After the US Federal Reserve raised rates by the expected fifty basis points, yesterday, US bond and stock markets rose. As bond prices rose, yields fell, and on the back of those lower yields, stock markets soared by around 2%. The reason was that the Fed's action was seen as dovish. Fifty basis points was anticipated, and so, the whisper number, the number that speculators thought would indicate the Fed was actually serious about fighting inflation, was actually seventy-five basis points. In fact, markets had, in any case, priced in seventy-five basis points for the next meeting in June, but Fed Chair Powell, scotched that idea too. Today, the Bank of England also raised its rates, but only by twenty-five basis points, with three members voting for a fifty basis point rise, whilst two members thought that even this feeble action was too bold.
Central bank members want to be monetarists when it comes to asset prices, but Keynesians when it comes to commodity prices. They know that they can inflate asset prices by simply devaluing the currency further by printing additional money tokens, but they think that commodity prices are simply a function of an interaction between supply and demand, rising largely as a result of cost-push or demand-pull pressures, and so can be contained simply by restraining economic growth. And, not surprisingly, because, for a long time, that strategy has worked for them. Their answer is, slow the economy, and, thereby, reduce, demand-pull, and at the same time reduce the pressure on inputs such as for raw materials, and most particularly, labour-power, so as to reduce cost-push.
That was the purpose of austerity after 2010, it was the purpose of trade wars, and of lock downs and lockouts over the last two years, which they are now ridiculously trying to continue with zero-COVID strategies based on reducing infections to zero, even though there is no chance of those infections making anyone who has been vaccinated, or otherwise gained immunity, from being seriously ill let alone dying! But, the illiberal, authoritarian state in China, which risks its economy overheating, its wages and interest rates rising, and its asset prices, based upon huge amounts of unsustainable debt, crashing, has been able to pursue such a ridiculous course, tanking its economy, and, thereby affecting the world economy along with it.
The strategy they hope for is described in this note from Dario Perkins of TS Lombard, cited by John Authers, in his Bloomberg Newsletter.
“The odds of a policy error are increasing, especially when everyone seems to be over-extrapolating COVID distortions into a new secular inflation narrative and when central banks are channelling the virtues of Paul Volcker (or, in Europe, the ’70s Bundesbank). What we need is a “growth scare,” one that is sufficient to stop central banks freaking out but not large enough to plunge the world into recession. And with all parts of the world facing near-term problems, this scare is now a distinct possibility. Combine China’s property slump (and lockdowns) with a massive squeeze on real incomes in Europe, plus tighter financial conditions in the U.S., and perhaps the world economy will deteriorate just enough to put the authorities on a more cautious policy path. In fact, this “soft patch” may be our best chance right now of a “soft landing.”
As Authers says,
“It’s just possible that the motley forces of Covid-zero, China Evergrande Group and Vladimir Putin could somehow could allow the FOMC to bring the airliner of the U.S. and global economy safely to rest on the Hudson River. Not likely, but there’s a chance.”
In other words, what the ruling class that owns its wealth in the form of these assets – fictitious capital – desires is that the world economy be undermined, that growth be artificially stalled, that firms capital accumulation be slowed or stopped, that employment be reduced, and ordinary workers' livelihoods be, again, undermined, so that interest rates do not rise from ridiculously low, artificial levels, and central banks can again, print money tokens so as to, again, inflate asset prices, and so increase the paper wealth of the ruling class.
At a time when NATO imperialism is conducting a war against Russia, vicariously through Ukraine, on behalf of one faction of the global ruling class, as an inevitable preamble to a similar war against China, which resides in the other camp of the global ruling class, along with Russia, its ironic that it is the actions of the Chinese ruling class with its authoritarian measures to enforce zero-Covid lunacy that is probably having the largest role to play in implementing that strategy of artificially slowed growth, so as to protect asset prices.
But, even that is not likely to have legs. There are limits, even for an illiberal, authoritarian state like China, to which the bounds of rationality can be stretched in promoting lockdowns in the name of fighting a COVID virus that never did represent the threat it was being presented as being, and certainly not now in an era of vaccination and widespread immunity. Already, Chinese citizens are protesting, and Bonapartist regimes like China appear solid up to the point when they are not. The biggest threat to the Chinese ruling class, and, ironically, to the global ruling class, comes from a billion ordinary Chinese citizens deciding enough is enough, and sweeping them aside, leading to a spread of revolts across the globe.
And, when the Chinese ruling class is forced to open its economy again, there will again be a rush of economic activity, much as there was last year, when its GDP rose by 18%, and that will flood out into effects on global primary product prices, demand in a range of emerging markets, leading to sharp increases in their own economic activity, and a wash over into the EU and North America. One of the other strategies of the ruling class is to use much higher energy prices as a means of draining monetary demand from consumers so as to reduce economic activity. The measures to ban oil imports, and reduce gas imports from Russia have a number of consequences. Firstly, they are encouraged by the US, because it acts to cripple the EU economy, as its main global competitor. Secondly, its an act of economic warfare against Russia, and anyone that sides with it, such as India, or China. Thirdly, it drains consumer's spending power, so that they cannot spend on other commodities and services that would act to stimulate the economy, increase jobs, wages and interest rates, and so cause asset prices to fall.
For now, that seems to work, and it forms part of the Bank of England and Federal Reserve projections of slowing economic growth. But what this fails to take into account is the phase of the long wave economic cycle we are in. The same is true in relation to the example of Paul Volcker in the early 1980's, and the role of interest rate rises on slowing growth. When the US non-farm payrolls data comes out tomorrow, it is likely to show that unemployment has fallen to 3.5% from 3.6%. That is the lowest level since the 1960's, when, like now, the global economy was enjoying a period of long wave uptrend. As I set out, yesterday, in the US, there are now 2 available jobs for every unemployed worker, and if they all got jobs, today, there would still be 6 million unfilled vacancies. So, this is not like the early 1980's, when labour was on the back foot, because a whole series of new technologies were pushing workers out of jobs across the economy. On the contrary, the existing productive technologies are getting a bit long in the tooth, dating back to the base technologies of the 1980's. Instead of productivity rising, and workers being replaced by machines, productivity is falling, workers are being taken on, and find themselves in a position to demand fewer hours, more holidays, and higher wages.
So, higher energy costs, for now, might act as a drain on household spending, but workers will increasingly respond to that, as with the other increases in their living costs, including higher mortgage payments, as interest rates rise, by simply demanding higher wages. As Marx sets out, higher wages do not cause higher inflation, as the Keynesians believe, but squeezed profits. However, faced with firms experiencing squeezed profits, central banks will inevitably respond themselves by printing more money tokens, destroying currencies further, and so enabling firms to raise prices to protect profits, leading to yet another twist in the inflationary price-wage spiral. But, the result will be that instead of economic growth being slowed, it will continue to rise, and so the pressure on interest rates will continue to rise, now compounded by the fact that lenders will seek to protect themselves against inflation eating away the value of their capital and revenues, by demanding much higher rates of interest, and paying much less for any assets they buy.
The Bank of England in its report is predicting slower GDP growth, and in part it comes from these other factors. But, GDP growth is really just a measure of growth in the social working-day. GDP is a measure of the new value created in the current year, i.e. the amount of new labour undertaken in the current year, which resolves into revenues – wages, rent, profit, interest (and taxes). It is not a measure of output in the current year, because it does not include the huge value of constant capital (raw materials, energy, wear and tear of fixed capital) that was not produced in this year, but whose value is simply transferred to current production, as it is consumed in this year's production.
For GDP to rise, the amount of new labour undertaken in the year (social working-day) must rise, which means that either more workers are employed, the existing workers work longer, or both, or some combination of the two, i.e. 10% more workers are employed, but hours worked falls by 8%, or vice versa. There is one other possibility, which is that the given economy enjoys a differential increase in its labour productivity compared to other countries. That would mean that its labour becomes more complex than other labour, so that an hour of its labour, produces proportionally more value.
The consequence, obviously is that, at some point, as economies experience full employment, they cannot expand the social working-day further. Not only do they not have the additional workers to employ, but also, as they reach near full employment, workers, in a stronger bargaining position, begin to demand a shorter working day, rather than a longer working-day; they choose not to work overtime, even at premium rates; they demand longer holidays, and earlier retirement. These are the conditions that Marx describes in Capital III, Chapter 15, and in Theories of Surplus Value, Chapter 21, which eventually lead to a crisis of overproduction of capital, because, first, as, here, as the social working-day cannot be expanded, and may even contract, absolute surplus value cannot be increased, as more capital is employed, but also,, then, eventually, wages also rise, so that relative surplus value cannot be expanded, and may also contract, as more capital is employed.
Those are the conditions that began to develop in the early 1960's, which is a comparable stage in the long wave to where we are now, other than it has been suppressed by measures to slow economic growth since 2010, and which led to the increasing squeeze on profits, the rise in interest rates, and ultimately, the period of crisis that began in the mid 1970's. But, the rising wages, squeezed profits and rising interest rates of the 1960's, did not prevent it being a period of rapid economic growth. Quite the contrary. Indeed, the fact of rising wages and employment is a major factor in stimulating aggregate demand, by increasing demand for wage goods, causing firms to have to accumulate additional capital, including employing additional workers. And, this shift to rising wages, does not lead immediately to profits being squeezed to a degree as to cause a crisis of overproduction of capital. Again, on the contrary, it took around 12 years for that emerge, around 1974.
So, in the US, as it begins to approach levels of unemployment similar to those of the 1960's, it begins to be clear that increasing GDP becomes more difficult, because it cannot expand the workforce enough to increase the social working-day, and as workers find they can pick and choose between jobs, they will also reduce their hours worked. But, the US also has huge reserves of labour still it can mobilise. Its participation rate is only around 62%, meaning that 40% of its working population are not employed for one reason or another. For some its because they have been able to retire, and have no great desire to work; for others its because they have been out of the labour market for so long they appear as unemployable, or else they may have ill-health, including large numbers suffering with the US's epidemic of opioid addiction. A large proportion of these workers could be drawn into the workforce if wages rose enough to be attractive. In addition, the US has a huge number of petty-bourgeois, i.e. self employed people, in a range of jobs, as well as shopkeepers and small business people, and smallholders, all of whom are really underemployed, and could be drawn into more productive and lucrative employment as wage workers, which is what would normally happen in a period in which large-scale industrial capital expands, and the petty-bourgeoisie is squeezed.
So, even as the US moves closer to full employment, do not expect it to be a barrier to further GDP growth, and that is before consideration of the prospect of further large-scale immigration is considered. And, the same applies to Europe. China, as it eventually is forced to end the zero-Covid madness, still has large reserves of peasants that are similarly underemployed, and can be drawn into wage labour, especially as it develops its infrastructure to the West, and to the North, as it forms a Eurasian Economic bloc with Russia, and the Central Asian states. Therefore, as in the early 1960's, we are a long way off reaching the point where the social working-day cannot be expanded, and so where a period of crises of overproduction arise.
Britain is somewhat different. It has the added problems inflicted on itself by Brexit. That has increased all of its costs at a time when the beneficial effects of cost reduction from globalisation had already mostly run its course. In essence, that means falling levels of productivity, which compounds the problem of labour supply, and expansion of GDP. Outside the EU, the idiotic policy of removing free movement of labour, supported by the nationalists both of the Tory party and of Blue Labour, means that it cannot easily expand the social working-day by those means, and indeed, as its hostile environment pushes existing migrant workers away, it exacerbates its labour shortages in numerous areas, again increasing costs, and creating bottle necks in supply chains and so on.
The effects of rising costs will impact the rate of profit in Britain more than in other countries for those reasons, as well as it suffering from a fall in the annual rate of profit due to a reduction in the rate of turnover of capital resulting from additional trade frictions, caused by the erection of borders. But, it is also suffering from much higher import costs, partly as a result of global inflation for the primary products it needs to import, partly as a result of its measures of economic warfare against Russia, and partly as a result of a falling Pound, which will fall further as a result of a deteriorating comparative level of productivity. Labour shortages are likely to enable workers to demand higher wages to compensate for these higher costs of living. Already, household energy costs have risen by more than 50%, and as UK wholesale gas prices have risen by around 1,000% due to the impact of the economic war against Russia, when the price cap is reviewed again in the Autumn, that is going to rise much further still.
So, workers will compensate for these higher costs in higher wages, higher wages that, currently, the Bank of England does not expect to arise, although it has increased its prediction of wage rises to 5.4%. Those higher wages will be the basis of continued spending, and economic growth, counter to the Bank's expectations, but they will also act to quicken the pace at which UK rates of profit are squeezed compared to its global competitors. That means, unless Brexit is reversed before then, Britain will go into a period of crises of overproduction much earlier than other economies, though that is going to be some years into the future yet.
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