In 2011, Leo Panitch wrote a piece, The Left’s Crisis, examining the Left’s response to the present crisis. He noted the Left’s response could be broken into two types: “irresponsible” and “fundamentally misleading”. In the irresponsible group, he puts those who called on Washington to let the banks fail, which, he asserted, gave no thought to the consequences of such an event. In the fundamentally misleading group he put those who called for tighter regulation of banks, which he asserted are already the most regulated in the world market.
Based on what I have described of Bernanke’s policy failure so far, is it possible to predict anything about the future results of an open ended purchase of financial assets under QE3? I think so, and I share why in this last part of this series.
Tags: Bailout, Ben Bernanke, deflation, Depression, economic collapse, economic policy, economy, exchange rates, Federal Reserve, Federal Reserve Bank, financial crisis, great depression, immiseration thesis, inflation, international financial system, International Monetary Fund, Jens Weidmann, Karl Marx, monetary policy, Money, overproduction, recession, Robert Kurz, stupid economist tricks, stupid Washington tricks, The Economy, Wall Street Crisis
I stopped my examination of Bernanke’s approach to this crisis and the problem of deflation after looking at his 1991 paper and his speech in 2002. I now want to return to that series, examining two of his speeches this to discuss the problems confronting bourgeois monetary policy in the crisis that began in 2007-8.
Tags: Bailout, Ben Bernanke, deflation, Depression, economic collapse, economic policy, economy, Federal Reserve, Federal Reserve Bank, financial crisis, great depression, Henryk Grossman, inflation, international financial system, International Monetary Fund, Karl Marx, Moishe Postone, monetary policy, Money, national economists club, overproduction, recession, Robert Kurz, stupid economist tricks, stupid Washington tricks, The Economy, Wall Street Crisis
The world market had been shaken by a series of financial crises, and the economy of Japan had fallen into a persistent deflationary state, When Ben Bernanke gave his 2002 speech before the National Economists Club, “Deflation: Making Sure “It” Doesn’t Happen Here”. Bernanke was going to explain to his audience filled with some of the most important economists in the nation why, despite the empirical data to the contrary, the US was not going to end up like Japan.
Tags: Bailout, Ben Bernanke, deflation, Depression, economic collapse, economic policy, economy, Federal Reserve, Federal Reserve Bank, financial crisis, gold, Gold Reserve Act of 1934, gold standard, Gold standard dollars, great depression, Henryk Grossman, inflation, international financial system, International Monetary Fund, Karl Marx, Milton Friedman, Moishe Postone, monetary policy, Money, National Bureau of Economic Research, overproduction, Presidential Executive Order 6102, recession, Robert Kurz, stupid economist tricks, stupid Washington tricks, The Economy, Wall Street Crisis, william white
So I am spending a week or so trying to understand Ben Bernanke’s approach to this crisis based on three sources from his works.
In this part, the source is an essay published in 1991: “The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison”. In this 1991 paper, Bernanke tries to explain the causes of the Great Depression employing the “quantity theory of money” fallacy. So we get a chance to see this argument in an historical perspective and compare it with a real time application of Marx’s argument on the causes of capitalist crisis as understood by Henryk Grossman in his work, The Law of Accumulation and Breakdown.
In the second part, the source is Bernanke’s 2002 speech before the National Economists Club: “Deflation: Making Sure “It” Doesn’t Happen Here”. In this 2002 speech, Bernanke is directly addressing the real time threat of deflation produced by the 2001 onset of the present depression. So we get to compare it with the argument made by Robert Kurz in his 1995 essay, “The Apotheosis of Money”.
In part three, the source will be Bernanke’s recent speech before the International Monetary Fund meeting in Tokyo, Japan earlier this month, “U.S. Monetary Policy and International Implications”, in which Bernanke looks back on several years of managing global capitalism through the period beginning with the financial crisis, and tries to explain his results.
To provide historical context for my examination, I am assuming Bernanke’s discussion generally coincides with the period beginning with capitalist breakdown in the 1930s until its final collapse (hopefully) in the not too distant future. We are, therefore, looking at the period of capitalism decline and collapse through the ideas of an academic. Which is to say we get the chance to see how deflation appears in the eyes of someone who sees capitalist relations of production, “in a purely economic way — i.e., from the bourgeois point of view, within the limitations of capitalist understanding, from the standpoint of capitalist production itself…”
This perspective is necessary, because the analysis Bernanke brings to this discussion exhibits all the signs of fundamental misapprehension of the way capitalism works — a quite astonishing conclusion given that he is tasked presently with managing the monetary policy of a global empire.
Tags: Bailout, Ben Bernanke, deflation, Depression, economic collapse, economic policy, Federal Reserve, Federal Reserve Bank, financial crisis, gold, Gold Reserve Act of 1934, gold standard, Gold standard dollars, great depression, Henryk Grossman, inflation, international financial system, International Monetary Fund, Karl Marx, Milton Friedman, monetary policy, Money, National Bureau of Economic Research, overproduction, Presidential Executive Order 6102, recession, stupid economist tricks, stupid Washington tricks, The Economy, Wall Street Crisis
As a contribution to Occupy Wall Street’s efforts against debt, I am continuing my reading of William White’s “Ultra Easy Monetary Policy and the Law of Unintended Consequences” (PDF). I have covered sections A and B. In this last section I am looking at to section C of White’s paper and his conclusion.
Back to the Future
It is interesting how White sets all of his predictions about the consequences of the present monetary policies in the future tense as if he is speaking of events that have not, as yet, occurred. For instance, White argues,
“Researchers at the Bank for International Settlements have suggested that a much broader spectrum of credit driven “imbalances”, financial as well as real, could potentially lead to boom/bust processes that might threaten both price stability and financial stability. This BIS way of thinking about economic and financial crises, treating them as systemic breakdowns that could be triggered anywhere in an overstretched system, also has much in common with insights provided by interdisciplinary work on complex adaptive systems. This work indicates that such systems, built up as a result of cumulative processes, can have highly unpredictable dynamics and can demonstrate significant non linearities.”
It is as though White never got the memo about the catastrophic financial meltdown that happened in 2008. If his focus is on the “medium run” consequences of easy money that has been practiced since the 1980s, isn’t this crisis the “medium run” result of those policies? Why does White insist on redirecting our attention to an event in the future, when this crisis clearly is the event produced by his analysis.
Tags: Bailout, debt, Depression, economic collapse, economics, fascist state economic policy, Federal Reserve, Finance, financial crisis, Hyman Minsky, inflation, international financial system, Krugman, monetary policy, political-economy, qe3, qu, quantitative easing, Quantitative easing and debt, stupid economist tricks, Wall Street Crisis, william white
!Quelle Surprise! Like Greece and Spain before it, the UK finds austerity can only result in more austerity:
U.K. Tories to Press Ahead With $16 Billion of Welfare Cuts
The Conservative Party will press ahead with plans to cut 10 billion pounds ($16 billion) from the welfare budget and reduce spending by most other departments as it extends Britain’s austerity program into a seventh year.
The cuts to the benefits budget will go ahead as long as they meet safeguards sought by Work and Pensions Secretary Iain Duncan Smith, who has clashed with Chancellor of the Exchequer George Osborne on the issue since the party came to office in 2010. Duncan Smith and Osborne published a letter today saying the differences had been resolved.
“We are both satisfied that this is possible and we will work together to find savings of this scale,” the ministers said, according to excerpts released by Osborne’s office.
Osborne will address activists at the Conservatives’ annual conference in Birmingham, central England, later today, seeking to assure voters that his party will spread the pain of austerity across society. He’ll accuse the opposition Labour Party of focusing too much of that effort on the rich.
“There’s unfairness if people listening to this show are about to go out to work and they look across the street at their next door neighbour with blinds pulled down, living off a life on benefits,” Osborne said in an interview with BBC Radio 5 today. “Is it fair that a young person straight from school who has never worked can find themselves getting housing benefit to live in a flat when people who are working, perhaps listening to this program, are still living with their parents” because they can’t afford to move out, he asked.
Osborne is seeking to extend spending reductions across government departments as a 2010 effort to rid Britain of its budget deficit by 2015 is pushed back a further two years. Britain spends more than 200 billion pounds a year on welfare, accounting for 30 percent of total government spending. The Treasury said in March that welfare cuts of 10 billion pounds are needed by the fiscal year that runs through March 2017 on top of the 18 billion pounds of savings already announced.
See this is the problem with austerity — the more you cut, the more you must cut. Folks, if the fascist state is subsidizing capitalism by accumulating debt, cutting fascist state deficits only weakens capitalism.Since the fascist state is propping up profits through its accumulation of debt, if this debt accumulation is reduced, it sets off a vicious cycle which can only end in each round of cuts making necessary the next round of cuts.
Tags: austerity, budget deficit, CURRENT ACCOUNT DEFICIT, debt, Depression, economic collapse, economic policy, inflation, Karl Marx, political-economy, Politics, recession, shorter work time, shorter work week, stupid economist tricks, TRADE DEFICIT, Trickle Down Economics
Here is an interesting chart from Zero Hedge: In data going back to 1980, employment for younger workers aged 20-24 has never increased in the month of September — that is, it has never increased until this year:
I know what you are thinking: the data provided by Washington is a fraud. I am going to show why, even if we take that chart on its face value as genuine, Washington is completely fucked. I am going to subject the entire category “employment” to an analysis using Marx’s labor theory of value. By “employment”. of course, I mean wage slavery; which means, although it is commonly treated as a good, it is actually an evil. But, I intend to treat this “employment” on its own terms, as it is commonly held a some sort of social good.
Let’s begin with this morning’s non-farm payroll report — 114,000 net hires in the economy and an unemployment rate of 7.8%. Both of these numbers are, of course, cooked beyond all credibility, but this is not the point. It doesn’t get us any closer to the actual situation to state (as the GOP will, no doubt) that Washington cooks the unemployment numbers. Dems cook the books when they control Washington, the GOP cooks them when they are in control.
Washington has always cooked the numbers — now the numbers are burnt beyond all recognition.
(First a note about this morning’s serving of cooked data: According Mish Shedlock, the minimum net new hires needed just to keep the unemployment rate flat is 125,000 per month. Last month there were 114,000 net new hires, however the unemployment rate declined from 8.1% to 7.8%. So, before you Obama voters celebrate, you should be aware than the economy did not even provide enough new hires to offset people coming into the labor force looking for jobs.)
Compulsory employment growth and inflation
It is the labor force participation rate that is most revealing in the numbers. The labor force participation rate (the blue line in the chart provided by Calculated Risk below) peaked in 2000-2001 and has been on a slow decline since that recession. From a high of just over 67%, that rate has now fallen to about 64% in this report. This reverses a trend of increasing participation in the labor force — folks actively seeking work — that goes back at least to 1962, according to the data available to me. Since 1962, in other words, as a general rule each year has seen more people trying to get a job than the year before. This trend higher reverses in the 2001 recession, and as a general rule, each year fewer people are participating in the labor force.
Why is this reversal in labor force participation important to analysis? Well, let’s look at this statement by President Truman in 1950 speaking of the military buildup that commenced with the start of the Cold War:
“In terms of manpower, our present defense targets will require an increase of nearly one million men and women in the armed forces within a few months, and probably not less than four million more in defense production by the end of the year. This means that an additional 8 percent of our labor force, and possibly much more, will be required by direct defense needs by the end of the year.
These manpower needs will call both for increasing our labor force by reducing unemployment and drawing in women and older workers, and for lengthening hours of work in essential industries. These manpower requirements can be met. There will be manpower shortages, but they can be solved.”
Following World War II, Washington set it as a priority that the labor force should steadily increase each year, in order to siphon off a portion of this growth for its military expansion. This goal was secretly given legal form as National Security Council Report 68. The goal of “full employment” was made the primary labor policy of Washington in 1946 and renewed in 1978.
“Full employment” in this case should be understood as full employment of labor power resources. In other words, it was the policy of the United States to seek full employment of its labor power resources for its strategic national ends. This “full employment” policy was sold to Americans as Washington’s commitment to providing a job to everyone who needed a job.
Which is fine and dandy, except at the same time, Washington was deliberately debasing the currency, driving up prices, and forcing more folks (particularly women) into the labor force to compensate for falling consumption, and moreover, forcing people to work well past their retirement. So what at first appears to be a benign policy, even an commendable agreement between Washington and its citizens that it would do everything in its power to create jobs, turns out to be a policy of forcing every person under its domination to look for work.
Children barely off the breast were abandoned to daycare warehouses, so mothers could find work just to pay for daycare; even substitute formulas for the breast were devised, so children could grow up attached to a rubber substitute for their mothers; essential functions within the home like child-rearing were thus commodified. And this, in turn, led to its own set of social ills, as women were assaulted by their bosses, discriminated against in their careers and under-paid — as the nation was convulsed with real or imagined terror of child abuse in day care centers. A generation of children were now referred to as “latch-key kids”, and teenage pregnancies proliferated. The elderly went back into the work force and became greeters at Wal-Mart, as people delayed or altogether gave up on the idea of retirement, unable to amass sufficient savings to stop working. Taking care of the elderly itself became a commodity sold as nursing home care.
Still, labor force participation increased despite these horrors.
Compulsory employment growth and debt: the hidden relationship
Hand in hand with this goes the ever increasing accumulation of consumer debt that working folk used to compensate for stagnant wages, despite the fact that each family was working more hours than their parents had. And all of these ills, which list could be extended almost indefinitely, appeared to have no cause other than the individuals themselves. If someone ended up working in a Wal-Mart at 70, it was because they had not saved enough; if a woman abandoned her child to day care, it was because she or her husband had not spent enough time in college; if teenagers were now getting pregnant at 13, it was because the morals of society were collapsing.
No one looked at Washington and said, “You fuckers are responsible for this!” And, if by chance, someone did say this, it was only in the form: “You democrat fuckers have tied up the economy with your regulations”; or, “You Republican fuckers have crippled Washington to the point that government can’t provide enough stimulus to create full employment.”
No matter what the policy advocated — tax cuts or spending increases — there was always someone to assure us it would create jobs and pay for itself with “increased economic growth”. Through most of the period from at least 1980 until now the growth of employment has always been proportional to the increase in debt. From 1980 until at least 2006, the savings rate of American declined until it went negative entirely in 2004-2005. It is particularly interesting that the saving rate actually touched near zero just as the labor force participation rate reached its peak.
The problem with the latest employment figures, however, is not to be found in the effects of a rising participation rate on working families, either in the form of social ills or the accumulation of debt. It is that, no matter these ills and no matter the accumulation of debt, total hours of labor must increase — the fate of capitalism depends on this growth.
But, it is not increasing.
Why compulsory growth of employment is necessary for Washington
Capitalism is a mode of production where the employment of labor power must constantly increase, no matter what the consequences. This mean, the duration of labor must constantly rise, a duration that is a function of the number of workers times their hours of work. Washington and the political parties always directs our attention to the unemployment rate, which figures are usually cooked, but, what really matters for Washington, is not the unemployment rate, but the duration of the social working day. At least this seems to be what is relevant, from the standpoint of Marx’s theory.
According to the date I have access to, social labor day has fallen only four times in the last 36 years: briefly in 1991 and again in 2001, and in a sustained way from 2007 to 2009. In other words, since this depression began in 2001, the total hours of work has fallen 3 years between 2001 and 2009. The response to this fall the first time, was the Bush tax cuts, Paul Krugman calling for a housing bubble to replace the NASDAQ bubble Bernanke’s speech on deflation, and Alan Greenspan being asked to retire from the Fed.
The second and third times the total social labor day shrank, coincided with the collapse of the financial system and Fed monetary policy.
This argues that this measure of economic activity is more significant than the hype over non-farm payroll numbers would have you believe. Such an argument might be said to be based entirely on coincidence, were it not itself based on the arguments of Postone and Kurz. They suggested the social labor day must constantly expand if existing relations of production are to be maintained.
What is more, each writer comes to this conclusion from different premises, i.e., different and contradictory notions of value. Postone’s argument suggests that the total labor time of society must expand despite the contraction of socially necessary labor time in the forms of value and surplus value; while Kurz suggests the increasingly fictional quality of credit, of fictional claims to future profits, requires the constant expansion of total labor time of society. In either case, Postone in 1993, and Kurz in 1995, using different notions of value, argue the total labor time of society must increase. And when, in fact, this total labor time actually did not increase, first a depression was triggered, then a financial collapse.
But, I hear you: ‘I am still not convinced by the evidence — it could, after all, be a really good scientific wild-assed guess on the part of those writers.’
Good point! Evidence suggests each writer, Postone and Kurx, was familiar with the writings of the other — so this could be just another instance of group-think. Instead of just going from Postone and Kurz to the empirical data, we need to go from Postone and Kurz back to Marx’s argument to establish a logical chain of reasoning, and figure out if, in fact, these guys were just making a wild guess.
In Marx’s argument, capitalism is not just a system of commodity production; it is a system of surplus commodity production, of the production of surplus in the form of commodities, of the production of surplus values. As a system of commodity production that aims always at the production of surplus value, capitalism relentlessly aims toward self-expansion beyond its given limits — as Marx put it, it employs existing value to create surplus value. Both Postone and Kurz employ this argument to uncover the absolute necessity of capitalism, at a certain stage in its development, to produce a sector consisting entirely of superfluous labor. In fact, Marx himself hints at just this result in volume 3, when he writes:
“If, as shown, a falling rate of profit is bound up with an increase in the mass of profit, a larger portion of the annual product of labour is appropriated by the capitalist under the category of capital (as a replacement for consumed capital) and a relatively smaller portion under the category of profit. Hence the fantastic idea of priest Chalmers, that the less of the annual product is expended by capitalists as capital, the greater the profits they pocket. In which case the state church comes to their assistance, to care for the consumption of the greater part of the surplus-product, rather than having it used as capital.”
Marx is clearly suggesting the unproductive consumption of the total social product becomes increasingly necessary when he closes with the wry comment:
“The preacher confounds cause with effect.”
Still later, Marx decries the result of this process:
“In the first place, too large a portion of the produced population is not really capable of working, and is through force of circumstances made dependent on exploiting the labour of others, or on labour which can pass under this name only under a miserable mode of production.”
Which is to say, a growing mass of workers makes its living by subsisting on the surplus value of the productively employed population. So, for me at least, there is a clear line beginning with Marx, through the argument of Postone and Kurz, that is expressed graphically below in the empirical data on the social labor day:
This decline is far more significant than the manipulated data foisted on the population of voters this morning. It suggests there is a real material dysfunction in fascist state economic policy that cannot be altered with a set of misleading stats. Beyond the convenient and willful ignoring of the shrinking labor participation rate, and the mass of unemployed no longer counted, the data suggests a situation that cannot be repaired by confidence tricks designed to keep the two parties in power.
Almost a fifth of the population is now permanently locked out of the labor force — the highest on record — according to Zero Hedge calculations:
If hours of labor do not expand at a sufficient rate to sustain existing relations of production, the entire Ponzi scheme must collapse. This process has probably already begun, which explains the insanely desperate actions of the Federal Reserve over the past month.
Tags: budget deficit, Depression, economic collapse, Federal Reserve, financial crisis, Karl Marx, Moishe Postone, NSC-68, Occupy Wall Street, recession, Robert Kurz, unemployment, value theory, Wall Street
Since Occupy Wall Street appears to be undertaking a concerted push toward addressing the growing debt servitude of the mass of working families to Wall Street banksters, I thought it might be interesting to understand how the Federal Reserve is now doubling down on a policy of manufacturing an even greater debt burden for working families under the guise of stimulating the economy.
Comments and suggestions for improvement to this post are welcomed.
Tags: Bailout, debt, Depression, economic collapse, economics, fascist state economic policy, Federal Reserve, Finance, financial crisis, Hyman Minsky, inflation, international financial system, Krugman, monetary policy, political-economy, qe3, quantitative easing, Quantitative easing and debt, stupid economist tricks, Wall Street Crisis, william white
I want to recommend everyone read John Weeks’ paper, “The theoretical and empirical credibility of commodity money“, because he presents a key to the analysis of neoclassical economic theory that unlocks its inner logic. I missed the juicy goodness of his argument in my first read because I have an aversion to mixing math with social criticism. However, in his math Weeks uncover why money is not a commodity-money in neoclassical theory, and why it cannot be a commodity-money.
Weeks tries to make sense of a troubling rejection by neoclassical economic theory to admit to the obvious internal consistency of Marx’s commodity-money theory:
Th[e] theoretical superiority of commodity-based monetary theory has had little practical impact because of a perceived empirical absurdity of the commodity money hypothesis.
I came to my understanding of fascist state issued fiat money based on one closely held idea that neoclassical economics is not irrational, capitalism is. Yes, capitalism is as irrational as it has been declared by Marxists to be, however no one but an idiot would buy into the neoclassical argument unless it made sense in the context of fascist state economic policy. Since capitalism itself is irrational, a rational person looks like an idiot when he buys into its propositions; on the other hand, accepting the irrationality of capitalist relations of production as the basis for formulating fascist state economic policy is rational.
Tags: Andrew Kliman, Bailout, commodity money, Depression, economic collapse, economic policy, ex nihilo currency, ex nihilo money creation, Federal Reserve, financial crisis, Fred Moseley, Frederick Engels, Henry Paulson, Jonh Weeks, Karl Marx, Marxism, MELT, monetary policy, neoclassical economics, noeclassical money theory, otma, stupid economist tricks, The Commune, Wall Street Crisis
(Or, more importantly, why should anarchists, libertarians and Marxists be as well)
So, has any reader of this blog heard that economists have conceded Marx was right after all? Have you at any time during the past 40 years heard an economist admit that Marx was correct in his transformation argument? I am really confused by this, because although Paul A. Samuelson declared Marx’s labor theory of value irrelevant in 1971, it is still being studied by BIS economists today. If I told you Marx’s theory was being studied by economists because Samuelson was a bald-face liar and a practiced dissembler, you would probably just yawn.
Of course, he was lying — he’s an economist. Economists are paid to lie and distort reality. They are employed by Washington not to explain economic processes, but to obscure them. To call an economist a bald-face liar, is simply to state he is breathing — nothing more.
But, to understand why Samuelson was lying, and why it was necessary that his lie stand unchallenged for forty years, we have to figure out the problem posed by Marx’s so-called “transformation problem”.
Marx’s transformation problem could be called the “paradox of capitalist price”, and we could state it thus:
Simple commodity price is an expression of the value of the commodity, but capitalist profit is the expression of surplus value wrung from labor power. To realize the surplus value wrung from the worker, the realized price of the commodity in the market has to include both the quantity of value created when it was produced plus a quantity of surplus value wrung from the unpaid labor time of the worker — capitalist price is the cost of producing the commodity plus the capitalist’s profit.
However, in the classical labor theory of value, the price of the commodity can only express the value of the commodity alone, not surplus value. Thus, for the price of the commodity to include both its value and a quantity of surplus value wrung from the worker, the capitalist price of the commodity must, of necessity, exceed the value of the commodity. The law of value is thus violated by the realization of capitalist surplus value — capitalist prices of commodities must always exceed the socially necessary labor time required to produce them.
The realization of capitalist profit violates the basic rule of classical economic theory: equal exchange of values in the market — but, as we shall see, this is far from a merely theoretical violation.
Now, Marx provides a number of caveats that work to stabilize the capitalist process of production — he called them “countervailing tendencies”, and they include things like the export of capital, etc. If we ignore all of these countervailing tendencies, however, the result is that prices of commodities must rise above their values, or alternatively money must exchange for these commodities below its value. (By money, I mean here only commodity money, i.e., gold or some other metal.)
What must occur when this happens is that money fails to circulate — the economy experiences a so-called credit, or financial, crisis. So, Marx’s labor theory of value explains why the dollar was debased in 1933 by the Roosevelt administration. It explains why your currency today is worthless pieces of paper or dancing electrons on a computer terminal. Marx’s transformation predicts and explains the debasement of the dollar and all other currencies on the planet.
Given this, how does Samuelson say Marx’s theory has no market predictive power? Because he was an economist — not a scientist, but a propagandist on behalf of the fascist state. I thought we already answered this — are you paying attention?
Eventually, Marx’s labor theory of value stated, gold could no longer serve as money because its function as measure of value conflicted with realization of the surplus value wrung from you — the unpaid labor time you work in addition to the value of your wages. At a certain point, the realization of surplus value — converting this surplus labor into profits — becomes incompatible with commodity money. Prices can only increase to reflect the average rate of profit if the currency is removed from the gold standard.
Samuelson once famously declared Marx’s theory could not explain the American and European economies between 1937 and 1971 — but, I just did, so fuck Samuelson!
Moreover, Marx’s transformation states you now work as many as 36 more hours per week than is necessary. The labor theory of value shows 90 percent of the current work week is being performed solely to maintain the rate of profit. Another way to understand this: essentially the labor time that is necessary under a regime of capitalist prices is about ten-fold that needed if capitalism is abolished.
On the other hand, maintaining such a long work week is the sole cause of inflation in our economy — it is labor wasted on a vast scale. This is why in this crisis the sole concern of Washington has been to maintain or increase the rate of inflation. The conversion of surplus value into profits demands the constant increase in the total hours of labor by the working class. While the unpaid labor time of the working class is the sole source of surplus value, the realization of this surplus requires still more unpaid labor time.
Based on the above, we can make four general statements — which can be empirically substantiated — about the implications of Marx’s labor theory of value and the paradox of capitalist prices. If these turn out to be true, Marx’s theory is vindicated and anti-statists have a weapon with which to change the terms of political debate.
If Marx is right, we should be able to prove:
- prices have generally increased faster than value for the past 40 years — this implies not simply that there was inflation, but that this inflation did not in any way result from an increase in the value of commodities, but increased despite a general decline in the value of commodities.
- total hours of work have increased faster than was socially necessary for the past 40 years — this implies the additional hours of work per person did not result from any cause necessary from the standpoint of social needs, but despite growing social needs.
- total employment has increased faster than productive employment in the past 40 years — this implies the employment of labor has become less efficient over time,despite increased addition of labor saving techniques to production. It also suggests growth has been in those part of the economy where productivity is impossible to measure.
- total output has increased faster than total wages in the past 40 years — this implies output has increased most rapidly in precisely those commodities that do not enter into the consumption of the working class.
Basically, these four general statements come down to one thing with regards to the great mass of society: In the past 40 years, people have had to work more hours, and more of them have been forced to work, even as they have become poorer. We should, in other words, be able to demonstrate beyond question that labor no longer adds any value to the economy, and the increase in output, in hours of work, and in additional jobs, does not increase the living standards of the great mass of society. The more work performed, the greater the increase in poverty.
The “paradox of capitalist price” is the paradox of more work for less real income. The paradox suggests only those measures which reduce the size of government can increase the living standards of the mass of working people. Of course, because, this argument is counter-intuitive — since, theory is only necessary when things are not as commonsense suggests they should be — making this argument requires it be buttressed with considerable empirical support from the anti-statist community.
Moreover, Marx’s labor theory of value has an additional aspect which recommends it even over what I just stated. Since, in Marx’s labor theory of value, socially necessary labor time is the material barrier to the realization of a classless, stateless society — which has been the avowed aim of communists for nearly two hundred years — his theory is also the concrete measure of the extent to which the productive capacity of society has developed to make this aim a realistic possibility. Contained in the labor theory of value is also the material measure of the possibility of society to immediately achieve a stateless and classless society on the basis of the principle of “each according to his need.”
I think every anarchist, libertarian and Marxist should understand Marx’s transformation of surplus value into profits and the paradox of capitalist prices, because in it is the entire argument against the existing state, and all the ugly mess bound up with it.
Tags: bank for international settlements, bieri, Bohm-Bawerk, Depression, economic collapse, economic policy, Federal Reserve, financial crisis, great depression, international financial system, Karl Marx, labor theory, monetary policy, necessary labor, Paul A. Samuelson, political-economy, recession, stupid economist tricks, transformation problem, unemployment, Wall Street Crisis, werner sombart
In reality, there was nothing in Bohm-Bawerk’s argument to be disproved. Bohm-Bawerk had indeed cited the essential contradiction at the core of capitalism. His problem, however, was to imagine the contradiction to be a defect of Marx’s theory, and not a fatal flaw laying at the heart of the capitalist mode of production itself.”
Bohm-Bawerk had inadvertently confirmed the rather grim future arrived at by Marx’s theory: Capitalism would kill the so-called free market, and in so doing, would destroy itself. It was, as Marx argued, creating its own gravediggers, a mass of directly social laborers who did not need it, and would see it as an impediment to their very survival, owing to obstacles it put in the way of its own operation.
By the 1970s, economists finally were forced to acknowledge there was in fact no inconsistency in Marx’s argument. Marx had, just as Bohm-Bawerk accused him, arrived at a theoretical description for why prices, although resting on the socially necessary labor time required to produce commodities, nevertheless appeared to reflect the prices of production of these commodities and not their labor times. It was not, as Werner Sombart feared, that from Marx’s labor theory of value “emerges a ‘quite ordinary’ theory of cost of production”, but precisely that Marx’s theory predicted from the first that the value of commodities must appear in the form of prices of production.
Moreover, Marx had demonstrated his proof almost in real time, so to speak, in front of his audience in a painstakingly detailed series of volumes — subject to the critical purview of his opponents. He had, as it were, made the elephant in the room — socially necessary labor time — disappear before the disbelieving eyes of his skeptical audience. It was a performance so dramatic and unprecedented, it took decades for the skeptics even to figure out what they had just witnessed with their own eyes.
The acknowledgement of Marx’s triumph took the form of a paper by Paul A. Samuelson, and was couched in the form of the complaint echoing that leveled against Marx by Sombart, as previously quoted by Bohm-Bawerk :
“…if I have in the end to explain the profits by the cost of production, wherefore the whole cumbrous apparatus of the theories of value and surplus value?”
Taking a cue from Sombart, Samuelson, in a paper titled “Understanding the Marxian Notion of Exploitation: A summary of the So-Called Transformation Problem Between Marxian Values and Competitive Prices”, introduced his so-called erasure method arguing,
It is well understood that Karl Marx’s model in Volume I of Capital (in which the “values” of goods are proportional — albeit not equal — to the labor embodied directly and indirectly in the goods) differs systematically from Marx’s model in Volume III of Capital, in which actual competitive “prices” are relatively lowest for those goods of highest direct-labor intensity and highest for those goods of low labor intensity (or, in Marxian terminology, for those with highest “organic composition of capital”). Critics of Marxian economics have tended to regard the Volume III model as a return to conventional economic theory, and a belated, less-than-frank admission that the novel analysis of Volume I — the calculation of “equal rates of surplus value” and of “values” — was all an unnecessary and sterile muddle.’
Samuelson gave a simple straightforward explanation of his “erasure method”:
I should perhaps explain in the beginning why the words “so-called transformation problem” appear in the title. As the present survey shows, better descriptive words than “the transformation problem” would be provided by “the problem of comparing and contrasting the mutually-exclusive alternatives of `values’ and `prices’.” For when you cut through the maze of algebra and come to understand what is going on, you discover that the “transformation algorithm” is precisely of the following form: “Contemplate two alternative and discordant systems. Write down one. Now transform by taking an eraser and rubbing it out. Then fill in the other one. Voila!
For all his genius, Samuelson argued, Marx had produced a theory which offered no greater insight into the social process of production than was already present in the form of mainstream economics. It could, for this reason, be entirely ignored.
Ignored also, however, would be the entire point of Marx’s “unnecessary and sterile” detour: namely, to demonstrate in comprehensive and theoretically ironclad fashion why the capitalism mode of production is doomed.
This only deepens the mystery of David Bieri’s interest in a theory routinely dismissed by economists as, at best, a vestigial remnant of classical political-economy. Why would this former bureaucrat of the Bank for International Settlements still be reviewing an obscure technical problem of a long dead theory?
Tags: bank for international settlements, bieri, Depression, economic collapse, economic policy, Federal Reserve, financial crisis, great depression, international financial system, Karl Marx, monetary policy, Paul A. Samuelson, political-economy, recession, stupid economist tricks, transformation problem, unemployment, Wall Street Crisis
In the previous blog post, I argued that in each of the three great capitalist catastrophes of the 19th and 20th Centuries — the Long Depression, the Great Depression and the Great Stagflation — economists scurried to bone up on Marx in an effort to understand practical problems of state economic policy confronting them at the time.
Naturally, the connection between these catastrophes and interest in Marx intrigued me, since this guy Bieri is now interested as well. If Bieri were just another Marxian economist I could understand his interest but his connection to the BIS and Bankers Trust, London intrigued me. Bankers Trust, one of the many institutions with which Bieri has been associated, is not exactly your typical local community credit union. It was up to its neck in the dirty dealings that led to financial crisis, and has long been implicated with equally shady dealings in the market in general. Here is what Wikipedia has to say about it:
“In 1995, litigation by two major corporate clients against Bankers Trust shed light on the market for over-the-counter derivatives. Bankers Trust employees were found to have repeatedly provided customers with incorrect valuations of their derivative exposures. The head of the US Commodity Futures Trading Commission (CFTC) during this time was later interviewed by Frontline in October 2009: “The only way the CFTC found out about the Bankers Trust fraud was because Procter & Gamble, and others, filed suit. There was no record keeping requirement imposed on participants in the market. There was no reporting. We had no information.” -Brooksley Born, US CFTC Chair, 1996-’99.
Several Bankers Trust brokers were caught on tape remarking that their client [Gibson Greetings and P&G, respectively] would not be able to understand what they were doing in reference to derivatives contracts sold in 1993. As part of their legal case against Bankers Trust, Procter & Gamble (P&G) “discovered secret telephone recordings between brokers at Bankers Trust, where ‘one employee described the business as ‘a wet dream,’ … another Bankers Trust employee said, ‘…we set ‘em up.”
Perhaps I am just being a tad paranoid, but when a guy with these kinds of connections starts sniffing around dusty old volumes of Capital just before the outbreak of the financial crisis of 2008, I begin to wonder what’s up.
But, I’m getting ahead of myself, am I not? I have not yet even explained what all the fuss is about. This tale begins with a little known simpleton scribbler, whose name is probably unfamiliar to anyone outside of the field of economics: Eugen von Bohm-Bawerk.
Tags: bank for international settlements, bank of international settlement, bieri, Depression, economic collapse, economic policy, Federal Reserve, financial crisis, great depression, international financial system, Karl Marx, london school of economics, monetary policy, political-economy, recession, stupid economist tricks, transformation problem, unemployment, Wall Street Crisis
I’m reading, “The Transformation Problem: A Tale of Two Interpretations”, by David Bieri.
According to his profile,
David studied economics at the London School of Economics and international finance at the University of Durham (UK). In 2006, he started his Ph.D. studies in SPIA.
From 1999 until 2006, David held various senior positions at the Bank for International Settlements, most recently as the Adviser to the General Manager and CEO. From 2002 to 2004, he held the position of Head of Business Development in which capacity he was responsible for new financial products and services and reserve management advisory for central banks. From 2004 to 2005, David worked as an economist in the BIS’ Monetary & Economics Department.
Prior to joining the BIS, David worked as a high-yield analyst at Banker’s Trust in London and in fixed-income syndication at UBS in Zurich.
What caught my attention is the notable resume of this author, which is quite unlike that of the typical Marxian economist. High-yield analyst, central bank bureaucrat, mainstream economist? This is not the sort of person you will find at your local Occupy campsite.
Why, I wondered, is the Bank of International Settlement interested in an obscure technical problem of Marx’s theory? So, I decided to give the paper a read.
Tags: Depression, economic collapse, economic policy, Federal Reserve, financial crisis, great depression, international financial system, Karl Marx, monetary policy, political-economy, recession, stupid economist tricks, unemployment, Wall Street Crisis
This is my final installment on the hyperinflationists section of theories of the current crisis for now. As I find in any good examination of a theory out there, I come away from this one with a better understanding of some of the problems of capitalism under conditions of absolute over-accumulation. The hyperinflationist argument forced me to confront several problems from the standpoint of the law of value, including, world market prices versus existing prices; ex nihilo currency and price behavior; definitions of price deflation, inflation and hyperinflation; definitions of depressions and recessions; the purchasing power of ex nihilo currency; and the rivalry between the monetary policies of the various nations states in relation to the Fascist State.
One of my conclusions from this examination is that FOFOA, properly understood, should not be in the hyperinflationist camp. I have no idea why he is advocating for dollar hyperinflation, since he, more than any other writer in the hyperinflationist camp, realizes the relationship between the purchasing power of an ex nihilo currency and the circulation of commodities. In 2010, he wrote:
Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero. This is backwardation!
Fekete says backwardation is when “zero [gold] supply confronts infinite [dollar] demand.” I am saying it is when “infinite supply of dollars confronts zero demand from real, physical gold… in the necessary VOLUME.” So what’s the difference? Viewed this way, can anyone show me how we are not there right now? And I’m not talking about your local gold dealer bidding on your $1,200 with his gold coin. I’m talking about Giant hoards of unencumbered physical gold the dollar NEEDS bids from.
Don’t let the term “backwardation” throw you. It is one of those insider terms among commodity traders, which, for our purpose, can be safely ignored, since it adds nothing to FOFOA’s essential argument. What FOFOA is saying in this excerpt is that the purchasing power of an ex nihilo currency rests on the willingness of gold owners to accept it as means of payment in exchange for their commodities. Unfortunately, FOFOA limits his argument to gold and misses the significance of his insight. This is because, for reasons previously mentioned, he articulates the viewpoint of the petty capitalist, who, unable to operate independently, must of necessity hand his meager wealth over to Wall Street investment banksters if it is to operate as capital, or, failing this, accept the depreciation of its dollar purchasing power, or, convert it to a hoard of useless gold.
There is, however, no reason to limit FOFOA’s insight to gold. Having been displaced in circulation as money, gold is simply another commodity whose particular use value is that it serve as a store of value. It is excellent in this regard, but broccoli is excellent as a vegetable, while gold is not. The specific quality of gold is its limited use as mainly a store of value, and, in this regard, it has few substitutes, while broccoli has many substitutes. This, however, should not blind us to the fact that it is now an ordinary commodity like any other. The true significance of FOFOA’s insight is that the purchasing power of any ex nihilo currency is directly a function of the willingness of commodity owners to accept it in exchange for their commodities.
If commodity owners are unwilling to accept an ex nihilo currency in exchange for their commodity, or prefer another currency in exchange for their commodity over that particular currency, its purchasing power will quickly fall toward zero — hyperinflation. This is precisely what happened in the case of the Zimbabwe dollar, which was undermined not only by the profligacy of the state, but also, by the preference of commodity owners for dollars and euros as a result of this profligacy. As FOFOA knows, the dollar is not likely to suffer such a fate, since its purchasing power rests on the fact that it is accepted for any commodity on the world market, and, consequently, is “undervalued” against all other ex nihilo currencies. Even if the purchasing power of a single ex nihilo dollar falls, the purchasing power of the total sum of dollars in circulation is not affected — it is still “undervalued” in relation to all other ex nihilo currencies, and must be undervalued as long as the total quantity of all other currencies is greater than zero.
By the same token, FOFOA’s insight demonstrates why, despite the constant depreciation of a single ex nihilo dollar, the sum of existing prices within the world market must be higher than world market prices denominated in dollars. No matter the depreciation of a single ex nihilo dollar, the sum of world market prices must fall toward world market prices denominated in dollars. Thus, the monetary policies of other nations is determined by the monetary policies of the Fascist State. Any nation wishing to pursue a so-called loose monetary policy, as Zimbabwe did, must find its ex nihilo currency displaced by dollars as commodity owners demand dollars in place of the national currency. On the other hand, the “tightening” of monetary policy by other nations cannot save these national currencies, since such “tightening” only leads them to the same fate as gold itself — they are withdrawn from circulation in a deflation of prices.
The end result, in either case, is the demonetization of all ex nihilo currencies except the dollar, and the equalization of the sum of prices within the world market with world market prices denominated in dollars. Hyperinflation and deflation do occur, but they occur in every other ex nihilo currency except the dollar.
From John Williams and FOFOA, I better understand the likely consequence of Fascist State economic policy — the front-loading of a series of events leading to the collapse of ex nihilo currencies by the fall of the sum of prices within the world market to the price level imposed by the dollar. This is because, as opposed to the deflationists, the hyperinflationists show the Fascist State will not sit by and let its dominant position be threatened by mere accounting identities. It will defend that position even at the expense of all other currencies. FOFOA is clearer on this point than Williams, but Williams implies it as well.
Paradoxically, FOFOA’s argument lends support, not for the hyperinflationist camp, but Modern Monetary Theory (MMT). His insight confirms the assumptions of the modern money theorists that the Fascist State faces no external constraint on its expenditures, since all ex nihilo currencies are only worthless dancing electrons on the computer terminals of central banks. The question raised by Fascist State expenditures is not its effect on national accounting balances, but the effect of these expenditures on other ex nihilo currencies. The accelerated spending of the Fascist State drives all of these currencies out of existence.
I look forward to examining this in a similar survey of modern money theory at another time.
Tags: Bailout, budget deficit, commodity money, CURRENT ACCOUNT DEFICIT, debt, deflation, Depression, economic collapse, economic policy, ex nihilo money, falling rate of profit, Federal Reserve, financial crisis, FOFOA, great depression, hyperinflation, inflation, international financial system, Karl Marx, law of value, Modern Monetary Theory, political-economy, recession, stupid economist tricks, The Economy, unemployment
In a recent post, Deflation or Hyperinflation, FOFOA begins the meat of his argument with investment adviser Rick Ackerman (who, until recently, predicted this present crisis will end in a debt deflation) by directly addressing Ackerman’s core deflationist argument, which originally was set forth in a 1976 book by C.V. Myers, The Coming Deflation:
My instincts concerning deflation were hard-wired in 1976 after reading C.V. Myers’ The Coming Deflation. The title was premature, as we now know, but the book’s core idea was as timeless and immutable as the Law of Gravity. Myers stated, with elegant simplicity, that “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” Inflationists and deflationists implicitly agree on this point — we are all ruinists at heart, as our readers will long since have surmised, and we differ only on the question of who, borrower or lender, will take the hit. As Myers made clear, however, someone will have to pay. If you understand this, then you understand why the dreadnought of real estate deflation, for one, will remain with us even if 30 million terminally afflicted homeowners leave their house keys in the mailbox. To repeat: We do not make debt disappear by walking away from it; someone will have to take the hit.
FOFOA’s response to the deflationist argument was both simple and fatal for the deflationist argument:
Yes, someone will pay. But there is a third option that is missing from Myers’ dictum. “The hit” can be socialized…
What the deflationist miss, says FOFOA, is that Washington will never accept the collapse of its failing economic mechanism. It will create whatever quantity of ex nihilo dollars it takes to socialize the losses of financial institutions, pension funds, etc. — even if this threatens the viability of global financial system and the dollar itself.
Like FOFOA, I want to begin this post by directly addressing the core argument of both camps, that this crisis must end either in the deflation or hyperinflation of dollar prices, or both. As FOFOA has argued, the present crisis will likely end in both hyperinflation and deflation at the same time. I agree with this analysis, but I disagree with his targets. Both hyperinflation and deflation of prices will occur, but they are likely to hit every ex nihilo currency on the planet except the dollar. If other currencies survive at all, they will do so only as boutique items marketed to private collectors, like their predecessor, gold. The deflationary/hyperinflationary hit will be not just socialized, but globalized as well.
Is this argument true? I don’t know for sure. To be honest, there are so many variables in the current crisis that any attempt to make a firm prediction must end in embarrassment for someone — a whole lot of “someones”, in fact. But, let’s assess the probabilities determining the outcome of this crisis using Marx’s Law of Value, rather than Austrian economics:
Zero divided by zero equals ?
To be absolutely clear at the outset, there is no difference between the fundamental facts underlying the dollar and the fundamental facts underlying all other national currencies — they are all worthless and possess infinitely more purchasing power than their actual value. From the standpoint of the law of value, any exchange rate between any two ex nihilo currencies is meaningless, since it is merely the ratio between one object that is entirely worthless and another object that is entirely worthless. For the past decade, the purchasing power of the euro has risen against the dollar despite the absolute worthlessness of either currency. The Zimbabwe dollar is collapsing into hyperinflation, but not so far as to actually represent in circulation its actual value — a Zim$1.00 note has exactly the same value as a Zim$1,000,000,000.00 note (and exactly the same value as a one hundred dollar bill for that matter).
Likewise, prices denominated in any ex nihilo currency are meaningless, since they can never rise to actually reflect the values of the commodities which the ex nihilo money denominates. An increase in the purchasing power of an ex nihilo currency would, in any case, conceal the utter worthlessness of the currency. And as to the fall in the purchasing power of any currency, it suffices to state no matter how far the purchasing power of Zimbabwe dollars fall, Zimbabwe dollar denominated prices of commodities never reflect how worthless the currency really is.
What both the hyperinflationist camp and the deflationist camp need to explain is why, despite the absence of value of all ex nihilo currencies, no major currency was put back on the gold standard after Washington closed the gold window in 1971? Why was gold, despite its value as money, relegated to the basements of major central banks or the private collections of hoarders? Why was it necessary for all major trading nations to remove a commodity standard for the general price level from the world economy? The questions answer themselves: a commodity standard for the general price level is incompatible with an economy founded on capitalist social relations at this stage of its development — absolute over-accumulation. The rather stunning fact presented by gold is this: if prices of commodities were denominated in gold, no commodity would be “worth” the gold standard price quoted for it, i.e., the purchasing power of gold as money would be below its value as a commodity — a situation previously found only during over-production of commodities is now a permanent feature of the capitalist mode of production. It is this situation that initially drove gold from circulation as money, that compelled it to strip off its monetary form.
Without understanding this piece of the puzzle, it is not possible to understand the nature of the present crisis, which, despite appearing as the product of a massive accumulation of worthless debt threatening all existing currencies, is actually the cause of this accumulation of fictitious capital. It is futile to try to understand the current crisis by comparing the attractiveness of various existing or imagined alternative ex nihilo currencies on the world market, since each is worthless, and are as prone to sudden and unexpected hyper-depreciation of their purchasing power as the dollar — and which, moreover, owe their role as money to the fact the gold has ceased to be able to function as money. Since there is nothing about the currencies themselves that set them apart from each other or from the dollar, predictions about their respective fates as currencies must rest, not on the respective attraction of the currencies themselves, but solely on the material relation between respective national states — we must ignore the apparent differences in the purchasing powers of various ex nihilo currencies and delve into the actual economic relations between and among the various states.
World market prices versus existing prices
No matter the differences in the exchange rate between dollars and all other currencies, the following conditions hold: on the one hand, world market prices are denominated in dollars, while, on the other hand, the total sum of present prices throughout the world market as a whole are determined by the ratio of the total sum of currencies of every nation to the total quantity of commodities in circulation throughout the world market. If the dollar was the only currency in circulation there would be no difficulty with regards to world prices and existing prices — they would be identical. However, if we have two currencies — we will call them ex nihilo dollars and an ex nihilo “Rest of the World Currency” (rotwocs) — the situation is changed. Although the dollars and rotwocs are identical — i.e., both are worthless — in circulation the effect on the total sum of world market prices is the ratio between all ex nihilo currency in circulation (X dollars plus Y rotwocs) to the total quantity of commodities in circulation throughout the world market.
Despite this fact, world prices are determined by dollars alone, and under the following circumstances: the dollar is not accepted for all commodities because it is world reserve currency; rather, the situation is precisely the opposite: because it is universally accepted in exchange for any commodity, it is the world reserve currency. This means the dollar’s purchasing power is absolute, while the purchasing power of the rotwoc is only relative — the rotwoc can purchase any commodity whose price is denominated in rotwocs, but to purchase a commodity denominated in dollars, it must be exchanged for dollars before the transaction can be completed. If we assume the world market is divided into two zones — a dollar only zone and a combined dollar/rotwoc zone — of equal size, it is obvious that the existing stock of dollars can readily serve as means of purchase in the entire world market, while the existing stock of rotwocs can serve as means of purchase only in the rotwoc zone. The purchasing power of the stock of dollars is, therefore, twice that of the stock of rotwocs, i.e., there are twice as many commodities available to be purchased by dollars as there are by rotwocs.
It should be obvious now that the sum total of all other ex nihilo currencies provide no additional purchasing power to global demand — they are entirely superfluous. On the other hand, the dollar actually exchanges with all other ex nihilo currencies at a rate significantly below its purchasing power throughout the world market — even against ex nihilo currencies that are, at any given moment, appreciating in purchasing power against it. Since the purchasing power of any ex nihilo currency is not inherent in the currency itself, but depends solely on the total quantity of commodities available to be purchased by it, it follows the purchasing power of the ex nihilo dollar is not limited to the commodities available to be purchased in the dollar zone alone, but all commodities that are available to be purchased by it throughout the world market.
On the other hand, it should be equally obvious that the total sum of prices in the world market must be above world market prices. Since world market prices are here determined solely by the ratio of the total sum of ex nihilo dollars in circulation to the total sum of commodities in circulation within the world market, but the actual sum of prices is determined by the ratio between total sum of dollars in circulation plus the total sum of all other currencies in circulation (x dollars plus y rotwocs) to the total sum of commodities in circulation, any quantity of non-dollar national currencies in circulation above zero results in prices that are above world market prices.
The endpoint of this crisis
The question is how all this works out in the crisis as it is now unfolding. While I don’t have a crystal ball, I will attempt to outline a likely course.
As we have seen in this crisis, no matter how profligate the Fascist State is in its spending on a massive global machinery of repression, and on socialization of the losses of incurred by the failed economic mechanism, the more expenditures it undertakes, the greater the pressure on other national monetary authorities to tighten their own monetary policies in response — to impose naked austerity on their citizens, to further constrain domestic prices in the face of rising global prices. Rising global prices translate into a falling rate of profit in the non-dollar states. To offset this falling rate of profit, the domestic labor forces of the various non-dollar states must be squeezed still further, and the resultant surplus product exported. The profligacy of the Fascist State and the austerity regime of these non-dollar states are only two sides of the same process, feeding on each other, each reinforcing the other.
The two do not merely reinforce each other, however, they also act to make their opposite insufficient in resolving the crisis. Insofar as the profligacy of the Fascist State increases, the pressure on the non-dollar states toward domestic austerity increases, and with this also increases its exports. Insofar as exports increase, global overaccumulation is intensified and the world market settles even more deeply into depression. But, as we have already seen, with an ex nihilo currency regime depressions are now associated not with deflation of prices, but the inflation of prices — so actual prices rise still faster in response to domestic austerity.
A straight-line assumption of the crisis indicates constantly rising world market prices, combined with increasing austerity and monetary policy contraction of non-dollar states. However, living processes do not move in a straight line; in any event non-dollar currencies are likely to experience an existential endpoint — separately, or in groups — since the collapse of any one of them involves fewer complications than replacement of the dollar as world reserve currency. Moreover, replacing the dollar with another currency does not solve the problem that these non-dollar currencies are superfluous. Non-dollar currencies are likely finished; nothing in this crisis appears to offer them another fate.
The question provoked by the above is not “What is the fate of the dollar?” Nor, is it, “What is the fate of non-dollar currencies?” Rather, the real question posed by my analysis is this:
“Why should any of these worthless currencies survive?”
Tags: Bailout, budget deficit, commodity money, CURRENT ACCOUNT DEFICIT, debt, deflation, Depression, economic collapse, economic policy, ex nihilo money, falling rate of profit, Federal Reserve, financial crisis, FOFOA, great depression, hyperinflation, inflation, international financial system, Karl Marx, law of value, political-economy, recession, stupid economist tricks, The Economy, unemployment
I know I promised to examine John Williams’ argument that hyperinflation hinges on an exogenous political event: the rejection of the dollar as world reserve currency by other nations. I will return to this point. But, before I do, I want to respond to Neverfox, who asked me to evaluate the argument of the writer FOFOA’s theory of the imminent hyperinflation catastrophe:
To summarize the argument of John Williams: The economy is spiraling into a severe depression of the 1930s or 1970s type. To meet its various present public obligations, future promises, and prop up the economic mechanism — which, for the moment, we can call debt-driven economic growth — the Federal Reserve is forced to monetize Washington spending. This monetization is itself producing a collapse in the credibility of the dollar. Sooner or later this loss in credibility will result in the outright rejection of the dollar as world reserve currency, triggering a hyperinflationary depression. In the course of this hyperinflationary event, lasting about six months or so, the dollar will become worthless.
To a great extent, although differing on some subtle points with Williams, FOFOA throws light on Williams’ own thinking. In FOFOA’s description of events, the hyperinflation event is front loaded with the essential dry tender: the accumulation of fictitious assets denominated in dollars over an 80 year period produced as a by product of the economic mechanism — debt fueled economic expansion. The event is triggered by a collapse of debtors’ ability to make good on their debts. This, in turn, is followed by an attempt by the Fascist State to rescue the financial institutions on whose books the fictitious assets reside, which produces a loss of confidence in the currency and its rejection as world reserve currency. It is only at this point, government begins printing money to survive and pay its obligations, generating the onset of extremely rapid price increases and the core hyperinflation event..
A deflationary episode can, and probably will, proceed the actual hyperinflation of prices. The hyperinflation episode does not invalidate the arguments of those who predict a deflationary depression; in fact, the hyperinflationary episode will in all likelihood start out as a deflationary episode. Those predicting a deflationary depression, however, miss the response of the Fascist State. Moreover, the deflation does occur just as those who predict deflation assert; only the deflation takes place in gold terms, not dollar terms. Expressed in gold terms, it is a deflation; however, in dollar terms, it is a hyperinflation. FOFOA believes the difference between a deflation measured in gold and a deflation measured in dollars is key to understanding the hyperinflation that is imminent:
“What’s the difference between a deflation denominated in gold versus dollars?” Well, there’s a huge difference to both the debtors and the savers. In a dollar deflation the debtors suffocate but in a gold deflation they find a bit of relief from their dollar-denominated debts. And for the savers, the big difference is in the choice of what to save your wealth in. This is what makes the deflationists so dangerous to savers.
A deflation imposes an extremely heavy burden on debtors, requiring them to repay their debts with ex nihilo denominated debt whose purchasing power is increasing, and which, therefore, requires increasing amounts of effort to repay. By contrast, a hyperinflation reduces the burden of accumulated debt by depreciating the purchasing power and burden of ex nihilo denominated debt. In the thinking of those predicting deflation, as the debt bubble of the last 80 years bursts, the Fascist State will find it impossible to reflate the debt bubble and will be forced to accept deflation. Thus, a full scale debt deflation depression is in the offing.
FOFOA argues that while it is not possible to reflate the debt bubble, the Fascist State can save the paper assets of financial institutions that are the fictitious claims on these debts. Decades of debt fueled growth has swollen dollar-denominated assets held by these institutions to fantastic dimensions. FOFOA argues the Fascist State will not and cannot let these institutions fail because it is merely the political expression of these financial institutions. The aim of Fascist State intervention is not to save the debtors — which it cannot do even if it wanted to — but, as events of the last three years show dramatically — the Fascist State aims to save the the assets of these institutions. FOFOA quotes another writer from whom he derives his own name, FOA:
hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today’s dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)
The process of actual hyperinflating prices begins with the attempts to monetize bad debts — to socialize the losses of big capital — not with money printing; the money printing only begins in earnest once monetization of bad debt leads to a loss in the credibility of the dollar.
…it is the US Govt. that will make sure this becomes a real Weimar-style hyperinflation when it forces the Fed to monetize any and all US debt. And as dollar confidence continues to fall, that’s when the debt must go exponential just to purchase the same amount of real goods for the government. One month the debt will be a trillion, the next month it will be a quadrillion just to buy the same stuff as the previous month. How long will this last? Less than 6 months is my guess.
According to FOFOA, on the balance sheets of the failed banks there now is more than enough reserves to fuel a sudden burst of hyperinflating prices should society suddenly lose confidence in the dollar. As this base is pulled into circulation by a general demand for goods in the face of rising prices, the Fascist State will be forced to begin printing money to cover its own obligations. Each month the amount of ex nihilo dollars needed to fill the same demand for government spending increases, and with this increase, the amount of new ex nihilo money created will increase. This compounding growth in the supply of ex nihilo currency will provide added impetus to the explosion of prices. The explosion of prices will not be contained short of a new monetary regime in which assets and debt are somehow tied to gold.
The problem is that the present monetary system, in FOFOA’s view, is that lending and saving both take the same form — either a gold backed system or an ex nihilo money system. FOFOA argues money lent out inevitably dilutes the value of money being saved, since they both come out of the same pot:
The problem is that the expanding money supply due to lending always lowers the value of a unit of currency. Even if it is gold. If I loan you a $1 gold money, you now have $1 gold and I have a $1 gold note. The money supply has just doubled, and the value of $1 gold just dropped in half.
This is a fact of money systems. We can try to get rid of it by outlawing lending, but that is like outlawing swimming in the summertime, or beer drinking.
The solution is quite simple. And I didn’t come up with it. The problem is that at the point of collapse, some of the savers are wiped out, whether gold money or fiat. Think about those at the back of the line during the bank runs of the 1930′s. They didn’t get their gold. They lost their money.
Today we don’t have this problem anymore. The guy at the back of the line gets all his money, it’s just worthless in the end. We solved the problem of bank runs (bank failures) but not the problem of value.
This problem, which is often referred to as debt deflation, is inherent in the prevailing monetary system, and will lead to financial crises even if the United States went back to a gold-backed dollar. He proposes instead to bring gold back into the money system, but within strict limits: split the functions of store of value and credit into two separate monetary systems — ex nihilo for lending, and gold for saving — so that ex nihilo currency lent out will indeed be diluted, but the gold-backed value of saving will freely rise to express this dilution:
The solution is that the monetary store of value floats against the currency. It is not the same thing that is lent! It is not expanded through lending and thereby diminished in value. Instead, as $1 is lent, and now becomes $2 ($1 to the borrower + $1 note to you the lender) and the dollar drops to half its value, the saver, the gold holder will see the value of his gold savings rise from $1 to $2.
I don’t want to get into the weeds on this proposal by FOFOA, since it is entirely beside the point of the examination of non-mainstream theories of the current crisis, and, in any case, a non-sequitur from the standpoint of capital. But, he inadvertently touches on a salient point for my examination: suffice it to say, capital is not and cannot be thought of as the accumulation of gold or any other commodity. It is the process of self-enlargement, or self-expansion, of the capital initially laid out in the capitalist process of production. At any given moment, this capital can take the form of money-capital, fixed and circulating capital, wages, and final commodities, but it is not identical with any of these momentary identities — it is relentlessly converted from one form to another constantly — both serially, and simultaneously in what, over time, comes to resemble a vast cloud of interrelated transactions — as it passes through the process of self-expansion. FOFOA’s proposal imagines the point of self-expansion is precisely what it is not: to assume the form of a hoard of gold — or any other store of value. This is true only insofar as we are thinking of capitals that are no longer capable of functioning as capitals — that are incapable of acting on their own as capitals, owing to the ever increasing scale of capitalist production, which renders these petty capitals insufficient to function on their own as capitals. Unable to operate on their own, they must be placed at the disposal of larger agglomerations of capital in order to continue functioning as capital, resulting in great stress for their owners, who now have to turn their otherwise lifeless hoards over to giant vampire squids of the Goldman Sachs type or cease being capitals at all.
This is, in part, what Marx meant by the concentration of capital, which is not simply the concentration of ownership of the means of production, but also the concentration of owners of capital who can continue to operate independently as capitalists. The existence of even very large savings does not permit these owners to operate independently as capitalists, given the scale of productive undertaking now required. Marx described the process 150 years ago:
A drop in the rate of profit is attended by a rise in the minimum capital required by an individual capitalist for the productive employment of labour; required both for its exploitation generally, and for making the consumed labour-time suffice as the labour-time necessary for the production of the commodities, so that it does not exceed the average social labour-time required for the production of the commodities. Concentration increases simultaneously, because beyond certain limits a large capital with a small rate of profit accumulates faster than a small capital with a large rate of profit. At a certain high point this increasing concentration in its turn causes a new fall in the rate of profit. The mass of small dispersed capitals is thereby driven along the adventurous road of speculation, credit frauds, stock swindles, and crises. The so-called plethora of capital always applies essentially to a plethora of the capital for which the fall in the rate of profit is not compensated through the mass of profit — this is always true of newly developing fresh offshoots of capital — or to a plethora which places capitals incapable of action on their own at the disposal of the managers of large enterprises in the form of credit. This plethora of capital arises from the same causes as those which call forth relative over-population, and is, therefore, a phenomenon supplementing the latter, although they stand at opposite poles — unemployed capital at one pole, and unemployed worker population at the other.
FOFOA’s proposal seems to confirm my identification of the social base of the hyperinflationist camp: a motley collection of petty speculative minnows, who are desperately trying to avoid the predation of the very biggest financial sharks and vampire squids — not to mention the Fascist State itself, which represents the interests of these predatory vermin. The hyperinflationists as a group imagine the dollar has reached the end of the line. They imagine this will lead to a revaluation of gold and the creation of a new monetary system to replace the dollar, driven by the dissatisfaction of the majority of the planet with the monetary policies of the United States.
So, we need to move on and examine this thesis.
Tags: Bailout, budget deficit, commodity money, CURRENT ACCOUNT DEFICIT, debt, deflation, Depression, economic collapse, economic policy, ex nihilo money, Federal Reserve, financial crisis, FOFOA, great depression, hyperinflation, inflation, international financial system, Karl Marx, political-economy, recession, stupid economist tricks, The Economy, unemployment
Even if we assume John Williams’ prediction of a hyperinflationary depression turns out to be correct — and the global economy is plunged into an apocalyptic nightmare as prices rise with blinding rapidity, while economic activity shudders to a standstill — his argument for this outcome is so defective as to merely represent the chimes of an otherwise broken clock for the following reasons:
First, his prediction rests on mere accounting identities, and assumes the Fascist State can be counted on, or forced, to observe these accounting identities. As a counter-argument, I offer the historical evidence of Washington’s behavior over the past 80 years, when it routinely ignored whatever accounting identities as were forced upon it by circumstances and left the rest of American society and the global population as pitiful bag-holders of worthless ex nihilo currency. Williams offers no argument why the Fascist State will act differently in this crisis. In all likelihood, Washington will effectively renounce its debts and continue business as usual — leaving China and other exporters to absorb the impact.
Second, Williams does not understand hyperinflation. His definition of hyperinflation is entirely defective, because he doesn’t realize ex nihilo currency is not made worthless by hyperinflation; rather, it is already a collection of worthless dancing electrons on a computer terminal in the Federal Reserve Bank. Ex nihilo currency was worthless the moment the Fascist State debased the token currency from gold in 1933 and 1971. Hyperinflation and inflation are not the more or less sudden depreciation of money, but the more or less sudden depreciation of the purchasing power of an already worthless money.
Third, Williams does not understand depression, and in particular the Great Depression. Depressions are produced by the overproduction of capital — whether this overproduction is momentary or persistent. They are characterized by a general surfeit of commodities, fixed and circulating capital, and a relative over-population of workers. These are periodic occurrences, owing their genesis not to simple fluctuations of economic activity, but to constraints imposed on consumption by the necessity that all productive activity is carried on, not with the aim of satisfying human needs, but for profit. All depressions result in the sudden devaluation of the existing stock of social capital, of the existing stock of variable and constant capital, which is the absolute precondition for the resumption of self-expansion of the total social capital.
Before the Great Depression, this last point always meant a rather pronounced and sudden deflation of prices. After the Great Depression, this devaluation is accompanied, not by a sudden and spectacular collapse of prices, but a sudden and spectacular explosion of prices. The event itself has not changed — it is still a devaluation of the total social capital. What has changed is the expression of this devaluation in a general fall in the price level. I argue the source of this change was the debasement of national currencies during the Great Depression.
What the three points made above tell me is that Williams and the growing community of hyperinflationists do not understand ex nihilo money; they do not understand how prices behave under an ex nihilo regime; and, finally, they do not understand why ex nihilo money was a necessary result of the Great Depression. They are an odd collection of petty speculative capitalists concerned only with preserving their “wealth” through what are likely to be very interesting times.
Understanding ex nihilo money
Like money in general, ex nihilo money, is not simply a “thing” — a currency without commodity backing — rather, it is a social relation that appears to us in the form of this thing. It is a social relation that takes the form of worthless currency because this social relation itself can only take the form of things. The social relation, of course, is a global social cooperation in the act of labor. Since, this social cooperation does not by any means result from conscious decisions of the members of society and proceed with their conscious direction, the requirements of this social cooperation impose themselves on the members of society as necessities — as the law of value, as the value/prices mechanism.
What is peculiar about ex nihilo money as a form of money is that the relation between value and price has been completely severed — the two most important functions of money have devolved on entirely different objects. By debasing the currency from gold money’s function as standard of price was completely severed from its function as measure of value. This much is acknowledged by the hyperinflationist, who place the blame for this separation on the Fascist State; however, historical research shows impetus behind this separation did not first appear as a matter of State policy, but as a matter of financial common sense.
Every depression begins with money exchanging for commodities below its value, or, what is the same thing, with the prices of commodities at their apex for the cycle. Prices near the top of the cycle rise to unsustainable levels, and the competition to dump commodities on the market under favorable price conditions gets fairly intense. Everyone is optimistic about the economic outlook, profits expand, credit flows freely, workers are hired, factories furiously churn out commodities around the clock, the stocks of goods begin to pile up in the warehouses. And, then, BOOM! — depression erupts just as wages, prices, profits and interest are at their highest, and the purchasing power of money is at its lowest.
As the disorder spreads, profits and prices collapse, credit is choked off, debtors default, factories grind to a halt, millions of workers are laid off… yadda, yadda, yadda — we all know the drill. Side by side with this disorder, money is with drawn from circulation. Gold money disappears into hoards, as capitals attempt to avoid the worst of the devaluation of the existing social capital. The competition at this point is not to see who can sell the most commodities, but who can avoid taking any of the losses that the social capital as a whole must suffer. While this total social capital must take the hit, which capitals actually take this hit is a matter of entirely other circumstances.
As Marx put it:
The class, as such, must inevitably lose. How much the individual capitalist must bear of the loss, i.e., to what extent he must share in it at all, is decided by strength and cunning, and competition then becomes a fight among hostile brothers. The antagonism between each individual capitalist’s interests and those of the capitalist class as a whole, then comes to the surface, just as previously the identity of these interests operated in practice through competition.
How is this conflict settled and the conditions restored which correspond to the “sound” operation of capitalist production? The mode of settlement is already indicated in the very emergence of the conflict whose settlement is under discussion. It implies the withdrawal and even the partial destruction of capital amounting to the full value of additional capital ΔC, or at least a part of it. Although, as the description of this conflict shows, the loss is by no means equally distributed among individual capitals, its distribution being rather decided through a competitive struggle in which the loss is distributed in very different proportions and forms, depending on special advantages or previously captured positions, so that one capital is left unused, another is destroyed, and a third suffers but a relative loss, or is just temporarily depreciated, etc.
The total social capital is devalued; and, this devaluation takes place both in terms of the values of the capital — prices fall, etc. — and by a winnowing out of the players — some definite portion of the total social capital is pushed out of productive activity altogether. Capitals go bankrupt, factories are shuttered, the reserve army of the unemployed expands. At the lowest point in the ensuing depression, prices and profits have fallen to their lowest point in the cycle, while the purchasing power of money is at its highest point in the cycle. Assets can be snatched up at bargain basement prices, labor power can be had for a wage below its value. If the capitalist has survived the wash out, he stands to accumulate on a prodigious scale, since unemployed productive capacity is just laying around collecting dust.
There was one problem with this scenario during the Great Depression: the economy hit this point and just laid there like the decaying carcass of a beached whale; the condition for the “‘sound’ operation of capitalist production” were never restored, money just sat in hoards as investors, waiting out the crisis for better times, clung to their useless gold stocks for dear life. There was, as usual, a general over-accumulation of capital, i.e., an overproduction of commodities, an excess of fixed and circulating capital, and an excess population of workers, but these excesses were rather persistent. As with any general over-accumulation, it was not a matter of “consumer confidence” returning, but the necessary actual devaluation of the existing total social capital. Absent this devaluation, attempts to increase production would merely result in an over-supply that further forced down prices and profits. Under these circumstances, a portion of the existing stock of commodity money could not circulate until the devaluation of the existing stock of social capital had taken place.
So, it was not the Fascist State that expelled gold from circulation as money; rather, because gold money could no longer circulate as money, the Fascist State was forced to replace it with ex nihilo currency. The Fascist State debased the currency from commodity money, because the circulation of commodity money had already halted. This action was no American exceptionalism, however; within a short period of time all industrialized nations went off the gold standard domestically.
I want to emphasize an extremely important point here, a point that is vital to understanding the present crisis: going off the gold standard did not simply convert money into a worthless, debased, token — entirely fictitious from the standpoint of the law of value — it also changed the behavior of prices, i.e., the behavior of the purchasing power of the currency itself. On this basis alone the Fascist State could take control of the social process of capitalist production.
The behavior of prices under ex nihilo money
Ex nihilo money is not commodity money, it is not token money, it is not fiat money — it is an altogether different animal entirely. For instance, under a commodity money regime an over-accumulation of capital produced falling prices during depressions, while the purchasing power of the commodity money rose. As I will show, ex nihilo currency inverts this relation after the Great Depression — now prices denominated in the debased ex nihilo currency rise as economic activity contracts, while the purchasing power of the ex nihilo currency falls.
So far as I know, there is no instance of a commodity money suffering a hyperinflation. Hyperinflation does not render a currency worthless; rather, the currency is immediately rendered worthless during debasement from a commodity that can serve as standard of price. Debasement can result in hyperinflation, but hyperinflation is not the necessary result of debasement. Hyperinflation must be defined as the extreme and rapid depreciation of the purchasing power of a currency that is already worthless, that already has been debased. Historically, while hyperinflation follows the debasement of the currency from gold, not every debasement of currency from gold has led to hyperinflation. Hyperinflation is historically associated not with commodity money per se, but with ex nihilo currency.
Here a distinction must be made between money — the commodity which performs the function of universal equivalent — and ex nihilo currency, which has no relation to commodity money at all. While this ex nihilo currency can replace commodity money in circulation like token money under certain definite circumstances, what makes it different from token money is that it has no definite relation with a commodity that serves as money — it is not “honest” money, i.e., tokens whose purchasing power is held within limits governed by the laws governing the circulation of commodity money. However, like the circulation of tokens of money, ex nihilo currency is subject to certain laws, the most important of which is it can only represent in circulation the value of the commodity money it replaces.
When we speak of the purchasing power of ex nihilo money, we are in fact only referring to the quantity of commodity money this ex nihilo currency actually represents in circulation. In this case, the commodity money on which I base my discussion is gold; so, the purchasing power of an American ex nihilo dollar represents the quantity of gold having a price of one dollar. If gold has a price of $22.67 an ounce, the purchasing power of one ex nihilo dollar is equal to the value of 0.044 ounce of gold; if gold has a price of $1525, the purchasing power of an ex nihilo dollar is equal to 0.0006557 ounce of gold. If the price of gold falls from $800 per ounce to $250 per ounce, the purchasing power of ex nihilo currency has risen from 0.00125 ounce of gold to 0.004 ounce of gold. If the price of an ounce of gold rises from $250 to $1525, the purchasing power of ex nihilo currency has fallen from 0.004 ounce of gold to 0.0006557 ounce of gold.
In any case, the purchasing power of ex nihilo currency refers only to the quantity of gold that would otherwise be in circulation circulation had not it been replaced by ex nihilo currency. It does not refer to the purchasing power of ex nihilo currency in relation to any other commodity. But, the quantity of gold in circulation at any point is not given — at one point it may be higher, while at another point it is lower. If, despite these fluctuations, the amount of ex nihilo currency in circulation is unchanged, it will, in the first case, represent more commodity money, and, in the latter case, represent less commodity money. The purchasing power of the ex nihilo currency will rise or fall with the fluctuation of economic activity which it denominates in itself. Since, when actually in circulation, the currency of commodity money is only a reflex of the circulation of commodities — rising and falling with this circulation — the purchasing power of the ex nihilo currency will only represent this quantity of commodity money irrespective of the absolute quantity of ex nihilo currency in circulation.
The circulation of commodity money is only a reflex of the circulation of commodities. Assuming the value of commodities and the velocity of money are fixed, when the circulation of commodities increases, the quantity of commodity money in circulation must increase. When the circulation of commodities decreases, the quantity of commodity money in circulation must decrease. Consequently, a fixed quantity of ex nihilo currency will represent a larger or smaller quantity of commodity money respectively as economic activity expands or contracts. If a fixed quantity of ex nihilo currency is in circulation when the circulation of commodities is increasing, the purchasing power of this fixed quantity of ex nihilo currency must increase. If a fixed quantity of ex nihilo currency is in circulation when the circulation of commodities is decreasing, the purchasing power of this fixed quantity of ex nihilo currency must decrease.
The supply of commodity money and the supply of ex nihilo currency are not the same thing. While the circulation of commodity money is naturally driven by economic activity, the amount of ex nihilo currency available to circulate is always dependent on the State issuance of ex nihilo currency. Moreover, once ex nihilo currency is in circulation, it will tend to remain in circulation. Thus, while the quantity of commodity money in circulation rise or falls with the circulation of commodities, the purchasing power of the ex nihilo currency replacing commodity money tends to increase or decrease with the circulation of commodities instead. For this reason, ex nihilo currency presents us with the paradox that prices tend to fall as economic activity increases and rise with the fall in economic activity.
If all else is given, we are forced to the following conclusion regarding the purchasing power of ex nihilo currency :
- the purchasing power of ex nihilo currency rises during periods of economic expansion, i.e, a given quantity of ex nihilo currency can purchase a greater sum of values. This is precisely the opposite of what we would expect from commodity money. While,
- the purchasing power of ex nihilo currency falls during periods of economic contraction, i.e, a given quantity of ex nihilo currency can purchase a smaller sum of values. Again, this is precisely the opposite of what we would expect from commodity money.
The behavior of prices are the inverse of what we would expect if ex nihilo currency behaved like commodity money. With commodity money, we should expect to find commodities being over-valued during expansions and devalued during periods of contraction. But. with ex nihilo currency, we find instead that commodities are devalued during expansions and over-valued during periods of contraction. Prices denominated in ex nihilo currency fall during expansions and rise during contractions.
When an economic contraction takes place, the sum value of commodities in circulation falls; since the circulation of the commodity money is only a reflex of the circulation of commodities, the circulation of commodity money too must fall. A given supply of ex nihilo currency now represents the value of a smaller quantity of commodity money. The values expressed by commodity prices fall, or, what is the same thing, a given value is expressed in higher ex nihilo currency prices. On the other hand, when an economic expansion takes place, the sum value of commodities in circulation rises; since the circulation of the commodity money is only a reflex of the circulation of commodities, the circulation of commodity money must rise as well. A given supply of ex nihilo currency now represents the value of a larger quantity of commodity money. The values expressed by commodity prices rise, or, what is the same thing, a given value is expressed in lower ex nihilo currency prices. The result is that, absent a commodity to serve as standard of prices, prices denominated in an ex nihilo currency will tend to rise during periods of economic contraction, but fall during periods of economic expansion.
Moreover, in a pure ex nihilo money economy where no commodity serves as standard of prices, prices of commodities are subject to disturbances in the ratio of the existing supply of ex nihilo money in circulation and the quantities of commodities in circulation that are denominated in the ex nihilo currency.
- Should the quantity of commodities in circulation suddenly increase, while the supply of ex nihilo money remains unchanged, the general price level expressed in ex nihilo money will just as suddenly decrease. Should the quantity of commodities in circulation suddenly decrease, while the supply of ex nihilo money remains unchanged, the general price level expressed in ex nihilo money will just as suddenly increase.
- Should the supply of ex nihilo money in circulation suddenly increase, while the supply of commodities remains unchanged, the general price level of commodities expressed in the ex nihilo money will just as suddenly rise. Should the supply of ex nihilo money in circulation suddenly decrease, while the supply of commodities remains unchanged, the general price level of commodities expressed in the ex nihilo money will just as suddenly fall.
In either case, the sum of prices are not related to the sum of values of commodities, but only to the ratio of the sum of ex nihilo money to the sum of commodities in circulation. In fact I question whether money exists at all. Insofar as money function as a measure and store of value, it cannot circulate within society; insofar as is circulates within society and serves as a standard of prices, it cannot be a measure of value. What is left after the debasement of money is money, the social relation, irretrievably broken.
Actually, we’ve been in a depression since 2001
Whatever the outcome of the present crisis, John Williams’ prediction rests on such a defective theory of money and ex nihilo price formation that his prediction is useless to us. Ex nihilo money appears to allow the formation of so-called monopoly pricing in the economy. By restricting production, monopolies can, in fact, pad their profits, even as society descends into abject scarcity and want under an ex nihilo monetary regime. Rising prices during a depression is not a defect of an ex nihilo monetary regime, but the way prices would be expected to behave under that regime as capital is devalued. From the standpoint of the capitalist mode of production, inflation of ex nihilo prices is to be expected, and is the expression of the mode’s attempt to establish the sound basis for its future operation.
When I look at gold prices, I find evidence that the economy actually has been in a depression since 2001. According to my figures, gold prices bottomed in 2001 at around $271.04, and have been rising steadily for most of the decades after this. This is the first time gold prices have risen so consistently since the 1970s great depression/great stagflation. It follows from this that Williams’ depression, at least, has nothing to do with a hyperinflation of prices itself. At the same time, hyperinflation, in his model, does not coincide with a depression, but hinges on an exogenous political event: the rejection of the dollar as world reserve currency by other nations. To this we will turn next.
Tags: Bailout, budget deficit, commodity money, CURRENT ACCOUNT DEFICIT, debt, deflation, Depression, economic collapse, economic policy, ex nihilo money, Federal Reserve, financial crisis, great depression, hyperinflation, inflation, international financial system, Karl Marx, political-economy, recession, stupid economist tricks, The Economy, unemployment
I am examining economist John Williams prediction of an imminent hyperinflationary depression published in March, 2011. Williams’ prediction appears to rest on a rather questionable hypothesis that this hyperinflationary depression is made inevitable by mere accounting identities — that is, by the logic of book-keeping, which suggests the Fascist State will be unable to stop a spiral into depression by depreciating the purchasing power of the US Dollar. Efforts to depreciate the dollar, Williams argues, will lead the world to reject the dollar as world reserve currency; setting into motion a series of events leading to it becoming worthless.
I am a bit skeptical on this point for no other reason than I saw the fate of Argentina when it could no longer pay its bills in 1999. I am forced to ask, since the US had not the slightest sympathy for Argentina in 1999, why would it have any sympathy for its own creditors in 2011? Indeed, Washington showed no hesitation in 1933 when it came to dispossessing society of its gold stocks, nor did it hesitate to close the gold window and renounce its obligations under the Bretton Wood agreement in 1971.The Fascist State sets the rules; there is nothing in the historical record to suggest it observes these rules except when those rules favor it.
Nevertheless, I want to give Williams the benefit of the doubt on this. So, I will continue to examine his argument.
Williams on Deflation, Inflation, Hyperinflation and Prices
Williams assumes the standard definition of inflation: a general rise in the prices of commodities. As is typical of this view, he completely neglects both consumption and production of commodities in his definition of inflation. He further defines hyperinflation as a particularly virulent form of inflation where prices rise multiple — hundreds or thousands — times a normal inflation.
Inflation broadly is defined in terms of a rise in general prices usually due to an increase in the amount of money in circulation. The inflation/deflation issues defined and discussed here are as applied to consumer goods and services, not to the pricing of financial assets, unless specified otherwise. In terms of hyperinflation, there have been a variety of definitions used over time. The circumstance envisioned ahead is not one of double- or triple- digit annual inflation, but more along the lines of seven- to 10-digit inflation seen in other circumstances during the last century. Under such circumstances, the currency in question becomes worthless, as seen in Germany (Weimar Republic) in the early 1920s, in Hungary after World War II, in the dismembered Yugoslavia of the early 1990s and most recently in Zimbabwe, where the pace of hyperinflation likely was the most extreme ever seen.
As is the standard thinking on the issue, Williams believes the most significant force behind dollar hyperinflation is the creation of money ex nihilo by Washington, not over-accumulation of capital. While inflation is a moderate expression of the chronic tendency of states with fiat currency to live beyond their means, hyperinflation is only an extreme expression of this chronic tendency.
The historical culprit generally has been the use of fiat currencies—currencies with no hard-asset backing such as gold—and the resulting massive printing of currency that the issuing authority needed to support its spending, when it did not have the ability, otherwise, to raise enough money for its perceived needs, through taxes or other means.
Excessive money creation takes the form of spending by the state that is otherwise unable to borrow from or tax society to the extent needed to fund its operations. In this case, the chief causes identified by Williams are unfunded promises in the form of social programs like retirement, health care and the social safety net, combined with the costs of bailing out the failed economic stabilization mechanism. (Missing, of course, is any reference to either service on the existing public debt, or spending on a massive global machinery of repression.) The point, however, is pretty much unoriginal: inflation begins with government spending, not over-accumulation of capital.
Deflation is simply defined as the opposite of inflation, i.e., “a decrease in the prices of consumer goods and services, usually tied to a contraction of money in circulation“; Hyperinflation is an “extreme inflation, minimally in excess of four-digit annual percent change, where the involved currency becomes worthless.” Thus all three — inflation, deflation and hyperinflation — are merely state driven monetary phenomenon; the result of changes in the supply of money in circulation within the economy provoked by state spending. The source of the changes in the money supply are said to be state monetary and fiscal policy.
However, with regards to hyperinflation, Williams adds one additional, critical, definition, not with regards to prices, but with regards to the currency itself: it becomes worthless. In Williams’ opinion, the currency becomes worthless as a result of rapidly escalating prices. However, both logically and historically the case is precisely the opposite: prices escalate rapidly because the currency is already worthless — because it has already been debased from gold or another money commodity. With the currency debased from gold, prices became a creature of state monetary and fiscal policy pure and simple. Moreover, with the currency worthless as a result of its debasement, prices and their movements no longer transmit meaningful information about market conditions as is generally assumed to be the case.
Williams on Recession, Depression and Great Depression
Williams outlines a similar set of definitions with regards to recession, depression and great depression.
Recession: Two or more consecutive quarters of contracting real (inflation-adjusted) GDP, where the downturn is not triggered by an exogenous factor… Depression: A recession, where the peak-to-trough contraction in real growth exceeds 10%. Great Depression: A depression, where the peak-to-trough contraction in real growth exceeds 25%. On the basis of the preceding, there has been the one Great Depression, in the 1930s. Most of the economic contractions before that would be classified as depressions. All business downturns since World War II—as officially reported —have been recessions.
Williams defines recessions, depressions and great depressions by levels of economic activity. In contrast to his previous definitions for inflation, deflation and hyperinflation, he focuses not on price, but actual output of goods and services. In discussing inflation, deflation and hyperinflation, Williams makes no reference to the general level of production and consumption of commodities; likewise, when discussing recessions, depressions and great depressions, he makes no reference to the general level of prices. But, both recessions and depressions are associated with definite changes in the level of prices in the economy. Historically, depressions clearly have been associated with deflations, or a general fall in the prices of commodities; while recessions clearly have been associated with inflation, or a general rise in prices of commodities.
The significance of this association is revealed if we assume great depressions are associated with hyperinflations — a hyperinflation not understood in the sense of breathtaking annual increases in the price level, but with the currency becoming worthless. Is there a basis for making such an equivalence? Remember, Williams asserts that historically hyperinflation is associated with fiat currencies — currencies that are not backed by some commodity that serves as a standard for prices. These are also currencies that can be created ex nihilo by the state. He associates hyperinflation not just with the general price level rising at a fantastic rate owing to the inability of the state to pay its obligations, but with the nature of the money used to pay those obligations — that is, with the fact that these currencies are not backed by gold or another commodity. It is important to remember in this regard that the US and all industrialized powers debased their monies during the Great Depression. But, just as important, the US also reneged on its obligation to pay its international debts in gold in 1971 — thus imposing on other nations a world reserve currency that was as worthless abroad as it was domestically.
For whatever reason, writers like Williams confuse the issue by treating debasement of the currency and hyperinflation as one and the same thing. In actuality, debasement of the currency — that is, the separation of the currency and gold — has been the signal monetary event of the post-Great Depression period. Hyperinflation — the rapid collapse of the purchasing power of a debased currency — is an entirely rare event. It is not rapidly rising prices that render money worthless, rather, because the money in question is already worthless prices can, under certain circumstances, rise at a fantastic rate.
How is this related to recessions and depressions? Before the Great Depression, and the debasement of the currency, depressions usually resulted in deflations. During the Great Depression, however severe and unprecedented deflation was interrupted by the debasement of all major currencies. In this debasement currency was rendered worthless, i.e., without any definite relation to a commodity which might serve as a standard for the general price level. The definition of worth being simply the dictionary definition of an equivalent in value to a sum or item specified, i.e., a specific quantity of gold or some other money commodity. Gold gave token currency its worth, that is, gave it some definite equivalent to other commodities which could be expressed as prices of those commodities in units of the money. After the Great Depression, and the 1971 abrogation of the Bretton Wood agreement, with money having no definite worth, depressions are now associated not with rapidly falling prices, but with rapidly rising prices — a condition that has been labeled recession.
The economic picture is cleared up once we realize the general price level is irrelevant for analyzing depression-type events after the dollar was debased. Precisely because money was rendered worthless by its debasement, prices, after this debasement, provide little useful information on the actual state of the underlying economy. Prices, at this point, are serving an altogether different function: they are an instrument of state economic policy. On the other hand, hyperinflation of prices does not lead to a worthless currency; instead, the debasement of the currency is a necessary precondition for hyperinflation.
Williams’ historical examples of hyperinflation
While a debased, worthless, currency can lead to hyperinflation, it is obvious that every debasement of the currency does not end in hyperinflation. Today, almost all national currencies are debased, yet hyperinflation occurs only rarely in history. Moreover, the extraordinary hyperinflations of history do not result primarily from the profligacy of the state. The United States, for instance, is by far the most profligate state in history — accounting for nearly half of all military spending. What triggers hyperinflations are definite economic circumstances in addition to this state profligacy.
The economic conditions leading to hyperinflation can be seen most clearly if we compare the current economic environment to historical examples of hyperinflation cited by Williams. Williams’ examination of examples of hyperinflation suffer from defects along the lines of his examinations of inflation/deflation and recessions/depressions. However, while he overlooks obvious connections in the latter cases, in the case of historical examples of hyperinflation he overlooks obvious differences.
Williams recounts the case of the Weimar Republic:
Indeed, in the wake of its defeat in the Great War, Germany was forced to make debilitating reparations to the victors—particularly France—as well as to face loss of territory. From Foster (Chapter 11):
By late 1922, the German government could no longer afford to make reparations payments. Indignant, the French invaded the Ruhr Valley to take over the production of iron and coal (commodities used for reparations). In response, the German government encouraged its workers to go on strike. An additional issue of paper money was authorized to sustain the economy during the crisis. Sensing trouble, foreign investors abruptly withdrew their investments.
During the first few months of 1923, prices climbed astronomically higher, with no end in sight… The nation was effectively shut down by currency collapse. Mailing a letter in late 1923 cost 21,500,000,000 marks.
The worthless German mark became useful as wall paper and toilet paper, as well as for stoking fires.
Germany suffered defeat in a war that left it exhausted and stripped of territory, population and productive capacity by the victors to pay for reparations; it was the scene of intense class conflict and intense economic dislocation. The hyperinflation of the Weimar Republic Germany, therefore, began not with absolute over-accumulation of capital — with overproduction of commodities and a surfeit of labor power — but decidedly the reverse: a massive loss of productive capacity — a loss the government then tried to paper over, without success, by issuing worthless paper. The government sought to stabilize the economy by printing money to offset these crippling economic losses. The subsequent explosion of prices occurs not merely because the Weimar Republic sought to paper over a disaster, but because it was not possible to paper over such catastrophic material losses with money printing. The lesson of the Weimar Republic is obvious: while debasement of the currency can artificially inflate the purchasing power of state issued token currency, it must ultimately fail in an explosion of prices if the state attempts to paper over real material losses.
Where in this litany of disaster are conditions similar to those faced by the United States? Despite Williams’ assertion that, “The Weimar circumstance, and its heavy reliance on foreign investment, was closer to the current U.S. situation…“, in fact, the two have nothing in common. While Germany was systematically stripped of its productive capacity, the US is experiencing capital flight caused by decades of debt-driven inflationary domestic policy, including not only social spending “to assuage social discontent,” but also thoroughly wasteful and excessive national security expenditures and a failed economic stimulus mechanism.
Moreover, it is not merely a question of foreign investors propping up the dollar. While Germany’s ex nihilo currency was not considered money beyond its borders, the dollar is the world reserve currency; commodities world wide are priced in dollars. At the same time, the United States accounts for a quarter of global consumption demand, and this demand takes the form of ex nihilo dollars exclusively. The global producers of commodities are facing severe over-accumulation of capital and insufficient money-demand for their output. They are looking precisely for currencies with the sort of excess money-demand that is typical of inflation driven growth economies. The question is not whether trillions of dollars of social wealth denominated in dollars can withdraw from the dollar in time should there be a crisis; rather, we have to wonder if any exit from the dollar is possible or probable.
Tags: Bailout, budget deficit, commodity money, CURRENT ACCOUNT DEFICIT, debt, deflation, Depression, economic collapse, economic policy, ex nihilo money, Federal Reserve, financial crisis, great depression, hyperinflation, inflation, international financial system, Karl Marx, political-economy, recession, stupid economist tricks, The Economy, unemployment
I took some times off to really dig into the competing theories of the present crisis and to see if redwoods are really all that much of a big deal.
- There are a lot of theories about this crisis.
- Most of them are worthless, and
- Redwoods are really huge — I mean HUGE!
John Williams and the imminent hyperinflationary depression
I want to begin this series of posts on various non-mainstream theories of the present crisis by examining some of the assumptions and definition proposed by John Williams, economist at the website Shadow Government Statistics, in his prediction of an imminent hyperinflationary depression. Williams is serious about his prediction — up to, and including, warning his readers to store guns, ammo, gold and six months of basic necessities.
In his recently published special report, Williams — a self-described conservative Republican economist, with libertarian leanings — advances a number of questionable arguments typical of theories of the current crisis floating around out there. The most significant of these questionable arguments is Williams’ assertion that the crisis begins with an unsustainable fiscal and monetary environment, not with over-accumulation. Despite the jarring nature of his prediction, for Williams’ an imminent hyperinflationary depression results purely from rather boring accounting identities:
By 2004, fiscal malfeasance of successive U.S. Administrations and Congresses had pushed the federal government into effective long-term insolvency (likely to have triggered hyperinflation by 2018). GAAP-based (generally accepted accounting principles) accounting then showed total federal obligations at $50 trillion—more than four-times the level of U.S. GDP—that were increasing each year by GAAP-based annual deficits in the uncontainable four- to five-trillion dollar range. Those extreme operating shortfalls continue unabated, with total federal obligations at $76 trillion—more than five- times U.S. GDP—at the end of the 2010 fiscal year. Taxes cannot be raised enough to bring the GAAP- based deficit into balance, and the political will in Washington is lacking to cut government spending severely, particularly in terms of the necessary slashing of unfunded liabilities in government social programs such as Social Security and Medicare.
This crisis, Williams explains, could be avoided if the US were to raise taxes sufficiently, or reduce spending accordingly, or some combination of either; however, these solutions are not possible for purely political reasons. To resolve this impasse, Washington has turned to inflating prices instead.
Key to the near-term timing [of an outbreak of hyperinflation] remains a sharp break in the exchange rate value of the U.S. dollar, with the rest of the world effectively moving to dump the U.S. currency and dollar-denominated paper assets. The current U.S. financial markets, financial system and economy remain highly unstable and increasingly vulnerable to unexpected shocks. At the same time, the Federal Reserve and the federal government are dedicated to preventing systemic collapse and broad price deflation. To prevent any imminent collapse—as has been seen in official activities of the last several years—they will create and spend whatever money is needed, including the deliberate debasement of the U.S. dollar with the intent of increasing domestic inflation.
This response has, in turn, provoked a reaction from the world community that will lead to a rejection of dollars and dollar denominated assets, a circumstance that must end in hyperinflation and depression.
The damage to U.S. dollar credibility has spread at an accelerating pace. Not only have major powers such as China, Russia and France, and institutions such as the IMF, recently called for the abandonment of the U.S. dollar as the global reserve currency, but also the dollar appears to have lost much of its traditional safe-haven status in the last month. With the current spate of political shocks in the Middle East and North Africa (a circumstance much more likely to deteriorate than to disappear in the year ahead), those seeking to protect their assets have been fleeing to other traditional safe-havens, such as precious metals and the Swiss franc, at the expense of the U.S. currency. The Swiss franc and gold price both have hit historic highs against the dollar in early-March 2011, with the silver price at its highest level in decades, rapidly closing in on its speculative historic peak of January 1980.
According to Williams, existing domestic fiscal commitments and further demands to shore up the current failed economic mechanism cannot be funded under existing political arrangements; these needs can only be satisfied by assuming creation of money ex nihilo by Washington; the assumption of increased ex nihilo money creation to fulfill existing commitments and shore up the failed mechanism is damaging the credibility of the dollar as world reserve currency; the loss of credibility should weaken the dollar and eventually lead to panicked dumping of dollar and of dollar-denominated paper assets, triggering hyperinflation.
When I follow this logic backward, the first question I encounter regards the panicked dumping of dollars and dollar-denominated assets. Assuming hyperinflation is triggered by panicked selling of dollars and dollar-denominated assets, for what is this currency and these assets to be exchanged? Who would step in to buy the assets when everyone else is selling them in a panic? In theory, the Federal Reserve can step in to buy treasuries, but it can only offer dollars in exchange for the treasuries. Other assets, since they are denominated in dollars, can only be exchanged for dollars. Moreover, if the sellers have dollars to dump, they can only use these dollars to buy other currencies, precious metals, or commodities. If they use the dollars to buy other currencies, the dollar’s exchange rate will fall. If they use the dollars to buy precious metals, the prices of the metals will rise. If they use the dollars to buy ordinary commodities, the prices of these commodities will rise still further. If Washington intends to inflate the general price level to fix its problems, creating at least the appearance of a selling panic on the dollar would be precisely the means of accomplishing this aim.
Moreover, what do the sellers of currencies and assets denominated in various currencies seek when it comes to selling? I can only assume they want what everyone else wants: to receive, in return for their asset, the greatest quantity of another currency for the one they are selling, or the greatest quantity of money in any currency for their asset. In a panic, however, the opposite situation obtains: they must accept massive losses on their currency and assets. If they want to sell dollars, for example, they would be selling these dollars for fewer euros. If they were selling euros, they would be selling euros for increasing amounts of dollars. In my assumptions, sellers tend to prefer situations where prices are rising for their commodities, not falling as is assumed under a panic selling situation.
A further problem exists: the dollar is the world reserve currency because world commodities are priced in dollars. To remove the dollar as world reserve currency requires the sellers of commodities to price their commodities in some other currency than dollars. If the dollar is weakening, the prices paid for commodities is rising in dollar terms. Against what currency are these commodities to be priced? Will they be priced in currencies where prices of the commodities are generally falling or currencies where the prices of commodities are generally rising? Assuming general over-accumulation of capital, sellers will be very interested in those currencies where prices are constantly rising not falling. Producers would appear to have a decided interest in seeing inflationary policies by the various national states.
Although Williams’ argues rapid inflation will induce holders of dollars to abandon it, he paints a bleak economic picture where the biggest problem is not rising prices but faltering demand:
Despite pronouncements of an end to the 2007 recession and the onset of an economic recovery, the U.S. economy still is mired in a deepening structural contraction, which eventually will be recognized as a double- or multiple-dip recession. Beyond the politically- and market-hyped GDP reporting, key underlying economic series show patterns of activity that are consistent with a peak-to-trough (so far) contraction in inflation-adjusted activity in excess of 10%, a formal depression (see Recession, Depression and Great Depression). The apparent gains of the last year, reported in series such as retail sales and industrial production, should soften meaningfully in upcoming benchmark revisions. The revised patterns should tend to parallel the recent downside benchmark revision to payroll employment, while the July 2011 annual GDP revisions also are an almost certain bet to show a much weaker economy in recent years than currently is recognized in the markets. (See Section 4—Current Economic and Inflation Conditions in the United States.) Existing formal projections for the federal budget deficit, banking system solvency, etc. all are based on assumptions of positive economic growth, going forward. That growth will not happen, and continued economic contraction will exacerbate fiscal conditions and banking-system liquidity problems terribly.
From Williams’ own analysis, economic conditions are worsening to levels not seen since the Great Depression. He is assuming that global sellers of commodities will face, in addition to weakening demand, increased liquidity problems created by a failed economic mechanism that previously was necessary to maintain economic stability in the face of absolute over-accumulation. If policy actions to reverse this situation are not sufficient to stabilize the global economy, what will be the result? From the point of view of economic policy the danger at this point seems not to be hyperinflation, but a rather pronounced deflation of prices. However, a more nuanced view of the situation is called for to confirm this conclusion.
Tags: Bailout, budget deficit, commodity money, CURRENT ACCOUNT DEFICIT, debt, deflation, Depression, economic collapse, economic policy, ex nihilo money, Federal Reserve, financial crisis, great depression, hyperinflation, inflation, international financial system, Karl Marx, political-economy, recession, stupid economist tricks, The Economy, unemployment
(Shown in the above chart is the historical correlation between the change in debt and the rate of unemployment. Courtesy of economist Steve Keen and chrismartenson.com)
Libertarians, anarchists and communists who sincerely favor a stateless society must realize that the present crisis is not merely, nor even primarily, an economic crisis — it is a crisis of the State itself. There is no exit for the State from this crisis, and it must result in the collapse of the State.
How we approach this crisis can spell the difference between a long drawn out process of collapse, or a much shorter one.
The two great issues facing Washington in this crisis are the rising public debt and the rising population of persons who cannot find work. Since World War II, Washington has been able to enjoy a trade off between these two symptoms of capitalist breakdown by encouraging the accumulation of private and public debt to offset the tendency toward a fall in productive employment of labor power.
The growth in public and private debt has allowed Washington to perform its essential role in a period of capitalist relative breakdown: to maintain generally stable conditions for the purchase and sale of labor power. This role corresponds to the needs of both the working and capitalist classes insofar as we only consider them as poles within capitalist relations of production.
In the face of falling demand for the productive employment of labor power, Washington has encouraged and facilitated the expansion of unproductive employment based on various forms of consumer debt in particular — mortgage, credit cards, auto loans, etc. — but also public debt, including ever increasing levels of federal debt. This debt, since it can never be repaid and sits on the books of financial institutions as fictitious assets, must be succeeded by increasing levels of new debt. It is a classic Ponzi scheme that had to unravel eventually and finally did in the Great Financial Crisis of 2008.
Since 2008, Washington has attempted to stabilize the economy by accumulating massive amounts of debt in its own right, hoping for its stimulative interventions in the economy to trigger a new round of debt accumulation by consumers. Consumers, who have been hit hard by the loss of millions of jobs in 2008 and 2009 have not responded to Washington’s stimulative interventions, and appear to be having an increasingly hard time even servicing existing debt.
The central problem facing Washington is that massive amounts of new debt must be created each year to absorb those who lost their jobs in 2008-2009. Moreover, this new debt must be sufficient not only to absorb those who lost their jobs, but also more than a million new workers who enter the labor force each year looking for work, and those who continue to be displaced from productive employment because of improving productivity. If consumers (who are, overwhelmingly, those workers who still are employed) are not able to carry a sufficient new debt burden to absorb this huge mass of new and existing unemployed, plus offset the falling demand for employment of labor power resulting from improvements in productivity, Washington will face an ever increasing mass of unemployed persons who are living on the edge of starvation.
At the same time, since Washington has been trying to compensate for inadequate consumer debt accumulation by running massive deficits in 2009, 2010, and 2011, a broad section of the population has been growing uneasy with the seemingly endless river of red ink in the federal budget. It doesn’t take a degree in economics to figure out that the massive accumulation of new federal debt must in time be offset by equally massive increases in the tax burden on the population and severe austerity of the type already evident in many European countries.
The result must be the steady conversion of public taxes into debt service to line the pockets of the big holders of federal debt, even as Washington tries to maintain its completely superfluous expenditures on military adventures, while the social safety net is ruthlessly eviscerated; leaving large segments of the population to starve. In its extremity, the fascist State consists solely of an ever increasing mass of new debt undertaken to maintain itself as an aggressive military machine.
Washington is thus trapped in an intractable crisis of rising public debt coupled with rising unemployment and an increasingly naked militaristic posture, even as it fails to address its most basic function: maximizing the purchase and sale of labor power. To an extent not seen in the post-World War II period, we are seeing the formation of permanent unemployable mass on the scale previously experienced only during the Great Depression. Despite two massive stimulus injections of nearly $1 trillion each, unprecedented zero interest rates for more than two years, and Federal Reserve money printing on a scale never seen before in history, unemployment has not fallen to anything approaching pre-crisis levels.
Washington is vulnerable to attack by those who favor a stateless society on both fronts. I would suggest libertarians, anarchists and communists pursue these points of agitation in their work:
- Debt and deficit spending: Oppose any attempt by Congress to increase the debt ceiling. It is clear that the Obama administration is working with both the GOP controlled House and the Democratic controlled Senate to slip through another increase in the debt ceiling this Spring. Libertarians, anarchists and communists should not stand aloof from this fight. They must combine efforts to ensure a NO vote on raising the debt ceiling, and to identify those Republican and Democratic Party representatives and senators who are conspiring with the Obama administration to saddle the nation with more debt.
- Unemployment and hours of labor: To the charge by apologists for Washington that deficit spending is necessary to combat rising unemployment, we should answer that it is not necessary. The unemployment crisis is solely the result of the refusal by Washington to reduce hours of labor. Those who stand for a stateless society should point out that increasing productivity of labor has made the reduction of hours of labor the pressing issue of our time. Any attempt to substitute State intervention in the economy for this reduction can only lead to further accumulation of debt without solving the problem of unemployment.
Washington is caught in a cul-de-sac from which there is no exit. Now is the time to strike a deathblow to it, and pave the way for a stateless society. If we fail to take advantage of this opportunity, we will have only ourselves to blame.
Tags: Barack Obama, budget, budget deficit, Depression, economic collapse, economic policy, financial crisis, great depression, international financial system, political-economy, recession, shorter work week, stupid Washington tricks, The Economy, unemployment, Wall Street Crisis, war
I received this response to my post, What help for the 99ers? (Part four: It’s not personal), yesterday on GonzoTimes:
Turn your soul off. Turn your humanity off. Turn your brain off. And voila, you’ve turned into a Republican “pro-lifer” who says “screw the poor”. Genius!
The comment was a bit cryptic to me. Is the writer saying I have become a Republican pro-lifer who hates the poor? I could not be sure so I responded with this gem in a moment of anger:
If your cryptic comment is directed at me, I take offense — not with your remark, but with the phony humanitarianism hidden behind it. Giving the unemployed $300 a week does nothing to address the causes of unemployment, which is Washington itself. If you are moved by the plight of the 99ers, as I am, I suggest you link up and find ways to support them on an authentic basis, rather than mailing your support in via your taxes. But, more important, I hope you will be moved to fight to reduce hours of work to abolish unemployment and the system that creates it permanently.
You might also consider Badiou’s critique of phony humanitarianism in his book, Ethics.
I am not satisfied with this response. It was driven as much by defensiveness as by any positive statement on the situation of the 99ers. It, therefore, does nothing to convince those who really support the cause of the 99ers to take another look at their assumptions.
Am I a renegade? The question asked, of course, demands a complete response — not first to the commenter, but to myself. Am I on some slippery slope to the renegacy decried by Badiou? Definitely time for an attitude check, and a deep examination to make sure my humanity was still in working order.
I come away from this moment of self-reflection even more sure of my position and a more fervent opponent of unemployment compensation than before. I do not think my view is one of a renegade or heartless conservative, but one who remains committed to the aims I have stood for since I was a teenager and first encountered the idea of communism. I put forth below six reasons why I think it is the classical communist position to oppose unemployment compensation:
The question I asked myself is this: Would Marx have supported unemployment compensation in his day? And, my answer to that was, “Yes.” Without a doubt he would have advocated for it, and considered it a demand consistent with the aim of communism — a measure designed to protect the working class from the vagaries and misery of the business cycle. So, why am I advocating against it? This is not Marx’s day. In his day periodic crises were common enough and no more than temporary lulls between periods of expansion during which the productive capacity of society was being augmented by capital. The scale of production was being increased, and the numbers of laborers moving from agriculture into industry was, however subject to fluctuations and sudden fits and stops, progressively converting the labor process from that of solitary farmers into massive engines of immediately social production. The process was not pretty, by any stretch of the imagination, but it was moving society generally in the direction of the abolition of labor.
Today it is otherwise. Society is drowning in its own productive capacity and we face a State that, for its own purposes, seeks to drive us under altogether. This requires we rethink all our assumptions. So here are my thoughts:
First. Today’s crises are not the mere interruption of an otherwise revolutionary reconstitution and enhancement of the productive power of labor. They are failures of State measures to facilitate the constant expansion of completely superfluous labor. Supporting unemployment compensation today, when unemployment is no longer a temporary condition but a permanent feature of an economy drowning in a surplus population of able-bodied workers, and when the only effective policy to reduce this surplus population is to reduce hours of labor, is a travesty.
Second. Just as this crisis is not a momentary cessation between periods of expansion of capital, so it is not an accident, defect, or aberration. It has been established by economists that we are facing a long-term secular decline in Washington’s capacity to force the creation of new jobs. Washington’s tools of fiscal and monetary policy are gradually becoming ineffective in stimulating superfluous economic activity. It is also requiring more aggressive measures to produce the same effect — much like in the case of a junkie requiring larger doses of his preferred substance to achieve the same high. Washington is now creating massive amounts of new debt each month in a desperate attempt to keep this ugly Ponzi scheme right side up. The declining effectiveness of job creating measures stems not from lack of serious effort on Washington’s part, but on the very goal of the effort itself: to create work where there is no need for work.
Third. The strategy adopted by Washington to create unnecessary work was predicted to fail by many economists during the housing bubble; and at least as early as 1993, Hyman Minsky predicted a financial disaster was unfolding before our eyes. He warned of just the kinds of Ponzi schemes that Washington was facilitating in its deregulation of financial activities in its desperation to lengthen the working day by encouraging working families to accumulate unprecedentedly large personal debts. Despite these warnings, Washington, under the Clinton administration, and again under the Bush II administration, facilitated this accumulating family debt and even put in place measures to prevent working families from declaring bankruptcy to relieve themselves of it. Fully two thirds of all job creation during that period resulted from such debt accumulation.
Fourth. Beyond this, Marx and many other writers warned that a collapse of capital was inevitable. The growing output of industry resulting from improvements in productivity of social labor, Marx explained, was running into declining demand for productive employment of labor resulting from this improvement. In its drive to accumulate surplus, capital was making the ever increasing employment of superfluous labor into the necessary condition for the employment of productive labor. In time it would, he argued, become a matter of life or death for capital to find some means to increase the absolute waste of human labor in order to support profitable investment. That time arrived during the Great Depression when every industrialized nation suffered a catastrophic economic failure, and the State stepped in as the ultimate consumer of commodities and labor power rendered superfluous by overly long hours of work. Efforts by many to reduce hours of work during that period were defeated in Washington, which went on to erase the possibility of less work time from political-economic conversation.
Fifth. Despite all of the above, an argument could be made that we are nevertheless forced to support unemployment compensation because we have no power to change the situation in the short run. I think this argument is specious and even misleading: Unemployment compensation is exactly the wrong measure to pursue at present because it asks people to identify with the very cause of their unemployment. It is the political equivalent of asking people to lobby Bill Gates and Warren Buffett for handouts to ease their poverty. This “progressive” solution to the problem of the ever lengthening work day, which is the entire basis for the present unemployment, is to ask the very institution in society responsible for unemployment to ease the impact of the problem it created in the first place. We have to wake up to the fact that Washington is not a neutral actor in this play: it is the largest single consumer of surplus value in the society — and in human history; beside it, every other consumer — all “the rich” taken in their entirety — run a poor second. Washington not only knows the consequences of its policies, it fucking intends to create those consequences! The whole of its policies are designed to press the consumption of the mass of society to the lowest possible level in order that it may feed on the resultant surplus.
Sixth. We should be completely offended by the very concept of State aid for unemployment in any case. The entire argument for it, as offered by progressives and Marxists, rests on the image of the unemployed as helpless victims who must be protected from the vagaries of economic forces. As Badiou might argue, this image is completely isolated from its social context. The image of the suffering victim does not ask us how this pathetic creature came to be in her circumstance, nor does it seek to identify who caused her suffering. We are left with the need to do something — anything — to end the suffering. But, what? It is all too easy to write your congressperson or senator demanding an end to the suffering, and then sit comfortably at home watching the progress of the bill on the Rachel Maddow Show — self-satisfied that you did your part, and outraged at those who didn’t.
I am sorry, but I do demand you do something — something real, something authentic! I demand you go out of your house and find 99ers, create a network of support among folks in your community to support all 99ers. Make their plight your own in voluntary association with others. And, demand Washington cease to exist.
Tags: Alain Badiou, Depression, economic collapse, economic policy, human costs of empire, Hyman Minsky, Karl Marx, political-economy, recession, renegacy, shorter work week, stupid Washington tricks, The Economy, Trickle Down Economics, unemployment
Cross-posted from Re: The People
Gold prices have averaged $1218.57 for the year 2010, as of yesterday. For the whole of 2009, the average price of gold was $972.35. This was a change of some $246.22 year over year — a rise of 25.3% in the average price of gold.
We can assume, based on these figures, that the, so far, ten years long depression beginning in 2001 is still under way with a vengeance. The price of gold in 2001 averaged $277.99 per ounce. It has now risen to 426% of its 2001 price.
Between 1970 and 1980, during the depression of the 1970s — the so-called Great Stagflation — gold prices (once they were allowed to float by the Nixon administration) rose by more than 1700%, from an average for the year 1970 of $35.94 to the then unimaginable 1980 year average of $613.95.
Why does the price of gold rise during a depression?
It did not always do this. In 1932, the dollar was fixed at about 1/22 of an ounce of gold, which meant it took approximately 22 dollars to buy an ounce of gold. Because the price was fixed by Washington the price of gold did not vary as widely as it does now; during depressions money merely became scarce.
The gold standard was a form of government price fixing. (We know this is a silly way of looking at the problem, since the intention wasn’t to control the price of gold, but to anchor paper dollars to some real good having a definite value, however it serves our purpose for the moment.) During depressions, as the volume of transactions fell, less gold was needed in circulation. Thus significant quantities of gold fell out of circulation and into private hoards.
As gold was withdrawn from circulation during depressions, paper dollars followed, because buyers and sellers found the purchasing power of these dollars were dropping in comparison to the same good priced in gold.
The result would be fewer dollars available — creating a credit crunch, like the one we experienced in 2008 and since.
As you can imagine, gold-hoarding was a big problem for those who had accumulated debts during the expansion that they needed to service even though the economy was depressed. Think of our homeowners in today’s crisis: as fewer people are employed, fewer wages are paid out, and fewer people are able to meet their mortgage debt service burden. What appears as a credit crisis is simply the downstream effects of unemployment.
The response of the Roosevelt administration to this credit crunch was to devalue dollars against gold by 70%, — from 22 dollars an ounce to 35 dollars an ounce — and this devaluation allowed the economy to stabilize. However, this “stabilization”, like today’s bankster bailout — was purchased by a massive reduction in living standards of working families — it amounted to a 70% across the board cut in wages.
Yes. Despite FDR’s reputation as the hero of the working class, he “stabilized” the economy by ruthlessly slashing workers’ wages.
If we fast forward to 1970, when the Nixon administration ran into difficulties by printing dollars to stabilize the economy as it was contracting, the massive flood of worthless dollars tipped his administration into another devaluation — but this time, instead of simply fixing the dollar to a an even smaller quantity of gold, Nixon allowed the dollar to float against it.
The depression continued unabated, but dollars, no longer fixed to gold, simply lost their purchasing power. In turn, those with the means to do so sold their dollars and bought gold. They were still hoarding gold, but this hoarding was expressed not as the shortage of money, but in the depreciating purchasing power of now worthless dollars.
Since Nixon’s Roosevelt-style assault on society, gold hoarding is now expressed in the rise of its price; while the purchasing power of dollars evaporates. Today, the rising price of gold is one of the surest indicators that we are still in a depression.
Tags: Depression, economic collapse, economic policy, Federal Reserve, financial crisis, gold, gold hoarding, great depression, political-economy, recession, richard nixon, Roosevelt, stupid Washington tricks, The Economy, The Great Stagflation, unemployment, US Dollar