Prediction 2 – There Will Be No Global Recession
For months, now, we have had financial pundits, who represent the ideas and interests of the ruling class, and speculators in general, as well as the general media, claiming that a recession was imminent, if not already upon us. The reason for such claims, even though the economic data continues to show economic growth, and particularly strong employment growth, is that speculators need central banks to provide liquidity in the form of QE, or, at least, not to be restricting it via QT, and they also require them to be reducing their policy rates not raising them. Because they associate higher interest rates with higher inflation, rather than the excess of demand for money-capital over its supply, they think that the road to lower interest rates runs through lower inflation, and because they see inflation only in terms of higher wages, they see the need to reduce wages, for which they see the need for higher unemployment, which means the need for slower growth and even recession.
Some of them are quite open about that. Larry Summers, for example, has said that US unemployment needs to rise by around 50% to more than 5%, for at least a year, so as to reduce inflation, by which he means reduce wage increases. When they see millions of workers on strike for higher pay to catch up with inflation, and see workers like those at Rolls Royce winning a 17.6% pay rise, and when they see firms scrabbling for labour to such an extent that the average pay increase for workers shifting employers is around 15%, you can imagine their fears. Of course, its not wages that cause inflation, and its not inflation that causes real interest rates to rise, but that does not matter to the speculators and their representatives for whom the only issue is easy money to support a continued inflation of asset prices.
Claims of impending recession not only justify the demands for that easy money, but they act to try to depress workers' pay claims, and firms plans to invest. After 2010, such claims were made, and QE has been justified as being necessary to prevent a 1930's style slump. But, virtually none of the QE after 2010 went into the real economy. Instead, it was pumped directly into asset prices. That is what QE does. Central banks directly buy bonds with the liquidity they create, inflating those bond prices, and reducing their yields. They also gave commercial banks liquidity to buy up bonds, and to lend out to other speculators nearly all of which (more than 90%) went into property speculation, inflating property prices. As bond prices were artificially raised, and yields lowered, so that made shares look cheaper, so encouraging speculation in shares, with firms themselves using profits to buy back shares, rather than invest in additional capital.
Indeed, far from QE preventing a 1930's style slump, by encouraging increased economic activity, it was, everywhere – except China, Africa, and other parts of Asia – accompanied by fiscal austerity designed to reduce economic activity! The two things, together, were a powerful inducement for liquidity to move out of the real economy and into speculation, so that, although, for example, the Dow rose by 1300% between 1980-2000, and by a further 40% between 2000 and 2007, before the bubble burst in 2008, between 2009 and 2019 it rose from 7,500 to 28,000. In 2020, when lockdowns were first mooted, stock markets sold off sharply, but the lockdowns simply gave central banks the excuse to return to the policy of printing money tokens and throwing them into circulation to inflate asset prices. Stock and bond markets again soared, with 20% of the economy closed down. The Dow Jones went from a low of 18,000 to close 2020 at 30,000, up 7.5% on the year, and in 2021, as the flow of liquidity continued, with economies still in lockdown, it soared further to 36,000, more than two and a half times the level it was at at the time of the 2008 bubble!
Its in 2022, as economies open up again, economic activity soared, employment continued its upward trajectory, and firms were forced to invest in additional capital, causing interest rates to rise, that first bond markets fell by the biggest amount in history, and then stock markets followed suit, with property markets in tow. Its no wonder the speculators are frantic to want a serious recession that will cause unemployment to rise, and workers to forego pay rises, and firms be able to get back to using profits to buy up useless bits of paper rather than investing in additional factories, machines and workers.
The most blatant example has, of course, been China, where lockdowns have continued in place until its population demanded they be lifted, and those protests began to spill into demands for greater political freedom, in general, and even for the overthrow of the Stalinist regime itself. There was no scientific, epidemiological basis for the lockdowns. We know that 80% of the population, i.e. those under 60, are at no serious risk from COVID, and, even more so, in relation to its later variants like Omicron. A rapid spread of the virus amongst that 80% would have quickly produced herd immunity, leaving the state only needing to isolate, and vaccinate the 20% of the population actually at risk, and primarily those over 70, which, given the authoritarian nature of the Chinese regime, should have been easy for it to do. But, it didn't, and has had even lower levels of vaccination than in the West. But, what that meant was that it could more easily justify lengthy, extensive, and repeated lockdowns, used both to restrain economic growth, and to control protests.
As western economies could no longer justify lockdowns with high levels of vaccination, and the number of seriously ill or hospitalised, let alone dying, from COVID, dropping to near zero, it had to look to alternative means of restraining surging growth, especially as populist governments were seeking electoral support on the basis of an end to the previous ten years of austerity, and even of fiscal largesse to “level up” populations. Various other viral infections such as Monkey Pox were hyped, but without success. The most successful alternative to suppress economic activity, and spread fear was war in Ukraine. But, within a matter of weeks public opinion tired of that as a look at internet searches on the subject shows. What did continue to be effective, however, was that, when NATO imposed sanctions on Russian oil and gas, it led to a sharp spike in energy prices. That spike proved useful, because it meant that many household's now saw a large part of their money going on fuel, eating into the savings and disposable income they had been using to expand their consumption, and which had fed into a surge in demand for wage goods, in turn causing firms to need to invest heavily in additional capacity.
Part of the problem with that was that these price hikes came just as Europe was entering the Spring and Summer period, when households use much less energy. It was mainly businesses that then bore the brunt of those price increases, whilst the other effect of NATO sanctions, restriction of Russian grain, fertiliser and food exports, caused global food prices to rise sharply, which mostly hit industrialising economies in Africa, rather than developed economies in Europe and North America. Higher oil prices resulting from the sanctions rebounded on Biden, as US oil companies shipped expensive oil to Europe to replace the cheaper Russian oil, and as they did so that caused petrol prices in the US to spike, endangering Biden's poll ratings, which, in turn, led to him draining the US Strategic Oil Reserve to dangerously low levels, and which now they will have to refill at much higher prices going into 2023.
The reason those prices will be much higher is that the Chinese protests that led to its lockdowns being lifted will now see the Chinese economy rebound mightily. The last time it lifted lockdowns, its economy surged by around 18%. It is set for another similar period, and that will mean that it will also suck in large quantities of primary products including Russian oil and gas, along with iron ore, bauxite, copper and so on, all of which will give a boost to the primary producers of those commodities in Africa, Latin America and so on. Chinese consumers will also be out in force again, buying western consumer goods such as German cars, and so on. So, although, the NATO sanctions will have acted to depress the Eurozone economy, which even so is not in recession, the opening of China will give a boost to global demand and trade that will prevent any recession, unless further direct measures are pursued to deliberately create one. The current rises in central bank rates are nowhere near enough to fulfil that function, and will crash asset prices long before they cause a recession.
As the US is engaged in an increasing economic war against China, it may also be the case that, in order to cushion any crash in its own asset prices, resulting from its lifting of lockdowns, China will withdraw large amounts of the liquidity it has tied up in US assets, and repatriate it to pump into Chinese assets. That will facilitate a further Chinese economic expansion whilst weakening the US both financially, as it suffers a serious asset price crash, and economically, as the Chinese economy again grows faster than the US, and secures a greater proportion of global trade and influence. Its no accident that Biden has been seeking to build additional ties with Africa, in the face of growing Chinese influence, but that seems to have gone badly, with the US having little to offer, and no real concrete proposals, at the same time that it also seems to be losing influence in the Middle East.
The predictions of financial pundits of recession are partly propaganda aimed at shifting expectations of workers, but also partly expectations themselves based on previous behaviour. The orthodox view is that employment is a lagging indicator, because its only after economies slow down that firms start laying off workers. However, as I have written before, in current conditions, of tight labour markets, employment is a leading indicator, because increasing employment leads to increased demand for wage goods, which leads to firms having to invest in additional capital, and so causing economic activity to rise. Its not just that, in the US, the last year has seen around 10 million new jobs created, which means 10 million additional wage packets creating additional demand in the economy, its also that, tightening labour markets mean that all existing 160 million workers see their wages rising. Those rises are higher than the figures for hourly wages suggest, because of additional hours worked, overtime rates, bonuses and so on, as well as the fact that larger numbers of workers are changing jobs, with an average pay increase of around 15% for having done so.
So, when we continue to see US non-farm payrolls continue to grow by between 200,000 to 300,000 per month, and we see weekly jobless claims down at around 210,000, as against a figure of around 500,000 in recessionary conditions, this is a leading indicator of huge amounts of additional wages coming in to form additional monetary demand for wage goods, meaning that competition forces firms to expand to grab their share of this growing market, which, in turn, creates additional demand for labour and capital. That is why just as with the predictions that inflation was merely transitory, the pundits have been repeatedly proved wrong in relation to predictions that job growth would slow, and so on.
But, the tsunami of strikes hitting global labour markets shows that conditions have fundamentally changed from those the mainstream analysts have in their models. Those models assume that, just as with the last 40 years, workers would not be able to raise wages, and so rising inflation would simply eat into disposable income, leading to a slow down in consumption, followed by a slow down in economic activity, and fall in wages and employment. Those conditions no longer exist, and have been falling apart ever since 1999, only interrupted by the period of austerity after 2010. Workers are demanding pay rises to match inflation, and getting them, as the Rolls Royce settlement and many more illustrate. Indeed, the fact that workers can get an average 15% pay rise just from shifting employers is indication of the underlying dynamic created by the demand and supply for labour-power.
Sharp rises in inflation, particularly fuel and food, in recent months, have bitten into household savings built up during lockdowns, and the current wave of strikes has not yet put the additional wages into workers pockets to compensate for that. But, it will, and when it does, workers will again have the funds to resume their increased consumption, meaning that firms will have to expand further, and so no recession. Given that 80% of the economy is service industry, which is labour intensive, as households now shift their spending away from the purchase of goods, undertaken during lockdowns, towards services, such as entertainment and so on, that will have an even bigger impact on increasing employment and economic activity. Although we are at much lower levels of unemployment, and higher levels of employment, we are still at levels of unemployment about 3-4 times what they were in the early 1960's, when such labour shortages led to a progressive shift, causing wage share to rise, relative to profit share, that continued through the 1960's, fuelling the consumer boom of that period, and into the 1970's.
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