US Economy On A Tear

In 2020, Michael Roberts, on his blog, wrote about a coming post-Covid slump, and he repeated the argument, subsequently, in articles in The Weekly Worker. I pointed out, at the time, that the claims were nonsense, and so they were, as the data since the ending of lockdowns has shown. No sooner were lockdowns lifted than a wave of pent up consumer spending was unleashed, and despite that going along with rising costs – not least from labour shortages – that reduced profit margins (the basis of Roberts' claim that falling profits would reduce capital accumulation, and so growth) competition drove firms to try to grab their share of this increased demand, and so, engaged in their own expansion, again, not least, in service dominated economies, an expansion of employment.

Defying all of the doom-mongering of the catastrophists, after 2022, and the hopes of the neo-liberals that have hoped and prayed for an economic slow down, so as to undermine the position of labour, and rising wages, so as to boost profits, and enable lower interest rates to boost asset prices, the US economy, in particular, has continued to grow strongly, and, most significantly, so has US employment numbers. Millions of additional workers have been employed in the US, and millions more have gone from part-time employment to full-time employment, precarious employment to more stable employment, and, with it, household earnings have risen, enabling a continuation of household consumption, even as the savings accumulated over lockdowns start to get run down.

For all of last year, the neo-liberals kept saying that the US labour market was cracking, even though there was no sign of that being the case. They looked for even the most tenuous data to support that argument, but, month after month, they were proven wrong, as employment continued to rise by large amounts, each month exceeding the highest estimates for non-farm payrolls. And, although I have set out why GDP is not a measure of output, and so rises in GDP are not a measure of output growth, the GDP figure has also exceeded the expectations, as each quarter came and went.

In the last quarter of 2023, it came in at 3.4%, which was down on the previous quarter's 4.9%, but still represents significant growth. And, last week's jobs numbers confirmed that its continuing. Not only do the weekly jobless claims numbers continue to come in at rates indicative of a period of boom rather than recession, let alone slump, but the numbers of additional jobs created continues to grow at a rapid pace. For the last month, US non-farm payrolls rose by 303,000, as against estimates of 200,000. Taken since last October, there has been not only strong jobs growth, but a rising trend of such growth.

In search of some data to support the idea that the jobs market is cooling, the ideologists of the speculators have pointed to the slow down in the Quits Rate. It measures the proportion of workers voluntarily quitting their job to move to some other, better job. It had been rising since the start of the new long wave upswing in 1999, as you'd expect, and as has happened at such periods in previous long wave cycles. It dipped after 9/11, and its aftermath, before rising again, and then falling sharply in 2008. But, since 2008, it has been on a continual rising trend. It peaked towards the end of 2022, and has since fallen back, but is, now, still at the kind of level seen prior to lockdowns. The reason it has fallen back is not an indication of a weakness in the labour market, but, if anything, the opposite.

After the ending of lockdowns, firms scrambled for workers, and paid higher wages to get them. The average pay increase for workers shifting jobs was around 14%, whereas the average pay rise for workers staying with the same employer was just around 7%, in the private sector, and much less in the state sector. But, that reflected, also, the fact that workers had not yet rebuilt the strength of their unions, and ability to get firms to pay up. Now, that has begun to change, following a surge in unionisation, including in previously non-unionised companies, and a rash of pay strikes for higher pay. In some cases, as with the US car workers, that has resulted in significant pay rises, so that, the individualist solution, represented by the Quite Rate, has been superseded by the collectivist solution, of greater collective organisation and collective bargaining.

The US economy is on a tear, which is in contrast to the situation in its subordinates in the EU and UK. The latter have suffered, as a result of the pursuit of the interests of US imperialism, in its proxy war in Ukraine against Russia, which led to the boycott of Russian energy supplies, causing Europe to face much higher energy costs, and, as a result of its global trade war against China, which has slowed global trade. As the EU boycotted Russian oil and gas, it damaged its own economies. The US, by contrast, benefited, as it was able to sell its higher priced oil and gas, to the advantage of US energy companies, and shareholders. As European companies were faced with these higher costs that resulted in both a tie-up of capital, and fall in the rate of profit. A portion of produced surplus value was resolved into constant capital (energy), rather than profit, and, meanwhile, the higher value of constant capital, caused a fall in the rate of profit, meaning less was available for capital accumulation, and so growth. I will come back to this later.

This is similar to the way that the subordinate role of European imperialism, to US imperialism, has led to it suffering in the past, to the benefit of US imperialism. For example the wars waged by US imperialism/NATO in Iraq, Syria, Libya etc., not only devastated the developing economies of North Africa, which were being drawn closer to the EU, but also led to a crisis of refugees, dealt with by European countries, not the US. Similarly, Biden has continued the global trade wars started by Trump, and has stepped up the trade war with China, not only blocking China from selling its commodities in the US (and pressuring European countries to follow suit), as with Tik-Tok, but also, blocking the sales of various technologies to China. That has restricted global trade, and, in particular, as the EU economy, notably Germany, has slowed, so that has impacted the Chinese economy, and vice versa.

Even so, the European economy has not gone into the kind of slump that had been predicted. Indeed, although the EU and UK, may have entered a technical recession, briefly, for the reasons I've set out before, its unlikely that this represented an actual reduction in output. For one thing, employment has continued to grow, meaning new value creation has continued to grow. In China, the continued imposition of lockdowns for purposes of slowing rapid growth, and of social control, has had its effect, now that they have been more generally lifted. But, the vast amounts of liquidity pumped into the Chinese system, to keep asset prices elevated, has meant that it is on the verge of an asset price bubble bursting, as shown in the problems of its property sector with the bankruptcy of Evergrande and Country Garden. That crisis is impacting on the rest of the economy, much as did the 2008 financial crash on western economies.

Yet, even so, China's economy is growing at 5.2% on an annualised basis, which is way below the 10% growth seen in previous decades, but can hardly be described as recession, let alone slump. To avoid an asset price bubble bursting, and affecting the rest of the Chinese economy, the state is likely to increase liquidity even further, leading to rapidly rising inflation, and as the Chinese economy expands, and sucks in primary products, those primary product prices are likely to rise in price, once more on global markets, as the next twist in the global inflationary spiral kicks in. Copper prices have already risen sharply, and are expected to rise another 30% this year. Iron ore prices are also rising, after having been falling. Gold is at an all-time high, not only because its production costs have risen in money terms, as currencies are devalued, but also because the actions of western imperialism in seizing Russian paper assets, gives an incentive to hold national wealth in the physical form of bullion.

But, its not only the Chinese economy, and US economy continuing to grow strongly. The Indian economy, which is seeking to challenge China in manufacturing production, is growing at 8.4% on an annualised basis, and its manufacturing at over 11%. This growth is taking place against the backdrop, and headwinds put in place, of the US's global trade wars, and rising interest rates. In fact, the rising interest rates are themselves not only a consequence of higher inflation, causing nominal rates to rise, but also of the rising economic activity, and demand for money-capital. As noted earlier, the tie-up of capital, resulting from higher energy and other primary product prices, means that a portion of produced surplus value is resolved into the replacement of this constant capital, rather than into profits. Because that appears in national accounts as lower profits (revenue), this gives the false impression that National Income/GDP has grown more slowly, or even fallen, hence the “technical recession”, in conditions where employment, and so new value creation continues to increase.

But, in conditions where, in reality, capital accumulation continues, this tie-up of capital, manifests in an increased demand, or reduced supply of loanable money-capital. If, firms have reduced profits, because a larger proportion is resolved into the replacement of consumed constant capital (and now, also, variable-capital, as real wages rise) in order to accumulate the capital required to grab their share of an expanding market, they must either retain more of their profits rather than paying it as dividends/interest, or throwing it into money markets, or else they must themselves go into those money markets to borrow additional money-capital. The first reduces the supply of additional money-capital, the latter increases the demand for it. The consequence of demand for money-capital rising, relative to supply, is rising interest rates. Hence, the latest data from the EU about reduced loan demand, may not mean what it is being presented as being.

Reduced loan demand may mean that consumers and businesses are reducing demand for loans, because of curtailing their additional consumption. On the other hand, it may mean that, given significant rises in interest rates, firms are deciding to finance capital accumulation from retained profits rather than additional borrowing. Moreover, with rising real wages, it may mean that worker households have less need to borrow to finance consumption, and are able to fund it, instead, from their higher nominal household incomes, or alternatively a combination of that along with a continued run down of built up savings, accrued during lockdowns.

Finally, recent data from the US, indicates that the petty-bourgeoisie are getting squeezed. As I have set out previously, from the 1980's onwards, the size of the petty-bourgeoisie expanded considerably, in contrast to the process of the previous century, in which it shrank, as its members were thrown into the ranks of the proletariat, resulting from the concentration and centralisation of capital. That growth in the petty-bourgeoisie, over the last 40 years, was the objective material basis of its increased social weight, during that period, as manifest in the take-over of the US Republicans, and British Conservatives, with similar processes elsewhere. But, economic expansion, now, means that workers, are again becoming organised in a way similar to the period of the 1950's through to the 1970's. Labour shortages have pushed up wages, and, now, unionisation, and an increased social weight for the working-class is making its first tentative steps in imposing itself.

Big capital, as Marx and Engels, and later Lenin, described, is able to deal, more easily with higher nominal and real wages. Labour forms a smaller proportion of its costs than for smaller capitals, and the greater productivity of the large capital, emphasises that. So, unlike the previous forty years, rising wages means that the petty-bourgeoisie is seeing their profits start to be squeezed, at a time when, also, they are facing rising interest costs on their borrowing. No wonder, therefore, that US Small Business Confidence has declined sharply, not as an indication of problems ahead for the US economy, but as an indication of a return of the normality of the squeeze on that petty-bourgeoisie, and its recognition of its impending descent into the ranks of the proletariat itself.

US GDP Rises 4.9% As It Screws The EU

US GDP, rose by 4.9%, year on year, in the last quarter. That increase is way above the average trend growth of US GDP, and now, coming nearly two years after the ending of lockdowns, cannot be ascribed, simply, to a post lockdown rebound. Of course, some catastrophists such as Michael Roberts and Paul Mason, had even talked, during lockdowns, about a post-COVID slump, which of course, was the opposite of what happened, but means that this current growth is even more impressive, by comparison. It hasn't just been the catastrophists who hoped for a slump, of course. The ruling class speculators and their ideologists have wanted to see the global economy slow down again too, so as to prevent the rise in interest rates that again threatens to crash global financial asset prices, the form in which they now hold all their wealth.

The quarterly rise in US GDP was nearly double that of the previous quarter, frustrating all the hopes of the catastrophists and speculators alike, though the latter continue to proclaim that deliverance, for them, is at hand, in coming quarters, in the form of the long predicted recession, which they hope will lead to lower wages, higher profits, a slow down in the demand for capital, and reduction in interest rates, so as to again boost the already astronomically inflated prices of stocks, bonds and property. The fact that US inflation has fallen significantly, despite this rampant growth of the economy, again illustrates the fallacy of the claims of the orthodox bourgeois economists that tried to explain it in terms of imbalances of aggregate supply and demand, requiring a recession to correct it – really meaning to discipline workers and get them to accept cuts in real wages.

In fact, despite month after month predictions of the coming recession, and slow down in the labour market, it continues to go from strength to strength too. Employment continues to rise, and initial jobless claims, having ticked marginally higher, a few months ago, have, also, been falling, once more, to levels appropriate to a period of economic prosperity, if not yet boom, rather than of recession. As I have previously described, we are not yet at the stage of the cycle in which the demand for labour significantly pushes up hourly wages, but, we clearly are at a stage where that increased employment, and shift to better paid, permanent and full-time employment, increases household incomes, facilitating continued consumer spending.

The GDP figure, however, is flattered for the same reason that, previously, it was negatively distorted. That is the effect of inflation on the tie-up and release of capital. GDP is not a measure of national output, but only of the value added to output by labour, i.e. v + s, which is also equal to revenues (wages, rent, interest/dividends, profits, and taxes). That provides the demand for end consumption, as well as savings used for capital accumulation. The much bigger, and growing, component of output is that which comprises the value of constant capital (raw material and wear and tear of fixed capital) whose value is preserved and transferred to total output, but the demand for which comes from capital, not revenues, and which is replaced directly from total output.

Changes in values (or money prices) of this constant capital, during the year, creates the phenomenon described by Marx, in Capital III, Chapter 6, and in Theories of Surplus Value, Chapter 22, of the tie-up and release of capital, which appears as a one-off fall, or rise, respectively, in the mass of profit, despite no change in the mass of surplus value. If we take, say cotton yarn, we might have the following:

c 100 + v 50 + s 50 = 200.

If, the capitalist comes to replace the consumed cotton, but its price has now risen to 120, because they must produce on at least the same scale, they will use 20 of their produced surplus value (a tie-up of their capital), to buy the required amount of cotton. Although their produced surplus value remains 50, i.e. that is the amount of free labour provided by their workers, their profit will appear as being only 30. The opposite would be the case if the price of cotton fell to just 80. This is the importance of Marx's theory of value, and the explanation of how this commodity value “resolves” into the funds for capital and revenues, as against the cost of production theory of value of Adam Smith and the TSSI, which constitutes the value on the basis of the historic values of the components of production.

Of course, firms do not, generally, only sell their output at the end of the year, and, then, replace the consumed means of production, and labour-power. Their circulating capital is turned over many times during the year, so that this process of sale and purchase, is more or less continuous, and the consequent increase or decrease in profit, resulting from the release or tie-up, is reflecting in the actual reported profit figures. If the above example is considered as happening, say, 50 times in a year, the effect on the reported profits can be seen. But, profits are also the basis for the payment of other revenues, such as interest/dividends, rents and taxes, as deductions from profit. So, if inflation causes a tie-up of capital, because the rise in input prices runs ahead of final output prices, its not only profits that would appear to be lower than they actually are, but also these other revenues.

Of course, firms attempt to compensate for that, because they seek to place the burden on workers. If wage goods prices rise faster than hourly wages, the rate and mass of surplus value rises, so that some of the reduction in profit is shifted on to wages. In conditions such as we have, of rising demand for labour, that is disguised, because workers work more overtime, go from part-time to full-time employment, additional family members get jobs and so on, so that household incomes rise.

But, as central banks reverse QE, via the selling of the bonds on their balance sheet, thereby, reducing the excess supply of currency in circulation, slowing the rate at which the currency/standard of prices is devalued, so inflation is reduced. If input prices rise at a slow rate than end product prices, this above scenario is reversed, leading to a release of capital, and flattering of profits, which, thereby, flatters revenues/GDP.

The US performance contrasts with that in the EU, reflecting the fact that the EU has been screwed over by US imperialism, as a result of NATO's war against Russia in Ukraine, and the subsequent boycott of Russian energy supplies, which caused EU energy prices to rocket. The US, unlike the EU, is a net exporter of oil and gas. As global energy prices rose, it was domestically insulated against that, as a result of its own production. Of course, US workers suffered from it, because they faced higher costs for travel and heating, whilst US oil and gas companies profited from the higher prices, at their expense. But, the US also benefited from exporting that oil and gas to the EU, and elsewhere, now at these higher prices, and consequently profits/revenues, boosting US GDP.

The EU, by contrast, saw a huge rise in its replacement cost of constant capital/energy, causing a significant tie-up of capital, and fall in its revenues. The soaring energy bills for consumers/workers, also led to to them protesting, and demanding higher wages to compensate, which would have meant a permanent rise in wages, squeezing profits. EU governments, as also the UK government, then, acted to head that off, by introducing temporary subsidies to energy bills, and households, funded partly out of profits, and partly out of increased borrowing/liquidity injections, which will hit future profits.

The EU bought in expensive gas and oil, to build its stocks in the Summer/Autumn of 2022, only to see a mild Autumn and Winter, reduce demand for energy, and global energy prices drop. But, the inevitable continuation of the war in Ukraine, as Zelensky's forces fail to make any headway, means that global energy prices are high again, as demand rises to build stocks for the coming Winter. The Zionist/US war against the Palestinians and Iran, means those prices look set to rise further. It is unlikely that Europe will dodge a bullet two years in a row, as far as Winter weather is concerned, meaning it is likely to need to continue to buy oil and gas, in addition to the use of its stocks. Last year, the possibility remained that it could do a deal with Russia for the supply of cheaper gas, but the sabotage of the Nordstream pipelines, by the US and NATO, has removed that option, which was the intention of the US, in the first place.

So, the lacklustre performance of the EU compared to the US economy is not at all surprising, given the burdens that US imperialism has imposed upon it, via the Ukraine War. Yet, even with that, European economies have not fallen into the kind of slump that the catastrophists predicted, and speculators hoped for. Indeed, for the reasons set out above, the actual growth of European economies is likely to be much greater than the GDP figures suggest. The continued rise in employment in European economies, as in the US, is indicative of that.

A Profound Economic Crisis?

Britain's new Prime Minister, Rishi Rich, in his opening address, talked about Britain facing a profound economic crisis. Of course, any such crisis is one entirely of the Brexitories making, including from his own actions over the last two years, during the idiotic lockdowns.  He was responsible for handing out large amounts of paper tokens, printed by the Bank of England, and pretending that they were money. And, of course, the Brexitories, alongside the ruling class, and other speculators, have been pushing this line about economic crisis for some time, as they try to frighten workers not to push for wages to cover inflation, and as they try to dissuade businesses from expanding, causing interest rates to rise, and so financial markets, and asset prices in general, to, once again, crash. But, is it true that Britain faces such a profound economic crisis, as against simply a crash in these asset prices, assets which are, overwhelmingly, just the property of the very, very rich?

The answer to the question is essentially no. However, that does not mean that government policies and actions, along with those of the Bank of England, may not cause such an economic crisis. A large part of the economic slowdown in Britain and the EU is down to the massive rise in energy prices. That meant that businesses had to tie-up capital to cover these higher prices for the energy they use, capital that otherwise would have been used for consumption by capitalists, or for capital accumulation and expansion of businesses. It also meant that consumers had to spend money to cover energy bills, leaving them short of money to spend on other consumption goods and services, so that firms, engaged in the provision of them, faced slowing demand, and were led to, then, slow down their own expansion.

But, firstly, those massive rises in energy prices are a direct result of NATO's boycott of cheap Russian oil and gas. They have been caused by the fact that Germany, under pressure from US imperialism, blocked the opening of the Nordstream2 gas pipeline which would have brought large quantities of cheap Russian gas into Europe. In addition, the EU introduced policies to boycott Russian oil and gas exports, which again massively increased the cost of oil and gas coming into the EU.

As the EU supported the sanctions again Russia, including exclusion from the SWIFT international payments system, Russia was left requiring payment for oil and gas to be made in Roubles, and the EU refused to do so, meaning that, as existing contracts expired, those supplies of gas also ended. So, this significant cause of economic slowdown, in Britain and Europe, is one that flows directly from British and EU policy, and could be ended, tomorrow, by simply reversing those decisions. At least it could mostly be reversed other than for the fact that the US has blown up both the Nordstream 1 and 2 pipelines to prevent the EU accessing cheap Russian gas!

But, of course, as Russian oil and gas imports were blocked, and the EU and Britain looked to other sources of energy, now, at much higher prices, states were not at all too unhappy about that, because, no longer able to impose lockdowns on populations, to curb economic activity, as the Stalinists in China have been able to do, and with opposition to the policies of austerity that had reigned after 2010, the draining of household disposable income into the payment of energy bills, now to US based oil and gas companies, in which the British and EU ruling class also have large share holdings, meant that there was a prospect of slowing the rampant increase in spending that has prompted rapid economic growth, and demand for labour that was underpinning an upsurge in wages, and strengthening of the position of labour, as labour shortages abounded, as well as the demand for capital, which was raising interest rates, and again causing asset prices to have crashed by around 20% already.

Talk of disposable income being squeezed by rising energy and food prices, as well as of general inflation rising faster than hourly wages was a useful means of spreading a new moral panic amongst populations to frighten them into being more cautious in their behaviour, to slow down spending on consumption, and for businesses on expansion. The trouble is that, despite all of that, consumers have continued spending, and businesses have continued expanding, as competition forces them to do so out of fear of losing market share, in conditions where demand for goods and services continues to increase, despite the energy and food price rises and so on.

In part, that is because, in Britain and in Europe, households were handed those paper tokens as replacement incomes, and, because they were locked down for two years, although they increased spending on some things significantly, i.e. all those things they could buy online, and enjoy indoors, their overall spending was curtailed, meaning they amassed cash hoards, paid down existing debts and so on. They now have those hoards, and strengthened household balance sheets, which they are using to finance consumption of all those goods and services they could not enjoy during lockdowns – with a concomitant hit to all those technology based expenditures they engaged in between 2020-2022, which has caused a big temporary hit to those technology companies.

So, its simply not true that there is some existing, or imminent, profound economic crisis facing Britain, the EU or the US, or indeed, much of the world. China's economy is being deliberately slowed by the Stalinists, using continued lockdowns, under its nonsensical zero-Covid policy, because, as elsewhere, each time it relaxes those lockdowns, consumption and economic activity expands rapidly, and that puts pressure on Chinese interest rates, which then threaten to burst all of the massive serial asset price bubbles that have been blown up, and which would destabilise the regime, and the Chinese ruling class whose wealth is based upon those assets. But, it will not be able to hold that position for much longer, and when that dam breaks, and a surge in Chinese economic activity arises, it will have ramifications for global economic growth, not to mention for interest rates, and a crash in global asset prices.

The most obvious manifestation of the fact that there is no economic slowdown, let alone recession, or economic crisis, is the fact that, throughout the globe, not only does employment continue to rise, but unemployment continues to fall. That is the case so much, that the speculators are demanding a recession, to stop wages rising.  Enemies of the working-class, like Larry Summers, demand that unemployment in the US, needs to rise to more that 5% for more than year, so as to discipline labour, and push wages down.  Its why central banks are raising their policy rates, in a vain hope of creating such a recession, whilst continuing with policies of QE that create inflation!

Both employment and unemployment can rise simultaneously, for the simple reason that the workforce itself continually expands. If the workforce is 1 million, of which 900,000 are employed and 100,000 unemployed, and it rises to 1.2 million, then employment might rise by 100,000 to 1 million, whilst unemployment also rises to 200,000. But, the rise in employment cannot, currently, just be explained by a rising number of workers, because unemployment is also falling, along with an increase in the number of workers moving from part-time to full-time, and temporary to permanent employment. The latest US initial jobless claims data, again, came in better than expected, at just 217,000, and is currently at less than half the number it would be if the US were entering a recession. US GDP growth for Q3, itself came in at 2.6% on an annualised basis, indicating that, far from slowing, the economy is growing.

The increase in employment is evidence that, whatever GDP data might suggest, output itself continues to expand. GDP is not a measure of output, but only of new value created during the year/time period. Its actually, not even a good measure of that, because, as a monetary figure, it is affected by a number of other factors. Given high levels of inflation, what is being seen in GDP data is the fact that significant capital is being tied up, and this is reflected in incomes, making the actual amount of new value created appear less than it actually is.

Total output value consists of c + v + s, whereas GDP, the new value created, during the year, consists only of v + s. That is, it is equal to the wages and profits in Department I and II, which forms the demand for consumption goods, and for the accumulation of additional capital (new c + v). If GDP rises or falls, it only means that the amount of new value created, and resolved into these revenues has risen or fallen, not that the amount of output value has risen or fallen, because it does not take account of changes in the value of c. But, it also does not accurately represent even the amount of new value created, either, because of what Marx explains in Capital III, Chapter 6, and in Theories of Surplus Value, Chapter 22, in relation to the tie-up and release of capital.

Suppose we have, in Year 1 total output equal to c 950 + v 475 + s 475 = 1900, and GDP - 950.  In Year 2, total output is equal to c 1000 + v 500 + s 500 = 2000. GDP is then equal to 1,000. However, during the year, the actual use values that comprise c, the constant capital, must be replaced “on a like for like basis”, as Marx describes it, in order for social reproduction to proceed. In other words, if the 1,000 c consists of 1,000 use values, another 1,000 such use values (raw materials etc.) must be bought out of the 2000 of total output, to replace them.

Suppose, however, that, between the time that the total output, equal to 2,000, is sold, and the 1,000 use values comprising c are bought, the price of these use values rises by 10%. They must still be bought, and the only way they can be bought, at a cost, now, of 1,100, is for some of the profit of 500 to be used for that purpose.  So, what would, then appear is c 1100 + v 500 + s 400 = 2000. It would appear as though profits had fallen by 100, and also that GDP has fallen, because of the tie-up of 100 of capital that previously would have formed revenue. If in the previous year, there was no tie-up of capital, and GDP was 950, it would appear that GDP had fallen by 50, to 900, whereas, in reality, it would have risen by 50, but, now, with 100 of it having been tied-up as capital to replace the higher priced constant capital.

We know that employment is expanding, and given that capitalist enterprises do not employ people to stand around doing nothing, let alone to actually reduce the amount of new value created, but rather to increase the amount of new value produced, we can assume that this increased employment, does, indeed, mean that the amount of new value being created is expanding, and, given the significant increases in employment, is expanding significantly, despite what GDP data might suggest.

We can conclude that the GDP data is simply reflecting the fact that capital is being tied up as a result of 10% rates of inflation, and frictions imposed reducing productivity, as constant capital is replaced during the year. And, a further look would tell us that, its possible that, given that hourly wages are rising more slowly than inflation, some of this tie-up of capital, which is reflected in lower profits, is itself offset by the fact that, currently, capital is able to shift some of that burden of the tie-up of capital on to labour, by money wages rising slower than prices, and raising relative surplus value.

There is also another question in relation to the amount of revenue that goes to the purchase of assets rather than commodities, with this money then being tied up in the sphere of assets rather than the general economy, which I will examine in some future posts.

In fact, its not only US GDP data that shows continued growth, albeit sluggish, but even the latest EU GDP data continues to show growth, so taking in the points above that GDP does not give an indication of output growth, the current condition does not at all signify some profound economic crisis, other than one that governments might create by idiotic policies such as those that Truss and Kwarteng attempted, or else that they deliberately create, as they did with austerity after 2010, or lockdowns after 2020, and that the Chinese Stalinists continue to implement, a version of which would be deliberately shutting down economies by creating physical shortages of energy, requiring businesses to close down for part of the week.

But, the austerity imposed after 2010, simply led to a further relative decline of those developed economies that imposed it. China continued to grow during that period, as did other Asian economies; African economies showed hardly any impact in the period after 2008, continuing to provide 6 out of the world's 10 fastest growing economies, with average annual growth rates above 10%. And, even with austerity, and QE being used to divert money and money-capital away from the real economy into speculation in assets, after 2014, developed economies too, began to expand more rapidly, and notably after 2018, the effect of which was, then, rising interest rates, and a 20% fall in stock markets, before Trump introduced a further impediment to growth via trade wars against China and the EU, and Brexit introduced the threat of frictions in Europe. As even that failed to stop global trade again beginning to rise, it was cut short in 2020, by the physical closing down of economic activity under cover of lockdowns.

In short, the continued rise in employment, fall in unemployment, tight labour markets, and continued rising demand for goods and services, in aggregate, does not give any grounds for believing that output is falling, or that economies are either in, or imminently approaching a recession, let alone some profound economic crisis. These latter facts, of continued economic expansion, causing the demand for capital to rise, and rising employment leading to rising wages, and the potential for a restriction on the increase in profits, available to finance capital accumulation, do represent a potential crisis for the ruling class, however, precisely because they recreate the conditions of rising interest rates that lead to a crash of asset prices, the form in which the ruling class, now, holds all of its wealth.

But, as Marx describes, this kind of financial crisis, causing asset prices to crash, is not at all the same as an economic crisis. Its why we should not allow the ruling class that owns its wealth in the form of that fictitious capital to exercise control of the socialised capital it does not own, and which is the collective property of the working-class. Its actions are, now, even contrary to the requirements of the capitalist system itself, sacrificing real capital on the altar of fictitious capital, and paper certificates.

Even for the continued development of the capitalist system, the existing ruling class has become a fetter, and should be swept aside, with control over capital passing to its collective owners, the working-class.

US Data Shows Why GDP Is Not a Measure of Output

The latest data, out from the US, indicates that its GDP fell for a second quarter. On some definitions, that makes it a “technical recession”. That is how all of the speculators who see bad news as good news – stock markets again soared on the news – want to portray it, as well as all of the catastrophists who continually predict the next recession as evidence of the unviable nature of capitalism. But, in fact, what these negative GDP numbers show, is simply that GDP is not a measure of output, for the reasons Marx describes in demolishing Adam Smith's absurd dogma, and also in explaining the role of a tie-up of capital.

GDP is not a measure of output (c + v + s), but only of new value created during the current year (v + s). As Wikipedia describes it, it is the value added at each stage of production, or if calculated on an income basis “This method measures GDP by adding incomes that firms pay households for factors of production they hire - wages for labour, interest for capital, rent for land and profits for entrepreneurship.” This latter definition is a perfect reflection of Adam Smith's absurd dogma that the value of output resolves entirely into revenues (v + s), whereas, as Marx describes, that is impossible, because the value of output resolves into c + v + s, and the value of c, represents an income for no one, it is merely the value of constant capital (raw materials, wear and tear of fixed capital produced in previous years) that is transferred to the value of current production, and is directly replaced out of that current production on a like for like basis. The equivalent value, and demand for this constant capital comes not from revenues, but from capital itself.

In Marx's schemas of reproduction, in Capital Volume II, he has total output value at 9,000 comprised as follows:

Department I

c 4000 + v 1000 + s 1000 = 6000

Department II

c 2000 + v 500 + s 500 = 3000

In other words, total incomes (National Income) is 3000, comprising 1000 wages in Department I, 500 wages in Department II, and 1000 profits in Department I, and 500 profits in Department II. Using the definitions used by Wikipedia above, and taken from the OECD, its clear that this is the equivalent of National Income, and of the value added by labour. It is equal to the value of final output for consumption of 3000. But, its equally clear that this 3000 is not the value of output, which is 9000.

As Marx puts it, in Capital II, this value created in the current year is equal to 1 labour year – it couldn't amount to any more, because that is tautologically true – whereas the total value of output for the year is equal to 3 labour years. The other 2 labour years comes not from current labour, but from the value of constant capital produced in previous years and merely transferred to the value of current output. The value of GDP is only the value of the consumption fund, i.e. of revenues (v + s), and not of the constant capital consumed in production, (c). In fact, the GDP is only a small proportion of the value of total output, and a declining proportion of it at that.

So, GDP data is not a measure of output, and changes in GDP are not a measure of changes in output. In fact, a look at the US economy shows this clearly. GDP is a measure of new value created in the current year. Value is labour, and new value is new labour performed. So, if additional labour is being employed, it follows that additional new value is being created. That new value divides into v + s, wages and profits, with profits itself being divided into profit of enterprise, interest/dividends, rent and taxes.

But, we know that additional labour is being employed in the US. Around 9 million new jobs have been created, around 400,000 new jobs are being created each month, on average, and workers are working additional hours as overtime, and moving from part-time and temporary work to full-time permanent employment. So, its clear that a huge amount of new value is being created in the US, as a result of all of this new labour performed, on the basis of Marx's theory.

The fact of how this new value is divided between wages, profits, interest, rent and taxes, on one level, is irrelevant, because it doesn't change the amount of new value created in total, and how it is resolved into incomes. So, how then can the fall in total incomes/GDP be explained? It would appear, on the surface, that Marx's theory must be wrong. But, it isn't, precisely because of the fact that GDP is not a measure of output, and because of another element of Marx's analysis of the process of reproduction, which is the question of the tie-up and release of capital.

As Marx describes in various places (Capital II, Capital III, Chapters 6, 49 et al, and in Theories of Surplus Value, Chapter 22) the process of reproduction is one in which the physical components of capital must be continually replaced “on a like for like basis”. That is, if a million tons of seed is planted and turned into grain, a million tons of seed must be taken from current production to replace it, for reproduction to take place on at least the same scale. But, if the value of this seed (constant capital changes), then either more of current production (tie-up of capital), or less of current production (release of capital) occurs. The effect of this, in the first case is to make it appear that less profit has been produced, and in the second that more profit has been produced.

So, its clear that, if the value of constant capital rises, to replace it on a “like for like basis” a portion of profit has to be used for that purpose. To take the case of a farmer, if they produce a surplus of grain of 100 tons, this year, as last year, but, last year they only needed to plant 10 tons of grain, but this year must plant 12 tons to get the same yield, the amount of their usable surplus falls from 100 tons to 98 tons, even though their actually produced surplus remained 100 tons.

And the same applies with GDP. Over the last year, a number of frictions have arisen, as the global economy expanded. The savings from globalisation have reached a plateau, and might even have declined, as a result of lockdowns, economic wars and so on, and this reduces social productivity, increasing the value of constant capital, so that, in order to reproduce itself on the same scale, a greater proportion of current production has to go to replacing the consumed constant capital, resulting in a tie-up of capital.

But, also, in the last year, there has been rampant inflation, and that inflation has been most marked in relation to Producer Prices, i.e. the prices of elements of constant capital from fixed capital, to raw materials, energy and so on. US Producer Prices are rising at over 11% a year, and yet US Consumer Prices are rising at only 9.4%, meaning that US companies have absorbed some of that increased price of constant capital out of profits, rather than passing it on into final consumer prices. As a result, the element passed into National Income, and into GDP from profits is accordingly reduced, even though that does not represent any actual reduction in output. And, that reality is shown in the fact that company results, overall, continue to show increasing output and demand.  This is actually a reverse of what happened in the 1980's and 1990's.

During that time, a technological revolution significantly reduced the value of constant capital. Moral depreciation reduced the value of fixed capital by huge amounts, whilst rising productivity from the use of the new technology also reduced the value of materials, improved ways of using them more efficiently, and so on. The result was a huge release of capital that also went along with a large rise in the rate of profit. I will look at other aspects of this in another post next Tuesday.

Consumers v Speculators - Part 1

On Wednesday, I set out why the speculators, and their representatives in the financial media, are banking on the real economy slowing down again, so as to reduce pressure for rising wages (squeezing profits), and rising interest rates (cratering asset prices). They hope for a goldilocks scenario, not too much of a slowdown to cause a recession, and so lead to lower profits (a hard landing), but enough to stop the current surge in demand, leading to firms increasing supply, and so demand for labour and capital, and, in current conditions of excess liquidity, also feeding into commodity price inflation. The speculators, after all, have grown accustomed to excess liquidity going directly into inflating asset prices, to boost their fictitious wealth, not into the real economy. However, if the choice is a hard landing, implying recession, they would take that over a continued booming economy, and its effects on raising wages, and interest rates, squeezing profits, and cratering asset prices.

The mentality was described by Bloomberg's John Authers, as I described a while ago. In fact, Authers, when he was still writing for the FT, back in 2013, had set out the principles of Goldilocks, as I described in my post Bust Without a Boom. Authers commented, back then, on the Goldilocks scenario existing in the 1990's and early 2000's,

“Things were “not too hot” to force central banks to raise interest rates, but “not too cold” to rid the corporate sector of profit growth.”

As I pointed out, at that time,

“Of course, this fairytale ended badly. Goldilocks got eaten by the Bear Market that resulted from the Financial Meltdown of 2008. Now as stock and bond markets soar to stratospheric levels again, the explanation given once more has an air of fairytale once more. Authers describes it as “Goldilocks On Ice”.”

That was in 2013, and by 2014, stock markets had already surpassed their 2007 bubble heights, and with QE infinity after that, followed by QE infinity plus, in the last 2 years, during lockdowns, they soared to even more surreal levels. As I wrote back in 2013, Authers described those conditions as Goldilocks on Ice. He wrote,

“The economy remains cold. Chilly enough for the US Federal Reserve and other central banks to continue with measures to support asset prices; but not so freezing that the economy lapses into crisis again.”

The chilliness was, of course, artificial. The US, first under Bush, in 2008, and continued by Obama, injected fiscal stimulus, and was, along with China, demarcated from Europe, by the fact that its economy rebounded, in a typical “V” shape from the crisis, at least until Republicans, under the whip of the Tea Party, used Congress, and control over state legislatures to limit those measures, and to hit the economy via political crises such as over the Debt Ceiling, and so on. But, in Europe, including Britain, measures of fiscal austerity were imposed from 2010, sending economies that had been rebounding strongly back into stagnation, or even recession. In Britain, it was the era of Ed Balls famous flat-lining hand signals across the Commons Chamber, and, in Europe, it was the time of the “Eurozone Debt Crisis”, and imposition of crippling austerity on Portugal, Ireland, Greece and Spain.

In his more recent Bloomberg article, referenced above, Authers quotes Dario Perkins of T.S. Lombard,

“The odds of a policy error are increasing, especially when everyone seems to be over-extrapolating COVID distortions into a new secular inflation narrative and when central banks are channelling the virtues of Paul Volcker (or, in Europe, the ’70s Bundesbank). What we need is a “growth scare,” one that is sufficient to stop central banks freaking out but not large enough to plunge the world into recession. And with all parts of the world facing near-term problems, this scare is now a distinct possibility. Combine China’s property slump (and lockdowns) with a massive squeeze on real incomes in Europe, plus tighter financial conditions in the U.S., and perhaps the world economy will deteriorate just enough to put the authorities on a more cautious policy path. In fact, this “soft patch” may be our best chance right now of a “soft landing.”"

And, as I cited, Authers commented,

“It’s just possible that the motley forces of Covid-zero, China Evergrande Group and Vladimir Putin could somehow could allow the FOMC to bring the airliner of the U.S. and global economy safely to rest on the Hudson River. Not likely, but there’s a chance.”

In fact, as I will set out in a future post, China, which has artificially hobbled its overheating economy, deliberately, with its otherwise bizarre zero-Covid strategy, is headed for hyper-inflation, as it combines this deliberate policy of restricting new value creation, via physical lockdowns, with a further increase in an already excessive amount of liquidity in its economy, and combined with an even more irrational fiscal expansion! That is what North America and Europe also did over the period of lockdowns, but they are, at least, having to end those irrational lockdowns, whereas China continues to impose them, even when natural and artificial immunity means that the link between infection and serious illness (to the extent it ever existed in the vast majority of the population) has been broken. The rest of the world faces continued, and now embedded, inflation as a result of those policies, which will take years to wash through the system, especially as central banks respond to wages squeezing profits, by yet further accommodation, whilst the irrational continuation of them by China, in an attempt to slow its economy, and avoid an asset price crash, is leading it into hyperinflation, and an even bigger crash.

The hopes of speculators, and their media representatives, of some kind of “landing”, are going to be frustrated, as I set out recently, because, in conditions where labour is in short supply, and employment is rising, you do not get a recession, or even a prolonged slow down. For one thing, in making these assessments, bourgeois economists look at only GDP, as against output. As I have set out before, GDP is only a measure of the social working-day, i.e. of the new value created by labour, in the current year. It is not the same as output, because GDP does not include the value of constant capital (raw and auxiliary materials, energy, wear and tear of fixed capital) produced in previous years, and whose value is merely preserved and transferred to current production. GDP is a measure only of new value created, i.e. v + s, not c + v + s.

In Marx's analysis, GDP was equal to only a third of the value of output, because two-thirds comprised the value of c, which was merely transferred into current production, and reproduced directly from it. Today, the difference between the value of GDP and of output is much greater, because in the last 150 years, the technical and, thereby, organic composition of capital has risen significantly, as productivity has risen. Today, a given amount of labour processes a far greater quantity of materials than it did in Marx's day, and although, the value of fixed capital, and so, of wear and tear, as a proportion of total output, has fallen (due to moral depreciation, and technological development) the total value of wear and tear is also much larger.

Changes in GDP are not solely a function of changes in the social working day, i.e. more workers employed, or the same number employed for longer, or both, as I have set out before. Changes in relative productivity of one economy to another, can make the value created by labour in one economy rise more than another, and also changes in the proportion of complex to simple labour can have that effect, as I set out some years ago in a response to Paul Cockshott. As I set out in that post, a population of 1 million, can produce more value than a population of 10 million, even with the same working day, if the 1 million's labour is complex, and that of the 10 million simple labour. Similarly, an economy that moves up the value chain, and has a larger proportion of its labour as complex labour, will produce more new value (increase its GDP) faster than an economy that does not.

However, in the short-run, when any significant change in either of these factors can be discounted, changes in GDP are merely a measure of changes in the social working-day, which is why, GDP in many countries fell by around 20%, the same as the reduction in the amount of current labour being undertaken, as workers were forcibly locked out of production, by state diktat, and economies rebounded by similar amounts as those lockouts ended, and new value creation resumed.

The factors that the speculators and their representatives are banking on are set out in the quotes from John Authers and others above, i.e. simple media reporting of various scare stories, be it pandemics, or wars that cause consumers to be more cautious in their spending, and firms to be more cautious in the investment plans; the role of high prices for energy and so on to squeeze incomes available for general consumption; increases in central bank policy rates to deter spending, and incentivise saving. But, as I have set out before, none of that seems likely to have its intended effect, in anything other than the immediate term.

Consumers, bombarded with news stories of impending recession, stagnation or stagflation, to the extent many of them ever see such stories, might change their behaviour at the margin, but mostly those spending patterns are well established. A certain level of spending is baked in, because everyone must eat, travel, buy clothes, and so on, and as lockdowns have ended, its not so much that spending on many of these declines, but that spending on other activities that were precluded, increases.

Higher prices for things like energy, do limit what is left out of incomes to spend on general consumption, but many consumers have funds built up over, the period of lockdowns, to enable them to continue spending, and seeing higher prices, projected now into the future, workers are already demanding much higher wages, and labour shortages ensures they get them. As most consumption comes out of incomes rather than savings, higher wages will more than offset higher prices for energy etc., enabling spending on general consumption to continue to rise.

And, central bank policy rates, and, thereby, rates on savings deposits, are so low in absolute terms that even large proportional rises, still amount to only small absolute increases in rates that can have little effect on the spending and saving behaviour of either consumers or firms. Moreover, with inflation at double digit levels and rising, real interest rates have grown even more negative, creating an increased incentive for spending rather than saving.

Forward To Part 2

US June Economic Data

Economic data for the US Q1, and monthly data for May came in today.  First quarter GDP came in at 6.4% as against estimates of 6.5%.  Weekly jobless claims came in at 406,000, the lowest in the post lockout period, and down significantly from the 430,000 of the previous week.  The data shows continued rapid upward pressure on inflation.  Durable goods orders were also up by 1% ex autos, though down 1.3% including autos, which fell by 6.7%, whilst capital goods orders, fuelled by rising demand from businesses facing rapidly expanding monetary demand, rose by 2.3%, way above expectations.

The data showed that the economy is growing rapidly fuelled by monetary demand, resulting from large injections of liquidity directly into people's pockets, which was burning a hole in them, as soon as they were let out to be able to spend it.  Durable goods orders were expected to rise by 0.8%, but fell by 1.3%, due to a large drop in car sales.  That drop is due to the fact that car makers had to shut down production, because surging global demand has created a shortage of microchips.  Given the temporary shutdown of car makers due to the microchip shortage, it is likely also to have had an impact on the jobless claims data too.  Without those shutdowns, jobless claims could have been back to the pre-lockout levels of 200,000, which was a sign of growing labour shortages.

The GDP data was also weakened by a sharp drop in inventories, which is an indication that retailers, in particular, have cleared their stocks, without yet having been able to replace them from suppliers.  The consequence will be a stronger upsurge in production in Q2, as suppliers ramp up production to meet those demands from retailers and wholesalers for restocking, alongside rapidly rising growth in sales.

At the same time, Joe Biden has announced a new fiscal stimulus package, promising to bring a $6 Trillion budget to Congress for infrastructure spending.  That is on top of all the other fiscal stimulus measures previously proposed.  All of this spending now promises to increase US debt to around 117% of GDP.  The US is projected to have a budget deficit of over $1 Trillion in each year for the next decade.  So far, bond markets seem to doubt that such spending will ever get through, and, together with the fact that the US Federal Reserve, which already owns a large mass of US Treasury Bills that no one else would, otherwise, want to own, continues to keep its knee heavily pressed down on the neck of the bond markets, means they have still not crashed, thereby, suspending disbelief for a while longer.

Tightening labour markets, as lockouts are lifted, rapidly rising inflation with huge oceans of liquidity, with rampant government spending fuelling huge levels of debt on top of existing high levels of household and company debt, is reminiscent of the conditions of the 1970's, when wages were rising due to a long period in which labour supplies were run down, when governments ran up large deficits to fund public spending on welfare programmes, on the Vietnam War, and on counter-cyclical measures, as economic growth began to falter, and suffer sharp contractions as with the 1973 Oil Crisis, that also saw primary product prices rising.  That led quickly to inflation at over 20% in Britain, and over 15% in the US, despite it becoming a period of stagflation, in the late 1970's.

The difference today, is only that we are at a different point in the long wave cycle, that would be closer to the equivalent of the early 1960's.  But, given current conditions that simply means that we are likely to see even sharper increases in growth, and pressure on inflation, wages and interest rates.  We are, after all, a long, long way from the kinds of interest rates of the 1960's.  In 1962, homebuyers in the UK faced interest rates of 5.50%, which rose to 15% in 1976, and 16% in 1981.

In the US, 3 Month Treasury Bills rose steadily from under 0.5% in the 1940's, to 4.5% in 1960.

Monetary authorities will have some rapid catching up to do.