Consumers v Speculators - Part 1

On Wednesday, I set out why the speculators, and their representatives in the financial media, are banking on the real economy slowing down again, so as to reduce pressure for rising wages (squeezing profits), and rising interest rates (cratering asset prices). They hope for a goldilocks scenario, not too much of a slowdown to cause a recession, and so lead to lower profits (a hard landing), but enough to stop the current surge in demand, leading to firms increasing supply, and so demand for labour and capital, and, in current conditions of excess liquidity, also feeding into commodity price inflation. The speculators, after all, have grown accustomed to excess liquidity going directly into inflating asset prices, to boost their fictitious wealth, not into the real economy. However, if the choice is a hard landing, implying recession, they would take that over a continued booming economy, and its effects on raising wages, and interest rates, squeezing profits, and cratering asset prices.

The mentality was described by Bloomberg's John Authers, as I described a while ago. In fact, Authers, when he was still writing for the FT, back in 2013, had set out the principles of Goldilocks, as I described in my post Bust Without a Boom. Authers commented, back then, on the Goldilocks scenario existing in the 1990's and early 2000's,

“Things were “not too hot” to force central banks to raise interest rates, but “not too cold” to rid the corporate sector of profit growth.”

As I pointed out, at that time,

“Of course, this fairytale ended badly. Goldilocks got eaten by the Bear Market that resulted from the Financial Meltdown of 2008. Now as stock and bond markets soar to stratospheric levels again, the explanation given once more has an air of fairytale once more. Authers describes it as “Goldilocks On Ice”.”

That was in 2013, and by 2014, stock markets had already surpassed their 2007 bubble heights, and with QE infinity after that, followed by QE infinity plus, in the last 2 years, during lockdowns, they soared to even more surreal levels. As I wrote back in 2013, Authers described those conditions as Goldilocks on Ice. He wrote,

“The economy remains cold. Chilly enough for the US Federal Reserve and other central banks to continue with measures to support asset prices; but not so freezing that the economy lapses into crisis again.”

The chilliness was, of course, artificial. The US, first under Bush, in 2008, and continued by Obama, injected fiscal stimulus, and was, along with China, demarcated from Europe, by the fact that its economy rebounded, in a typical “V” shape from the crisis, at least until Republicans, under the whip of the Tea Party, used Congress, and control over state legislatures to limit those measures, and to hit the economy via political crises such as over the Debt Ceiling, and so on. But, in Europe, including Britain, measures of fiscal austerity were imposed from 2010, sending economies that had been rebounding strongly back into stagnation, or even recession. In Britain, it was the era of Ed Balls famous flat-lining hand signals across the Commons Chamber, and, in Europe, it was the time of the “Eurozone Debt Crisis”, and imposition of crippling austerity on Portugal, Ireland, Greece and Spain.

In his more recent Bloomberg article, referenced above, Authers quotes Dario Perkins of T.S. Lombard,

“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.”"

And, as I cited, Authers commented,

“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 fact, as I will set out in a future post, China, which has artificially hobbled its overheating economy, deliberately, with its otherwise bizarre zero-Covid strategy, is headed for hyper-inflation, as it combines this deliberate policy of restricting new value creation, via physical lockdowns, with a further increase in an already excessive amount of liquidity in its economy, and combined with an even more irrational fiscal expansion! That is what North America and Europe also did over the period of lockdowns, but they are, at least, having to end those irrational lockdowns, whereas China continues to impose them, even when natural and artificial immunity means that the link between infection and serious illness (to the extent it ever existed in the vast majority of the population) has been broken. The rest of the world faces continued, and now embedded, inflation as a result of those policies, which will take years to wash through the system, especially as central banks respond to wages squeezing profits, by yet further accommodation, whilst the irrational continuation of them by China, in an attempt to slow its economy, and avoid an asset price crash, is leading it into hyperinflation, and an even bigger crash.

The hopes of speculators, and their media representatives, of some kind of “landing”, are going to be frustrated, as I set out recently, because, in conditions where labour is in short supply, and employment is rising, you do not get a recession, or even a prolonged slow down. For one thing, in making these assessments, bourgeois economists look at only GDP, as against output. As I have set out before, GDP is only a measure of the social working-day, i.e. of the new value created by labour, in the current year. It is not the same as output, because GDP does not include the value of constant capital (raw and auxiliary materials, energy, wear and tear of fixed capital) produced in previous years, and whose value is merely preserved and transferred to current production. GDP is a measure only of new value created, i.e. v + s, not c + v + s.

In Marx's analysis, GDP was equal to only a third of the value of output, because two-thirds comprised the value of c, which was merely transferred into current production, and reproduced directly from it. Today, the difference between the value of GDP and of output is much greater, because in the last 150 years, the technical and, thereby, organic composition of capital has risen significantly, as productivity has risen. Today, a given amount of labour processes a far greater quantity of materials than it did in Marx's day, and although, the value of fixed capital, and so, of wear and tear, as a proportion of total output, has fallen (due to moral depreciation, and technological development) the total value of wear and tear is also much larger.

Changes in GDP are not solely a function of changes in the social working day, i.e. more workers employed, or the same number employed for longer, or both, as I have set out before. Changes in relative productivity of one economy to another, can make the value created by labour in one economy rise more than another, and also changes in the proportion of complex to simple labour can have that effect, as I set out some years ago in a response to Paul Cockshott. As I set out in that post, a population of 1 million, can produce more value than a population of 10 million, even with the same working day, if the 1 million's labour is complex, and that of the 10 million simple labour. Similarly, an economy that moves up the value chain, and has a larger proportion of its labour as complex labour, will produce more new value (increase its GDP) faster than an economy that does not.

However, in the short-run, when any significant change in either of these factors can be discounted, changes in GDP are merely a measure of changes in the social working-day, which is why, GDP in many countries fell by around 20%, the same as the reduction in the amount of current labour being undertaken, as workers were forcibly locked out of production, by state diktat, and economies rebounded by similar amounts as those lockouts ended, and new value creation resumed.

The factors that the speculators and their representatives are banking on are set out in the quotes from John Authers and others above, i.e. simple media reporting of various scare stories, be it pandemics, or wars that cause consumers to be more cautious in their spending, and firms to be more cautious in the investment plans; the role of high prices for energy and so on to squeeze incomes available for general consumption; increases in central bank policy rates to deter spending, and incentivise saving. But, as I have set out before, none of that seems likely to have its intended effect, in anything other than the immediate term.

Consumers, bombarded with news stories of impending recession, stagnation or stagflation, to the extent many of them ever see such stories, might change their behaviour at the margin, but mostly those spending patterns are well established. A certain level of spending is baked in, because everyone must eat, travel, buy clothes, and so on, and as lockdowns have ended, its not so much that spending on many of these declines, but that spending on other activities that were precluded, increases.

Higher prices for things like energy, do limit what is left out of incomes to spend on general consumption, but many consumers have funds built up over, the period of lockdowns, to enable them to continue spending, and seeing higher prices, projected now into the future, workers are already demanding much higher wages, and labour shortages ensures they get them. As most consumption comes out of incomes rather than savings, higher wages will more than offset higher prices for energy etc., enabling spending on general consumption to continue to rise.

And, central bank policy rates, and, thereby, rates on savings deposits, are so low in absolute terms that even large proportional rises, still amount to only small absolute increases in rates that can have little effect on the spending and saving behaviour of either consumers or firms. Moreover, with inflation at double digit levels and rising, real interest rates have grown even more negative, creating an increased incentive for spending rather than saving.

Forward To Part 2