The Bond Market Bear Trap

Just over two weeks ago, global bond markets sold off, yet again, sending bond yields to new highs. Back in November of last year, the US 2 Year Treasury Yield had come close to breaching the 5% level, but, then, gradually fell, as the narrative of approaching recession, a hard or soft landing, caused by repeated Federal Reserve rate hikes, took hold, and, as a series of softer inflation figures were used to back up this story. But, the story was always a fairy tale, as I had set out, last year, and again at Christmas. Inflation was not going away, and the employment and unemployment data showed that economies were continuing to expand, labour supplies were getting tighter, wages were rising, and creating conditions for continued rises in aggregate demand.

By the start of February, the speculators were themselves having to accept that reality refuted their hopes of recession, and the conclusion that there would be neither a hard nor soft landing, but no landing at all, as I had set out last year. At the start of March, a hotter than expected inflation number, another strong jobs number, and Jerome Powell's suggestion that the Fed might have to raise rates by fifty basis points, led to the US 2 Year Yield surging to 5.10%, and the yields on other bonds rising in line with it.

Then, SVB crashed, followed by Signature Bank, Silvergate, and dozens of small regional US banks saw their share prices drop sharply too, and this also led attention back to the fact that the weakness of European banks, exposed during the 2008 global crash, and the 2010 Eurozone Debt Crisis, had never been resolved, and blew up, again, with the collapse in the share price of Credit Suisse, which, despite central bank support, had to be taken over by UBS, reminiscent of the events of 2007/8. All of a sudden, the speculators smelled blood in the water, and quickly returned to their old narrative that central bank rate hikes would break the economy, leading to recession. As set out, before, the purpose of that narrative is to try to get workers to moderate pay claims, a tactic that seems to have worked, at least on British trades union bureaucrats, and businesses to slow expansion, taking the pressure of market rates of interest, and giving space for central banks to cut rates, and so inflate asset prices once more.

In the belief that central banks would, then, have to begin cutting their policy rates, causing, first bond prices to rise, money surged into bonds, pushing their prices higher, and yields much lower. The US 2 Year Yield fell from 5.10% down to 3.6%. But, nothing, fundamentally, in relation to the economy, had changed. Some banks had seen huge drops in their share prices, and the reason for that was that these banks, like most banks, are undercapitalised, and so, when they needed to obtain liquidity, and prevent a bank run, that was exposed, because to get the liquidity, they needed to sell assets whose real market value was way below the inflated book value on the bank's balance sheet. Central banks have, again, staunched that flow, by providing huge amounts of liquidity, and, from Janet Yellen, the promise of even more, to guarantee that depositors do not lose money, in order to discourage them from taking their deposits out. But, that additional liquidity, like that provided by the Bank of England, in September last year, faced with a crisis in the UK Pension industry, as Trussonomics caused UK Gilts to crash, means yet another boost to inflation, as the standard of prices is again trashed.

There is no reason why the problems of banks should be equated with a problem for the economy as a whole. One reason for the problem of the banks is that there are just too many of them, both in Europe and in the US. In the US, particularly, it was amongst the dozens of small regional banks that the falls in share prices, were most notable, and part of the reason for that is not just contagion from SVB, but the fact that the Federal Reserve did not regulate these banks in the way it does the larger banks. Not only are larger banks, relatively better capitalised, but a small number of large banks are much easier to regulate than hundreds of small banks. A rationalisation of banks is inevitable, and as with other industries, such rationalisation, often occurs violently, via a crisis, and many of the firms in that industry going bust, and their capital being taken over, on the cheap, by others.

The speculators claim that the banking crisis means that credit conditions are tightened, because the banks will lend less to businesses to expand capital, or will have to charge higher rates for doing so, and that that is equivalent to a further raising of rates by central banks, meaning the central bank should stop raising, or even cut their rates. But, again, this is largely bunkum. The banks have not been lending large amounts to small businesses for capital investment in previous years, as 90% of that lending went to finance speculation in property of one sort or another. For large companies, if they needed to finance fixed capital investment, they could issue shares, or bonds. In fact, they issued bonds, often not to finance investment, but simply to be able to buy back shares so as to inflate the share price. With bond prices having risen, since the bank crisis, they can, now, again, raise money for investment, at less cost than before it.

But, as I have described, previously, a lot of expansion by firms takes the form, not of fixed capital investment, but of increases in circulating capital, i.e. employing more labour and materials. That is particularly the case with service industry, which, now accounts for around 80% of the economy. A fast food restaurant, does not need to build another restaurant, and buy additional machinery, for example. It can increase its sales simply by using its existing fixed capital more intensively and extensively. Existing restaurants can open for longer, more staff can be employed, and process additional components. But, that is financed by commercial credit. They simply order more from their suppliers, to be paid for in 30 days time, probably long after the money from customers for the food sold in the restaurant, has gone into the restaurants' bank account. Similarly, the workers are paid in arrears.

The bankers and money-capitalists make a big thing out of this, because they have always purveyed the myth that capital is something that its not. They have always presented capital as only money-capital, and the source of this money-capital being capitalists, who continually create it from nowhere and set it to work. Without capitalists we are told, there would be no money-capital to be able to buy factories, machines, materials or to pay wages, and banks are simply the centralising and facilitating means for such capitalists to engage in such altruism, and useful activity. But, that is false. The money-capital required to buy the additional elements of productive-capital does not come from capitalists, who continually pluck it from thin air, nor from banks, but from the realised profits of firms, which is the money equivalent of the surplus product of those firms, i.e. the surplus over and above what is required to reproduce the capital consumed in their own production. It comes from the surplus value produced by workers in production.

Provided this mechanism of enabling the circulation of money, commodities and capital is enabled to continue to function then there is no reason, why, the money-capital, realised in the normal circuit of industrial capital cannot continue to be available to finance the accumulation of capital, of which it is the money equivalent, and that applies also to the money hoards and reserves that have been previously accumulated, as a result of that process, as a result of not being immediately used to purchase other commodities for personal or productive use. The question of interest rates comes down to a matter of those who, in aggregate, hold these money hoards and reserves, as against those, who, in aggregate, seek to borrow them for use in purchasing the elements of industrial capital, and the price of that money-capital, the interest rate, that results from this interaction of demand and supply.

Banks, as commercial capitalists, making profits, as money-dealing capital, from charging a commission to transfer money, including by borrowing money from savers at one rate, and lending money to borrowers at a higher rate, should make bigger profits when interest rates rise, because the absolute difference, the spread, between what they pay to savers/depositors, compared to what they charge borrowers expands. So, the problem for the banks that have experienced problems should not be one of profitability, in relation to their trading activity. It is a problem of lack of capital, and of having relied on using inflated asset prices over a long time as a substitute for adequate capitalisation.

The banks needed to issue many more shares and bonds to increase their capital, but, like most large businesses over the last 30 years, they have sought to minimise the issue of shares, in order to inflate their own share prices, so as to inflate the paper wealth of shareholders. When that has resulted in crises, they have relied on the state coming to the rescue of the banks, and, unlike with other industries, the state has been far more likely to effect such a rescue, by providing the deficient capital, or by substituting additional liquidity for it. That is an indication of the extent to which the state simply defends the interests of the ruling class that owns its wealth in this form of fictitious capital, as against defending the interests of real industrial capital.

The ruling class speculators, and their representatives are convinced that central banks will now have to reverse course, just as they had convinced themselves of that before Christmas. But, they are wrong, and the sharp rise in bond prices, over the last couple of weeks, and fall in yields, will prove to be simply a huge bear trap, that will see those that have gambled on it losing large amounts of their money. 

There is a good reason, why some people have bought bonds, illustrated by the UK 1 Year Gilt. Currently, it is providing a yield of 3.8%. Compare that with an interest rate on most savings accounts of around 2-3%, and the attraction of taking your money out of the bank is obvious. But, the speculators, do not buy bonds, shares or other assets in order to obtain these yields (which in real inflation adjusted terms remain hugely negative, with UK inflation running at 10.4%), rather they have rushed into them, in the expectation that the yield will fall massively, as the price of the bond rises significantly, on the back of lower market rates of interest, and falling Bank of England rates.

One thing this also illustrates is the extent to which banks have not been passing higher interest rates on to savers, and part of the reason for that is that, they would also have to charge higher rates to borrowers, the majority of whom are not the beleaguered small businesses we are being told will suffer, but the vast number of borrowers for the purchase of property, whose prices are also massively inflated. What banks and building societies are worried about, as also seen in the aftermath of Trussonomics, is the effect that rising lending rates will have on property prices, which as it also crashes will mean that all of those assets, sitting on banks' balance sheets will also be seen to be actually worth only a fraction of its current book value, and so requiring even greater capital injections.

The ECB, seeing EU inflation still at 8.5%, as against 8.6% the previous month, but, having also risen by 0.8% month on month, confounding predictions of further falls, was led to raise its policy rate by a further 0.5% points. The idea that EU inflation is going to fall significantly this year, or to 2% by the end of 2024, is total fantasy. Excess liquidity created over a long period, continues to wash into the economy, and a look at energy prices, food prices and so on, all rising in high double digits, indicates that prices are set to continue to rise.

La France en flammes

The fact that Macron has tried to make French workers pay for the higher prices that flow from that excess liquidity, and from the EU's boycott of Russian energy and grain supplies, and that the response of French workers has been to take to the streets, shows the problem facing the ruling class, as labour supplies across the globe continue to tighten, improving the position of labour as against capital.

And, the same was seen in the UK, where even the headline rate of inflation rose from 10.1% to 10.4%, confounding the assertions that inflation had peaked. The trades union bureaucrats that persuaded their members to take lower than inflation pay rises, i.e. to take a pay cut, at least partly on the basis of government assurances that inflation was going to fall rapidly, will have to answer to those members, as UK inflation continues to rise above wages. Currently, workers are gaining bigger increases in their wages by simply moving jobs – average increase around 14% - than unions are getting for them, in annual pay negotiations, other than in the private sector, cases like Rolls Royce, where workers won a 16.9% rise. That is likely to mean, as it did in similar conditions in the 1960's, a further radicalisation of workers, and demands from them that their unions pull their finger out. We will need a dramatic democratisation of the unions, and new more militant union leadership in coming months.

The US, also saw the Federal Reserve raise rates by a further quarter of a point, last week, though before the recent events, a half point increase had been possible. But, as with the EU and UK, the idea that US inflation is going to fall significantly in the next couple of years is a fantasy, and the further liquidity injections in response to the bank crisis makes that even more certain. US jobs numbers continue to rise significantly, and again, the weekly initial jobs claims came in at historically low levels, confounding the speculators continual hopes that the economy would slow, and unemployment rise. It will not, as we are in a similar period to that of the early 1960's.

May '68 barricades in Bordeaux

It doesn't mean there may not be temporary slow downs, as there was during that period too, but the tightness of labour markets, rise in wages, and growing strength of labour relative to capital is now set on course, boosted by the effects of lockdowns and their removal, and the huge deluge of liquidity thrown into the real economy, as a result of it. Those are not the conditions in which employers can continue to hold down wages, nor the state impose the solutions it seeks, as with Macron's measures simply resulting in France in flames, reminiscent of May '68.

In the last couple of weeks, bonds have behaved more like meme stocks, with huge movements in prices. The speculators have convinced themselves that central banks will have to stop raising rates, and even cut them. They are wrong. Inflation may moderate, slightly, but only to rise again, as it ebbs and flows in waves, with all the data showing underlying inflation still persistent, and even rising. Central banks, as I set out last year, will continue to inject liquidity, whether its to simply enable firms to raise prices to protect profits from rising wages, or in large tranches in response to crises of pension funds, or banks, and the consequence is a further devaluation of the standard of prices, and rise in inflation.

What the central banks should do, if they really wanted to reduce inflation, is to speed up QT, to remove the excess liquidity. If they provide liquidity to banks, to prevent bank runs, they should compensate by selling more bonds off their balance sheet. But, they will not do that, because it would prevent firms raising prices to protect their profits, and would cause bond prices also to fall much more, causing the paper wealth of the ruling class to evaporate, as well as exposing the under-capitalisation of financial institutions to an even greater degree.

It is chickens coming home to roost, after 40 years of conservative social-democratic attempts to protect the interests of the fictitious-capital of the ruling-class, at the expense of real capital, and the real economy. It weakened the material base of social-democracy itself, founded upon large-scale socialised capital, and massively strengthened the position of the petty-bourgeoisie, whose numbers expanded from the 1980's onwards, in defiance of the long-term trajectory of its dissolution, and descent into the ranks of the proletariat. As a result, it strengthened all of those reactionary tendencies that go with it, of nationalism, populism and bigotry, as witnessed by their take over of conservative social-democratic parties like the Tories, victory of Brexit and so on.

Sharp class struggles are approaching as occurred in the 1960's, and the world labour movement is very ill prepared for it, as the collapse of what remains of a very confused, and misguided Left into social-imperialism, in relation to the NATO/Ukraine – Russia~China war, illustrates. Most of it is going to be rolled over and swept away like so much petty-bourgeois effluent, by workers who are finding their feet once more, but who will rapidly have to take advantage of the new material conditions that present themselves, via new technologies, to rapidly educate and organise themselves, and build the revolutionary party, and institutions required for their success. In the process, they make it impossible, as France is showing, for the ruling class and its state to revert to the old solutions of the last 40 years. When the ruling class speculators begin to realise that, as central banks are led to have to continue raising their rates in face of continued inflation, those bond markets are going to sell off on an even greater scale.

R* And R**

Last year I set out the problem facing the ruling class of speculators and coupon-clippers, and their state, which is summarised in the difference between “the neutral rate of interest” (R*), above which the economy is supposed to be constrained, and R**, the rate of interest that results in a crisis in financial markets, as asset prices are significantly reduced. As I have previously set out, Marx demonstrated that there is no such thing as a “natural rate of interest”, because the rate of interest is the market price of the use-value of capital (its ability to produce the average rate of profit), but capital is a social relation, and not a thing. It is not produced by labour (as against the commodities that comprise the physical elements of capital), and so has no value, or price of production, around which such a market price would fluctuate, as a natural or equilibrium price.

As I explained, the figure for R* is, now, much higher than for R**, meaning that the aim of the speculators to create a recession, to reduce wages, and boost profits, was impossible to achieve, because, long before that happened, there would be a financial crisis causing asset prices to crash, the prevention of which is the sole aim of the speculators and central banks. That has proved right, as, in the last few days, rising interest rates, leading to falling asset prices, caused a series of bank crashes, all of which now starts to resemble the last days prior to the collapse of Lehman Brothers, and the onset of the 2008 global financial meltdown.

This is a worse problem than was faced by Fed Chair Arthur Burns, in the 1970's.  He also began tightening monetary policy, but had to change course, as profits got squeezed, and asset prices fell.  In the 1970's, continued tight labour markets, strengthened the position of labour v capital, preventing prices from rising above wages, so squeezing profits.  Inflation spiralled higher, as wages chased prices, and interest rates rose, causing inflation adjusted asset prices to fall.  But, today we have the conditions of the early 1960's, when the process of tightening labour markets is still under way, not the 1970's, when they were about to be quickly relaxed as a technological revolution, replaced huge masses of labour across the globe.

Of course, the speculators must think they have had some success, because for months they have been saying that the central banks would risk raising interest rates to a point where something would break, and then they would have to begin cutting rates and loosening policy again. The collapse of SVB, and Signature Bank, and sharp sell-off in the shares of dozens of others, is touted that something broke, and central banks would need to start cutting rates. Sure enough money poured into government bonds, particularly at the short end, as speculators anticipated interest rate cuts, and also as some people decided that, instead of having money sitting in risky bank accounts, or bond funds, paying low yields, and with a risk of big capital losses, they may as well just hold short dated government bonds directly, in which they can avoid a capital loss, by holding them to maturity, and which are now paying higher yields than available on bond funds, or savings deposits.

Indeed, the latter is a problem for banks trying to attract deposits, because with short dated bond yields paying around 3-4%, that is nearly double the interest rate on savings deposit accounts offered by banks, other than for fixed rate, longer term accounts. To attract funds from savers they will need to raise those interest rates significantly, as they need to attract additional funds to overcome some of their current funding problems. That will reduce their trading profits, and require them to raise lending rates too, pushing market rates of interest higher, and putting further pressure on asset prices, leading to a further round of asset price falls.

On the one hand, as speculators gamble that central banks will have to stop raising rates or even cut them, and will also have to end QT, bond prices have shot up bringing bond yields down, but, with the same fear that a series of banks, including big banks like Credit Suisse are about to get crushed, stock markets have sold off by large amounts in the last few days, only to bounce when central banks promised yet more huge doses of QE and liquidity injections directly into the banks, which will again fuel inflation, to which the central banks will respond with higher interest rates, causing further asset price crashes, further undermining the balance sheets of banks, and so on.

Another part of the reason for that is that, not only are these banks now seen to be susceptible to large capital losses on their own bond holdings, as with SVB, but also, as asset prices fall, the other assets on their books, such as property, are also going to show large capital losses too. Even if banks do not go bust, they will need to raise large amounts of capital to fill the gap, by issuing large amounts of additional shares and bonds, which, in turn, will reduce their share and bond prices. In the last few days, as speculators fled banks and shares, they surged into government bonds, for safety, causing bond prices to rise and yields to fall, but, as seen with the ECB decision, yesterday, central banks then have to deal with the continued inflation now being further stoked by the additional liquidity being pumped into circulation to shore up the financial system.

The recent data across the globe shows that even headline inflation remains high, despite manipulation of energy prices by states, and some falls in global energy prices, mostly due to an abnormally warm Autumn and Winter in the Northern hemisphere, and built up stocks of gas in Europe that did not need to be replenished, but will in coming months. The data also shows continued economic growth, despite all the predictions of global recession, which also shows that whilst current levels of R* have not come anywhere near “breaking” the real economy – and will not at current levels of inflation - they are above R**, and have already started to break the fictitious economy, and destroy the paper wealth of the ruling class speculators.

Labour markets continue to tighten, meaning that total wages continue to rise, fuelling consumption, and so the need of businesses to accumulate capital. Food prices continue to rise by around 15%, and the measures of core and “sticky prices”, as well as of median levels of CPI, continue to remain high if not rise further, even as headline rates drop slightly. Service industry accounts for 80% of the economy, and services inflation continues to rise.

Some consolation, for speculators, in the US was given by the latest data for Producer Prices and Retail Sales, which showed moderation, but that is likely to be a fluke. With labour shortages, rising wages, a new round of liquidity injections by central banks, and still large amounts of liquidity sitting in consumers bank accounts (which they may want to spend rather than risk losing them in any bank failures) a new wave of inflation is being prepared.

In the US, UK and EU, the authorities are predicting that inflation will fall from current levels of between 6% to 10%, respectively, to around 3% by the end of this year, nad back to the target 2% in 2024. That is pie in the sky, as the figures for the trimmed mean, median, and core and sticky prices indicate. That is before the current huge liquidity injections to backstop the banks lead to a further fall in the value of the standards of prices, $,£, € and so on, causing further rises in prices measured by those shrinking yardsticks. The predictions of these lower levels are really just propaganda aimed at workers currently demanding higher wages to compensate for those rising prices, and specifically those employed by the capitalist state who are being forced into strike action to obtain it.

Next week, the Federal Reserve meets amid debate as to whether it will follow the ECB in also raising rates, as it had intimated, prior to the current round of bank runs, by as much as 50 basis points, or whether it will restrict its increase to 25 basis points, no increase at all, or, as some speculators are calling for, even cutting its rates, at the same time that it is engaged in huge new doses of QE, when it was supposed to be undertaking QT. My guess, and in current conditions no one can do more than guess, is that it will copy its last decision and raise by 25 basis points, as any other move might spook the markets. It will gauge the response, and then tack accordingly in its dialogue following the decision.

But, the fact remains that central banks are engaged in contradictory policy moves. They have needed to continue providing liquidity, first to enable firms to raise prices to cover rising wages, to avoid squeezed profits, and now they are injecting even more liquidity to try to rescue collapsing banks whose real problem is not lack of liquidity, but lack of capital, and fictitious balance sheets based on astronomically inflated asset prices. That has manifested itself first in the small regional banks, that are now being bailed out by the Fed, and also by other large banks, the FDIC and so on, but that increasingly means contagion to larger banks and financial institutions, via all of the range of derivatives such as Credit Default Swaps and so on, that happened in 2008. But, the big banks have the same underlying problem too, its just that they are not facing the same requirements to realise the losses on their asset portfolios yet, but, at some point, they will.

A look at Credit Suisse, a bank that, systemically, is as significant as Lehman's shows that. Its share price has collapsed; its main share owned the Saudi National Bank, has refused to provide any additional support; the cost of insuring against a default on its credit soared by more than 1000% during the week, as other speculators ditched credit default swaps, fearing they would lose their shirts if it defaults; and it has only found temporary respite from a liquidity injection and backing from the Swiss National Bank, with now calls for it to be merged with UBS, a move similar to those in 2008, which only succeeded in dragging down other banks by the problems of the ones they take over.

As I pointed out last year, in fact, the policy of raising rates by central banks is the wrong tool for reducing inflation. Inflation is a monetary phenomenon resulting from the creation of excess money tokens/credit, and to remedy it, it is necessary to remove that excess, i.e. a policy of QT. But, central banks would not do that aggressively or consistently, because to do so would prevent firms from raising prices to protect profits in the face of rising wages. On the contrary, they would continue to undertake QE, and be sluggish with any QT, precisely so that firms could do that. And, indeed, when they did start raising rates, and it began even at very low rates, to cause asset price corrections, that is what was seen. In Britain, the Bank of England had to step in to undertake new QE, at the time of Truss/Kwarteng's budget, and sharp sell off in longer dated bonds, and crisis in the pension funds, whilst the ECB, faced with soaring spreads between German Bunds, and Italian BTP's, reminiscent of the Eurozone Debt Crisis, also introduced a new version of QE to support peripheral country bonds.

The hiking of policy rates is not a means of reducing inflation, but a means of trying to provoke a recession or economic slowdown, similar to austerity, or lockdowns, with the intention of raising unemployment and so causing wages to fall, and, also, thereby, to slow down economic expansion in the real economy, reducing the demand for capital, and so reducing interest rates, and allowing asset prices to rise once more. But, for the reasons previously described, that could never work, in current conditions.

Firstly, inflation is not caused by rising wages. Secondly, it is not caused by an excess of aggregate demand relative to supply. A look at Argentina currently illustrates that point. Its inflation rate has just topped 100%. But its economy is about to go into recession, and its GDP is falling in constant prices. It has an unemployment rate of 7.1%, and wages are growing at only 4.5%. In other words, this is simply an illustration that slowing economic activity does not lead to falling inflation, but only to stagflation, as economies found in the 1970's. Reduced output, or even very slowly growing output, will, in fact, lead to higher inflation, if the currency supply, thereby, grows relatively faster, and that is exacerbated if the lower levels of output results in higher costs of production via lower levels of productivity.

But, also, as described earlier, the hikes in central bank rates, although they have been rapid, when they eventually started, have still taken them to relatively low levels. We are still way off the 5% plus levels of interest rates that existed in 2007, and yet, today, inflation, in the US, is more than double what it was then, and in Britain and Europe, is three or four times what it was then. In other words, real, after inflation interest rates, are actually negative, continuing to give an incentive for consumers to borrow to spend, rather than to save. But, as also described, current consumption spending, as with the circulating capital of businesses, is not funded from borrowing, but from current income. With employment rising, and household wages rising, that funds additional consumption, which drives additional demand for goods and services, which is what continues to be seen in the data for retail sales and so on.

Firms have to compete for this rising level of demand, and so have to increase their circulating capital, buying additional materials, employing additional workers, which again is what the data shows, especially in relation to service industry, and to growing employment levels. Firms can fund additional materials and so on via commercial credit, from suppliers, unaffected by rising interest rates. So, rising central bank rates were never going to significantly slow the economy, at these levels, and yet, already, those levels were enough to start to cause a financial crisis, as asset prices began to crash.

The demands from speculators have heightened for the central banks to stop raising rates and end QT, before they have really even started. Yet, inflation rates, particularly for services, have not fallen significantly, indeed, for services, the largest part of the economy, they continue to rise, and, now, the core rates of inflation are remaining sticky, in some cases exceeding the headline rates, creating further problems for central banks. 

As I wrote at the end of last year, inflation, even if it drops slightly is not going away any time soon, and that is all the more the case the more central banks fail to implement QT. But, the central banks are there to respond to the interests of the speculators, and so, its likely that they will heed those demands and restrain their hikes in rates, and certainly will continue to introduce new doses of QE, as the Federal Reserve did this week in its programme to allow banks to borrow from it using Treasury Bonds as collateral at par, even though the market value of those bonds, currently, is only around 80% of that figure. Increased liquidity will simply lead to a further rise in inflation, meaning that they will only have again deferred a solution.

The speculators who only a week ago were having to accept that their hopes of recession were not going to be fulfilled, and that rather than there being either a hard or soft landing for the economy, there would be no landing, as it continues to expand, are now proclaiming that a recession is imminent. But, that is, again, simply their hopes being expressed, along with their perpetual confusion of the financial markets with the real economy. There is no reason why the problems of banks and finance houses, who are suffering from decades of speculation in grossly over priced financial and property assets, as those prices again crash, or of the ruling class that is similarly suffering large capital losses, should have any impact on the real economy.

Provided that the function of banks and finance houses as money-dealing capital, i.e. as a transmission mechanism for currency, via payments and receipts, continues to operate smoothly, then capital, commodities and currency can continue to circulate, and firms can continue to sell goods and services and be paid for them, so that capital is reproduced, and production continues as normal, on an expanding scale. Not only does a large part of that expansion of capital, as circulating capital, derive from profits, and is financed by commercial credit, but those same profits are the basis of investment in fixed capital too. The idea that this capital is somehow continually injected into the economy from outside it, by “capitalists” from nowhere, is a fiction concocted by those capitalists and by the banks and finance houses.

It shows why the operation of banks and finance houses in this role of money-dealing capital, should be separated off from their role as money-lending capital, or vehicles for financial and property speculation. If the former is threatened, then, in the first instance, it is necessary to insist that the state steps in, to ensure its efficient operation, but, the real solution, under capitalism, resides in workers establishing their own cooperative banking system. It also requires workers to have control over their collective property in the form of socialised capital, so that they can ensure that the profits they produce can be used to finance the expansion of real capital, and reserves built up to that effect. But, the real solution is to end the casino economy that creates these conditions, driven by the needs of fictitious rather than real capital. It resides in a transition of socialised capital, owned by workers, but controlled by speculators, to socially owned and controlled means of production used to meet the needs of society, not the greed for paper wealth by speculators.

We should not allow 2008 to happen again, in the way the money lenders and speculators were bailed out, and it was paid for at workers expense, including by the imposition of austerity to slow economic activity, and reduce interest rates. That simply showed the way that the ruling class speculators have become entirely parasitic on real capital, as “coupon-clippers”, as Marx and Engels described them, without any social function, and in fact, how their interests have now become a fetter even on the further development of capital, let alone its transformation into socialist property, means of production used to meet the needs of society.

How Liquidity Flows From Asset Markets Into The Real Economy - Part 17 of 17

A fall in the costs of shelter, both in terms of lower house prices to buy, and lower rents, means that households have much increased disposable income. This fall in the costs of shelter, also, however, represents a fall in the value of labour-power, which should translate into lower wages, and higher relative surplus value. Of itself, that facilitates greater capital accumulation, and an expansion of the real economy, as the liquidity released by falling asset prices then facilitates this greater productive and unproductive consumption.

However, money wages do not tend to fall, being sticky downwards. Instead, this fall in wages is achieved via a relative increase in the prices of other wage goods. Moreover, the conditions described are ones in which the long wave cycle has facilitated this increase in economic activity, a rise in the demand for labour, and capital, which results in the higher interest rates which causes the asset prices to fall, and the excess liquidity tied up in assets to then be released. In those conditions, as the demand for labour rises, its not only money wages that rise, but, at a certain point, as seen, for example, in the 1960's, wage share rises relative to profits.

This is also why the notions of a negative wealth effect are wrong. From around 1965 until around 1985, asset prices fell in inflation adjusted terms, but this did not result in any kind of negative wealth effect undermining consumer spending. Quite the contrary, it was a period not only of rising money wages, but also of rapidly rising real wages, and consumer spending, including consumer spending on whole ranges of what were previously luxury goods, and on whole new ranges of goods and services developed in response to it.

If it were only a question of existing land in cultivation, or existing houses being bought and sold, then its quite true that a fall in land prices would not have this effect. But, that is not the case. New farmers enter production, and the capital they have available for productive use is very much determined by what they have to pay for land to begin farming. House and other property builders are continually buying land for new developments, and the same applies that the amount of capital they have available for productive use, and so the amount they are able to produce is determined by what they have to pay for land.

This applies to other assets too. Pension funds, receive new money from workers and employers each month, and must be used to buy additional bonds and shares, and other assets, from which to derive the revenues to meet future liabilities. Suppose, the additional liabilities that these funds must meet each year amounts to £1 million, and the average amount of interest/dividend per bond/share is £10. To meet the additional liabilities, therefore, the fund must buy 100,000 bonds/shares. If the average price of a bond/share is £100, the fund must obtain £100 million in contributions to make these purchases. This is £100 million deducted from surplus value, either directly from profit, or indirectly via wages. If, the average price of bonds/shares, however, falls to £50, only £50 million in contributions is required.

In practice, just as, when these asset prices inflated, contributions did not increase proportionately, so as to buy the same quantity of assets, leading to an undermining of the capital base of the funds, and subsequent black holes, so contributions tend not to be reduced when asset prices fall, other than that employers may seek a pension holiday, once the fund can be shown to be able to meet liabilities. Workers contributions, remain at the same monetary level, which means that the capital base of the fund gets rebuilt. Its one reason, again, the ruling class does not like such devaluation of assets, because, now, a greater proportion of them are accounted for by these workers' pension funds, rather than being in their personal possession. Again, however, their control over the majority of shares in banks and finance houses, means that these institutions, which act as managers of the pension funds, continue to also control this collective workers' property, just as they do the collective workers' property in the form of socialised capital.

The workers monetary contribution is not reduced, but as commodity prices and wages rise, it falls in real terms, so that it forms a smaller proportion of their income, leaving a greater proportion available for spending on other wage goods.  And, similarly, the owners of existing bonds and shares, whilst they now have the money paid for them in their bank account rather than that of the worker or businesses, in a climate of falling asset prices, rising commodity prices, and demand for real capital, they are more likely to throw it back into the real economy for those purposes than simply to bid up the prices of existing assets.

In short, a fall in asset prices, whilst it may have catastrophic effects for the existing owners of those assets, not only need have no such catastrophic effect on the real economy, meaning that, where some lose others gain, but also results in benefits for the real economy, because it means that, as with a release of capital, it means that money that has been tied up in the sphere of assets is released into the real economy, stimulating consumption, and capital accumulation.

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How Liquidity Flows From Asset Markets Into The Real Economy - Part 16 of 17

In conditions where the supply of money-capital exceeds the demand, so that these interest rates are falling, money can go into not only unproductive consumption, but also into speculation, into the purchase not of new bonds and shares, issued to finance additional capital accumulation, but simply to buy up existing bonds and shares, including government bonds, as well as into the purchase of property and other assets, in the expectation of making capital gains, and that is what has happened since the 1980's. But, in conditions where the demand for capital rises faster than its supply, so that interest rates rise that causes asset prices to fall so that the yields on those assets rise, and this is manifest in a fall in the prices of those assets.

Of course, as Marx sets out, the demand for money-capital does not come just from industrial capital for capital accumulation. In times of crisis, firms demand it, not as money-capital, but as means of payment, to pay their bills and stay afloat. Its at those times that actually interest rates reach their highest level, because firms are prepared to pay almost any rate to stay in business. The state also demands money-capital, not for the purpose of capital accumulation, but to cover its budget deficits, and to fund infrastructure projects. Consumers demand it, again not for capital accumulation, but to cover household budget deficits, and to finance the purchase of durable goods such as houses or cars, and so on. The fact that the demand for all of this money-capital is not for the purpose of capital accumulation, does not change the fact that, for the owner of this money-capital, it remains precisely that, money-capital, and so, as this demand rises rapidly, relative to its supply from realised profits, or savings, the amount they are able to charge in interest rates rises sharply.

So, in a final return to the situation in respect of falling land and property prices, the way this results in liquidity flowing from assets into the real economy, can be summarised as follows. As the price of land falls, the amount of capital that farmers need to tie up to buy land to cultivate falls, and this release of capital means that they can buy additional machinery, employ more labour and so on.

Its true that the landlord may now obtain only £1 million, rather than £2 million (though that may not be the case if the farmer now buys twice as much land from them, to cultivate), but, in the previous conditions of rising asset prices, the landowner was likely to use the additional £1 million to speculate in the purchase of other assets (as this is the basis upon which the asset prices keep rising), whereas, now, they are more likely to use the £1 million (or possibly £2 million if twice the land is bought) to finance additional consumption, or else to use as capital themselves, or to throw into capital markets so that others may use it productively.

Marx noted that the old landed aristocracy built up debts to fund their conspicuous consumption, using land as collateral. This is another way that the sale of land provides money which is then used as means of payment, rather than means of circulation. Either way, this money then enters the sphere of the real economy, rather than continuing to circulate in the sphere of assets, simply inflating the prices of those existing assets.

At the same time, this increase in productive activity, sucking liquidity into the real economy leads to rising money prices of commodities as against falling prices of assets. That means rising money profits, even if underlying profits remain unchanged, or even fall slightly. That facilitates companies accumulating additional capital, in response to rising aggregate demand. Similarly, builders can now buy land cheaper, build more houses, and sell them at lower prices. Liquidity previously tied up in high land prices, is thus freed to purchase additional building materials, and labour-power.

They may have smaller profits per house, but the general mass of their profit rises, because more capital is employed, and more houses are sold. Because house prices are now much lower, house rents also fall, both because tenants can more easily buy instead, and because property landlords obtain much higher rental yields. In other words, if house rent is £1,000 per month, on a property that the owner has to pay £480,000 to buy, that is a yield of 2.5% p.a., but if the same property now only costs £240,000 to buy, a landlord would make 5% in rental yield. Competition between landlords for tenants, including new landlords drawn in by these higher yields from lower prices, would push the actual rent down, towards £500 per month as a result.

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How Liquidity Flows From Asset Markets Into The Real Economy - Part 15 of 17

Its these rising interest rates that always burst asset price bubbles. Its what happened in 2008, and its happening again, now, despite all measures such as austerity combined with QE, trade restrictions, lockdowns and so on, to prevent it. Those rising interest rates, resulting in higher mortgage rates act to crash house prices, for the reasons described earlier, but they also reduce land prices along with all other asset prices, as a result of capitalisation.

Take a piece of land that produces £1,000 of rent per year for its owner. It doesn't matter whether this rent is the result of the land being used to grow potatoes, to graze cattle, or upon which leasehold houses have been built. The owner of the land has capital tied up in the ownership of the land, and the £1,000 of rent is the yield obtained on this capital, the same as if it was capital they had tied up in a bond providing them with a given amount of coupon each year, or in shares, providing them with dividends each year. Similarly, the owners of any of these assets can sell them, and buy some other asset, where the yield produced by it is higher. If a £10,000 government bond, also produces a coupon of £1,000 a year, then assuming no difference in risk between owning such a bond, as against owning land, then we would expect that the price of the land would then be, also, £10,000, so that both produce a yield of 10%. The same would be true of shares that produced a dividend of £1,000 a year.

Of course, in practice, this is not true, because different degrees of risk attach to owning these different assets. The state in developed economies, is not likely to default on its debts, so if you buy its bonds, you can expect to get your money back when the bond matures, though its real value may have declined, as a result of inflation. If you buy shares, however, the company may go bust, so that the money you paid for the shares is lost, or it may not make anticipated profits in any given year, meaning it pays out less in dividends. Consequently, you would expect to receive a higher yield on shares to compensate for this higher risk. With land, rents are fixed over several years, so even though a tenant may fail to make surplus profits from its use, the landlord still obtains the rent, unless, of course, the tenant goes bust. Moreover, unlike the market for bonds and shares, the market for land is illiquid. Bonds and shares can be bought and sold at the press of a computer key, but land can take months to buy or sell, and when prices move significantly either everyone wants to sell at the same time, or everyone wants to buy at the same time.

So, rising interest rates mean that yields rise. As Marx points out, the yield on government bonds is not the relevant measure of market rates of interest, because, as seen with QE, the price of the bond, which is a determinant of its yield, can be inflated as a result of central banks printing money tokens to buy them, or else to lend to commercial banks, so that they buy them. Rather Marx says, the relevant rate of interest is what businesses charge each other for the loan of capital. For example, a machine hire company, does not just lend machines, i.e. the use value of the machine as a machine, but also loans out capital, i.e. the money equivalent of the value of the machine. In determining how much it will charge, it seeks compensation for both of these elements.

Firstly, if the machine has a value of say, £1,000, this is what the buyer pays for the use value of the machine over its lifespan, of say 10 years. To put it another way, it loses 10% of its use value, and so also of its value, each year, equal to £100 per year. But, the machine hire company does not sell the machine. It loans it for, say, a year. At the end of the year, it gets the machine back, but its value is now, only £900, and so they seek to recoup the £100 of wear and tear from the borrower. Its like they sold a tenth of the machine to the borrower. But, in lending the machine, they also loaned it as capital, i.e. £1,000, whose use value is to be able to produce the average annual rate of profit, of say 20%, i.e. £200. Had they used the machine themselves, they would have expected to have made this £200 of profit. Therefore, they seek compensation for having foregone that profit, and for the fact that the borrower is now enabled to make this £200 of profit instead.  The machine as commodity has a value of £1,000, but as capital, it has a value of £1,200. 

The lender will not lend the machine for nothing, whilst the borrower will not pay the whole £200 of potential profit as interest either, so that the actual amount of interest is somewhere between these two extremes, and itself determined by the demand and supply for capital. If this market rate of interest is, then 5%, the borrower will pay £50 in interest, but the total amount to them for the year will be £150, including the £100 for wear and tear. This latter, they get back in the value of the commodity they produce and sell, as with every other producer using such a machine, but the £50 of interest is not transferred to the value of the commodity, and is, instead, deducted from their profit. It is this market rate of interest that, Marx says, is determinant. As the demand for capital rises, because capital accumulation increases, as the economy expands, so this rate of interest rises, and that is the case whatever manipulations central banks make of bond yields, or their own policy rates. The supply of additional money-capital comes mostly from realised profits, with some also coming from mobilised savings, and, again, if realised profits start to be relatively squeezed by rising wages, this supply of money-capital falls relative to the demand for it, causing interest rates to rise.

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How Liquidity Flows From Asset Markets Into The Real Economy - Part 14 of 17

Going back to houses, the same principle applies, A and B could stick a £200,000 price label on their houses, as they exchange, but builder C comes along who can build the same house for £100,000. Seeing that they can, however, sell such a house to A and B for £200,000 that is the price they put on it, and so make £100,000 surplus profit. The landowner, however, now charges a rent/price for this land, equal to this £100,000 surplus profit, so that, unlike with the production of cars, where surplus profits induces capital in from other firms in search of it, there is no incentive for other builders to also enter production to drive the price down, and remove the surplus profit.

If the price of existing houses falls, then the price that builders can obtain for new houses will also fall, meaning that their surplus profits would fall, and so rent/the price of development land would also fall. But, instead of this liquidity simply remaining trapped in a paper chase of never ending circulation from one asset to another (as with A and B above), one asset class to another (as with sellers of bonds buying land or equities and vice versa), the fall in asset prises, here land prices, surges out in liquidity to the real economy, as the money previously required to buy the land becomes available to buy the elements of productive capital to, actually, build additional houses, rather than merely inflate the prices of existing ones. Moreover, the production of these additional houses, and lower house prices, meaning that buyers also have revenue released, which also surges out into the real economy, because, contrary to the negative wealth effect, and trickle down theory, homebuyers and renters, now enjoying lower rents and prices to buy, now have much increased disposable income/discretionary income to spend on other commodities, giving a spur to the rest of the real economy.

The inflated price of houses is a result of excess liquidity injected into the economy over a long period of time, and particularly since the 1980's, but with that process intensified after 2008, and with the liquidity directed into the purchase of assets, and away from the real economy. If the excess liquidity is removed, via QT, and by a limitation of the quantity of new notes and coins thrown into circulation, then the value of money tokens (the amount of social labour-time each represents) will rise, so that the general level of prices is reduced.

But, in conditions, such as we have now, where economies are growing, under the dynamic of the long wave uptrend, employment is expanding, and labour supplies are dwindling, resulting in higher wages, firms will be led to continue accumulating capital, to meet this rising demand, or face losing market share to competitors. To do so, they will need to use a greater proportion of realised profit to accumulate capital, so that the demand for capital rises relative to its supply, causing interest rates to rise. In a reversal of the conditions of the last 40 years, that means that asset prices fall more precipitously, and as that means that capital and revenue is released, instead of being tied up in the purchase of those inflated assets, the corresponding liquidity provides additional demand for real goods and services.

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How Liquidity Flows From Asset Markets Into The Real Economy - Part 13 of 17

But, the fundamental driver of all this is the astronomical rise in property prices. As I have set out previously, this process began, in Britain, in 1963, when Tory Chancellor Reggie Maudling tried to goose the economy with a dose of fiscal and monetary expansion that led to rising property prices. It was again used by Tory Chancellor Tony Barber in 1972. But, its most exceptional periods were that of the 1980's, under Thatcher, up to the housing crash of 1990, and then, again, under Blair/Brown, from 1997 on, until the crash of 2008, with an even greater use of liquidity to inflate asset prices from 2009 to the present. Alongside it, at different points, went other measures to boost the demand for property such as Mortgage Interest Relief at Source (MIRAS), which allowed property buyers (including landlords) to claim tax relief on the interest on mortgages, right to buy discounts for council houses (and later housing association properties, even though the state didn't own them), and, of course, all of the various Help To Buy schemes.

These massively inflated property prices, for existing property, mean that builders can charge similarly inflated prices for any new houses they build. They do not build more houses than they can sell at those inflated prices, which is why buyers are required to buy “off plan”, rather than builders building houses speculatively, and then hoping to sell them. The only builders that do that are the small builders, who must build and sell a minimum number of houses each year, in order to stay in business. The big builders, like any other landowner, can simply sit on their land banks, if there is not enough demand at these inflated prices, watching the capital gains accrue on the increasing price of the land. That is why the amount of new house building has been so low, despite these high prices, and no matter how much they are implored to build more, they will not do so, so long as they know that the result would be an overproduction of houses, and a fall in the price they could sell them at, resulting in lower profits, and a fall below the average annual rate of profit.

Consider the position discussed earlier where A and B are both owners of houses with a price of £100,000, who decide to exchange them. A buys B's house, not with money, but with his own house, and vice versa. It is a condition of barter, with commodity/asset bought with commodity/asset.  As described, on this basis, A and B could stick any price label on these houses they liked. It would not stop them exchanging on the same basis. This is what the proponents of theories of subjective value think occurs in relation to the prices of all commodities.

However, the trouble with this is that it assumes that the only commodities being exchanged are ones that have already been produced, and that no further production is taking place. Suppose that instead of houses, A and B are exchanging cars, each with a price of £100,000. What would stop them pricing these cars at £200,000, and exchanging on that basis? It is the fact that C is a car producer, and produces cars to sell at a price of £100,000, and so, in a money economy, if A asked B for £200,000, B would say, why would I pay that when I can buy the same car from C for just £100,000, and A would say the same to B. What determines that C's price is £100,000 is the actual cost of production, and competition from all other car producers, with the same cost of production, which means that C can only sell at that price, or lose out to their competitors.

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The Latest US Inflation Data

The latest US inflation data showed it falling on both the reading of its headline and core rates, by more than had been predicted. Bond markets surged, causing yields to fall sharply, and equity markets soared. That in itself poses problems for the Federal Reserve, at a time it is supposedly trying to tighten monetary policy, because it eases liquidity conditions in financial markets. Its worth remembering that a fall in inflation does not mean prices are falling (though some, like used car prices, may), only that, overall, in the basket of goods and services measured, they are not rising so fast. But, the data also poses other problems for the Federal Reserve, the State, and bourgeois economic theory.

The argument presented by bourgeois economists, like Larry Summers, is that inflation is a consequence of an imbalance between aggregate demand and aggregate supply, and not, as Marx explained, a monetary phenomena caused by excess liquidity – printing too many money tokens, or increasing credit. So, the solution put by bourgeois economists is to send the economy into recession, so that demand is reduced, which really means creating unemployment so that workers accept lower wages, because what they really mean is that workers wages are too high, causing them to increase their demand for wage goods, and also causing firms costs to rise. Larry Summers has been open about this line of argument, saying that US unemployment would have to rise by around 50% from its current 3.5% level to over 5%, for more than a year, to reduce inflation.

Well, the latest data trashes that notion, because the US is not in recession, the labour market remains very strong, and yet, the rate of inflation appears to have taken a marked step backwards. On the same day that the inflation data was released, weekly initial jobless claims data was released, showing new claims of 225,000. That was higher than the predicted 220,000, and the previous week's 217,000, but it is way below the 260,000 figure seen back in July, and less than half the kind of figure of around 500,000 that is normal for periods when the US is in, or entering, recession. It followed last month's non-farm payrolls report also showing that the US had created 261,000 new jobs last month (about three times what is required to cover the average 90,000 new workers per month), as well as last month's data for job openings showing a further increase. So, the argument that, to reduce inflation, its necessary to increase unemployment has been shown to be baloney. That was already obvious, of course, from the fact that, over the last year or so, inflation was rising even when employment levels were much lower, and during which time hourly wages have lagged inflation.

The ruling class do, however, need to increase unemployment, and slow the economy for other reasons. Its not to slow inflation that they need to increase unemployment, but to try to discipline labour, and slow wages growth, so as to protect profits that get squeezed when wages rise. Its not to slow inflation they need to reduce wages, and slow economic growth, but to prevent those rising wages and consequent economic growth causing firms to use profits to expand, rather than paying out the profits as interest/dividends, or to buy back shares to inflate their prices. Rising demand, means that competition forces firms to expand for fear of losing market share, and, in conditions of rising wages, and a squeeze on profits, to finance that expansion, they have to retain more of the profit, and issue more shares and bonds, which reduces the prices of those shares and bonds, which, in turn, leads to less flattered figures for earnings per share, and so on, so that the multiples of p/e ratios are seen to be way too high, leading to further selling of assets.

That is why central banks have been raising their interest rates, rather than focussing on increased QT, and its why the Brexitories are now so keen to implement a new round of fiscal austerity to slow the economy. In conditions, however, where millions of workers are now lined up to defend their living standards, the Brexitories are going to struggle to push through their agenda, especially with a fatally wounded and divided Brexitory Party. Its not only that they are going to have to concede inflation busting pay rises for workers in the state and near state sector, but even as they try to shut down areas of state provision, it will fail to have the desired effect. Firstly, huge swathes of the state sector cannot be cut further without ending provision altogether, but, in current conditions, where that provision is vital, non-state providers will fill the gap, seeing new profit making opportunities, even though, often, paying workers higher wages to recruit them, and workers using this new non-state provision will simply demand higher wages to cover the cost of it. That is only a problem if you fetishise provision by the capitalist state.

There is no reason why many of these services have to be provided by the capitalist state, which itself tends to be extremely bureaucratic, inefficient and so costly in its provision. In Europe, there are centralised single payer social insurance schemes for health and social care, but the actual provision comes from non-state, often mutual, providers, and is far more efficient, and of higher standard than the NHS and social care in Britain, for example. Moreover, there are far more vital things even than health care that no one thinks twice about, which are not in the realm of the capitalist state. Food is vital, but food production and distribution is in the hands of non state enterprises. Its not fetishising control by the capitalist state (itself our immediate class enemy) that workers should focus on, but gaining our own democratic control over all of the socialised capital (state and non-state) involved in all these spheres.

So, closing down state provision of many of these things will not have the desired effect, in current conditions, because alternative providers will step in to fill the demand, themselves, then, employing workers. This is not the 1980's or 1990's. That is why the Brexitories are so intent on focussing on holding down state sector wages, and would, if they could (they can't because of internal divisions), cut pensions and benefits. And, the Brexitories own agenda of Brexit has also screwed them on that, because it has caused frictions and rigidity in the economy, and the labour market, in particular, raising costs, and making labour scarce. Hence the Brexitory Chairman of Next complaining that they need to increase immigration. That's not the result that all the racists that supported Brexit intended, but, in any case, a vain hope, because why would any skilled workers want to come to Britain on visas that give them no rights or safeguards, when they can go to fill jobs in the EU instead?

But, in the US, many of these state provided services, in Britain, are already provided by non-state enterprises, anyway. And, far from implementing austerity, the US is in the process of a sizeable fiscal expansion, although the Republicans will no doubt, again, try to derail it, even with slim majorities in the House, and possibly the Senate. The problem for the Federal Reserve is that, if the inflation rate actually has peaked, and its not clear that it has, yet, it will be under pressure to end its tightening cycle of rate rises. Its the prospect of that, or even a slow down in those rises, that caused bond and equity markets to surge, on Thursday, and also caused the Dollar to drop sharply. But, that is another example of buy on the rumour sell on the fact, seen recently in relation to the suggestion that China was going to drop its Covid-zero policy nonsense.

The reality is that real, market rates of interest are not a consequence of inflation, but of the relation of demand for and supply of money-capital. If inflation slows, and the Federal Reserve ends its rises in its policy rates, the US economy will continue to grow strongly, and the demand for labour along with it, causing wages to rise, and profits to be squeezed. Rising wages feed into yet further rising demand for wage goods, and even for some goods and services that previously workers could not afford to buy. In fact, falling inflation will accelerate that, because mobilised workers, as well as just the momentum now established for rising wages, will then have increased disposable income, causing a more rapid expansion of consumer demand.

Firms are forced by competition to accumulate capital to meet this rising demand. For many goods and services, as Marx describes in Theories of Surplus Value, Chapter 21, this accumulation of capital amounts to an accumulation of circulating capital, which takes the form of an increase in coexisting labour. It is financed out of commercial credit, rather than additional borrowing or realised profits. But, some requires additional fixed capital, which does require financing from profits or borrowing, and that means rising real market rates of interest. In either case, rising wages, as employment grows, means squeezed profits and an increased demand for money capital relative to its supply, resulting in rising interest rates, and a fall in asset prices.

In other words, firms either use some retained profit to finance the expansion, throwing less into the money markets, or into the pockets of shareholders as dividends, or else they issue more shares and bonds to raise the money, the increased supply causing their prices to fall, or else, they borrow from banks and other financial institutions, again raising the demand for money-capital, and causing interest rates to rise. These rising rates of interest cause all asset prices to fall, due to the process of capitalisation.

Bourgeois economists fail to understand this, because they see the rate of interest as the price of money (a meaningless concept) rather than the price of money-capital, and they confuse money with money tokens, believing that the supply of money, can be increased by printing more money tokens, and so, its price (rate of interest) reduced. The contradiction of the latter is shown by the fact that printing additional money tokens causes inflation, and yet they, also, believe that, at least central bank, interest rates rise or fall according to the rate of inflation. To overcome that contradiction, their theory posits inflation as being caused, not by the devaluation of the measure of value (standard of prices), but by the imbalance of aggregate demand and supply, essentially rising wages.

But, its not clear that the latest US data actually does indicate that inflation has peaked. As I have set out before, inflationary periods are usually characterised by several waves, not by a progressive rise followed by a corresponding fall. Nor do the various indices actually measure inflation itself, but only the changes in prices of various selected baskets of goods and services. So, as I pointed out at the time, the data during lockdowns was highly misleading, because the prices of all those goods and services that consumers were not able to buy, but which were prominent in the various baskets measured, fell significantly, whilst the prices of all those goods and services they actually were buying, rose sharply. Its also well known that all such indices underweight those goods and services that workers tend to buy.

The data is still reflecting the fact of changing consumption patterns of the large increase in “inside” spending now being replaced by “outside” spending, as people reduce purchases of new TV's, and so on, and begin to spend more money on entertainment, and so on. Similarly, used car prices rose significantly over the last year or so, because lockdowns and other frictions meant that computer chips for new cars were not available, and consumers unable to buy new cars, significantly increased demand for a limited supply of nearly new, used cars. Now, chip supplies are becoming available, raising new car production. This is not a change in inflation, but merely in market prices resulting from changes in demand and supply, in this specific sphere.

Another similar example is energy prices. Over recent months, oil prices rose as NATO sanctions against Russia, reduced global supplies. Increased oil prices fed through into higher US gasoline prices, threatening the chances of Biden's Democrats, so Biden tapped the Strategic Oil Reserve to reduce US gasoline prices. However, the SPR is now at very low levels, and needs to be replenished. Pushing out oil from the US and other strategic reserves, combined with the slowdown in China caused by its zero-Covid lockdowns, had resulted in oil prices falling. However, the need to replenish reserves combined with reductions in supply from OPEC+, together with rumours of an end of China's zero-Covid madness, has led to global oil prices rising again, towards and beyond $100 a barrel. Strategic reserves are likely to be replenished at much higher prices than those prevailing over recent months, and that will pass through into current prices for fuel and heating oil.

Another example is gas. In recent months, the EU, again in response to NATO's sanctions against Russian gas supplies, has attempted to build up its stocks, in readiness for the Winter. It did so at very, very high prices, because those same sanctions, had blocked supplies of cheap Russian gas via Nordstream. EU storage facilities are now more or less 100% full. That does not mean that the EU has sufficient gas to last through the Winter, because, although the EU has much better storage facilities than, say, Britain, which relied on the natural storage of the gas in the North Sea, it cannot store enough gas to provide for supply over the Winter, only to supplement the gas it needs to buy during the Winter months.

In recent weeks, with storage capacity full, it has stopped buying, reducing demand, with a consequent fall in global gas prices. However, the gas it will supply to consumers in coming months, has been bought at those previous high prices, and as that supply in storage is used up, it will still need to buy in additional supply, especially if there is a severe Winter. The infrastructure does not exist to buy in large amounts of LNG, for example, to replace Russian gas, and so, in coming months, as additional supplies must be bought, gas prices are likely to rise, yet again, and as a global commodity that will affect US gas prices too.

These energy prices feed into the costs of all other goods and services, and so this is part of another wave of inflation that may unfold in coming months. Any opening of the Chinese economy is likely to have further effects on raising the prices of energy, food and other primary products. Moreover, we are yet to see the second round effects of rising wages. Higher wages do not case inflation, but they do, as described lead to a squeeze on profits, and, to protect those profits, central banks increase liquidity so that firms can pass on the higher costs in their prices.

The strong labour market in the US means that wages will continue to rise as firms have to compete against each other for available supplies. Even in Britain and the EU, where the economic war against Russia, and damage done to the economy by inflicting high energy prices on itself, means that economic growth has been slowed, that remains the case. The latest UK GDP data showed only a 0.2% fall in the latest quarter, most of that caused by a 0.6% drop in September, accounted for entirely by the additional Bank Holidays for the Queen's funeral etc.

The chart for US Headline Inflation seems to indicate a peak, but its not at all clear that the same is true for the Core CPI, as there have been similar previous dips. 

The Core rate is more significant than the headline rate, because it gives an indication of how persistent the inflation is likely to be, rather than being affected by big changes in particular prices that may reverse or not recur. On the other hand, core rates can exclude those important things that consumers have to buy, and so changes in whose price have significant effects. Looking at the other measures of core inflation that the Fed used, in the past, to justify its claim that inflation was only transitory, this is even clearer. 

The Cleveland Fed's chart of the trimmed mean shows a dip, but it is tiny compared to the huge rise that preceded it, whilst the index of sticky prices produced by the Atlanta Fed, indicating the change in price of all those goods and services, whose prices are least affected by seasonal or temporary factors, showed no change at all. We have only month of data showing any indication that inflation has peaked, following month after month for the last year or so in which inflation has continued to exceed expectations. Time and again speculators have seized on any news or rumour to hope for the best for asset prices, which usually also means the worst for the real economy and for workers. This could be just another such instance.