If, central banks really want to halt inflation, then, rather than raising their policy rates, they would speed up QT. The consequence would then be that, as wages rise, and prices don't, profits fall, but firms would still need to accumulate capital to meet the rising aggregate demand, or face losing market share to competitors. In increasing the demand for capital, with the supply of capital from realised profits declining, interest rates would then rise, and rising interest rates would then cause asset prices to fall sharply. That reverses the condition of the last 40 years, during which time money has been drained from the real economy into the fictitious economy, in search of speculative capital gains.
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In the last 40 years, an increasing proportion of the money from realised profits (M` red line to bank deposits) remained locked in that green sphere, going back and forth from bank deposits to [bonds etc.], and to share capital and other derivatives and assets (fictitious capital) rather than circulating back into the real economy, as either money-capital (red line from Bank Deposits to M), or as revenues funding personal consumption (green line from Bank Deposits to C`) |
Because, profit margins, and the mass of profit, are currently at historically high levels, there is plenty of scope for firms to be able to continue to accumulate capital in this manner, and to pay the higher rates of interest that result from it. In short, we are a long way away from the condition of a crisis of overproduction of capital. Moreover, in most economies, about 20% of capital is tied up in zombie companies that have only continued to exist because of artificially induced low rates of interest. As higher interest rates drive these inefficient small capitals out of business, their capital is freed up for more efficient use, and their inefficiently used labour also becomes available for more productive use by larger, more efficient and productive capitals. So, the point at which labour supplies become so tight that wages rise to squeeze profits, and cause an overproduction of capital (as occurred in the 1970's) is pushed further into the future.
But, the reality is that central banks really do not want to reduce inflation. What they actually want to do is to reduce wages, and, thereby, boost profits. That is why they are raising their policy rates rather than actively reducing liquidity. Their aim is not to reduce inflation, but to slow economies, to slow aggregate demand, as a combination of higher prices of energy, caused by NATO's sanctions on Russian oil and gas, higher food prices, caused by NATO's sanctions on Russian grain supplies, combined with these higher interest rates, raising mortgage costs, reduce workers' disposable incomes, causing them to reduce consumption of other goods and services.
Their hope is that this lower demand for wage goods, combined with a higher cost of capital due to higher interest rates, would then cause firms to also slow their expansion, laying workers off, and so causing wages to fall, as unemployment rose. They are fairly brazen, now, in their desire to cause such a recession, so as to reduce wages, with people like Larry Summers demanding that US unemployment needs to rise to at least 5.5%, so as to cause wages to fall. That would mean the number unemployed rising by 50% from current levels, for around five years, or else, Summers demands, it needs to rise to around 10% for a year or more!
Unfortunately, for the speculators, and other enemies of the working-class, like Summers, the conditions they require for that to happen do not exist. Rather than simply sitting back and acquiescing in the higher costs of living that the policies of NATO, conservative governments, and central banks have created, workers, across the globe, are taking to the streets, joining unions, and demanding higher wages to compensate for those higher costs, and, because, everywhere, there is a shortage of labour, firms are having to concede those pay claims, which simply impacts profits even harder!
I have argued for some years, now, that with interest rates at such low levels, even small absolute increases amount to large proportional rises, which results in equally large proportional falls in asset prices due to the process of capitalisation. Now, the very highly paid academic economists appear to be catching on too, as Bloomberg reported recently. They have recognised that the R*, the supposed neutral rate of interest, beyond which central bank rates are supposed to slow the economy, and raise unemployment, is now way above what has been termed R**, the level of interest rates above which financial instability is caused in asset price markets, an indication of which was seen in the UK, last week, when the Bank of England had to inject £65 billion to prevent a Gilt Crash due to rising bond yields.
Work by Alan Ruskin of Deutsche Bank, also emphasises this point I have been making about the relation between rising central bank policy rates, and employment and unemployment. It turns out, as I had said, that there really isn't one, and that what is actually determinant of both is what else is happening fundamentally in the economy, and the stage of the long wave, as these two charts produced by him illustrate.
Indeed, that shortage of labour is such, now, that, even without workers joining unions in much larger numbers, and taking industrial action, wages are rising anyway. Amazon in the US has had to raise its wages, yet again, not because unions have demanded they do so, but simply because it could not fill its vacancies without doing so. Some pundits have talked about some firms announcing plans to freeze hiring, but others have commented that you cannot fire what you cannot hire. In other words, with twice as many job vacancies as there are workers to fill them, plans of some firms to slow or freeze hiring is moot, because the positions they are planning to freeze are positions they had not been able to find workers to fill in the first place!
And, although there are individual stories of some firms proposing to slow hiring, the overall data for the US economy points in the other direction. In the Spring, the number of weekly initial jobless claims seemed to be rising from around 200,000 up towards 260,000, though that is way below even the average of the US, of around 340,000, let alone the kinds of levels of around 500,000 you would expect if the economy was significantly slowing. In fact, as I wrote at the time, a lot of this increase seemed to be a result of an increase in the Quit Rate, that is workers now confident in being able to get another better paid job, actually handing in their notice, and moving to another job.
And, now, in the last few months, rather than continuing to rise, the number of new initial jobless claims is falling again, now to levels below 200,000, signifying that the labour market is tightening even further. And, yesterday's, non-farm payrolls data again confirmed this trend, as the US created a further 265,000 new jobs, as against a predicted 250,000, and about three times the number required to absorb the natural rise in the workforce, each month of around 90,000. Consequently, the unemployment rate fell from 3.7% to 3.5%, and bond yields rose once again, causing equites to sell off, once again.
The US is tightening liquidity, via QT, at a snail's pace, compared to the huge volume of money tokens printed over the last 30 years, most of which was channelled into the fictitious economy, inflating asset prices that are now being rapidly deflated, as a result of rising interest rates, with that liquidity then moving from the fictitious economy into the real economy, and so facilitating an inflation of commodity prices. I will discuss how that happens in a future post. The one thing assisting the US currently, in terms of its inflation, is the strength of the Dollar. As the Dollar rises relative to other currencies, it has the effect of raising the value of the standard of prices, counteracting the fall in its value due to excess printing of money tokens, and of credit. It reduces the Dollar price of imported goods and services, thereby, having a disinflationary effect.
Conversely, a rising Dollar means a falling value of other currencies such as the Euro, Pound, Yen, and Yuan, and that has the effect of exacerbating inflation in these other economies, at a time when they are already suffering with high levels of inflation themselves. Japan has seen the Yen fall in value against the Dollar significantly, from around Y100 to over Y140, to the Dollar. The Bank of Japan has continued to print Yen so as to buy up Japanese Government Bonds, thereby, continuing the process of pumping liquidity into asset markets to keep their prices inflated, which also continues to drain liquidity from the real economy, having a deflationary effect on commodity prices.
The Euro has fallen from around $1.40 to a below parity $0.95. And, as with the UK, higher borrowing costs for its peripheral economies, means it has had to continue its programme of QE, whilst only talking about QT, as it prints more and more Euros to buy up worthless peripheral EU bonds, to try to prevent a repeat of the 2010-2012 Eurozone Debt Crisis. The Pound fell precipitously against the Dollar following Kamikwasi Kwateng's budget, and China's currency has also fallen against the Dollar as its zero-covid idiocy continues to crater the Chinese economy, which is also printing money tokens to hand out like confetti. All three countries have intervened to try to stop further precipitous falls.
Despite that, Japan has seen commodity price inflation of 2.5%, after years of deflation, and, in part, that is the result of the falling Yen. The Bank of Japan, has, in the last week, intervened in foreign exchange markets to sell Dollars and buy Yen, slightly raising its value. The Bank of Japan has vast foreign exchange reserves with which to undertake such action, but even they are small compared to the current level of foreign exchange trading on global markets.
In 1985-7, when the Dollar was strong, the Plaza Accords led to coordinated intervention to reduce its value. But, then, the US was on board in trying to reduce the value of the Dollar, whereas today it isn't, precisely because it does some of the Federal Reserve's job of reducing inflation, but does so at the expense of other countries. Moreover, in 1985, daily FX turnover was near US$200 billion per day (on a net-gross basis) but, as of the last reported BIS figure in 2019, daily turnover is over 40 times higher at US$8.3 trillion per day. To put that in context, the G10 collectively has US$2.8 trillion in FX reserve assets (deposits and securities, so excluding gold). Ironically, one country whose currency has risen against the Dollar is Russia, as the NATO sanctions have raised oil and gas prices to the considerable benefit of Russia.
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