Prediction 1 Inflation Does Not Go Away
It said,
“Many central banks are predicting that inflation falls significantly in 2023, such that, by 2024, it will be back down to their target 2% levels, with some, even, predicting deflation at the end of that process. These are, of course, the same central banks that, in 2021, claimed that inflation was merely “transitory”, and repeatedly underestimated the level it was going to reach. Given all of my writing on inflation over the last couple of years, setting out the Marxist analysis of it as a monetary phenomenon, it should be obvious why I think these claims are going to be proved wrong.”
The prediction has been proved right. Its true that the measures of commodity prices have stopped rising at the prodigious rates of 2021 and 2022, but they are still rising, and, what is more, in every case, rising by more than the 2% target rates that most central banks set for themselves, let alone, resulting in overall falls in those price levels. In the US, which has seen those commodity price rises slow the most, they are still rising at 3.1% measured by its inflation index, and by 4% on its core inflation index. That is still double the Federal Reserve's 2% target. What is more, both the month on month inflation and core inflation measures ticked up slightly in November, compared to the previous month. The figures are also heavily influenced by the prices of manufactured goods, and energy prices, whose market prices rose most sharply following the ending of lockdowns, but whose prices have moderated, as supply has risen. But, 80% of the US economy, like most economies, is in services, and the prices of services are still rising by 5.17%, which again was up from the 5.06% the previous month.
As I wrote, in making the prediction.
“There are three reasons why the prices of commodities might rise. Firstly, the value of the commodity itself rises, i.e. it requires more social labour-time for its production than before. Secondly, the value of the standard of prices falls, i.e. it represents less social labour-time than it did before – inflation. Thirdly, there may be fluctuations in the demand and supply for commodities, so that, at one point prices rise, and at others they fall. In the last two years, all of these have played into rising prices, but, it is only the second that causes inflation, and leads to a permanent rise in prices.”
Global lockdowns disrupted supply chains, meaning that more social labour time was required for the production of commodities. The growing march to a new global imperialist war has also ensured that those supply chains have remained disrupted. The US, in particular, has entered a new period of protectionism, begun by Trump, and continued by Biden, in the form of his Inflation Reduction Act, which does the opposite of what is suggests. This protectionism has encouraged capital to return to the US, and has encouraged supply chains to be localised within the US, reversing the 40 year process of globalisation.
There was a reason for that globalisation, in the first place, which was that it reduced costs of production. So, the US, saw its costs of production rise, both because the costs were higher in the US, and because US companies, sitting behind those protectionist walls of the IRA, were able to pass on those higher costs to consumers in higher prices. In addition, lockdowns and the disruption of supply, together with the inability of supply to respond quickly when lockdowns ended, and demand rose sharply, has led to firms moving from Just In Time systems of production and stock control to Just In Case, systems. The latter is much less efficient, meaning that capital is locked up in stocks rather than production, again raising costs of production, which were passed on into prices.
But, those higher costs, tended to be a one-off, which is what led the central banks to their original claims about inflation being “transitory”. Once production has adjusted to all of the “re-shoring”, “friend-shoring”, and so on that goes with the rising protectionism, there is no further consequent increase in those costs. The costs do not fall, but nor do they continue rising significantly. However, what does happen is that once production has adjusted to these new arrangements, supply is able to rise more quickly. The element of rising prices (market prices) caused by imbalances of supply and demand, is reversed, so that market prices, for some of these commodities may actually fall. But, again, just as the rise in market prices due to such imbalances is “transitory”, so too is the subsequent fall in those market prices. The falls in general price level measures of inflation, caused by these effects is, then, probably at an end. Only the normal reduction in costs of production, resulting from the continual rise in social productivity, will impact those prices.
This is illustrated by the fact that services inflation remains higher than these other measures. One other reason for that is that services is labour intensive, whereas goods production is now capital intensive. As demand for services was restored, following the end of lockdowns, the supply of workers to meet that demand, could not be increased fast enough. To attract workers, wages were raised, including in the form of bonuses etc. Existing workers were turned from part-time, and casual workers, into permanent, full-time workers, and overtime work, and premium payments introduced. This not only raised costs of services, which were passed on into service prices, but, also, as additional workers were taken on, seen most prodigiously in the continued rise in US non-farm payrolls, month after month, repeatedly defying the predictions of speculators of a slowdown in employment, these rising wages, going into households, enabled US demand for wage goods and services to continue unabated, again defying the expectations of speculators and their ideologues for recession.
Finally, the real basis of inflation, as against just rising prices, is the devaluation of the standard of prices itself, i.e. in the US, the Dollar. As described, that devaluation is a result of an excess of currency thrown into circulation, compared to the money/social labour-time it represents, so that each Dollar represents less money/social labour-time. As Marx describes, in A Contribution To The Critique of Political Economy, this can arise for a variety of reasons. If the total value of commodities (goods and services) to be circulated is equal to 1 million hours of social labour-time, and the standard of prices ($) is equal to 1 hour of social labour-time, the money equivalent of those commodities is $1 million. If each $ performs 10 transactions per year, 100,000 Dollars are required in circulation, as the money equivalent.
So, an excess of currency, and devaluation of the standard of prices, might result from a) more than 100,000 Dollars being thrown into circulation, b) a rise in the average number of transactions performed by each Dollar (rise in the velocity of circulation), or c) a fall in the total value of the commodities to be circulated, which might be a result of i) the unit value of commodities falling, or ii) the unit value of commodities remaining constant, but the total volume of production falling. As Marx also, describes, in Capital III, if we take into consideration, the role of currency not just as means of exchange, but also as means of payment, the amount of currency required varies depending upon the extent of credit.
If 20% of the commodities are sold using commercial credit between firms, all of which cancels to zero, then only 80,000 $'s are required in circulation, because it is only the net balance (zero) that requires actual currency as means of payment. As Marx also describes, in Capital III, in times of economic expansion, not only does the number and pace of transactions rise, raising the velocity of circulation, but also, firms increase the amount of commercial credit provided. Consequently, the increased amount of currency required, as economic expansion occurs, is always proportionately less than the rise in the total value of commodities to be circulated.
In the last year, central banks stopped QE, and began a process of QT, which takes currency out of circulation, as the maturing bonds on their books are sold/redeemed. As economies continued to expand, so that the volume of output grows, then, as Marx described, this requires more currency, all else being equal. However, as described above, all else is not equal. Economic expansion means the pace of transactions rises, raising the velocity of circulation of currency; firms offer more commercial credit to each other, meaning less currency is required, and so on. Indeed, in modern economies where workers are paid by direct transfers to their accounts, and where they often pay for goods and services by similar electronic transfers out of their accounts, or else by use of debit and credit cards, this has a similar consequence to the commercial credit between firms, reducing the amount of currency required in circulation. Consequently, even as central banks reduce currency via QT, the relative excess of currency may still rise, causing the value of the standard of prices to fall, hence continued inflation.
The fall in the rate of inflation is a consequence of this fact that an excess of currency is still being produced, but at a slower pace than during lockdowns, and their aftermath, as output has expanded. Indeed, the fact that the pace of price rises has slowed, even as economies have continued to grow, in some cases, as with the US, at a significant rate, again shows the fallacy of the Keynesian theories of inflation, which had claimed that it could only be reduced by the creation of a recession! In the third quarter of 2023, the US economy grew 5.2%.
In the Eurozone, headline inflation is 2.4%, reflecting the fall in energy prices from the spikes of the previous year, but core inflation remains at 3.6%, whilst food price inflation is at 7.5% and services inflation at 4%. Moreover, the rates within different Eurozone economies differ considerably. In the UK the headline inflation rate is still 4.6%, whilst core inflation is at 5.7%. Confounding the speculators, catastrophists and Bank of England, wages are growing by 7.2%, meaning real wage growth is running at 1.54%. Productivity remains flat, meaning labour costs are rising. Full-time employment continues to rise, meaning that workers continue to be in a position to raise wages to compensate for rising prices, and more.
That means that relative wages will also rise, and firms will seek to compensate for that by raising prices. Some of those rising prices will be possible as a result of an expansion of commercial credit, even if central banks do not increase liquidity to enable firms to raise prices to recoup higher wages. Consequently, the chance of inflation falling below the 2% target figure seems small, even if we do not go back to the double digit figures witnessed in 2022.
Prediction 2 – There Will Be No Global Recession
As this prediction stated, for months, during 2022, the speculators as well as the catastrophists had been claiming that a recession was imminent, or already occurring. It wasn't. The speculators need to promote the idea of recession, for the reasons set out that they wanted workers to hold back on pay claims, firms to hold back on investment, and wanted central banks to start cutting their interest rates, so as to again inflate asset prices. Catastrophists wanted to promote the idea of recession, because, well, that's what catastrophists do, always hoping for a crisis to confirm their crude views and need for such crisis as the basis of workers rising up against the system.
But, as set out in the review of Prediction 1, the US economy, continued to grow significantly, at 5.2%, in the third quarter of 2023, and with no sign of it slowing significantly, in the final quarter either. US non-farm payrolls have continued to rise, month by month, not only above each month's estimates, but also way above what is required to cover the normal increase in the workforce, meaning that the demand for labour continues to rise ahead of the supply. The weekly jobless claims figures, also continues to run at levels associated with periods of growth, not of recession.
The second largest national economy – China – has not grown as rapidly as might have been expected following the ending of its lockdowns, but is growing at 4.9%. It is mired in financial problems, caused by the same kinds of excess liquidity seen in other capitalist economies that blew up asset prices bubbles. In China that is most notable in its property prices, and, consequent crisis for real estate companies such as Evergrande, and Country Garden. The Chinese economy is also impacted by the global trade war being conducted by US imperialism, and its allies, and the sanctions imposed on it. Similarly, European economies, particularly Germany, are impacted by the condition of the Chinese economy, as they supply high value consumer and producer goods to China.
In the EU, as suggested in the prediction, it has borne the brunt of the US war against Russia in Ukraine, and consequent sanctions, and boycotts of Russian energy. High energy prices impacted the EU and UK economies, as it impacted input prices for firms, and also drained government budgets to finance subsidies to households, as it became clear that workers were not going to sit idly by as their energy costs rose prodigiously, as a result of the boycotts on Russian energy, introduced by their governments. To compensate, UK and EU governments have curtailed necessary infrastructure spending, as the fabric of their societies literally crumbles as epitomised by the RAC concrete scandal in the UK, and the collapse of the fabric of the road system.
But, although the Eurozone has seen flat GDP in the last year that again is not recession, and as with the inflation data, covers a wide range of performance for individual economies within it. So, this prediction was also correct.
No comments:
Post a Comment