Why are they all demanding a recession? Because, for the first time in forty years, apart from a couple of years prior to the financial crash of 2008, wages have started to rise, and workers have begun to see things move in their favour. The greedy speculators who have had forty years of wages being squeezed, profits rising, and asset prices being sent to infinity and beyond, by central banks printing money tokens to cause asset price inflation, now see even slightly rising wages causing profits to grow more slowly, and interest rates to rise, causing the huge financial and property bubbles to begin to burst.
The speculators want a recession, in order that the current tightened labour markets should become less tight, as a result of millions of real human beings, who actually work for a living, being thrown out of work. You might think that the speculators would be alarmed at the prospect of a recession that would lead to businesses not making so much profit, but not in the least. Just look at what happened from Spring 2020 onwards, during all of the period of enforced lockdowns. Those lockdowns had the same effect as a recession, preventing workers from working, and goods and services that we all need being produced.
Yet, during that period, financial markets soared to even higher levels! At the end of March 2020, the Dow Jones stood at 21,917, and by the end of April 2022, it had risen to 32,977, a rise of 50%! Nor was that the highest point. At its highest, in 2022, the Dow hit nearly 37,000. It has only started to fall, as the lockdowns were lifted, economies opened up, workers started working again, and also began spending money, leading businesses to need to accumulate capital, employ yet more workers, and to have to pay higher wages and interest rates in the process.
In fact, that is the same thing that has happened since the mid 1980's. In the early 1980's, as firms introduced new labour saving technologies, workers were thrown on the dole. Wages fell, profits rose. With more workers on the dole, and workers incomes falling, demand for wage goods fell, relative to output, economies grew more slowly than they had during the preceding 25 years, but the share of output that went to profits increased. That also meant that a greater share of those profits could be used to pay out interest and dividends, because, with output growing at a relatively slower pace, a smaller proportion of profit was required for capital accumulation. That was also helped by the fact that a lot of fixed capital was massively depreciated, as a result of the new technologies introduced. Marx calls that a release of capital.
Whilst the amount available to pay in interest/dividends rose, the increased supply of money-capital, relative to the demand for it, meant that interest rates fell, and the manifestation of that comes in the form of higher share prices. For example, suppose the average share price is £1, and the average dividend is £0.10, a 10% yield, with interest rates also at 10%. Now, if interest rates fall to 5%, i.e. the amount you get on £1 is £0.05, the £0.10 dividend you get on a £1 share looks twice as good, so people tend to use their money to buy shares, which pushes up their price. To get back to the same yield, share prices would have to rise to an average £2, so that the £0.10 dividend then represents a yield of 5%. However, because profits rose, and more was paid out in dividends, dividends might also rise to say £0.20. Now, this makes the shares look even better value. For this £0.20 dividend to only be as good a return as the rate of interest, the average share price would have to rise to £4, a rise of 300% from its original level.
The greedy speculators are not at all concerned about ruining the lives of millions of ordinary working people, by demanding a recession and that those workers be thrown on the dole, because that is the condition for them seeing their share prices, bond prices, property prices and so on increase. The speculators, of course, contribute nothing to society's well being. Listen to the financial speculation channels and you will hear them described as investors, but they are no such thing. An investment involves advancing money-capital to purchase real productive capital, which is then used to produce real goods and services, new value, and in the process, surplus value, which is the basis of profit, and yet more capital investment. But, that is not at all what the speculators do.
What the speculators do is to simply gamble, as though they were in a casino. They use money, often not even their own money, as the 2008 financial crash demonstrated, not to buy productive capital, but simply to buy shares, or alternatively bonds, or derivatives of them. This is presented as being “investment” in capital, because, after all isn't the money raised from the sale of shares and bonds used to buy this productive-capital? The answer to that question, however, is an overwhelming no.
Only a tiny proportion of the shares traded on stock markets are new shares, issued to raise finance for businesses. The vast majority of shares traded are existing shares, and, in simply continuing to bid for these existing shares, the effect is to push up their prices. If the total value of shares is $1 trillion, and rises to $2 trillion, as more money comes in to demand them, this does not result in $1 trillion going to the companies whose shares are traded. The money simply goes as a capital gain to those shareholders who bought at a lower price, and sell to someone else at the new higher price. They gambled successfully, but whilst that made them richer, it produced not one new product, and added not one cent to the overall wealth of society. Its a bit like someone betting on a horse race. If I bet on a horse at 100-1, and it wins, that's great for me, and bad for other punters who lost their bets, and whose money comes to me. But, none of that money I win goes to the owner of the horse, who trained it, fed it and so on.
Its no different than with houses. The large majority of houses bought and sold in England are existing houses, with newly built houses forming only 7% of all transactions, and 8% of the value of transactions.
So, when more money comes in to increase demand for houses, and causes prices of houses to rise, it does relatively nothing to increase the number of houses supplied, or the wealth of society. It simply puts more money into the hands of the existing house owners who sell their houses, although by the same token, when they come to buy another house, they will see its price has also risen leaving them, usually, worse off.
But, for the speculators who are not interested in property as somewhere to live, none of that matters, because, just as with shares, and bonds, they have come to care very little about the small amounts of revenue they can obtain from these assets. What they have grown addicted to is the continual large capital gains from them, as asset prices appeared able to just keep going higher, as long as interest rates were kept low, and when that became increasingly impossible, as long as central banks were prepared to step in and print money tokens to be used to buy up the worthless paper, and so inflate the asset prices once more. So, for example, large numbers of consortia of speculators put money into large, very expensive property developments in London and other large cities across the globe, and yet were prepared to leave them empty of tenants. Why, because they came to believe that central bank money printing would ensure that property prices rose by 10% a year and more, inflating their paper wealth without them needing to lift a finger.
And, this is the nature of the greedy speculators who, today, demand that governments create a recession, so that the people who do actually lift a finger, the people who go to work each day, driving trains, buses and so on, who work in offices and factories, and create the wealth, are thrown out of those jobs, prevented from working, in the same way they were prevented from working under lockdowns, or as a result of previous austerity measures. They want that so that the conditions that existed before, in which wages were kept low, enabling profits to increase, when interest rates were kept low and money printing was able to go into inflating asset prices, could be restored. The problem they have is that the money printing they had to do in the last two years created the huge levels of inflation we have now, and as workers respond to that, we see the way the greedy speculators respond.
“No”, they cry, “workers can't expect their wages to keep up with prices. It is the natural order of things that workers should know their place. Only we are entitled to see our wealth grow fabulously year after year, as our God given right!” And, of course, the liberal politicians like Biden and Starmer, and their ideologists like Summers come out to sing this same song in chorus that workers must accept real terms wage cuts, for the good of “society”. And, if workers will not accept such wage cuts then the speculators and their representatives will seek to impose them.
That is what Summers means when he says that unemployment would have to rise to 5% for years. Its what the Tories mean when they say that they will change the law so that even the safeguards that workers won 40 years ago are removed, and their conditions made even more precarious, their rights reduced even further! And, they show that in order to win such a fight they have no interest in the health and safety of consumers either, as they propose putting untrained and unqualified temporary agency workers into skilled jobs on the railways risking, serious accidents, leading to death, destruction and serious injury.
Capitalism, in its social-democratic/one nation variant was supposed to ensure that the position of workers improved year after year, but the reactionaries of the Tory Party want to turn workers' conditions back to a worse level than they had even in the 1970's! When the Tories say they want to tear up agreements that date back to the 1970's that is what they mean. Things like the Equal Pay Act, were also introduced back in the 1970's, as part of those gains made by workers to go some way to protecting them. Given the option, the Tories would scrap that too, in order to enable profits to rise. That, of course, is why they wanted Brexit, so that they could push for all of those reductions in workers pay and conditions, and in consumers rights and so on.
When people like Summers talk about recession, and the narrative that recession is around the corner is ubiquitous across the media, what they have in mind is that consumers – for which read workers – will be forced to cut back on their spending, which, in turn, will lead firms to not feel the need to expand to grab market share, and so they will stop hiring and start firing. The trouble is that no matter how much they want to talk up the imminence and inevitability of recession, in the hope of, at least, slowing economic activity, the data does not point to any such outcome. Across the globe consumers still have lots of savings they can use for spending, and whilst the huge increases in energy and food prices, caused by NATO's boycotts and blockades of Russian exports, acts as a drain on consumer spending, what the speculators depend on is that workers will not be able to increase their wages to cover these higher costs, and so to be able to continue spending at the same level. Indeed, its to try to prevent that that the speculators are trying to increase the talk of recession, and to undermine workers ability to get higher wages.
The rash of strikes in every part of the globe, many of which are not being reported shows that hope is likely to be dashed. In Britain, the media has covered the rail strikes, and mentioned that millions more workers are planning strikes across the country, but they have not covered the pending strike of 50,000 dockers in Los Angeles, nor the recent huge strike wave in Belgium, and the same thing is happening on every continent.
The hope of the speculators and liberals was that, just as in the last forty years, prices would rise, wages would fail to catch up, so profits would rise, and so interest rates would fall, and asset prices would rise again, and money would again be drained out of the real economy into this speculation, so that commodity price inflation would again be eradicated. But, the possibility of that was already shown to have ended in 2008. It has taken Herculean efforts of fiscal austerity by governments, along with deliberate bribes to push up house prices, along with astronomical levels of currency printing and buying of paper assets, by central banks, followed by overt physical measures to destroy economic growth via lockdowns – the most odious form of which is China's ridiculous zero-COVID policy – to prevent economies growing, the demand for labour rising, and so wages squeezing profits. The policy's time was already up, and the last two years, firmly banged the final nails in its coffin.
Whether hourly wages rise or not, the growth in the workforce means that the wage fund itself has grown, creating additional demand for wage goods, boosting aggregate demand, and meaning that firms individually have to respond by trying to grab their share of the increased market, and that creates a virtuous circle as far as labour is concerned, because, then, more of them are employed, labour supplies become tighter, and so wages themselves start to increase alongside the greater employment of labour, and consequent growth of the wage fund. The only constraint on that is when profits become so squeezed, as in the 1970's, that it leads to a crisis of overproduction of capital, sharp stoppages of production, and capital engages in technological innovation to replace labour, but we are a long way from that point, as we were in the late 50's and early 60's. The conditions we have, with still high levels of profits, and with the last innovation cycle still providing the basis for the technologies being rolled out, means that, as in the 60's, and early 70's, a period of stronger economic growth, and rising employment and living standards is ahead.
People like Summers believe that, in addition to the effects of higher energy and food prices eating into disposable income, and fear caused by scare stories about war and pestilence, the remaining bit of the task will be accomplished by higher central bank interest rates. But, workers can cover higher living costs by rising wages, as the rash of strikes now demonstrates, and those higher wages will mean they can continue spending as before. In fact, in conditions of rising prices, they have an incentive to bring forward spending where they can, front loading demand, and so incentivising firms to accumulate capital even faster, spurring economic growth more. The scare stories about COVID have run their course and more, and the attempts to introduce new bogeys in the form of Monkey-Pox, and Polio seem to have fallen flat. As for war, people lose interest in the news stories quickly, and that is seen with the way that the spike in internet searches for Ukraine, quickly disappeared to nothing.
As for interest rates, they are massively negative. With US inflation in double digits for workers, a US Fed Funds rate of 1.75%, is negative by around 8% points, and the position in Britain is even worse. Moreover, the majority of people do not pay for current consumption from borrowing, although the least affluent do, via Pay Day loans and loan sharks, but given the astronomical levels of interest they charge, a point or two either way on the Fed Funds Rate or UK Bank Rate, makes not the slightest difference. Some people are using savings to supplement income to cover current consumption, but that is because a) they are still making up for consumption foregone during lockdowns, and b) they have not yet increased their wages to cover that consumption, but that is coming over the next months. They are certainly not going to be convinced to keep money in savings with a massively negative interest rate for savings deposits, rather than continue to use it to supplement income to cover consumption. In fact, that in itself will cause market interest rates to rise.
In fact, what people do use savings for is to buy big ticket items such as houses. But, as they see house prices falling along with other asset prices, money savings to be used for that purpose become supercharged. If house prices fall by 50%, then every £10,000 of savings you have, becomes worth £20,000 overnight, for use in buying a house. Given that rising interest rates will cause such a crash in asset prices it creates an incentive to hold back on that spending, as against day to day spending, draining money out of assets and into the real economy, a reversal of the conditions existing for the last forty years. In both the US and UK, the data for the housing market shows a sharp slow down in demand, for houses, whilst houses are being put up for sale at a higher rate, meaning prices will soon start to fall noticeably.
And, the same is true in relation to businesses. With an annual rate of profit still at historically high levels, and many multiples of times higher than nominal interest rates, and money profits rising by around 10% due to inflation, there is no reason on Earth why businesses would be dissuaded from continuing to accumulate capital, as a result of interest rates at 3-4%, the level that speculators seem to think is their limit. Why would you do that, especially as you see demand for your goods and services continue to rise, and know that if you do not seek to grab your share of it, you will never get it back, and will put yourself on course to go out of business? The last time UK inflation was at this level, Bank Rate was at 13%, and, even in 2007, Bank Rate was at 5.75%, even though inflation was less than half what it is today.
Its true that, in the early 1980's, Paul Volcker raised interest rates sharply, and squeezed inflation out of the system, but its not actually true to say that he caused a recession, and that it was that which ended the inflation. There had been recession during the 1970's and early 80's, but far from it ending inflation, inflation surged to its highest levels, soaring to around 27% in the early years of Thatcher's government. What squeezed out the inflation was the reduction in the amount of currency in circulation, not recession, and not higher interest rates. Volcker pushed against an open door, because, by the time he began raising rates sharply, the conditions for a sharp recession, followed by stagnation had already been created. The technological revolution of the 1970's and early 80's that brought the microchip and associated base technologies, meant that labour could be replaced, and wages could be reduced. Workers could not recoup what they lost from inflation, so profits rose. That is what the spivs and speculators want to mimic, now, but the conditions are completely reversed.
Central banks will raise interest rates, and the spivs and speculators will squeal, as they insist that they must pause or reverse course, as asset prices continue to fall, and the pundits on the speculation channels whimper about whether they have seen capitulation or not yet. But, the higher rates, which remain massively negative, and insignificant compared to annual rates of profit, will not cause consumers to stop spending, nor firms to continue accumulating capital. They will cause asset prices to continue falling, however. And, as workers continue to increase their wages to cover rising prices, as they feel more and more confident, as economies expand, so central banks will continue to pump liquidity into circulation, even as they raise rates, and the increased liquidity will buffer profits against rising wages, but will also consequently mean that inflation remains high for a long time, meaning that any prospect that central banks might pause their rate hikes, let alone might begin to reduce them any time in the next decade, can be abandoned.
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