Martin Thomas On Inflation - Part 17 of 25

Maintaining the low interest rates, and inflation, even after 2008, has required a monumental effort by the ruling class, including a deliberate damaging of capital itself. It required large-scale fiscal austerity to undermine the economy across the globe, at the same time as an even more astronomical increase in liquidity, which was even more deliberately driven into the sphere of speculative assets, via QE, and by government policies to encourage property speculation, thereby, also driving liquidity out of the real economy, and into asset markets.

But, even that was not enough to prevent global growth rising, even with policies to reduce trade, such as the US's trade war against China and the EU, and its many economic sanctions against countries across the globe, and such as Brexit. As global growth and interest rates began to rise again, in 2020, it was only abruptly ended by the imposition of physical lockdowns of economies, whose idiocy, and real purpose was shown by their continued use by the Stalinists in China, to slow economic activity, and control populations, in the hope of staving off a while longer the rise in wages, interest rates, and crash of asset prices.

Martin writes,

“In my investigations of the 2008 crash later written up in the book Crisis and Sequels I asked Costas Lapavitsas, a Marxist writer specialising in finance, whether governments' emergency policies would unleash inflation (as then looked possible or even likely).

They might, Costas replied, but probably not. The squalls of incipient inflation died away, and I didn't return to the question.”

But, of course, the inflation did not die away at all. It simply continued to appear in the same way it had for the previous 20 years, as an inflation of asset prices.  (Indeed, for several years, even consumer prices, in Britain, ran at over 5%).

Between 1980 and 2000, the Dow Jones rose by 1300%, although US GDP rose by only 250%. The same was true of the S&P 500, and other indices. By 2007, the Dow had risen a further 40% to 14,000 (pretty much in line with the US GDP growth between 2000 and 2007). In the crash it fell to 6500 in March 2009. But, in the following 13 years, it has risen to a high of 37,000 in January 2022, and even now, after the falls in asset prices of recent months, it stands at 34,000, or two and a half times the extreme bubble level it hit in 2007. In the same period, US GDP has risen by just 50%.

In other words, it stands at even more astronomically inflated levels, today, than it did at the time of the 2008 crash, and that has been brought about simply as a result of the inflation of asset prices via huge injections of liquidity by the central bank. Part of the problem facing developed capitalist states is shown in the comparison between US and Chinese GDP between 2009 and 2021. The latter tripled during that period. The ruling class can try to hold back economic growth, in order to limit wage growth, and interest rates, so as to prevent further crashes in asset prices, but, as they do so, other developing economies fill the gap, just as monopolies if they seek to limit their own expansion, only encourage other smaller capitals to increase their own market share.

In the last part of his article, Martin, basically, collapses into an orthodox, Keynesian explanation of inflation that is really a discussion of market prices, rather than the phenomenon itself. It is based upon market prices, as driven by supply and demand, and competition, rather than an examination of the material conditions standing behind those superficial manifestations of social processes. So, we are told,

“One factor adduced is increased world-market competition - cheaper imports driving down prices. However, there had been a previous surge of world-market competition in the late 1960s, which plausibly had been a factor in increasing inflation (capitalists seeing diminished profits, so increasing mark-up where they could, and having that facilitated by anxious governments).”

The evidence that competition is the cause of neither inflation, nor deflation is given in the statement itself, in which its argued that it results in higher prices at one time, and lower prices at another! This is just a restatement of the orthodox Keynesian view of inflation arising from an excess of aggregate demand, and deflation as an excess of aggregate supply. In Theories of Surplus Value, Chapter 17, Marx illustrates the fallacy of Say's Law, and shows that, at any one time, there can be an overproduction of all commodities, because there is an increased demand for the general commodity – money. In other words, commodity owners, having sold, and obtained money, decide to hold on to the money, rather than spend it. This overproduction of commodities leads to commodity owners attempting to clear the market by reducing their prices.

But, this is not the same as deflation. Has the value of commodities changed? No. Their market prices have fallen, temporarily, because of the glut, i.e. the commodities represented a quantity of unnecessary social labour, because a quantity of them did not represent use values for consumers, at their market value. 

If supply is reduced, correspondingly, because some producers go bust, and leave production, then the market prices of these commodities will revert to their previous level, unless, as less efficient producers are now removed, the market value of the commodities itself is reduced, as the average labour-time required for production falls. In fact, as Marx sets out in A Contribution To The Critique of Political Economy, such conditions can lead not to deflation but inflation (stagflation), because the quantity of money tokens is not reduced proportionate to the total value of commodities to be circulated.  Keynesian policy, indeed, increases it, as part of a demand stimulus, witnessed in the Weimar and 1970's stagflations.

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A Contribution To The Critique of Political Economy, Chapter 2.3 Money, a) Hoarding - Part 1 of 6

a) Hoarding

“The coin itself becomes money as soon as its movement is interrupted. In the hands of the seller who receives it in return for a commodity it is money, and not coin; but when it leaves his hands it becomes a coin once more.” (p 125)

But, this process of circulation of commodities and coin, itself, necessarily leads to the movement of coin being suspended, and so the creation of money reserves and hoards.

“This happens whenever a sale is not immediately turned into a purchase.” (p 125)

The whole nature of commodity production and exchange, as against that of direct production, is that production and consumption – supply and demand – is separated. Take an independent weaver. They produce cloth, and the frequency with which they take cloth to market is determined by the amount of time required by them to produce sufficient cloth to be sold. In Capital II, in examining the turnover of capital, Marx calls this time the production time. It comprises two elements. First is the working period, which is the actual amount of time in which labour is expended on production, but for some commodities, such as agricultural products, or wine, it involves a period where labour is not actively expended, but where natural chemical processes are required.

For a weaver, it may be, for example, that the optimum quantity of cloth for them to produce, to take to market is 10 metres. After all, it must be a sizeable amount, because taking it to market requires their time, which, otherwise, could have been used in production. Their labour in production is what creates value, whereas their labour in merely selling the cloth, whilst necessary, does not create value, but only realises the value already created. To produce this 10 metres of cloth may take a month. The weaver may also buy wool or cotton or flax, on a similar monthly basis, to replace the consumed material, but they may also not want to store that quantity of material, and so buy it, say, each week. So, already, even in relation to their production, it can be seen that sales and purchases, C – M, and M – C, do not coincide.

They sell 10 metres of cloth, and obtain £10, but may spend only £1 to buy materials, for the week ahead, with £3 forming a money reserve, only spent over the coming month to buy materials. As a full-time weaver, they no longer spend time producing their own food, as Lenin describes in relation to the development of commodity production in Russia, for example, in “On The So Called market Question”. But, they must still eat, drink and so on, and the frequency with which they must do so is in no way related to their production of cloth, or the frequency with which they obtain money from its sale. In times before refrigeration, canned goods and so on, the purchase of fresh food might be a daily requirement, so that, for this element of their spending, M – C, a totally different frequency, and series of circuits is established.

However, to be able to buy without selling requires, also, that, at some previous point, they have sold without buying. Initially, they must have bought material before they had sold cloth produced with such material. But, to buy the material, they had to have sold cloth, or something else, to obtain the money to buy the material. Consequently, these different frequencies with which they sell and obtain money, compared to those in which they buy, and so dispose of money, of itself requires that, as well as having always stocks of materials waiting to be processed, and stocks of finished cloth waiting to be taken to market, they must also hold stocks of money itself, money reserves and hoards.

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Martin Thomas On Inflation - Part 16 of 25

In the 1980's, although the mass of profit did not rise so rapidly, because capital itself grew less rapidly, so employing less additional labour, and creating less additional new value, the rate of profit rose sharply, because the new labour saving technologies, introduced, led to falling wage share, and rising profit share, raised the rate of surplus value, and also brought about a significant fall in the value of both constant (particularly fixed) and variable capital, which also created a huge release of capital. That meant that the supply of additional money-capital rose significantly compared to the demand for it, causing interest rates to begin a secular, and long term decline, from around 1982 onwards.

So, its simply wrong, when Martin says,

“The "Thatcherite" policies "worked" to reduce inflation - but only by way of bringing long periods of slump, union-bashing, high unemployment, and increased social inequality, which of course reduced market demand and pushed bosses to moderate prices and seek redress instead via cutting labour costs.”

Just as its wrong to claim that it was Volcker's policies that had worked to reduce US inflation. Had capital not, in the 1970's, responded to the shortage of labour, and consequent crisis of overproduction of capital, by engaging in a new period of technological innovation, so that it could begin replacing labour on a large scale, then worker's would have continued to increase wage share, and central bank's would have responded by continuing to increase liquidity to enable firms to raise prices to compensate for rising wage costs, so that inflation would have continued an upward spiral. Indeed, central bank chairman Arthur Burns is remembered for having introduced more restrictive monetary policy, in the 1970's, but to have withdrawn it, leading to inflation rising sharply once again, in the late 70's, and early 80's.

The reality is that Burns had to reverse, because, at the time, labour was still strong, and able to raise wages to, at least cover price rises, so that restrictive monetary policy led to wage share rising further relative to profit share, as money wages (and the social wage) rose faster than prices. The breakdown of the Social Contract, and the Winter of Discontent (1978/79) in Britain, was an indication of it.

Its only when, the effects of the newly introduced technologies undermined labour, creating a relative surplus population that prices could rise faster than wages, and workers could be systematically defeated, in the 1980's. The undermining of the power of labour, via labour-saving technologies, is also what led to the period of stagnation, just as it had in the 1870's-80's, and in the 1920's-30's. Its not government or central bank policy that enables this, but the normal operation of the long wave cycle, and the change in material conditions resulting from it.

Martin skips over the period 2000-2008, describing it as a period of low inflation, and low interest rates. But, its the period that is currently most interesting. It is the period immediately after the start of the new long wave upswing in 1999. Far from that being marked by low inflation, it saw the usual surge in demand for food and primary products, which cannot be quickly met from existing sources, and requires a large increase in investment in new farms, mines and so on, driven on by a sharp rise in primary product prices. In the post-war period, the new long wave upswing, which began in 1949, required married women to join workforces, required the encouragement of immigration to increase the workforce, and rise in the social working-day. It was not until the early 1960's that the effects began to cause wage share to rise notably.

After 1999, the US saw increased migration from the South, and the EU's free movement of labour saw workers migrate from its East to fill job vacancies in the West. Britain took on 2 million migrants to fill jobs in skilled areas, such as for plumbers, and so on. Even so, employment grew so rapidly that wages started to rise, even though unions remained historically weak, as firms competed for labour.

That was true globally, with the working-class growing by a third in the first decade of the new century. Even with new global sources of food and primary products, by 2008, this increased global workforce was demanding food at a level that led to huge price rises, and a global food shortage, leading to food riots. By 2007, interest rates were already rising, as was inflation, and workers such as UK lorry drivers were able to demand a 14% pay rise, and to have it conceded after just 2 days of industrial action, and similar things happened across Europe. As interest rates rose, from what had been historically low levels, it was enough to cause asset prices, which had been perpetually inflated by the liquidity thrown into circulation over the previous 20 years, and diverted into such speculation, to crash, bringing about the global financial meltdown of 2008.

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A Contribution To The Critique of Political Economy, Chapter 2.3, Money - Part 2 of 2

So long as the money acts as currency, it does not act as money. It forms simply a moment in the circuit C – M – C, passing into and immediately out of my hands. Its only when its movement is halted, when I hold on to it, that it becomes money rather than currency. Now, it acts as a store of wealth, as the equivalent form of all these other use values I may obtain in exchange for it. And, as equivalent of all these other use values, it also becomes the physical embodiment of exchange-value itself. The desire to sell, in order to obtain money, and to then hoard this money, as such a store of wealth, and as the physical manifestation of that wealth, the ability to convert it, at will, into an infinite number of use values, becomes compelling.

But, such accumulations of money then mean that the money can form the start point of the circuit M – C – M, which raises the question why would anyone use money to buy commodities only to sell them, and so obtain the same amount of money they began with? If M is 1 gram of gold, it exchanges for, say, linen whose value is equal to 1 gram of gold. When the linen is sold, 1 gram of gold is similarly obtained for it. In the circuit C – M – C, the value of C – M, and M – C are identical, but the use value, for me, of the final C is greater than that of the first C, which I sell to obtain it, and that is, exactly, what makes this exchange possible. However, in M – C – M, not only do M, C and M have the same value, but the use value of the first M – 1 gram of gold – is identical to the final M.

“But if one translates M—C—M into the formula – to buy in order to sell, which means simply to exchange gold for gold with the aid of an intermediate movement, one will immediately recognise the predominant form of bourgeois production. Nevertheless, in real life people do not buy in order to sell, but they buy at a low price in order to sell at a high price.” (p 123)

This is the fundamental basis of commercial capital, which rests upon unequal exchange, as against industrial capital, which rests upon equal exchange and the creation of surplus value in production. It is also the basis of interest-bearing capital, and of landed property. It is the reason that all of these forms of property could stand on one side, as against industrial capital, in the 19th century, as described by Engels in The Condition of the Working Class.

Commercial capital, and interest-bearing capital come into existence soon after the development of money, but, as Marx describes, wherever they dominate, they are inimical to the development of industrial capital. In the case of commercial capital, the owner of money buys commodities at a price below their value, and then sells them at, or above, their value, obtaining a commercial profit from doing so. A money lending capitalist simply lends money-capital on condition of being paid back a greater sum of money at some future date.

The result is, then, that, in terms of use-value, the M at the start of this circuit is qualitatively identical to the M at the end of the circuit, but they are, however, quantitatively different, i.e. we have M – C – M`, or even just M – M`, in the case of interest bearing capital. In the process, therefore, M, which originates simply as money, out of the process of commodity exchange, is transformed into capital, and money itself becomes the object of these exchanges, precisely because it now has the potential to become capital, to become self-expanding value. Its owner no longer has to engage in labour to obtain value, but can simply appropriate value from this ownership of capital, in the form of commercial profit or interest, just as the owner of landed property appropriates value in the form of rent.

“Money and commodity in the circuit M—C—M therefore imply more advanced relations of production, and within simple circulation the circuit is merely a reflection of movement of a more complex character. Hence money as distinct from the medium of circulation must be derived from C—M—C, the immediate form of commodity circulation.” (p 123)

Gold, as measure of value/unit of account, does not have to be present to fulfil this function of money. It is only nominal gold, or nominal money. Gold, as coin, is present, but may or may not be present in the amount of money nominally represented by the coin, as a result of the coin being debased. It is only symbolic gold, or symbolic money. It is only as actual gold that it “is money, or money is real gold.” (p 124)

Gold, in this corporeal form, therefore, becomes the natural symbol of wealth, and the form in which hoards are amassed.

“It is the "epitome of all things" (Boisguillebert), the compendium of social wealth. As regards its form, it is the direct incarnation of universal labour, and as regards its content the quintessence of all concrete labour. It is universal wealth in an individual form. Functioning as a medium of circulation, gold suffered all manner of injuries, it was clipped and even reduced to a purely symbolical scrap of paper. Its golden splendour is restored when it serves as money The servant becomes the master. The mere underling becomes the god of commodities.” (p 125)

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Martin Thomas On Inflation - Part 15 of 25

I will turn now to the question of inflation and interest rates. Martin says,

“In the 1980s, interest rates were pushed high to tighten credit in a more slippery system with much faster-moving and more extensive bank activity, and thus restrain money-creation.”

In fact, looking at real interest rates, as against nominal interest rates, a quite different picture emerges, as the following World Bank chart of US and UK real interest rates between 1961-2021 demonstrate.

Looking at real, i.e. adjusted for inflation, interest rates, in the US, they rose steadily from the mid 1970's, as the squeeze on profits, was manifest in a need to finance a greater proportion of capital accumulation from borrowing, in conditions where that same growing wage share, which squeezed profits meant that there was growing consumer demand fuelling aggregate demand, and a consequent need of firms to accumulate capital to meet it.

The same is seen in Britain. In the US, real interest rates peaked in 1981 at 8.6%, and then fell progressively to 3.5% in 1993, before rising again until they reached 6.8% in 2000. In the aftermath of the financial crisis of 2000, they then fell until 2003, but, confirming the analysis above, as the new long wave expansion, begun in 1999, reasserted itself, they rose again, reaching 5.2%, in 2007, ahead of the global financial crisis. Even so, by 2011, the US real interest rate was rising again until 2019, when the effects of lockdowns brought about a sharp fall, but 2022 has seen the long wave and laws of economics reassert themselves, as not only has inflation risen massively, but bond markets have seen their biggest falls in prices in history, with a corresponding rise in bond yields, which is now also being manifest in rising real interest rates.

As I have set out elsewhere, real interest rates do not rise as a consequence of inflation. The reason for that is simple. The rate of interest is determined by the supply of, and demand for money-capital. The supply of additional money-capital comes from realised profits, and some from mobilising additional savings, such as money reserves for the replacement of worn out fixed capital, or for future consumption and so on. The demand comes from firms to finance capital accumulation, but also from governments to finance budget deficits and capital projects, and from households to fund purchase of durable goods, houses etc.

As Marx sets out in Theories of Surplus Value, basing himself on Hume and Massie, if the general level of prices rises, due to inflation, then, as the money prices of commodities rise, so money profits will rise, and the nominal money value of money reserves will rise, so that the supply of money-capital rises nominally. But, the same higher commodity prices mean that firms face higher prices for constant and variable-capital, so that their demand for money-capital rises nominally by the same amount. If demand and supply rise by the same nominal amount, then there is no basis for a change in the rate of interest.

“Massie laid down more categorically than did Hume, that interest is merely a part of profit. Hume is mainly concerned to show that the value of money makes no difference to the rate of interest, since, given the proportion between interest and money-capital—6 per cent for example, that is, £6, rises or falls in value at the same time as the value of the £100 (and. therefore, of one pound sterling) rises or falls, but the proportion 6 is not affected by this.” (p 373)

However, it clearly makes a difference if I lend £100 at today's prices, and get back the same £100 capital sum, in a year's time, when inflation has caused prices to rise by 10%. In effect, I would have lost 10% of my capital. Nominal, as opposed to real, interest rates rise accordingly, as lenders seek to cover themselves for such depreciation of their capital, in the same way that a machine hire company seeks to obtain an amount to cover the wear and tear of the machinery, during the period of lease, in addition to charging interest on the loan of the capital. The real situation is shown by looking at, for example, inflation protected securities. If you had put your money in the UK NS&I's inflation protected bonds, for example, over the last year, you would have received a tiny 0.25% rate of interest, but you would have received a whacking 10% to cover the inflation adjustment during the year.

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