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Inflation Stays High - Part 3 (3) UK & EU

UK

UK headline CPI on Wednesday, came in at 10.5%, for December, as against 10.7% in November, with the core figure being 6.3% as against 6.3%. The latter was above consensus forecasts of 6.2%. RPI came in at 13.4%, as against 14%, and forecasts of 13.6%. Inflation at around or above 10-13% % can hardly be called a success for the Bank of England, on any measure. It remains at highs not seen for 40 years. The situation for food prices, which remains significant for household spending, and particularly for the least affluent households, continues to run at an even higher level. It came in at 16.8%, as against 16.4%, the previous month. It is the 17th straight month of rising food prices, and the fastest increase since, at least, 1977.

Most of the tiny reduction in headline inflation came from a fall in petrol prices between November and December, as the effects of a warm Autumn, and NATO's depletion of its Strategic Petroleum Reserves took effect. But, the Northern hemisphere has only just entered Winter, with the coldest months yet to come, and also, now, with China reopening, increasing significantly the demand for oil and other primary products, as well as NATO/G7 countries needing to scrabble to refill their reserves, before prices shoot up to a predicted $120 a barrel. The headline inflation rate, was unchanged month on month. The rate of price increases for services continues to rise, with prices for hotels and restaurants rising by 11.4% as against 10.2% in November. Healthcare costs rose by 5% as against 4.7% the previous month, and for all services, the rise was 5.8%, as against 5.4% in November. There is no indication, in this data, that inflation is going away any time soon, and certainly not to the target 2% level.

The latest wage data, released on Tuesday, for the three months from September to November, shows wages rising by 6.4% including bonuses, but also regular pay excluding bonuses also grew by 6.4%. Demonstrating the lies told by the Tories and their apologists, average private sector pay rose by 7.2%, compared to just 3.3% in the public sector. What this doesn't show is the effect that current strikes will have in raising those wages. Nor does it show the effect of workers simply moving to other, better paid jobs, where the average increase in pay amounts to around 15%.

As in the US, the UK also faces a relative shortage of labour. Vacancies fell slightly – by 75,000 – to 1,161,000, though that is still above the level prior to lockdowns, in March 2020. With the number of unemployed being 1.5 million, that means that there is one job vacancy for every unemployed person, which, although way below the 2:1 figure for the US, is still an historically high ratio. The number of people employed has also risen to record highs of 36.2 million, which is 541,000 jobs more than in December 2019.

The cause of UK inflation, as with that of the US, is excess liquidity pumped into the system over the last 40 years. That liquidity was injected to reverse falls in asset prices, and to ensure those asset prices continued to rise, as the ruling class, today, owns all its wealth in the form of such assets (fictitious capital) rather than in the form of industrial capital. 

Every time the real economy begins to grow faster, and the demand for capital rises relative to its supply, interest rates rise, and cause asset prices to fall. For forty years, that process of ever inflating asset prices also sucked liquidity out of the real economy and into assets, but after the new long wave uptrend began, in 1999, it has been ever harder to sustain that, because the underlying economic dynamic pushes its way into economic expansion. The most dramatic example, so far, was the crash of 2008, and, ever since, not only have central banks had to directly pump increasing amounts into the purchase of assets, via QE, but governments have also had to directly constrain economic growth via austerity, restrictions on trade, and lockdowns. But each has simply heightened the level of contradiction.

As with the US, the lockdowns saw a further huge rise in liquidity, but now directed into the real economy, in the form of furlough payments, and once released, as lockdowns ended, that liquidity led to a sharp rise in inflation, just as previously it had led to the inflation of asset prices. The increase in input costs, which are themselves the output prices of other producers, is not the cause of inflation, but a symptom of it, as is the rise in wages. Of course, in Britain, there have been other increases in costs, just as there have in the US. The trade war introduced by Trump, caused US import prices to rise, with a consequent effect on other US prices, and Brexit had an even more pronounced effect on Britain, which imports the majority of its food, as well as materials, and a lot of energy.

Even with Britain having to comply with EU Single Market and Customs Union rules, Brexit means that its trade with the EU has shrunk by around 25%, with no significant increase in non-EU trade to compensate. It has introduced all kinds of restrictions on trade, with all of the added costs that implies that have then passed on into UK prices. Those restrictions have also led to a slow down in the rate of turnover of UK capital, with a consequent effect on the annual rate of profit of UK firms, for which they try to compensate by again raising prices. The UK has also suffered from NATO's boycott of Russian oil and gas, which has pushed up global energy prices. The UK, unlike the EU, does not get much of its oil and gas from Russia, but a rise in global prices still affects UK energy prices.

Initially, a rise in energy prices was not seen as a bad thing, because, for one thing, it was seen as only short-term, with the expectation that Russia would quickly be brought to the negotiating table over the war in Ukraine, and even that a colour revolution in Russia might occur, installing a western puppet regime that would sell off Russian resources, on the cheap, to western companies, but, in addition, higher energy prices sucked up household disposable income that was causing demand for wage goods to rise sharply, leading to rapid economic expansion, and rising interest rates that threatened to cause asset prices to crash once again. After all, high energy prices, also meant that household spending went to buy oil and gas supplied by western owned companies, and so to boost the profits, dividends and share prices of those companies, to the benefit of their shareholders. But, despite huge amounts of the latest NATO weapons and technology pumped into Ukraine, and a bottomless pit into which hundreds of billions of western Dollars was dumped, the reactionary and corrupt regime of Zelensky, was unable to defeat, or push back, the equally reactionary and corrupt regime of Putin that had occupied Eastern Ukraine.

Furthermore, in contrast to the conditions of the previous forty years, in which workers were on the back foot, and had to simply accept lower real wages, because they lacked bargaining power, now, as inflation rose, they responded by joining unions in increasing numbers, establishing unions in workplaces where none had existed, and taking industrial action to win pay rises to cover their rising living costs. The calculations were now all changed, because those rising wages, not only threatened to begin to squeeze profits, but they certainly meant that the demand for wage goods was not going to decline as fast as the speculators hoped for, and that meant that competition between firms would force them to continue to expand production, to employ more workers, to demand additional capital, causing interest rates to rise further, whatever central banks did.

The Tory government can try to impose further legal limits on workers right to strike, but it can't change the laws of economics. It can try to impose wage limits on its own employees, but with workers in the private sector already getting much higher wages, better conditions, and, now, also getting much bigger pay rises too, nothing can stop those state sector workers simply moving to other jobs. The average pay increase for workers changing jobs is 15%, and, contrary to the propaganda, private sector employees, on average, are already getting much higher pay rises than public sector workers, with the 16.9% pay rise of Rolls Royce workers being just a well known example. Shortages of truck drivers led to a 30% rise in wages, as haulage firms struggled to find workers, and recruited whole teams of local government bin lorry drivers and so on.  Care workers can earn more as supermarket checkout workers, and so on.

The Tories can try to impose further limits on the right to strike, but, in conditions where workers are increasingly in the driving seat, that will fail, just as it did when, first, Wilson's Labour government attempted that in the 1960's, followed by Heath's government in the 1970's. Already, in Britain, we see a naturally evolving General Strike developing, as wave after wave of workers are drawn into strike action, each one joining millions of workers already engaged in such action. The media can bleat as much as they like about public opinion, but the reality is that, not only is public opinion irrelevant, but it is necessarily on the side, now, of strikers, because the reality is that there are so many workers engaged in action that the majority of households, in the country, has or has had someone on strike. Everyone knows that it is not wages causing inflation, and that its unreasonable to demand workers not to have their wages rise in line with it. Even Heath's government in the early 1970's admitted that, and introduced the monthly indexing of wages to RPI!

As in the US, the perpetual announcements of impending recession have been proved wrong. GDP slowed, and, in some months, even contracted, but GDP is not output, and the reality is that capital does not employ additional workers to produce less additional value! GDP is a measure only of new value created, which is subsequently resolved into wages, profits, interest, rent and taxes. With more labour employed, more new value is created, and, so, if GDP falls, that is an indication, not that output has fallen, or even that the amount of new value created has fallen, but that some of that new value has been tied up as capital, to ensure the replacement of consumed capital. As in the US, even the UK economy, suffering the dire consequences of Brexit, has continued to increase employment.

UK employment has been steadily rising since about 1985, with short drops coinciding with periods of recession such as in the early 90's, 2008, and during lockdowns. It has risen from around 24 million to around 33 million. Its true that, unlike the US, it has not recovered the level it reached just before the introduction of lockdowns, in 2020, but it is significantly higher than during the lockdowns themselves, and also, even that in 2019. It's risen by around 1 million compared to the period of lockdowns, and although, during that period, many of those workers received furlough payments, they did not cover the whole amount of wages. That means that this is all additional wage income going into households that feeds into demand for wage goods, and which is supplemented by those furlough payments much of which was saved during lockdowns, as the potential for consumption was physically restricted.

Contrary to expectations of declining GDP, including from the Bank of England, UK GDP has continued to rise, and that is before, the effects of China reopening on the global economy take effect. As millions of workers take strike action in search of higher wages, that reduction in new value created will inevitably impact GDP, but as those workers win those pay rises, and begin to spend those wages on wage goods, causing firms to have to employ more labour and capital to satisfy that demand, the effect will be a further expansion of GDP in months to come. And, as that continued expansion leads to a further strengthening of workers' position, and employers pay up higher wages, central banks will again respond by increasing liquidity so that firms can raise prices to avoid a bigger squeeze on those profits.

At the same time as increasing liquidity, the resultant inflation means that the hopes of cuts in official interest rates will be dashed. But, the increased demand for capital, will cause market rates of interest to rise too, causing asset prices to fall further, with a consequent rise in yields on bonds and shares. Increasingly, the mindset of the last 30 years of a search for speculative capital gains, as against yield will be reversed.

EU

For the EU, the figures, released on Wednesday, were, for the headline rate, 10.4% as against 11.1%, and 5.97% as against 5.96% for core inflation.  (For the Eurozone it was 9.2% as against 10.1%) As in the UK, the figure for food prices showed a rise in the rate of change, from 17.26% to 17.86%. Energy prices have more or less doubled. The biggest increase is for gas, as a result of NATO's boycott of Russian gas supplies, now exacerbated by it having blown up the Nordstream 1 and 2 pipelines, to prevent EU countries backtracking on that policy. That decision which caused energy prices to rocket, and forced the EU to buy more expensive oil and gas from the US, illustrated the continued subordination of EU imperialism to US imperialism, further illustrated by the trade war unleashed by Biden and US imperialism against the EU, via its Inflation Reduction Act.

The soaring energy costs, were seen as a means of soaking up household discretionary income that was fuelling increased consumption, and contributing to the growing relative shortage of labour, and rising wages, as well as economic growth that led to a rising demand for capital, raising interest rates, and rapidly falling asset prices. Germany, which for years has had significantly negative bond yields, has seen those yields rise to 2.20%, as its bond prices, like those across the globe, have crashed.

The ruling class speculators that own all their wealth in the form of these assets, are desperate to see that condition reversed, and have repeatedly shown they are prepared to destroy the real economy and real capital to achieve it. But, workers, across the EU, have shown, as have those across the globe, that they were not prepared to just sit back whilst their living standards were reduced by these rising prices, or their jobs threatened by calls for recession, and closing down production in the name of NATO's war against Russia and China. The General Strike in France, yesterday, against Macron's attack on them, is just another illustration.  The plans of the ruling class and their states have been upset.

Millions of workers across the EU have seen that things have changed, just as they did in the 1950's (and before that in the 1890's, and 1840's), as relative scarcity of labour has grown, as the fundamental dynamic of the long wave uptrend began in 1999, has again forced its way through, particularly after the reopening from the unnecessary lockdowns of 2020 and 2021, themselves intended to slow down economic expansion, rather than being any kind of rational response to the pandemic, as Professor Woolhouse has shown. Not only have they, like other workers, joined unions in larger numbers, and taken industrial action to win higher wages, but they have also taken to the streets in large numbers protesting at the massive rises in energy prices that have resulted from NATO's boycott of cheap Russian oil and gas supplies, as part of its economic war against Russia and China.

The number of employed workers in the EU continues to grow, to 197.6 million from 195 million. Both the unemployment rate (6%), and the long-term unemployment rate (2.4%) continue to fall. Wages are, so far, failing to keep pace, rising by just 2.8% up to September, last year. But, that does not reflect the growing mobilisation of workers across Europe, as elsewhere, seen in more recent months. Despite all of the same predictions of recession, and despite the potential of that, caused by the EU's boycott of Russian oil and gas, which hugely increased its costs, the fact is that the EU also continues to grow. Its GDP rose by 2.5% in the third quarter compared with a year earlier, and, as described earlier, GDP is not a measure of output, but only of new value created, and, itself, also affected by the tie-up of capital involved in periods of rising prices.

As the EU's largest economy, Germany has also been affected by the low level of economic activity in China, itself resulting from the attempts of the Chinese ruling class to slow growth via its own lockdowns. Germany is a major supplier of luxury cars and other manufactured commodities, as well as high value capital goods to China. With China's ridiculous lockdowns abandoned, and its economy reopening rapidly, that will have a dramatic effect on the German economy, and, thereby, to the EU economy. The latest ZEW Survey illustrates that, having jumped by 40 points. The predictions had been for it to show a decline of 15 points, but it rose to 16.9, the first time its been positive since February 2022.

As the EU economy expands further, as China reopens, the position of workers will become stronger too. Already, workers in France are set to continue their strikes against Macron's attempts to increase the retirement age, and so on, with large strike waves, also, having taken place in Belgium and elsewhere. The Winter has only just begun, with the potential for colder weather, across the continent, causing the demand for energy to rise again, leading to higher energy prices, that have fallen in recent months, as the EU had stocked up at much higher prices, and the Autumn was mild.

The ECB was already late to the party of rising rates by central banks, and although the talk of recession will disappear, and, along with it, the speculators dreams of once again falling rates, as workers across Europe respond to rising prices with increased demands for rising wages, the ECB, like other central banks, will respond by ensuring sufficient liquidity is available to allow firms to raise prices further to protect their paper profits. The inflation is not going away any time soon.

Back To Part 2

Martin Thomas On Inflation - Part 10 of 25

Martin then turns to the post-war period, characterised by Bretton Woods, which really only determined the value of currencies internationally, and is essentially separate from the question of inflation within each national economy, though the two cannot be divorced. That was particularly true for the US, whose Dollar acted as global reserve currency, and whose value was administratively set under Bretton Woods at $35 to an ounce of gold. That meant that the US could continue to effectively print Dollars whilst, externally, these Dollars were valued against other currencies at a fixed rate, enabling the US to import the commodities it required at lower Dollar prices than otherwise would have been the case.

As with previous periods where money tokens were devalued, the manifestation of that came in the form of a rise in the market price of gold over its administrative price. Even by the 1970's, when the US ended Dollar convertibility, when France demanded gold in exchange for Dollars at the administrative price, the market price of gold was at around $300, and rose to $800 by 1980. Martin's account, here, is strange. He says,

“Why had steady peace-time inflation re-emerged, centuries after the old "Price Revolution"? The speed and intricacy of the circuits of capital was far outstripping the capacity of gold (heavy, difficult to move physically, restricted in quantity) to facilitate it, even with more elaborate provision for tokens to be used instead of physical gold most of the time. Money was becoming "fiat money", money valid because firms and households were confident that the government or central bank would make it a ticket for an approximate quantum of labour-time on the world-market.”

Currencies had become “fiat currencies” long before Bretton Woods, let alone the collapse of Bretton Woods. Incidentally, Martin's use of the term “fiat money”, rather than “fiat currency”, again emphasises that, like Hume and Ricardo, he does not understand the difference between money and currency, and simply equates the two.

As soon as money takes the form of tokens of value, be they precious metal coins, base metal coins, or paper notes, it relies upon those accepting these tokens trusting that they represent a given quantum of universal labour, whether that be directly linked to a quantity of some money commodity such as gold, or not. The basis for them doing so is that such tokens have the backing of the state. And, as Marx describes, in A Contribution To The Critique of Political Economy, the state soon assumes control of issuing such tokens, and they become fiat currency. That is true whether these tokens are exchangeable for gold or not, because, as Marx describes, the state, then, also determines how much gold, each token is exchangeable for!

That was obvious with, for example, gold coins, as Marx describes.

“When the decline of the metal content has affected a sufficient number of sovereigns to cause a permanent rise of the market-price of gold over its mint-price, the coins will retain the same names of account but these will henceforth stand for a smaller quantity of gold. In other words, the standard of money will be changed, and henceforth gold will be minted in accordance with this new standard. Thus, in consequence of its idealisation as a medium of circulation, gold in its turn will have changed the legally established relation in which it functioned as the standard of price. A similar revolution would be repeated after a certain period of time; gold both as the standard of price and the medium of circulation in this way being subject to continuous changes, so that a change in the one aspect would cause a change in the other and vice versa. This accounts for the phenomenon mentioned earlier, namely that, as the history of all modern nations shows, the same monetary titles continued to stand for a steadily diminishing metal content.”

And, if that isn't a description of systematised and deliberate inflation by the state I don't know what is.

Back To Part 9

Forward To Part 11

Inflation Stays High - Part 2(3) United States

United States

Whilst the annual figure for the US came in at 6.5% for headline, and 5.7% for core CPI, the month over month figures were a fall of 0.1% on headline, as against a 0.1% rise the previous month. For core CPI, the figure was a rise of 0.09 points, as against a rise of only 0.06 points the previous month. Services account for 80% of the economy, and also, currently, represent the fastest growing part of the economy, as it continues to come out of lockdowns, and spending shifts from goods that consumers could not buy, into all those areas of services, such as entertainment and leisure. In that sphere, rather than inflation falling, it continues to rise, with a rise from 7.22% to 7.52%.

A major contributor to the fall in US headline inflation has been the fall in energy prices. It fell from 13.1% to 7.3% last month. That had several causes. Firstly, Biden used the US Strategic Petroleum Reserve, and pressed other NATO states to do the same, with their reserves, to increase supply, and push down prices. For Biden a large part of that was to push down US petrol prices that had been pushed up, as a result of NATO's boycott of Russian oil, and which threatened Democrats' election prospects in the midterm elections. A second reason was to try to put pressure on Russia, which has gained massively from those high global energy prices, during 2022, which boosted its coffers, and led to a sharp appreciation of the Rouble. The SPR is now depleted to dangerously low levels, and needs to be restocked, now, at already higher prices.

Another reason was mild weather in the Northern hemisphere, during late Autumn, at a time when the EU had built up its stocks of oil and gas. But, the Winter has only just started in the Northern hemisphere (21st December 2022 - 20th March 2023), and the coldest months, when, also, the most snow and ice arises are in January and, particularly, February. The recent weather bomb in the US, shows the potential for much more severe cold weather to affect those calculations, as we move deeper into Winter.

Finally, the repeated lockdowns in China, which had intensified again, over recent months, meant that its economy was slowed, and so its demand for energy. But, those lockdowns, as I had predicted, could not be sustained, and China has now more or less fully reopened with its economy starting, once again, to grow rapidly, and along with it, its demand for energy. Already oil prices have surged, with estimates of it rising to $120 per barrel in the near future. As those states that denuded their strategic reserves now also need to rebuild them, at these higher prices, that will add further to demand, pushing prices higher, quickly.

Oil prices are clearly important, because, they pass through into all other prices. Oil is used for the production of vast ranges of other commodities, not just plastics, but also fertiliser and pharmaceuticals – one reason that demands to “Just Stop Oil”, are ridiculous and reactionary – but, is also required to fuel ships, planes, trains, trucks and so on, required to transport goods across the globe, and contributing to their price. As oil prices rise sharply, again, that will pass through into all those other prices. Nor, is it just for goods prices that that applies, because all service industry also relies upon large amounts of both fixed capital, and materials, all of which are goods that must be produced, and shipped across the globe. In addition, it feeds into the costs of the workers in those service industries, raising the value of their labour-power, and, whilst its true that higher wages do not cause inflation, the reality is, also, that central banks always increase liquidity when wages are rising so that the rising wages do not lead to a sharp squeeze on profits, and that increased liquidity is what leads to higher inflation.

China's reopening also means a surge in demand for other primary products, and consequent spikes in those prices. Its predicted that primary product prices, for things like copper, will rise 40% in the coming year. Copper prices have risen by 7% in the last 5 days, 11% over the month, and 23% over the last 3 months, showing that the rise in its price is accelerating. A similar thing can be seen with iron ore prices, which have risen from $80 per ton, in November, to around $120 today. Movements in these prices depend a lot on supply and demand, which needs to be taken into consideration, with alternate periods of excess supply and inadequate supply. In the longer-term, supply increases to meet the higher level of demand, but that can take months, and even years to accomplish, and the fact remains that with huge amounts of excess liquidity in the global economy, even with longer-term falling values of primary products, prices are raised, and those higher prices feed into the prices of other goods and services.

Higher prices of raw and auxiliary materials (circulating constant capital) do not squeeze profits, as, unlike wages, they form part of the value of the commodity. The other part of the value of the commodity is not wages, but the new value created by labour. But, as Marx sets out, in Capital III, Chapter 6, if the price of these materials rise sharply, it may not be possible to pass all of this increase on into final prices, without causing demand to fall. In that case, firms have to absorb some of the cost out of surplus value/profit, so, then, profits are squeezed as a result.

Already, as I have set out in previous posts, earlier rises in the prices of constant capital, have led to a tie-up of capital, which is what is manifest in the slow down and even falls in GDP, rather than any actual slow down or fall in output, or new value creation, as the continued strong rises in employment show. Firms do not employ additional labour to produce less! But, as well as causing a tie-up of capital, they also lead to a fall in the rate of profit as c rises, causing s/(c + v) to fall. So, to enable firms to avoid rising material costs squeezing profits, central banks will again ensure excess liquidity so as to enable generally rising prices – inflation, meaning it does not go away any time soon.

For months, the representatives of the ruling class speculators have been claiming that economies were already in, or about to go into, recession, and they were joined by the IMF, which claimed a third of the world would be in recession in 2023. But, as I have set out for months, that was never likely, despite the fact that central banks have tried to slow economic growth with rising rates, and states have caused energy prices to rise, via their boycott of Russian oil and gas, cutting into disposable income. It was more a triumph of hope over reality, as the speculators, and their representatives, actually desired a recession, causing unemployment to rise, so that it would put downward pressure on wages, and reduce, also, the demand for money-capital, so that interest rates would stop rising, enabling asset prices to stop falling. It was symbolised by the call of Larry Summers for US unemployment to rise by 50%, to over 5%, throwing millions of workers on to the dole.

But, instead of US unemployment rising, it has continued to fall, and the US has continued to create hundreds of thousands more jobs each month. In most months, it has created more jobs, often substantially more jobs, than the pundits had predicted, or hoped for. Last month it created 223,000 new jobs, as against estimates of just 200,000. Its economy needs only to create an average 90,000 jobs per month, to account for the increase in the workforce. Similarly, last week's data showed only 205,000 initial jobless claims, as against expectations of 215,000. Job Openings were at 10.5 million, as against expectations of just 10 million, meaning that the number of available jobs to unemployed workers remains very high at around 2:1. The number of unemployed, itself fell from 6 million to 5.7 million.

Its true that average hourly earnings, even in these conditions, have not kept pace with inflation. In the last year, they rose by just 4.6%. However, a look at wages themselves, shows that they rose by 6.17% over the last year – and wages for the lowest paid workers have been rising at over 7% a year, and the lowest wage that workers are prepared to accept when moving to a new job has also hit a record of $73,667, as against $72,873 the previous month.. Its most notably amongst younger workers that this increase is being driven. The average pay increase for workers moving jobs is 15%. Workers wages depend on more than just the hourly rate. They depend on the number of hours worked, payment of overtime and overtime rates, bonuses and so on.

When firms need more labour, their first recourse is to employ their existing workers for longer hours, a fact that was seen by the extensive hours that US dockworkers, in California were putting in to clear the ports, last year. As Marx points out, in Theories of Surplus Value, the cycle goes something like this. Firms need more labour, and so extend the working day, and, in conditions of surplus labour, do so without increasing pay, thereby, raising absolute surplus value, and rate of surplus value; then they have to pay at normal rates for the additional hours, so increasing absolute surplus value, but leaving the rate of surplus value unchanged; then they have to pay overtime rates for the additional hours, still increasing absolute surplus value, but the rate of surplus value now falling; finally, they can't expand the individual working-day further, and, as labour becomes scarce, workers even refuse to work overtime, reducing absolute surplus value, and hourly wage rates rise, reducing relative surplus value, and causing a sharper squeeze on the rate of surplus value.

We are a way from that last condition, which arose in the 1960's, and ran through into the 1970's, but when the unemployment rate was at about a quarter of what it is, today, measured on the same basis. But, one reason it progresses in this way, is that disposable/discretionary income for workers is a function of household income, not hourly wage rates. In the 1950's, it was the fact that women entered the workforce in large numbers, as well as male workers working large amounts of overtime that led to a significant increase in disposable/discretionary income, not rises in average hourly wage rates. In the US, the average number of hours worked per week, over the last ten years, has been around 34.4, but following the lockdowns, in 2021, it rose to around 35, and is now subsiding back to the previous level. But, there are 5 million more people employed in the US, today, than there were in 2018. Compared to the period of lockdowns, there are 30 million more people employed, or an increase of around 25%!

The graph shows the secular rise, since 1948, in total hours worked, and so of new value created by labour in the US. which resolves, into wages, profits, interest, rent and taxes, forming the basis of demand for personal consumption, and capital accumulation.

Given a 20-25% increase in the number of people employed, each of whom feed additional income into their households, and so contribute to disposable/discretionary income for the household, whether average hourly wages keep pace with inflation, or not, becomes irrelevant, in terms of households spending on wage goods, and that continued increase in demand, means that firms have to continue to respond to it, by employing more workers, particularly, in labour intensive service industries, and to accumulate additional, particularly circulating, capital. Workers may not be at the point they were in the 1960's, when labour scarcity enabled them to raise wages more than prices, and to squeeze profits, but they are certainly at a point, whereby, they are not going to allow their wages to fall behind prices for long, and that is manifest in the hundreds of millions of workers, across the globe, engaged in strike action for those higher wages.

And, we are seeing that capitalist regimes that were enabled to become more Bonapartist and authoritarian, as a result of the complicity of labour movements and the Left, during lockdowns, are now using those same means to try to prevent workers from gaining those higher wages. Whether it is Biden imposing a pay cut on rail workers in the US, by law, or the Tories new anti-union laws in Britain, with no resistance from a reactionary, nationalist Blue Labour Party, the intention is the same. But, in fact, that simply is the counterpoint to the fact that labour is on the rise, and the conditions have shifted in its favour. If workers were not, now, able to demand higher wages, as firms scrabble to buy their labour-power, and if they were not confident enough in their strength to be joining unions in large numbers, and taking industrial action, mostly against intransigent state employers, those states would not need to be using such Bonapartist methods to resist them.

And, despite all of the claims of imminent recession, the US economy grew at an annualised rate of 3.2% compared to the previous, quarter. Rather than slowing, even measured by GDP, the US economy has speeded up. That was before, the effects of China reopening are felt on global growth. Indeed, such are the facts about actual economic growth, across the globe, that many of the financial institutions that, even before Christmas, were forecasting recession, are now changing their positions. With the demand for labour remaining strong, household incomes rising, economic activity continuing to expand, and now supplemented by the effects of China reopening, the speculators dreams of a recession, and falling wages and interest rates are forlorn. And, with all of that pressing on profit margins – even as total profits expand – central banks will inevitably keep liquidity plentiful to enable rising prices, in addition to automatically expanding liquidity from the growth of commercial credit.

Looking at the other measures of inflation referred to in previous posts, the CPI trimmed mean fell, on a year on year basis, from 6.66% to 6.54%, but, on a month on month basis, it actually rose. The CPI Median figure fell, but only from 6.98 to 6.93%, hardly suggesting that core inflation is going to fall significantly any time soon.

Looking at the Atlanta Fed's index of sticky prices, i.e. those that do not move one way or the other easily, they also rose on a year on year basis, now reaching nearly 7%. Its true that, on the basis of a three month moving average, as indicated in the chart, they have moved down sharply, but the chart also shows similar previous downward moves, in the average, without it being sustained.

Looking inside these movements in prices of individual commodities, large movements can have significant, but not necessarily longer-term effects. For example, chip shortages, and lockdown frictions led to new cars not being available that drove huge rises in used car prices. Now chips are becoming available, and lockdown frictions are disappearing. New cars become available, and, consequently, used car prices have actually fallen substantially, but that will not continue.

Similarly, as interest rates have risen, and mortgage rates have followed, house prices have started to fall noticeably. In the US, a figure known as owners equivalent rent is used for housing costs. Home owners are asked how much their house would rent for. With falling house prices, that figure necessarily falls. Yet, new rents for tenants are still rising, as falling property prices have not yet fed through into lower rents. As property prices fall, rents undoubtedly will follow, but falling property prices, and rentals is the inevitable consequence of the fact that for forty years, excess liquidity was pumped into inflating such asset prices, and now that process is reversing. A sizeable fall in house prices will feed into yet further household disposable income, and that will go into increased demand for all of those wage goods workers require, and whose prices are now rising.

The US had another advantage in 2022 that has disappeared. For most of the year, the Dollar appreciated against other currencies, as the Federal Reserve raised its rates faster than other central banks. The Dollar rose by around 20% compared to other currencies other than the Rouble, and that meant that the US Dollar price of imports was lower than it otherwise would have been, and with a consequent effect on other US prices. But, in the last few months, the Dollar has been falling. The Euro had fallen to just $0.95, but has now risen to $1.08, whilst the Pound fell to just $1.03 briefly during Truss's premiership, but has now risen to $1.22. The Yen had continued to fall, as the BoJ continued to try to implement yield curve control, by ever larger amounts of liquidity pumped into JGB's, but as its abandoning that strategy, the Yen has risen from 150 to 127 to the Dollar. Now, as China reopens, the Yuan has also risen from 7.2 to 6.7 to the Dollar.

As the Federal Reserve looks to slow the pace of rate hikes, at the same time that the ECB, Bank of England, BoJ and others increase theirs, the Dollar looks set to weaken further, with a consequent effect on rising US import prices, and its domestic prices.

I will examine, the UK and EU on Friday.

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Forward To Part 3

Chapter 2.2 – Medium of Exchange, C. Coins and Tokens of Value - Part 17 of 22

So, paper currencies cannot be driven out of circulation, and, so, when they are issued in excess, the consequence is that each note is devalued, accordingly. But it retains the name £1, $1, €1 and so on, so that the result is that the prices of all commodities rise proportionally – inflation.

“The number of pieces of paper is thus determined by the quantity of gold currency which they represent in circulation, and as they are tokens of value only in so far as they take the place of gold currency, their value is simply determined by their quantity. Whereas, therefore, the quantity of gold in circulation depends on the prices of commodities, the value of the paper in circulation, on the other hand, depends solely on its own quantity.” (p 119)

It was for this reason that the issuing of paper notes was legally restricted to this gold, which they represented in circulation. In the 17th, 18th and early 19th centuries, commercial banks were able to produce their own bank notes. Much as with De Gaulle's demand to be paid in gold rather than Dollars, each of these notes entitled its owner to convert it to gold. As the notes circulated as currency there was little reason for anyone to demand the gold, which then continued to sit as money hoards in the bank vaults.

Indeed, as businesses deposited money in the banks, the banks themselves came to realise that the amount of these deposits that customers withdrew amounted to only a small proportion of their deposits. That meant that the bank could, then, lend out the remainder of the deposits, at interest, and so make a commercial profit on this operation, equal to the difference between the interest they charged to borrowers, and the interest paid to depositors. As Marx puts it, this money-capital, for them, became the equivalent of raw material for a manufacturer, or like a merchant who buys commodities below their value, and then sells them on at their value, thereby making commercial profit on the difference.  If only 10% of deposits are ever taken out by depositors, the bank can lend out the other 90%. This is the basis of the credit multiplier.

Suppose £1 million is deposited. Only £0.1 million is withdrawn. The bank can lend out £0.9 million, and does this by creating an account for the borrower. In total, £0.9 million of such new deposits are created. But, these borrowers have borrowed money, because they want to spend it on something. When this £0.9 million is then spent, the recipients of this money pay it into the bank, creating an additional £0.9 million of deposits. Again, 10% of these deposits are withdrawn, leaving £0.81 million available to make further loans and so on. In the end, this process means the initial £1 million of deposits turns into £10 million of deposits, so that £9 million of new bank money has been created. This £9 million is money, because it is the equivalent form of the £9 million of value embodied in the commodities for which it is the equivalent. It raises the question of whether this equivalent form in the commodities was the consequence of the bank money/credit created, which is the foundation of the arguments surrounding MMT. This is not the place to examine that, and I have discussed it elsewhere.

But, the banks were tempted to issue their own bank notes way in excess of these limits, which, as with all such behaviour, which tends to accompany periods of speculative frenzy, ends in disaster. At a certain point, the idea circulates that this or that bank does not have enough money in its vaults to cover the bank notes it has issued. So begins a bank run of the kind frequently featured in old westerns, but was also seen in 2007 with Northern Rock, the next year with Bear Sterns, Lehman's, a series of British and European banks, and, after 2010, more banks in Greece, Cyprus, and elsewhere.

In those previous times, depositors rush the bank demanding their bank notes be redeemed in gold or silver coin. In more recent times, they simply demand to close their accounts, and payment in Bank of England notes, US Dollars, and so on. The banks often have nowhere near the gold or silver required, or the ability to convert their own notes into Bank of England notes, etc. The bank collapses, and, given the interlinking of banks and other financial institutions, the panic spreads.

At the same time, businesses that had been happy to accept bank notes as currency refuse them. In the same way as they had expanded their own commercial credit, so as to ensure continued growth in sales, they now curtail it. They begin to demand payment in gold/silver coins, or Bank of England notes etc. That is a credit crunch, as it appeared in 1847, 1857, and in 2007.

Back To Part 16

Forward To Part 18

Inflation Stays High - Part 1 (3) Introduction

Introduction

The latest data for the US, UK and EU, shows that, inflation stays high. The hype is that inflation is falling – which, of course, does not mean that prices are falling – but, inflation, like all economic phenomena, never moves relentlessly in one direction only, and that is particularly true with inflation data that is actually only a presentation of the movement of selected prices of different baskets of goods and services. As I pointed out, during lockdowns, published inflation data suggested that inflation was low, because it continued to deal with a basket of goods and services that consumers could not buy, and whose price were low due to a collapse in demand, and left out a whole host of other goods and services they were, then, buying, and whose prices had risen sharply. Official data always understates the effect of rising prices on the goods and services that workers buy.

But, inflation always arrives in waves and surges, meaning it also goes through periods of ebb, as well as flow. The fact that inflation might fall from a peak does not mean, it may not rise again to a higher peak, in the next wave, or may simply remain at high levels, taking years to subside. Given that nearly all central banks aim for a 2% rate of inflation, and yet, in those economies, inflation remains at three to five times that level, its clear that it remains at a high level,  and in contrast to the claims, more than a year ago, that it was merely “transitory”, is not going away any time soon. Its in the interests of governments to pretend it is, as they try to force workers to accept multi-year pay deals, on that basis, pretending that, as for example with the 9% offer, over two years, to rail workers that, as inflation falls, accepting a below current inflation rise now, will be compensated the following year. Workers would be mad to accept that, because it simply means accepting below inflation rises, not just this year, but for those future years too, as inflation stays high.

last week, headline US CPI came in at 6.5%, year over year, compared to 7.1%, the previous month. The core inflation figure came in at 5.7%, compared to 6.0% the previous month. The last UK headline CPI came in at 10.7%, as against 11.1%, with the core figure being 6.3% as against 6.5%. UK RPI came in at 14%, as against 14.2% the previous month. Food inflation came in at 16.4% up from 16.2% the previous month (the latest data is released on Wednesday). For the EU, the figures were, for the headline rate, 11.1% as against 11.5%, and 5.97% as against 5.96%. But, its also important to examine what is happening on a month to month basis, as well as inside these aggregates.

I will examine that for the US, UK and EU, starting with the US, on Wednesday.