contrary, as the US encourages the EU to commit economic suicide by cutting off energy supplies from Russia, the US offers to make huge profits by filling a small portion of the deficit by selling expensive LNG to the EU!
But, the main consequence of the Ukraine-Russia War is to create global risk and uncertainty, which, like Trump's trade wars, in 2018, leads to a slow down in trade and global economic growth, which then acts to reduce the demand for labour and capital, reducing the pressure for interest rates to rise, and so enabling the collapse in asset prices to be deferred a while longer. But, by increasing costs, introducing additional frictions, all of which will disappear in due course, all it is doing is creating conditions in which this dam will itself burst, as economic growth bursts through, and inflation is driven much higher.
The defenders of the interests of the ruling class, and high prices of its assets, are hoping that higher inflation will not lead to higher wages, because they are applying the same rules that existed over the last 40 years. They will be wrong, as the demand for labour is already pushing employers to have to pay much higher wages in certain sectors, as, for example, the 30% rise in wages for truck drivers. But, its also being seen in increased unionisation, as workers see the possibility that for the first time in 40 years, a union might actually be able to negotiate a higher wage for them. Its being seen even in a rise in industrial action to that end.
They are hoping that rising inflation will cause consumers to reduce their demand for commodities, so as to act as a natural mechanism to slow demand and economic growth. They will be wrong again. Higher prices slow demand in conditions where demand is already sated, or where consumers do not have savings or the potential to compensate with higher wages. But, after 40 years in which wage growth has been subdued, there is considerable potential for additional consumption of a whole range of existing and new commodities.
Moreover, although it is highly differentiated, large numbers of consumers have considerable funds available to spend, as a result of their spending being forcibly curtailed during tow years of lockdowns. With savings deposit rates still hugely negative, in real terms, there is considerable incentive for consumers to use savings for consumption, and that has been seen in the last couple of months, with savings falling, and consumer credit rising sharply. And, finally, consumers have every likelihood of responding to higher prices by simply demanding higher wages and getting them, so as to continue spending. This is what is fuelling the continued sharp rise in inflation, and its set to continue for at least another two years from here.
The government and central bank may try to respond by raising interest rates, which they are belatedly doing, having realised they are massively behind the curve, but, again, this is not the 1980's. Central banks have not wanted to raise their policy rates, because doing so is itself an indication of defeat in their attempts to keep asset prices inflated. But, they find themselves having to do so or see themselves become irrelevant, and inflation rise out of control. But, in the short term, a rise in central bank policy rates acts to crater bond prices at the short end. The drop in global bond prices over the last few months has again been the sharpest on record. As bond prices fall, bond yields rise, and this eventually impacts on all other asset prices.
One of its effects is to increase mortgage rates, and with those rates at such low levels, any increase represents a large proportional rise in monthly mortgage payments. That has two effects. Firstly, it means that households see another large rise in their cost of living, which they will seek to cover by increasing their wages. Secondly, it slashes the price of houses that anyone needing a mortgage can afford to buy. There may well have been a 20% rise in house prices since 2020, the largest rise since 2004, but such sharp rises, as was the case in 2004, usually precede a crash in those prices. Yet, the rise in interest rates is only just beginning.
In the early 1980's, rising interest rates, introduced by central banks, acted to curtail demand and inflation, because they pushed on an open door. Rising productivity meant that firms had a higher rate of profit to finance capital accumulation internally without borrowing. But, part of the reason for higher rates of profit was the fact that technological development meant that less physical fixed capital was required, as one machine replaced several, and because the actual cost of constant capital was reduced as a result of higher productivity. Finally, a slower growth of gross output, meant that less additional capital was required.
And, like the early 1960's, when interest rates were also rising, this rise in interest rates does not choke off economic expansion. Unlike the early 1980's, economic expansion, and rising wage share creates conditions, instead, like the 1960's, where consumption continues to rise at a pace. Faced with rising demand, firms have to respond by accumulating additional capital, or else face losing market share to competitors, and going out of business. And, interest rates are still at very low levels compared to the 1960's or 1970's. So, even if interest rates rise by very large proportional amounts, they will still be at relatively low absolute levels that will not pose a problem for capital accumulation to firms seeing sharply rising demand for their products. What these relatively small absolute rises in interest rates, but large proportional rises will do is to crater asset prices, as a result of the effect of capitalisation.
The most important aspect in all of this currently is the sharp rise in inflation, but also the continued rise in economic growth, as soon as the restrictions from lockdowns, and of war hysteria are removed. The 40% rise in Italian PPI has been mentioned, but, in the last week, the sharpest rise on record of Eurozone consumer price inflation was also seen. After years of near zero consumer price inflation, Europe has seen inflation soar to levels last seen in the 1970's almost overnight. The ECB, which was forecast not to be raising its policy rates until 2024, is now forecast to be raising rates in the next few months, even before it has stopped its existing policy of QE. Its forecast to raise rates four times in the next year, and I expect that will be a significant underestimate, or it will have to raise rates by larger increments.
For the Euro Area as a whole, the inflation rate rose to 7.5%, last month. This is before, economies really start moving as the effects of lockdowns, and of war hysteria get out of the way. In the US, the ADP private payrolls data showed, half a million new jobs last month, whilst the BLS data showed overall payrolls rising by 431,000, and the previous month's figures being revised sharply higher to 750,000 new jobs. Meanwhile, US CPI is up 7.9% on the year, the biggest rise since 1982, and again the pace of increase is rising rather than moderating. As John Authers points out, in his Bloomberg Newsletter, a closer look at the data shows even more worrying signs for the Federal Reserve.
During its attempts to present the narrative of transitory inflation last year, it used a measure of inflation that trimmed off the highest and lowest rising prices, and then gave a figure of “trimmed inflation”. But, that figure is now showing both that the figures used for it last year were underestimated, and that, even on this basis the pace of inflation is quickening.
But, into this, there comes the consequences of NATO's economic war with Russia and China. The war hysteria over Ukraine-Russia has raised risk, and subdued economic activity, much as Trump's trade wars, and lockdowns did, but also like those actions, they have increased costs, and as economic activity resumes, the increased costs continue to feed through. Again, it is the US that benefits, and the EU, and rest of Europe that suffers. The EU now not only faces much higher costs for its energy, but also shortfalls in supply, as it may be cut off entirely if EU countries that have fallen in behind NATO imperialism, refuse to pay for gas in Roubles. There is no possibility that the EU, and certainly not those countries like Germany and Italy, and Netherlands most dependent on Russian gas, can replace that supply from elsewhere, and nor can they shift to alternative forms of energy inside a decade.
Already gas prices have risen massively, and Britain too is facing a 1000% increase in wholesale gas prices that will make today's 54% increase in the price cap look like small beer, when its effects feed through. On top of that, Britain is facing sharply rising costs as a result of Brexit, which has caused dislocations in supply, and additional costs and frictions due to additional red tape. As economic activity picks up, these pressures will intensify further. Increased economic activity will see profits continue to grow, which is what speculators are hanging on to, as they continue to put money into shares, but the profits will grow at a slower pace than output as the rate of profit begins to fall as its squeezed by rising input costs, and higher wages. That means firms having to use a larger proportion of profits to finance expansion, rather than pay out dividends; it means more share offerings to finance fixed capital expansion, and that means falling share prices and higher interest rates in the not too distant future.
As I wrote recently, all of this undermines the conditions that facilitated conservative social-democracy over the previous 30 years. The reality is that those conditions already ceased to exist back in 2008. To try to avoid the reality, governments and central banks have been forced into increasingly surreal conditions, but now they are collapsing around their ears too.
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