Keynesian economic policies don’t work, but fighting for these policies will?
Guglielmo Carchedi’s essay on the so-called Marxist multiplier has me bugging. He is handing out bad advice to activists in the social movements and telling them this bad advice is based on Marx’s labor theory of value. The bad advice can be summed up concisely: Keynesian policies do not work and cannot work, but the fight for these policies (as opposed to neoliberal policies) can help end capitalism:
From the Marxist perspective, the struggle for the improvement of labour’s lot and the sedimentation and accumulation of labour’s antagonistic consciousness and power through this struggle should be two sides of the same coin. This is their real importance. They cannot end the slump but they can surely improve labour’s conditions and, given the proper perspective, foster the end of capitalism.
Frankly, Carchedi’s advice is the Marxist academy’s equivalent of medical malpractice. (For the record, Michael Robert’s has his own take on the discussion raised by Carchedi’s essay.)
Tags: budget deficit, capital, debt, Depression, economic policy, Employment, falling rate of profit, financial crisis, great depression, Guglielmo Carchedi, inflation, Karl Marx, Keynesian economics, Marxism, neoliberalism, political-economy, unemployment
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
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 am adding additional comments to my reading of Weeks’ paper, “The theoretical and empirical credibility of commodity money” (PDF). In my first reading, I identified a problem with Weeks’ presentation of what he asserts is empirical evidence supporting a link between commodity-money and price. In my second reading I explained how Weeks’ real contribution to my understanding is his analysis of the neoclassical theory of money. In this reading, I am trying, based on Weeks’ argument to define exactly what the dollar and other fiat currencies are; and their relation both to commodity money and the circulation of commodities.
The problem posed by most Marxist attempts to analyze fiat currency is that state issued fiat is treated as if it is money when it is not; and prices denominated in a fiat currency are treated as if these prices express the value of commodities, which they do not. For years now Marxists have been asking if money can be a valueless piece of paper in Marx’s theory — the answer is no. This answer is unpalatable to many Marxists because they think it suggests Marx’s theory of money is invalid for purposes of analysis. My assumption in this post is that Marx’s theory is and remains valid AND this valueless currency is not money.
So if the dollar is not money, what is it? Why is it used for transactions? To answer these questions, we have to begin by understanding exactly how the currency works according to neoclassical theory.
Tags: commodity money, economic policy, ex nihilo money, fascist state economic policy, Federal Reserve, inflation, international financial system, john weeks, Karl Marx, labor time, MELT, monetary policy, neoclassical money theory, otma, stupid economist tricks, stupid Washington tricks
I apologize for this part of the series, because it is hopelessly geeky. Unfortunately, I see no way to move forward without getting into the weeds of Marx’s unique contribution to the theory of money at this point. Please bear with me on this. As I really need to explain the difference, before 1933, between a token currency and the commodity money that underpinned its value. Without understanding this relationship, it is impossible to truly understand what happened when the dollar was removed from the gold standard in 1933. Nor is it possible to understand why ex nihilo dollars can’t tell us anything about anything.
As I explained in the previous post, to become capital, a quantity of gold must be exchanged for ex nihilo currency, but this exchange also strips the capital of the value it contained when it was in the form of gold. This requires a bit of digression: In Marx’s labor theory of value, when a currency of a state no longer has a fixed exchange rate with gold, the value contained in a unit of gold no longer has any definite relationship with the use value of the currency as medium of circulation. This has a radical implication for political-economy that has been long overlooked by both Marxist and bourgeois economists. I will try to explain the implications of going off the gold standard using as little jargon as possible.
Background: Prior to debasement dollars served in the United States both as a measure of value contained in an individual commodity, and the medium of circulation for commodities. By the term “value”, I mean the labor time required by producers on average to produce any object. If an automobile takes as much time on average as a ounce of gold to be produced, we can say that the value of the car is equal to one ounce of gold. Gold acts as a socially valid measure of the value of other commodities when it is used as money. Before money was debased, the value of any good was loosely bound to some definite quantity of money because both the money and the commodity were the product of some definite expenditure of socially necessary labor time. The movement of market prices over a period of time worked to align the socially necessary labor time of a good with the quantity of money containing the same amount of socially necessary labor time. The two functions of money are closely connected: the price of any commodity, when this price was denominated in a currency that observed the gold standard, followed the general rule that, on average and over a period of time, this price was also a measure of the value contained in the commodity.
A token (e.g., paper) currency only could serve as measure of value contained in the commodity if it was fixed to a definite quantity of gold — for instance, prior to the Great Depression law stated one ounce of gold could be exchanged for 20.67 dollars. Since an ounce of gold always had a definite quantity of value (socially necessary labor time required to produce it) fixing the token currency to this definite amount of gold served to fix the currency itself to a definite amount of socially necessary labor time. Token currency, therefore, could only serve as the material expression of socially necessary labor time, because it was itself tied to gold.
We could say the term “dollar” was not only the name of the official currency, it was also the “name” established by law of some definite quantity of gold.
On the other hand, when used directly in circulation, a gold coin served as medium of circulation of commodities in such a way that its actual use in any particular exchange for commodties was very brief; the coin constantly moved from one person to another in the course of commerce — rarely, if ever, staying in one hand for long, since it would almost immediately be used in the next transaction. Marx argued gold in this function was, for several reasons, merely a token of itself used to facilitate the circulation of commodities.
One particular example of this token role was the use of a coin that had been eroded by use over a period of time and was now no longer of legal weight. Although the coin carried a legal definition of one dollar, its weight now no longer adhered to the standard of legal definition of a dollar. Since the coin was legally a dollar, but did not actually contain a dollar’s weight, if it continued in circulation it had been reduced to a token of itself. As a practical matter, this meant, within certain limits, the gold coin could be replaced in circulation by a token currency provided this token was redeemable for a definite quantity of gold. Thus, a token currency like the dollar could serve as money only because it had a fixed and definite relation with some commodity money.
So, when the dollar was debased from gold, there was more at stake than a simple legal redefinition of money. The Roosevelt and Nixon administrations were severing the currency from the only thing that gave it the ability to express in price form the value contained in a commodity. This legal redefinition of what was officially called money, concealed within itself an unprecedented break in the role of prices in a modern economy. It would not be an exaggeration to say Roosevelt and Nixon, through their executive orders, chopped off Adam Smith’s invisible hand, and replaced it with the iron fist of Fascist State economic policy.
With the debasement of the currency, the two functions of money — measure of value contained in an individual commodity, and the medium of circulation for commodities — devolved on different objects whose relationship was no longer fixed and given. As the material to express the value contained in each commodity, gold no longer played a role as a medium of circulation of these commodities; while token currency, as medium for circulation of commodities, could no longer serve as the material to express their values in the prices we paid for goods.
But, the crises which produced this change offer an even more profound argument about why this debasement occurred. Every commodity is both a useful object and an object containing a definite amount of value (socially necessary labor time to produce it.) Debasement suggests that the routine exchange of commodities is now fundamentally at loggerheads with the routine production of these commodities. As an object containing value — i.e., a definite amount of socially necessary labor time — the commodity cannot circulate; as a particular useful object in circulation its value cannot be expressed. The solution adopted by the two administrations essentially severed rules governing exchange from the rules governing production.
On the one hand, this means commodities no longer circulate as objects containing value, but only as particular useful objects differentiated only by their particular useful qualities. This conclusion will be both startling and controversial, because it also implies Marx’s law of value no longer determines exchange. The fact that currency has been debased from gold must force the conclusion that prices no longer express the values of the commodities to which they are attached.
By exchange, we can only mean the exchange of qualitatively different objects having equal values — so many pairs of shoes for so many pairs of pants — but the ex nihilo currency now serving as the medium of circulation has no value of its own, and, therefore, the price denominated in units of the currency cannot express the value of either the shoes or the pants.
After the debasement of the dollar, in any transaction between the seller of a commodity and the buyer with an ex nihilo currency, the seller of the commodity gives it to the holder of ex nihilo currency and receives in return nothing but a piece of paper. She gives away not only the particular use value she has, but also the value contained in this particular use value as well. While receiving ex nihilo currency in return for her commodity, she receives nothing in return for the value contained in her commodity. Although it appears otherwise, the exchange is not determined by the quantitative equivalence of the values contained in the two objects, but by qualitative differences in their respective use values alone.
On the other hand, things having no value at all — for instance, Predator drones — can now circulate alongside shoes and pants, the latter of which have both use value and value. This is already given in the successive transactions involving an ex nihilo currency and commodities, or in the exchange between any two ex nihilo currencies. The state can, for instance, produce a quantity of ex nihilo currency simply by crediting it to the account of a defense contractor and receive in return Predator drones to kill kids in Afghanistan. While the purchase of the drone by Washington using newly created ex nihilo currency looks like just another simple market transaction, and even shows up in measures of gross domestic product side by side with purchases like groceries or a new car — this appearance is really quite deceiving.
The most significant implication of the debasement of the currency that is completely overlooked by Marxist and bourgeois economists is this: once gold was removed as the standard of price by the Fascist State, not only did the currency lose its capacity to express the value of an individual commodity, the market as a whole lost the capacity to distinguish between productive labor and wasted unproductive labor. Rather than limiting society to the productive and efficient employment of labor power, the stage was set for something truly unprecedented: the relentless expansion of superfluous labor time and the attendant secular inflation of prices.
“The mode of production is in rebellion against the mode of exchange.” – Frederick Engels, Socialism: Utopian and Scientific, 1880
Krugman confuses the superficial relations of exchange for a deeper analysis of the capitalist mode of production. This failing might help him when he wishes to ignore the likely results of this sort of examination, but when he actually tries to understand how capitalism works — for instance, why rising gold prices might be a warning sign of a deflationary event — his inability to get beyond the superficial appearances lead him straight into a dead end.
Had Krugman looked at data from the 1980s and 1990s, he would have immediately noticed the slide in the price of gold over that period, and the incongruity of this decline for his argument. His hypothesis turned things exactly upside down — associating a negative so-called real interest rate with a period of general expansion. This is at odds with historical evidence to the contrary: prior to 1934 rising prices and generally rising interest rates and profit have always been associated with economic growth.
Speaking of the impact of Fed’s current counter-cyclical strategy on the price of gold, Krugman writes:
…there has been a dramatic plunge in real interest rates…What effect should a lower real interest rate have on the Hotelling path? The answer is that it should get flatter: investors need less price appreciation to have an incentive to hold gold…if the price path is going to be flatter…it’s going to have to start from a higher initial level…And this says that the price of gold should jump in the short run…with lower interest rates, it makes more sense to hoard gold now…which means higher prices in the short run and the near future.
Krugman is arguing Federal Reserve policy over the last three years is responsible for more than a decade of persistently rising gold price. He wants to explain gold price movements by interest rates, when it is clear he should be explaining interest rates by the movement in gold prices. The data suggests he has the situation exactly reversed. Moreover, if the connection I have made between generally falling gold price and economic expansion is correct, logic suggests the Federal Reserve is not trying to reduce real interest rates, but working feverishly to raise them. The real interest rates is only the change in the price of dollars over a period of time measured in gold (or some other commodity serving as money). If, at the beginning of the year, the price of dollars is such that one ounce of gold can buy 1400 dollars, but at the end of the year this price has changed so that one ounce of gold can now only purchase 1260 dollars, the real price of dollars has increased by 10 percent — restated in conventional terms, the “price” of gold has fallen from $1400 an ounce to $1260 an ounce.
Since, as Krugman argues, the rising price of gold is a sign of a depressed economy, it follows that a falling annual average price of gold must be evidence, at least, that this depression may be lifting. When the price of gold is falling, as during the 1980s and 1990s, it is a sign that real interest rates are positive, not negative. Moreover, it is a sign that the purchasing power of gold, as measured in dollars, is falling. Which is just what I would expect based on Marx’s theory of value.
All of this forces me to conclude the question of whether there is a persistent inflation or deflation hinges not on the general price level as measured in dollars or some other ex nihilo currency, but on the real price level — the purchasing power of gold (the purest commodity money) as measured in the sum of dollars or other ex nihilo currency a definite unit of this commodity money can purchase. When the quantity of dollars a troy ounce of gold can purchase is increasing, deflation is positive; when the quantity of dollars a troy ounce of gold is falling, deflation is negative. But, from the standpoint of the ex nihilo currency the situation is reversed: as the price of a troy ounce of gold decreases, the so-called real interest rate is positive; when the price of a troy ounce of gold increases, the so-called real interest rate is negative.
Rather than removing the change in the general price level from the equation of nominal interest rates, so-called real interest rates are only a measure of the change in the price of ex nihilo currency.
As we stated in the previous part of this series, gold is money, dollars are not — this is also true for all ex nihilo currencies in the world market, they are not money. The object serving as money is the material expression of the value contained in commodities solely because it is itself a product of a definite quantity of human labor. However, the value contained in a single dollar bill is the same as that contained in a one hundred dollar bill — or that contained in $700 billion created with a few keystrokes in a computer terminal at the Federal Reserve Bank in Washington; namely, zero. Once this is understood, it is possible to see that holders of ex nihilo currencies do not buy gold — that dollars are not here serving in the exchange as the money pole in the transaction, but as something else. Rather the situation precisely is the reverse: the holders of ex nihilo currencies are sellers who auction off their currencies to the highest bidder, while the holders of gold buy these worthless currencies from their holders.
Although it appears otherwise on the surface — that we must explain why, and under what circumstances, the holders of currency will choose to place their savings in gold — the case is exactly opposite of appearances: the fact that gold is exchanged for a valueless currency requires us to explain not why the holder of an ex nihilo currency would want to get out of her holdings of dollars or euros, but why the holders of gold would want to exchange their gold for these worthless currencies.
To be sure, since the ex nihilo currencies have no value, they are not purchased for their value. If dollars are not purchased for their value, the motivation for the exchange on the part of the holder of gold cannot be the value contained in the ex nihilo currency but the use value of the currency to the holders of gold. While gold serves especially well as a store of value, as a form of riskless savings, these saving can only become capital if this gold can be turned into land, machinery, factories, and other elements of fixed and circulating capital, and, above all, into a mass of labor power that is the source of surplus value and what makes real capital out of capital. For the owner of a hoard of gold to actually become the owner of a mass of capital, this gold must be converted into one or another currency, allowing it to assume the form of money-capital. This conversion is nothing more than the conversion of money into capital once removed.
The conditions determining this conversion are established by laws in each nation, which determine what is and is not to be used as money within the borders of that particular nation. If the laws of a nation establish that its currency shall exchange with an ounce of gold for, say, $20.67 per ounce, then the owner of gold can use his hoard to purchase 20.67 dollars for each ounce of gold he is willing to give in exchange. If the laws of the nation should suddenly change, so that now an ounce of gold will exchange for $35, then the owner of gold use his hoard to purchase 35 dollars for each ounce of gold he is willing to give in exchange. Finally, if the laws of a nation establish that its currency will have no fixed exchange rate with an ounce of gold, then the owner of gold must search in the market for the best exchange rate for the currency concerned. All other things equal, in the first two cases, the capacity of the state to issue currency is more or less severely constrained by the need to maintain the proper balance between the quantity of currency in circulation and the quantity of gold it must represent. In the final case, this constraint is relaxed.
If the point of the exchange of an ounce of gold for any quantity of dollars was a mere commodity transaction, the owner of the gold would be giving her gold away for free, no matter the quantity of dollars she received in return. Since the dollars contain no value, were the exchange regulated by the law of value, it would require an infinite quantity of dollars to equal the value in one ounce of gold. It should be obvious that equal exchange plays no role in this transaction, but only the laws of the state concerned. The state has determined that its ex nihilo currency is money; should the capitalist wish to turn his hoard of gold into capital, and become a real not imaginary capitalist, he must purchase this ex nihilo currency. He, therefore, purchases not the value contained in the dollars, but the use value of the dollars: its capacity to become capital.
It is the use value of the currency — its capacity to become capital — that serves as the basis for determining the exchange ratio of an ounce of gold with the currency, i.e., that determines the price of dollars expressed in units of gold, or, in the eyes of simpleton economists like Paul Krugman — whose point of view is determined by the needs of Fascist State monetary and fiscal policies, as “essentially a capitalist machine” — determines the price of gold. The use value of currency consists entirely of its use as capital, as self-expanding value, as value set in motion for the purpose of creating more value. From the point of view of the owner of gold, the ex nihilo currency is but the form his gold must take on, before it can take the form of capital — of fixed and circulating capital, and of labor power. Far from being something mysterious, it is actually no more mysterious than the need to exchange dollars for euros in order to purchase fixed and circulating capital and labor power in the Eurozone. What motivates this latter exchange is not the exchange rate of dollars for euros, but the specific use to which these euros can be put as capital.
There is, however, a problem with this that might throw a monkey wrench into the gears of capitalist production: to assume the form of capital, our would be capitalist must exchange his gold, containing real value, for a currency containing no value of its own. To expand the value of his gold holding, the capitalist must first strip off the value of the gold. What does he get in exchange for this quantity of gold? He receives in return some quantity of use value in the form of so many dollars, which, despite their usefulness as capital, contain not a single jot of value. The capitalist places this quantity of dollars in motion as a capital, and, after some period of time, withdraws it plus an additional quantity of dollars which make up the profit on his activity. But, it is not until he has reconverted this quantity of dollars back into gold, and assured himself that, indeed, the new quantity of gold is greater than the original quantity, will he know that, in fact, his gold became capital.
When there is a fixed exchange rate between a definite unit of gold and a definite unit of dollars, it is not at all complicated to assess whether the capitalist currency profit is also a definite quantity of surplus value. However, when the exchange rate between a definite unit of gold and a definite quantity of dollars is subject to fluctuations within the world market, assessing whether some profit in currency form is actually surplus value is complicated by the fluctuations in the rate of exchange itself.
The capitalist exchanges 100 ounces of gold for dollars at a given rate of 1000 dollars per ounce of gold. He then places this total capital of $100,000 in motion as capital; later drawing out of it a new sum of $150,000 — $100,000 is his initial capital plus a profit of $50,000. However, upon reconverting his $150,000 back into gold, he is surprised to find that his 100 ounces of gold is now only 50 ounces of gold, or, alternately, has grown to 200 ounces of gold. In the first case, this is because the new exchange rate of gold has changed from 1000 dollars to an ounce of gold to 3000 dollars to an ounce of gold. In the second instance, the exchange rate has changed from 1000 dollars to an ounce of gold to 750 dollars to an ounce of gold. In the first instance, he has lost fifty percent of his capital; while, in the second instance, he has doubled his capital.
I have a simple hypothesis for how Krugman managed to reach the correct conclusion regarding the relationship between the price of gold and the general level of economic activity: he probably started with his conclusion and tried to work backward. He needed an argument for why the rising price of gold might signal deflation rather than inflation. So, he took his conclusion and looked for some argument on which he might hang this conclusion.
Hey, it happens sometimes — that is how intuition works. The problem in this case is that Krugman’s argument requires us to ignore so many facts it is clear he did not think the problem through completely.
The most vital empirical fact Krugman overlooks is the rather jarring upward slope of the demand curve for gold. This means increasing demand for gold is driven by its increasing price (if not completely insensitive to price altogether). If this seems bizarre, that’s because the actual relationship between gold and currency is reversed in the demand schedule. The demand schedule for gold can be restated thus: the quantity of dollars demanded in the market is the inverse function of its price in ounces of gold. In other words, if the observation of our gold-bug in China can be believed, ex nihilo dollars is the “commodity”, and gold is its price. I am not the first person to note this. The writer, FOFOA, often quotes another anonymous writer from 1998, who observed:
It is gold that denominates currency.
FOFOA, commenting on this argument, states:
Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero.
The upward slope of the demand curve for gold can be seen in the above chart for the years 2001 to 2010, using data, supplied by the World Gold Council, of demand for gold in the form of bars and coin plus gold purchased by exchange traded funds. The pronounced upward slope is unmistakable. This curve suggests that the story of gold as just another commodity is wildly off-base.
To put this in terms that might be less opaque, when CNBC states an ounce of gold is going for $1400, they are not telling you the value of an ounce of gold, but the value represented by 1,400 dollars, using an ounce of gold as the unit of measure. Gold is money by reason of its natural (physical) properties; while dollars are money only through the fiction of a state law that says they must be accepted as payment for transactions. Having no value of their own, the value represented by a quantity of dollars is solely dependent on the ratio between this quantity of dollars and a definite quantity of gold (or, some other commodity that can serve as money in the relationship). So, when Krugman proposes to explain the “real price of gold” in this situation, he is employing a meaningless term. Unbeknownst to him, he is merely asking what quantity of gold can be used to purchase that quantity of gold. If, instead, he had asked what determines the “real price” of a dollar in gold terms, it would immediately have been obvious that the price of a dollar is the physical quantity of gold that can purchase it. Moreover, it would have been obvious that the change in the price of the dollar is identical to the change in the quantity of gold with which it can be purchased — in other words, that the so-called “real interest rate” of dollars is equal to the change in the quantity of dollars that gold can buy over some period of time.
Now that we solved the riddle of the unusual demand curve for gold, we can resolve, as well, the paradox of ex nihilo currency real interest rates in the United States over the long period from 1980 until now. As I stated in the last post, Krugman’s argument implied interest rates were negative for most of the 1980s and 1990s, and that interest rates have been positive since 2001. Now, it is obvious that the case must have been the exact opposite of Krugman’s implicit argument: For most of the 1980s and 1990s, as the average annual price of gold fell, the real interest rate averaged +5% per year. This is because the quantity of gold necessary to purchase a given quantity of dollars — i.e., the real price of dollars — was increasing over that 20 year period by 5% per year. In 1980, an ounce of gold could purchase $595, but by 2001, it could only purchase $271. By the same token, as the average annual gold price has risen at an average rate of 15% per year for the entire period from 2001 to 2011, this implies the real interest rate has been -15% per year over the period.
Since, gold is money (a specific money commodity at least), we can explain its use as a store of value. When gold serves as a store of value, it is merely serving as a form of savings for its holders. In this case it becomes clear why gold is a preferred form of saving. First, it has an unlimited shelf-life; but, second, and more important, Washington cannot devalue gold as it can dollars, by printing dollars indiscriminately.
We can also explain the relation between gold and dollars: gold is money, and ex nihilo currency is not. Gold has value but no purchasing power — you can’t use it to buy groceries — since it is not legally recognized as money and it does not serve as the standard of prices. On the other hand, while ex nihilo currency has no value, it does have purchasing power, since it is officially recognized as money and serves as the standard of prices. However, despite the legal definition of the dollar as official money in the United States, money is not just whatever the state says it is. It is a real relation between members of society that exists independent of the thing government legally defines as money (or, even the commodity serving as money).
What else dollars might be is not our concern right now.
When a worthless ex nihilo currency has a floating exchange rate against gold, it doesn’t represent any real value itself but only that expressed in its actual exchange rate with gold over a period of time. Based on this, it is now clear that the “real price” of a good is not its ex nihilo currency price — as measured in so many dollars — but the definite quantity of gold that can purchase this quantity of dollars. Even if it is not obvious to us in our daily shopping activities, the “real price” of a commodity is derived from the quantity of gold that can be used to purchase the quantity of money listed as the price of the commodity.
We have examined the relation between gold and ex nihilo dollars, showing that gold is money while dollars are not. We also showed why the value represented by any quantity of dollars is only an expression of the value contained in a definite quantity of gold that can purchase this definite quantity of dollars.
So, for example, the value of the price of a 42 inch, wide-screen, high definition, plasma television at Best Buy, with a price of $1400, has the value of one ounce of gold when that ounce of gold can purchase 1,400 dollars. If that ounce of gold can purchase 2,800 dollars, then the television has the value equal to one half ounce of gold. And, if, If that ounce of gold can purchase only 700 dollars, then the television has the value equal to two ounces of gold. In any case, the price of the television only reflects the value of the quantity of gold that can purchase a quantity of dollars equal to that price.
It might appear, at first, that the value of the television could be doubled simply by doubling its price, but this would be an error. As we stated above, the dollars used in such a transaction have no value of their own, and, therefore, cannot express the value of either the television or gold. So, if the prices of all goods were suddenly doubled, this would not result in the doubling of the value of the total output; it would simply double the dollar price of the existing output — leaving the value of the output unchanged. The relationship between the value contained in the commodity and the corresponding value contained in a unit of gold is determined not by the price paid for the commodity, but their respective socially necessary labor times of production. As long as these respective socially necessary labor times do not change relative to each other, the change in dollar price of either is of no consequence.
This statement has implications for both calculating inflation and nominal interest rates, as we will see in the next post.
Paul Krugman manages to stumble Mr. Magoo-like to his analytical destination through a series of comical errors.
Krugman’s argument on gold and deflation is actually an argument on gold and depressions. Krugman begins by explaining that rising gold price has been popularly linked to the prospect of inflation created by the monetary policies of the Federal Reserve Bank. He has ignored this argument, because he thinks Fed policy is far too restrictive to create inflation — deflation is his worry. He has, in fact, brushed rising gold prices aside as something caused by gold-bugs and the like — until now.
Now, he thinks, he can explain why rising gold price may actually be an expected outcome of a deflation, not inflation. I know Krugman’s argument here is flawed, but coincidentally on the right side of the relation: rising gold price implies the economy is experiencing a depression but this real contraction of economic activity does not necessarily lead to a general fall of prices — the deflation Krugman thinks he can explain. So, I want to examine his argument to locate the fallacy in it.
In the model Krugman is using, gold is an ordinary commodity like oil or coal; i.e., without any significant monetary properties. Gold is used primarily for its industrial applications:
Imagine that there’s a fixed stock of gold available right now, and that over time this stock gradually disappears into real-world uses like dentistry. (Yes, gold gets mined, and there’s a more or less perpetual demand for gold that just sits there; never mind for now).
At this point, we need to make explicit what Krugman wants to dismiss in the set up of his argument: First, he is dismissing what is undeniably the most important use of gold: its use as money, as measure of value and as standard of prices. The use of gold as a way to store value — as gold “that just sits there” — does not consume the gold; it simply sits in a bank vault or some other storage facility and is rarely if ever moved, except to be transferred to the ownership of another person. What makes gold ideal for this is that it has a shelf-life that is unlimited — because it does not corrode or otherwise decompose. Even as standard of price gold does not necessarily get consumed. If it is used as currency it may be eroded during the course of circulation. But if it is not directly used as currency, this is not true — again, it simply sits in a bank vault until it is exchanged for paper tokens of itself.
Second, Krugman wants us to ignore the fact that the existing stock of gold is constantly being added to by production of new gold from sources deep in the earth. Most of this new gold also does not enter into production, but is used for its principal purpose as money — as a store of value (savings). Production of gold has to be important in any explanation because of a unique characteristic this gold production has: the production of gold does not appear to be significantly affected by the laws of supply and demand. While the price of gold may rise or fall, the amount of gold produced manages to remain in a very narrow band; rarely, if ever falling out of this narrow limit — e.g. between 2001 and 2010 production ranged between 2400 to 2650 tons per year, while prices quadrupled. As a commodity, gold behaves very curiously in a non-commodity fashion
These two objections are enough to raise serious questions about Paul’s entire model, but, for the moment, we will set them aside and continue to examine Paul’s argument:
The rate at which gold disappears into teeth — the flow demand for gold, in tons per year — depends on its real price
We have a fixed stock of gold that is gradually being consumed by various uses in production. Krugman argues that the rate this stock of gold is consumed will depend on its “real” price. What is the “real” price of gold, and how does this differ from the nominal currency price of gold? Krugman does not tell me. He simply throws the term out there and expects me to figure it out for myself. Since, I can only price gold in an existing currency, I assume by “real” price, Krugman means its currency, e.g. dollar, price. We will see why my assumption is not be correct — gold, it turns out, does not have a price, “real” or otherwise. For now, let’s continue:
Crucially, at least for tractability, there is a “choke price” — a price at which flow demand goes to zero. As we’ll see next, this price helps tie down the price path.
Krugman is arguing there is a price at which the “flow demand” (the money demand for a good over time) for gold in the market goes to zero. He slips this assumption into his argument without discussing it, but I am forced to wonder how he arrives at this statement. Certainly, for use as an ordinary commodity, as a commodity used in industrial processes, we can assume there is a point at which the price of gold might become prohibitive. But, as money — as store of value, or as the standard of prices — is there any evidence that gold has a price point at which demand for its goes to zero? Well, no and yes. One of the paradoxes of gold is that demand tends to increase along with the price. Here is just one example taken from a gold-bug (he even calls himself “Mr. Gold”) doing research on China’s demand for gold:
When at the beginning of this century I studied the elasticity of gold demand to incomes, I was stunned by how steep the demand curve was in China. PRC gold demand was unlike in any other country because, precisely, it was upward sloping – the more expensive the gold, the more the Chinese bought of it. The trend has not changed since then…
Note, how this gold-bug asserts the demand curve for gold is “unlike in any other country because, precisely, it was upward sloping.” This is hardly true, as we can see at least in the anecdotal evidence with demand for gold in the United States — the hysteria for gold increases as the price of the metal increases here as well. This pattern of behavior is not unusual if we assume gold is exhibiting the kind of money-like qualities associated with appreciating currencies. As a currency appreciates, demand for it increases. This suggests that price is driving demand, not vice-versa, that the demand curve for gold is upward sloping — which is to say, the higher the price rises, the greater the demand for gold. Moreover, there is no evidence of a price point, no matter how high, where the demand for gold goes to zero.
To argue this another way: In the real world, economists argue that deflation reduces the willingness of individuals to part with their money for commodities. They hold onto it as they anticipate even lower prices in the future. It is clear that gold is behaving in this fashion — as its price increases — which is to say, as its purchasing power increases — people want to hold onto it, and hold more of it. A hypothesis which does not account for this money-like behavior is not a hypothesis at all.
However, even if there is no price point where the demand for gold goes to zero, this does not mean there is no price point where “flow” goes to zero. If gold does indeed exhibit money-like qualities with an upward sloping ‘demand curve’, this would imply gold can fall to some price below which it no longer circulates as money. We can return to this point later as well.
Krugman now turns to the core question of his post:
So what determines the price of gold at any given point in time? Hotelling models say that people are willing to hold onto an exhaustible resources because they are rewarded with a rising price.
At this point we should say something about this “Hotelling model”. Harold Hotelling developed an economic model to describe how cartels act to restrain the supply of a commodity in the market in order to maximize profit, that is, the return on their investment in the production of the commodity. The Wikipedia has this to say about Hotelling’s Rule regarding scarcity rent — excess profit derived by creating scarcity in the supply of a product:
Hotelling’s rule defines the net price path as a function of time while maximising economic rent in the time of fully extracting a non-renewable natural resource. The maximum rent is also known as Hotelling rent or scarcity rent and is the maximum rent that could be obtained while emptying the stock resource. In an efficient exploitation of a non-renewable and non-augmentable resource, the percentage change in net-price per unit of time should equal the discount rate in order to maximise the present value of the resource capital over the extraction period.
Simply stated, if I have a commodity that will eventually be exhausted, I will manage its production so that, over the lifetime of its production, the amount of money I can charge for it will be maximized. Think about, for instance, OPEC, who wants to be sure they produce no more oil each year than is demanded by the market when the price of oil is the highest and the amount demand is the greatest.
The problem with applying this rule to a stock of gold is that, as we saw above, gold exhibits the characteristic features of a money, not of an ordinary commodity. This will seem to be a non sequitur to Krugman’s core argument — until you realize the aim of maximizing rent on the production of a commodity is to maximize the quantity of money one receives in return for that commodity. Essentially, Krugman is arguing that owners of a lifeless hoard of gold sitting in a vault seek to maximize rent on that lifeless hoard of gold sitting in a vault.
Since the gold never moves from the vault, never enters into circulation, never exchanges with other commodities, and, thereby, become the form of the profits sought by producers of commodities, its role in its own price appreciation or depreciation must be completely passive — it is a mere victim of circumstance, a bystander to events. Whatever the change in the price of gold that occurs must be the result of other processes in the economy that impose themselves on the price of gold, causing this price to vary over time.
So, whatever is happening with the price of gold is not the result of any change in the behavior of the owners of the commodity, nor of any rent maximizing effort on their part. In fact, from what we have seen above, there is no reason to assume the owners of gold do anything with this gold except hold onto it. The entire point of having the gold is to hold it irrespective of any change in its price. While there may be some fluctuations of willingness to hold gold at the margins — of interest in supplies of newly produced gold — the great bulk of gold is likely no more traded than do people trade their savings in any other form. The question raised by this is obvious:
What determines the preference of individuals to hold their savings in the form of gold as opposed to some other form? But, we will leave this to the side as well for now.
Krugman next states:
Abstracting from storage costs, this says that the real price [of gold] must rise at a rate equal to the real rate of interest.
As with the “real price” of gold, I am at a loss at to what the “real rate of interest” refers. So, I went looking for a definition of the term on Wikipedia and found this:
“The nominal interest rate is the amount, in money terms, of interest payable.
For example, suppose a household deposits $100 with a bank for 1 year and they receive interest of $10. At the end of the year their balance is $110. In this case, the nominal interest rate is 10% per annum.
The real interest rate, which measures the purchasing power of interest receipts, is calculated by adjusting the nominal rate charged to take inflation into account. (See real vs. nominal in economics.)
If inflation in the economy has been 10% in the year, then the $110 in the account at the end of the year buys the same amount as the $100 did a year ago. The real interest rate, in this case, is zero.”
Krugman is arguing that the price of gold will rise or fall to reflect interest rates once inflation has been stripped out of the equation. If the real interest rate is positive, gold will tend to appreciate relative to currency. If the real interest rate is negative, gold will tend to depreciate relative to currency. If, at the end of a year $100 in your savings account has increased to $110, and inflation that year is zero, an ounce of gold will appreciate by a proportional amount — say, from $1400 to $1540. If, at the end of a year $100 in your savings account has decreased to $90, and inflation that year is zero, an ounce of gold will depreciate by a proportional amount — say, from $1400 to $1260.
This latter example would likely cause some difficulties: you would go storming into your local bank branch to inquire why you were being charged an astonishing ten percent a year to keep your money in the bank. Once informed that the current interest rate charge by your bank was now -10% per year, you would promptly withdraw your funds — triggering what, in time, will grow into a run on the bank, as everyone withdraws their saving in the face of stiff new negative interest rates.
Why might this cause some difficulties? Between 1980 and 2001, the average annual price of gold fell on average by 5 percent per year; while, since 2001, the average annual price of gold has risen on average by 15 percent per year. The surprising result of Krugman’s argument is that, after accounting for inflation, real interest rates were negative for most of the 80s and 90s, but have been decidedly positive since then.
We will leave this for later examination as well.
Krugman concludes the recent jump in the price of gold is the result of the Federal Reserve Bank’s zero interest rate policy:
Now ask the question, what has changed recently that should affect this equilibrium path? And the answer is obvious: there has been a dramatic plunge in real interest rates, as investors have come to perceive that the Lesser Depression will depress returns on investment for a long time to come:
What effect should a lower real interest rate have on the Hotelling path? The answer is that it should get flatter: investors need less price appreciation to have an incentive to hold gold.
There are two things I question about this reasoning. First, the price of a troy ounce of gold has been increasing since 2001, when it hit bottom at an annual average price of $271. That means, for whatever reason having nothing to do with the Fed’s zero interest rate policy, investors have had an incentive to hold gold as its purchasing power, measured in dollars, has been rising for a decade now. Second, since in my argument, gold is playing only a passive role, the historical evidence suggests the Fed’s zero interest rate policy is being driven by the same forces that are also causing gold to appreciate in price and investors to hoard it.
Rather than driving events, the Fed’s zero interest rate policy is completely reactive. Simply stated, based on Krugman’s argument, the Fed’s zero interest rate policy is not sending capitals scurrying into gold and driving gold price higher, rather it is responding to whatever economic forces are doing this, and, driving real interest rates to an average 15% a year for the last decade — it is trying to drive real interest rates negative to reverse those forces, and to reverse the depressed return on investment.
We will show why this argument falls flat on its face as well
The logic, if you think about it, is pretty intuitive: with lower interest rates, it makes more sense to hoard gold now and push its actual use further into the future, which means higher prices in the short run and the near future.
The evidence is, in fact, the exact opposite: the behavior of gold indicates the Federal Reserve’s zero interest rate policy is a failure so far (along with all the fiscal stimulus and backdoor bailouts) since, despite the effort and unprecedented scale of the various policy actions, the price of gold indicates interest rates remain stubbornly high at levels not seen since the 1970s depression. And, moreover, still increasing.
Nevertheless his string of errors in reasoning, Krugman manages to end up, Mr. Magoo-like, at what is somewhat close to the right conclusion:
…this is essentially a “real” story about gold, in which the price has risen because expected returns on other investments have fallen; it is not, repeat not, a story about inflation expectations. Not only are surging gold prices not a sign of severe inflation just around the corner, they’re actually the result of a persistently depressed economy stuck in a liquidity trap — an economy that basically faces the threat of Japanese-style deflation, not Weimar-style inflation. So people who bought gold because they believed that inflation was around the corner were right for the wrong reasons.
Krugman is correct to state rising gold price is a sign of an economy in a depression, where returns on investment have fallen flat. He is also correct to state gold is not signalling future inflation. But, Krugman arrives the correct conclusion only by making a series of Mr. Magoo-like blunders that just manage to offset each other — blunders, which, when stripped out of his argument, allow a simpler explanation for the relation between gold and real interest rates.
In the next part of this series, I will show why Krugman’s model, although arriving at something close to the truth of the matter, is nevertheless wholly wrong.
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
In part one of this series, I showed how inflation affects not only consumption but also production. In the former, inflation expresses itself in the fall of the consumption power of the mass of society. In the latter, inflation expresses itself as a fall in the actual realized rate of profit — a negative rate of profit arising not from a material change in the composition of capital, but from a depreciation in the purchasing power of money. The two of these effects are achieved by one and the same cause. The two effects do not simply exist side by side, but influence each other: in the circulation of capital, excess money-demand effectively reduces the portion of the output of productively employed capital that is realized in sales. With an inflation rate of ten percent, a capital with value of $100 now can be realized only if $110 is offered for it. On the other hand, a capital with the actual value of $110, is effectively purchased for $100.
The problem here is that between the production of the commodity and its realization in a sale the purchasing power of the money has depreciated. The problem can be better understood if we divide value and price and examine each separately. If we assume a capital with the value of $100, represents 10 hours of socially necessary labor time, we can make the following observation: The capitalist takes his capital with a value of $100 or ten hours of labor time and produces a quantity of commodities with a new total value of $110, representing 11 hours of socially necessary labor time. However, during this same period, the purchasing power of money has changed so that 1 hour of labor time no longer has a price of $10, but has a new price of $11. His capital now has the value of 11 hours of labor time with an implied expected price of $121 (11 times 11 = 121), yet he only realizes $110, or 10 hours of labor time under the new price conditions.
From the point of view of value, the capitalist has taken his capital with a value of 10 hours of socially necessary labor and produced a capital with a value of 11 hours of socially necessary labor. Yet, of this 11 hours of value he only realizes 10 hours, i.e., he realizes no more than his original investment. From the point of view of price, the capitalist has taken his capital with a money-price of $100 and produced a capital with a money-price of $110. He expects no more than $110 and is satisfied with this, despite the fact that this $110 in sales only has a value of 10 hours of socially necessary labor time.
The riddle of the divergence of prices from values
The riddle of this perverse situation can only be solved if we assume that a change occurred in the relationship between values and prices during the exchange of money and commodities — that the realization of the value of capital produced suffered from a defect such that a portion of the value this capital was lost in the act of exchange itself. This defect, as we showed in part three, is already inherent in the value/price mechanism itself. The value/price mechanism contains in itself a contradiction between the actual labor time expended on the production of a commodity and the socially necessary labor time required for its production; a contradiction between the value of the commodity itself and the expression of the value in the form of the price of the commodity; and, a contradiction between the price of the commodity denominated in units of the money and the socially necessary labor time required for the production of the object that serves as the money.
These contradictions exists only in latent form until crises bring them to the surface in a sudden divergence between prices and values of commodities. During periods of over-production of commodities — or, more accurately, over-accumulation of capital — these crises are expressed in the sudden collapse in the prices of commodities below their value, or socially necessary labor times. The divergence between prices and values of commodities only express the fact that for a more or less lengthy period of time wealth can no longer accumulate in its capitalistic form; and, as a result, the socially necessary labor time of society must contract to some point where the production of surplus value no longer takes place. Precisely because the circulation of capital requires not just the production of surplus value in the form of commodities, but also its realization in a separate act of sale of these commodities, the possibility exists for an interruption of the process of realization for a longer or shorter period of time until balance between production and consumption is restored — that is, until conditions exist for the total social capital to once again function as capital; for the process of self-expansion of the total social capital to resume.
If, for whatever reason, conditions are not established for the total social capital to resume functioning as capital — for the process of self-expansion of the total social capital to begin again — production itself must cease. The interruption of exchange — which, I note for the record, begins not with too much money-demand for too few commodities, but precisely the reverse — creates a sudden fall in the rate of profit to zero. If this occurs not as an intermittent breakdown, but as a permanent feature of capitalist production — which is to say, if the over-accumulation of capital is not momentary, but a now permanent feature of the mode of production — capital has encountered its absolute limit as a mode of production. From this point forward the production of wealth can no longer take its capitalistic form — can no longer take the form of surplus value and of profit.
Over-accumulation of capital and civil society
Moreover, since the production of surplus value is the absolute condition for the purchase and sale of labor power, the sudden interruption of its production affects not just the capitalist class, but the class of laborers as well — it appears in the form of a social catastrophe threatening the existence of the whole of existing society, and all the classes composing existing society without regard to their respective place in the social division of labor. Each member of society encounters the exact same circumstance: she cannot sell her commodity, whether this commodity is an ordinary one — shoes, groceries, etc. — or the quintessential capitalist commodity, labor power. The premise of all productive activity in society is that this activity can only be undertaken if it yields a profit; if, in other words, the existing socially necessary labor time expended by society realizes, in addition to this value, additional socially necessary labor time above that consumed during its production.
Marx argues in Capital Volume 3 that capitalist production presupposes a tendency toward the absolute development of the productive forces of society, irrespective of the consequences implied by this development for capital itself. What does Marx mean by this? As a mode of production, capital shares with all previous modes of production the feature of being founded on natural scarcity, on the insufficiency of means to satisfy human need. Yet, at the same time, it implies a tendency for the productive capacity of society to develop more rapidly than consumption power of society — a tendency for more commodities to be thrown on the market at any given time than society can consume under the given conditions of exchange. What society can consume at any given moment is not determined simply by the amount of commodities available to be consumed, but by class conflict between the mass of owners of capital and the mass of laborers; a conflict which presupposes the reduction of the consumption power of the mass of laborers to some definite limit consistent with the realization of profits.
That this conflict, absent a successful attempt on the part of the mass of society to end the monopoly over the means of production by an insignificant handful of predators, must be settled in favor of capital and, therefore, that production is constantly kneecapped by completely artificial limits on consumption, is already given by capitalist relations of production themselves — relations which nowhere figure in the description of capital by simple-minded economists, who instead ascribe this barrier to the gold standard, etc.
This contradiction — that the productive power of society tends toward its absolute development, yet the consumption power is constantly constrained by the need to produce commodities at a profit — implies that at a certain point in capital’s development production and consumption come into absolute conflict — a conflict which, on the one hand, cannot be resolved by simply increasing this productive power still further, nor by limiting consumption still more severely. It can only be overcome by such means as overthrow capitalist relations entirely, or, alternately, destroy both the productive and consumption power of society together in one and the same act of exchange.
Exchange and disaccumulation, or, the destruction of value through exchange
I have made the assumption that both the productive power of society and the consumption power of society are destroyed by one and the same act of exchange. Based on this assertion, I define inflation not simply as the increase in money-demand over the supply of commodities, but the actual destruction of the productive power of society and consumption power of society during the act of exchange. Or, what is the same thing, by the progressive reduction of the total social capital circulating within society, i.e., the reduction of the quantity of the existing total social capital which continues to function as capital within society, through exchange.
I have also made the assumption that this same act of exchange also expresses,
- the contradiction between the actual labor time expended on production of commodities and the socially necessary labor time required for production of these commodities — inflation, therefore, expresses itself as a declining portion of the total labor time expended by society that is socially necessary, or, alternately, the constant increase in the total labor time of society in relation to the social necessity for productively expended labor time;
- the contradiction between values of commodities and the expression of these values in the prices of commodities — inflation, therefore, is expressed as a decline in the value of commodities as a proportion of the prices of commodities, or, alternately, the constant increase in the prices of commodities in relation to their values; and,
- the contradiction between the prices of commodities denominated in units of the legally defined money and the price of the commodity that historically served as the money — inflation, therefore, is expressed in the constant depreciation of the exchange ratio of the money token against the commodity historically serving as the standard of price, or, alternately, as the rising price of the commodity historically serving as the standard of prices denominated in the money token, i.e., a secular rise in the price of gold.*
The conditions of this act of exchange, which destroys both the productive power of society and its consumption power — and which, on this basis, progressively reduces the quantity of the existing total social capital which continues to circulates as capital and function as capital on this basis — is fulfilled only by exchange of that portion of the newly created social capital representing surplus value with ex nihilo money, and the unproductive consumption of this newly created value by the Fascist State. Moreover, this unproductive consumption of the newly created surplus value is only fulfilled if it is entirely unproductive in all of its forms, i.e., whether this unproductive consumption takes the form of the unproductive consumption of commodities, of labor power, or, of the fixed and circulating capital.
Fascist State expenditures consist entirely of removing the surplus product of labor from circulation, consuming it unproductively, and replacing this surplus product in circulation with a valueless ex nihilo money that formally completes the act of exchange, but that in reality abrogates it. The total mass of capital circulating within society is thereby reduced by this exchange, while the total money-demand in society is simultaneously increased.
The chief symptoms of inflation, therefore, is (1.) the unproductive consumption of the existing total capital by the Fascist State, no matter what form this unproductive consumption takes; (2.) the constant secular increase in Fascist State expenditures, no matter how these expenditures are financed, but which is no more than the continuous exchange of every form of commodity (i.e., of capital in the form of commodities) for newly created valueless ex nihilo money; and, finally, (3.) the constant expansion of the total labor time of society beyond that duration required by the satisfaction of human needs. In tandem with the improvement in the productivity of labor, society is compelled to expend an ever greater amount of effort just to feed, house and clothe itself. In tandem with the reduction in the value of commodities, the prices of commodities soar still higher. In tandem with relentless expansion of Fascist State expenditures, the actual provision of necessary public services — education, health care, provision for the disabled and those no longer able to work, public infrastructure and communications — sink into decay and obsolescence.
The terminal trajectory of capitalist social relations is expressed precisely in the fact that at a certain stage of development the total social capital can no longer function as capital, can no longer realize the constantly increasing quantity of surplus value produced in the form of profits, that, to the contrary, this surplus value must be unproductively consumed in its entirety by the Fascist State and replaced by purely fictitious profits denominated in a purely fictitious money.
*NOTE: I need clarify from Part Three that this third contradiction implies gold tends to exchange with other commodities at some exchange ratio below its relative value, despite its rising nominal price. As is obvious, if commodities are priced above their values, the purchasing power of gold — the physical body of exchange value — is exchanged below its value. This situation, which once occurred only during periods of general capitalist expansion, is now a permanent feature of exchange. It is, however, expressed through the intermediary of the money token by commodities being priced above their values, while gold is priced below its value. An existing quantity of money token can buy fewer commodities, but more gold, than otherwise expected. This inevitably leads to charges by gold-bugs that the price of gold is being deliberately suppressed, but I think it is actually a natural consequence of over-accumulation of capital — a condition normally seen at the apex of an expansion. Commodities in general are devalued, but this devaluation is expressed most thoroughly in the devaluation of the former money commodity which serves little other function in society but to express value.
Tags: capital, commodity, consumption, ex nihilo money creation, ex nihilo pecunaim, exchange, fictitious profits, fiscal policy, gold, inflation, monetary policy, negative rate of profit, prices, production, public debt, purchasing power of money, socially necessary labor time, stupid economist tricks, wages
According to the Wikipedia entry on Executive Order 6102, the fine for hoarding gold was ten thousand dollars. At the same time, the executive order demanded all private holdings be turned in and exchanged for government issued ex nihilo dollars at an exchange rate of $20.67 per troy ounce of gold. Using this as our base measure, the fine for hoarding gold amounted to 483.79 troy ounces of gold.
So, like the authors of the Wikipedia entry I tried to update the purchasing power of the 1933 ten thousand dollar fine into an amount of money equal to it in 2011 dollars. I went to the Bureau of Labor Statistics Consumer Price Index website and found that according to its statistical measure of inflation it now takes $171,897.69 to purchase the same quantity of goods that the ten thousand dollar fine would have purchased in 1933. According to the Bureau of Labor Statistics, the purchasing power of the ten thousand dollar fine has fallen to just 5.82 percent of its purchasing power in 1933. This is a fantastic depreciation in the purchasing power of dollars. However, it is also a gross lie — the depreciation of dollars has been far more severe than even the BLS admits, as we will now show.
The Problem of the Consumer Price Index
The Consumer Price index has been the subject of continuing controversy, including charges that it overestimates inflation and charges that it underestimates inflation. But, this controversy does not concern us here, since it is, in part at least, a political disagreement. What does concern us is the index itself, which popularly purports to measure the depreciating purchasing power of money in relation not to a fixed standard, but against a multitude of standards — that is, against a so-called basket of consumer goods.
Upon deeper investigation, however, I found, according to the entry in the Wikipedia on the United States Consumer Price Index, that the CPI was never meant to measure inflation or the depreciating purchasing power of money:
The U.S. Consumer Price Index (CPI) is a time series measure of the price level of consumer goods and services. The Bureau of Labor Statistics, which started the statistic in 1919, publishes the CPI on a monthly basis. The CPI is calculated by observing price changes among a wide array of products in urban areas and weighing these price changes by the share of income consumers spend purchasing them. The resulting statistic, measured as of the end of the month for which it is published, serves as one of the most popular measures of United States inflation; however, the CPI focuses on approximating a cost-of-living index not a general price index.
Intrigued by this disclaimer, I went searching for the difference between a measure of inflation and a measure of the “cost of living”. Among the information I found was an admission by the Bureau of Labor Statistics that the Consumer Price Index not only does not measure inflation, but it is not even a true measure of the cost of living. It is limited to measuring market purchases by consumers of a basket of goods and services.
According to Wikipedia, the BLS states:
The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. BLS has for some time used a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI. A cost-of-living index is a conceptual measurement goal, however, not a straightforward alternative to the CPI. A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain utility level or standard of living. Both the CPI and a cost-of-living index would reflect changes in the prices of goods and services, such as food and clothing that are directly purchased in the marketplace; but a complete cost-of-living index would go beyond this to also take into account changes in other governmental or environmental factors that affect consumers’ well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime that would constitute a complete cost-of-living framework.
Since, the BLS, by its own admission, incompletely measures the amount you must spend to achieve a presumed certain level of “utility” — the so-called Standard of Living — how do they define this “utility”? Further reading explains:
Utility is not directly measurable, so the true cost of living index only serves as a theoretical ideal, not a practical price index formula.
So, to sum up: the Bureau of Labor Statistics Consumer Price Index is a measure of a theoretical construct which cannot be defined, is difficult to determine, and, in any case, is not directly measurable: the so-called “Standard of Living“.
The hidden costs borne by society
If we go back to the first paragraph of the original definition of inflation proposed the the Wikipedia entry, we find this:
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.[my emphasis] A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.
Inflation is defined as the general rise in prices of goods and services, but also as the erosion of the purchasing power of money — i.e., the depreciation of money. Against what is this erosion of purchasing power to be measured? Here, the Wikipedia is silent, leaving us with the wrong idea that the “real value” of money is to be measured against the commodities we can purchase with it. As this “real value” erodes, we can purchase fewer goods and services. This implied method of measuring the depreciation of money, however, does not give us a general measure of the price level, as the BLS admits, but only a measure of the price level as expressed in a series of transactions in the market for so many individual commodities.
The war in Afghanistan, for instance, would not be captured by this implied method; nor, would the cost incurred by society as a result of the damage British Petroleum caused to the Gulf of Mexico; nor, the cost borne by society for the Fukushima nuclear disaster, or that created by the bailout of the failed banksters on Wall Street. Unless these costs actually entered into the prices of commodities in market transactions, they will not show up in the Consumer Price Index. And, a considerable period of time could pass between the events and their expression in the prices of commodities tracked by the Consumer Price Index. Moreover, the change in prices of the commodities tracked by the Consumer Prices Index are subject to innumerable factors arising from market forces within the World Market — making it impossible to trace any specific fluctuation back to its source. On the other hand, each of the events of the sort cited above materially affected either the necessary labor time of society or the quantity of ex nihilo money in circulation within the economy.
The question to which we seek an answer is not how much the purchasing power of ex nihilo money has depreciated with respect to some arbitrarily established concept of living ltandard, but how much it has diverged from the purchasing power of gold standard money? To answer this question, we must directly measure these changes by comparing the general prices level against the commodity that served as the standard for prices until money was debased and replaced with ex nihilo dollars.
Gold standard dollars more or less held prices to the necessary social labor time required for the production of commodities; the divergence between gold and dollars since the dollar was debased, provides us with an unambiguous picture of inflation since 1933. The divergence between the former gold standard money and ex nihilo money must be expressed as the depreciation of ex nihilo money purchasing power for an ounce of gold over time , or, what is the same thing, as the inverse of the price of gold over a period of time — as is shown in the chart below for the years 1920 to 2010.
Inflation since 1933 has been four times higher than BLS figures show
So, how does all of this relate back to the fine imposed on anyone found guilty of hoarding gold under Executive Order 6120? Remember, in 1933 the ten thousand dollar fine could have been exchanged for 483.79 ounces of gold. According to the BLS Consumer Price Index this translates into $171,897.69 in current dollars. However, 483.79 troy ounces of gold actually commands the far greater sum of $714,441.22, or 4 times as many dollars as the BLS Consumer Price Index states.
To put this another way, the Consumer Price Index is a complete fabrication by government to deliberately understate the actual depreciation of dollar purchasing power. The cumulative results of decades of false inflation statistics can be seen by simply comparing CPI statistics to the actual depreciation of dollar purchasing power against its former standard, gold. The extent of this fabrication can be seen in the chart below:
Moreover, for 2010, the annual average price inflation rate was a quite staggering 26%, when measured against the value of gold, not the paltry 1.6% alleged by the BLS.
If you didn’t receive a 26 percent increase in your wages or salary in 2010, you experienced a 26% loss in purchasing power — your consumption power was systematically destroyed by Washington money printing.
Using gold as the standard against which the depreciation of ex nihilo money is measured demonstrates how the Fascist State deliberately manipulates statistics for its own purposes to hide from the public the extent to which it manipulates exchange, and, therefore, the extent to which this manipulation has resulted in greatly increased prices for commodities.
But, gold does not only allow us to actually visualize the extent of this manipulation, as we shall show in the next post, gold also can demonstrate how this manipulation results in the needless extension of social working time beyond its necessary limit. That the Fascist State relentlessly extends working time beyond this limit, or, more importantly, that operates to maintain an environment of scarcity within society, which is the absolute precondition for Capital’s continuation.
To be continued
Tags: Bureau of Labor Statistics, capital, commodity, Consumer Price Index, consumption, ex nihilo pecunaim, exchange, Federal Reserve, fiscal policy, Franklin Delano Roosevelt, gold, Gold Reserve Act of 1934, gold standard, Gold standard dollars, inflation, monetary policy, negative rate of profit, Presidential Executive Order 6102, prices, production, purchasing power of money, Standard of Living, stupid economist tricks, the "real value" of money, Utility, value versus “real value”
In the bare bones sketch of Marx’s theory I argued that the value of the object serving as money played no role in its function as money. This was incomplete, of course, but it served to advance my argument until I could directly address the implication of debasement of money by the industrial powers during the Great Depression. In reality, the price (actually value/price) mechanism can only perform its function to coordinate the separate acts of millions of individual labor times if it shares with commodities the attribute of being a product of labor itself, and, for this reason, requires a definite socially necessary labor time for its own production. Because gold has value, it can express the value of the commodities with which it is exchanged.
On the surface, a commodity is exchanged for money, and this transaction is the exchange of two absolutely unlike objects: the money serves no purpose but means of exchange, while the commodity with which it is exchanged is eventually consumed; the money never leaves circulation, while the commodity disappears; the money can always find a new owner, while the commodity only finds an new owner where it is needed. They are as different as night and day. Although, the flows of money through the community are only a necessary reflex of the flows of commodities through the community as it engages in a more or less developed act of social production. But, by always being exchangeable for commodities throughout the community, always being in constant circulation within the community, and by serving only as means of exchange, money brings millions of isolated individual acts of production into some sort of rough coordination.
As the physical expression of socially necessary labor time money is a natural and spontaneous means by which the value/price mechanism regulates the activities of the community in absence of the community’s own planned management. However, I must emphasize, money is only the expression of socially necessary labor time; it is not and should not be mistaken for socially necessary labor time itself. And, it can only express the socially necessary labor time of society, because the community requires some definite socially necessary labor time to create it. What object serves as money for the community is, therefore, of general interest to the whole of the community, and has a very long history — most of which, since we take this history as our starting point, is of no interest to us here. I only note that since this General Interest must take some form, the form it takes during the period under discussion, from the Great Depression until the present, are the laws of the various States regarding the legal definition of money.
Breakdown of the law of value emergence of the Fascist State
On April 5, 1933, the Roosevelt administration issued Executive Order 6102. The Wikipedia outlines the scope of this executive order:
Executive Order 6102 is an Executive Order signed on April 5, 1933, by U.S. President Franklin D. Roosevelt “forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates” by U.S. citizens. The bank panics of Feb/March 1933 and foreign exchange movements were in danger of exhausting the Federal Reserve holdings of gold. Executive Order 6102 required U.S. citizens to deliver on or before May 1, 1933, all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange for $20.67 per troy ounce. Under the Trading With the Enemy Act of October 6, 1917, as amended on March 9, 1933, violation of the order was punishable by fine up to $10,000 ($167,700 if adjusted for inflation as of 2010) or up to ten years in prison, or both.
This simple executive order, which was succeeded by several additional orders during 1933, and by the Gold Reserve Act of 1934, removed gold as the standard for the dollar, made it illegal to own more than a small amount of the metal, and compelled individuals under penalty of law to turn their gold over to the Federal Reserve in return for the then existing exchange rate of $20.67. On the surface this order just gave the State monopoly over the ownership of gold and reduced money to just a State-issued token. While this step was, in and of itself, fairly staggering, particularly when we consider that it was duplicated in all the big industrial nations at the same time, once we consider the full ramifications of the orders and succeeding law in terms of the various national economies, it quickly becomes apparent that a state monopoly over the ownership of gold, and the replacement of gold standard money by State-issued currency was only the most obvious effect. John Maynard Keynes, who examined the issue entirely from the standpoint of a bourgeois economist, had some inkling of the far reaching implication of State issued ex nihilo money. Fifteen years earlier, he argued that the inflationary consequences of excessive money printing amount to the confiscation of private property:
… By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
If excessive money printing raised the question of secret confiscation of property, the actual confiscation of gold, and the replacement of gold money by state-issued currency amounted to the explicit expropriation of monetary wealth. Yet, even this implied expropriation of social wealth in its capitalistic form was not the most significant implication of the state action: From the standpoint of Marx’s theory, the debasement of money was the abolition of the historically developed natural and spontaneously created value/price mechanism as the regulator of the social act of production. In place of a natural relation between the values of commodities and the prices of commodities, the relation between the two was, after this, to be established as a matter of state policy. This separation is the absolute development of the historical antithesis between the commodity and money, since paper money has no use except as medium of circulation of commodities — as means of exchange. Moreover, by this executive order severing gold from money, we see not only that the value of the commodity was severed from its price, but, further, that production was severed from consumption; labor power was severed from wages; surplus value was severed from profits. Finally, with the law of value no longer determining the social necessity of a given expenditure of labor time, the labor time expended by society was no longer limited by social necessity.
In place of the historical, spontaneous and naturally developed mode by which the separate activities of millions of members of Civil Society in every country had been hitherto regulated, social labor and its duration was now regulated by the State, and under conditions determined solely by the State. The abolition of the gold standard did not simply sever the connection between gold and money, and abolish the value/price mechanism, it also placed the total social capital of Civil Society at the disposal of the State — or, what is the same thing, announced the emergence of the Fascist State. Property, the classical thinkers argued, is the power to dispose of the labor of others, hence this total social capital was converted into the property of the State.
The Fascist State as regulator of production and consumption
The entire social capital of every nation was expropriated, precisely as Marx predicted, but in a fashion and under circumstances quite different than those which might have been welcomed by him. As I argued in another post, Marx’s differences with Bakunin came down to difference over whether the Proletariat would be compelled to effect management of social production according to the principle of “to each according to his work”, that is by replacing the existing Civil Society and the State with new rules enforcing labor equally on all members of society. Marx was not making this argument in a vacuum; his theory predicted a breakdown of the law of value as the regulating principle of social labor before the necessary conditions were established for a fully communist society. Society would be required by this breakdown to step in and manage social labor directly and according to a plan. Marx’s argument with the Anarchists essentially asked the question, “By what rules would this management be effected?” As is obvious from an investigation of history, this question was settled decisively in favor of the existing Civil Society, which rose to manage its General Interest — i.e., its interests as a mode of Capital — through the machinery of the Fascist State.
Within ten years of this act, more than 80 million people were dead and the Eurasian continent lay in ruins, as each nation state, finding itself in total control of the productive capacity of their respective nations, immediately put this productive capacity to good use by trying to devour their neighbors — unleashing a catastrophe on mankind. By 1971, with the collapse of the Bretton Wood agreement, a single fascist state, the United States, had imposed on the survivors the very same control over the other national economies, that it imposed on its own citizens.
As I stated in the previous post:
However, there are so many holes in the economist’s definition of inflation, as a matter of due diligence I must consider inflation from the standpoint of Marx’s labor theory of value. If I arrive at the same conclusions about inflation that are expressed in the Wikipedia definition — or at conclusions that throw no new light on the subject — then I will have spent about five hours pursuing a dead end.
I have now considered inflation from the standpoint of Marx’s labor theory of value and have come to decidedly different conclusions than those drawn in the Wikipedia entry on the subject. These conclusions, I argue, suggest a catastrophic breakdown of the conditions of capitalist production and exchange during the Great Depression; and, based on this, the assumption by the State of direct management of social production, the conversion of the total social capital into the property of the State — not by means of outright seizure of this capital, but by taking control of the conditions of exchange — and the extension of this relationship to the entire World Market.
With the assumption of management of social production by the Fascist State, the law of value, which served to limit the average price of the commodity to the socially necessary labor time required for its production, no longer imposed such limits on prices. Hence, prices could be determined by factors other than the value of these commodities. On the other hand, with the law of value — that is socially necessary labor time — no longer imposing a limit on the total labor time of society, this labor time could be expanded in a form that is completely superfluous to social necessity. We can, therefore, define inflation as the chronic general rise in the price level resulting from the further extension of hours of labor beyond their socially necessary limit; or, prices held constant, by the reduction of the ratio of socially necessary labor time to the actual hours of labor expended. Finally, we can see that inflation itself is no more than the result of Fascist State policy, which, acting as the social capitalist, seeks the ever greater extension of the working day even as the productive capacity of society reduces the necessary labor time of social labor.
In my next post, I will examine each of these conclusions in turn.
To be continued
Tags: Bakunin, capital, Civil Society, commodity, consumption, ex nihilo pecunaim, exchange, Federal Reserve, fiscal policy, Franklin Delano Roosevelt, gold, Gold Reserve Act of 1934, gold standard, inflation, Karl Marx, Lord John Maynard Keynes, monetary policy, negative rate of profit, Presidential Executive Order 6102, prices, production, stupid economist tricks, value versus "real value"
The Wikipedia definition of inflation includes this rather silly statement on the definition of the so-called “real value” of money:
…inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.
In this statement the “real value” of money is reduced to the purchasing power of the currency, which is simply the inverse of the price of a commodity. If a commodity has a price of ten dollars, the “real value” of a dollar in relation to this commodity is one tenth of the commodity. By the same token, the value of the commodity can be said to be ten times the “real value” of one dollar. The value of the commodity is, therefore, only its price in some unit of the currency, and, in this way the economist can dispose of the nasty implications of Marx’s labor theory of value — that the classical notion of value amounts to a death sentence for Capital itself, and of the sum of relations of society founded on Capital.
It is typical of economics that its practitioners hold to the notion reality can be abolished merely by refusing to acknowledge its existence. Thus, tens of millions of unemployed women and men no longer exist simply because the Bureau of Labor Statistics’ data removes all evidence of their existence. Unemployment like the classical notion of value is no more than a conceptual construct which can be disposed of by replacing it with a new concept. However, there are so many holes in the economist’s definition of inflation, as a matter of due diligence I must consider inflation from the standpoint of Marx’s labor theory of value. If I arrive at the same conclusions about inflation that are expressed in the Wikipedia definition — or at conclusions that throw no new light on the subject — then I will have spent about five hours pursuing a dead end. The effort, however, is worth it.
Price and value
It may surprise you that, in Marx’s model, money can be thought of as something without any value at all. Value is a characteristic of a commodity, and, insofar as we consider money not as money, but as just another commodity (for instance, the gold in a necklace) it does indeed have value equal to the socially necessary labor time required for its production. But, when serving as money, gold’s value as a commodity never enters into the equation. As money, gold’s entire role in social production is to express the value of the commodity, not its own value; and this it does in its material body. Marx would never speak of the “real value” of money, because as money, its “real value” is not what matters — what matters is its physical material.
Simplified Marx’s model is this: When we speak of the value of a commodity, we are referring to the duration of labor time socially required to produce the commodity. This socially necessary labor time is expressed in a quantity of gold that requires the same duration to produce. The socially necessary labor time required to produce the commodity is the value of this commodity, while the quantity of gold equal to this socially necessary labor time is not the value of the commodity, but its price. Value and price are two different animals — in the market, where the commodity is exchanged for money, the the value of a commodity and its price in gold are just as likely represent two different quantities of socially necessary labor time as they are to agree. They will agree only on average. In its simplest form, Marx’s theory of value assumes not that the price and the value of a commodity are the same, but that they are NEVER the same — the price of the commodity and its value only coincide by innumerable transactions in which the two only coincide on average.
If the price and the value of a commodity never coincide, what is Marx’s point? His point isn’t to find the secret of prices of commodities, but to demonstrate how the millions of separate and isolated activities of the members of society are, through this mechanism of constant price fluctuations, converted into an embryonic form of social production. While the economist is trying to crack the great ‘mystery’ of price, Marx is showing how private productive activity naturally begins to inch its way along the long road to fully social cooperative productive activity.
The point of the exercise is to advance a theory showing how the labor time of the community, composed as it is of millions of separate labor times is regulated naturally through the pricing mechanism, since the community does not regulate this labor time consciously and according to a plan. In this sense, I think, Marx is not breaking any new ground in relation to the classical writers like Adam Smith. Marx’s unique contribution to this discussion is that in place of labor time generally, he posits socially necessary labor time — which is to say, he shows that productive activity is carried on under the conditions that are established generally in society and not directly arising from the decisions of the individual. The individual’s productive activity is, therefore, being constantly coerced by conditions that are entirely beyond her control, which impose on her the requirement to constantly reduce the amount of time she spends on the production of her commodity.
The conclusion Marx drew from his investigation, briefly stated, was this: If there is no connection between the socially necessary labor time of society and the prices of the commodities produced during this socially necessary labor time, the pricing mechanism could not effect a coordination of all of the millions of individual acts of production within society. We already know these millions of individual acts are not planned and consciously coordinated by the members of society; if we presume these millions of individual labor times are regulated naturally by prices, we have to accept the idea that price itself is doing what people are not, namely effecting regulation of millions of different labor times. So while, in the real world, a commodity requires so much definite time to produce, how much of this time is considered necessary, and how many of the items are to be produced, is determined by society in general, and this value is imposed on the individual in the very real form of the commodity’s price.
When too few of the commodity is produced, its price rises signaling a need to increase the amount of social labor expended on production of the commodity, when to many of the commodity is produced, its price falls signaling a need to reduce the labor time expended on production of the commodity. On the other hand, if the average amount of time need to produce to commodity falls, its price falls signaling a need to reduce the labor time expended on production of the commodity; and, if the average amount of time need to produce to commodity increases, its price increases signaling a need to increase the labor time expended on production of the commodity. This is not rocket science, folks. It is just common sense.
Capital and value
Capital introduces an additional complexity to what I have stated above: with capital the aim of production is not to produce the commodity, but to produce a profit on production of the commodity. The capitalist doesn’t care about the commodity in the least, he is totally focused on seeing that he ends with more gold in his pocket than he began with. To do this he begins with so much money-capital, which he lays out on labor power and the other necessities demanded by production of the commodity. Since he is bound by the same laws that govern production generally, he can only realize a profit if the labor power he purchases can produce more value than it costs for him to purchase it, that is if he can realize, in addition to the money-capital he advanced, this same quantity of money-capital plus an additional sum of money-capital.
However, there is a problem here: when we say the capitalist aims to produce more value than he laid out at the beginning, we are also saying the capitalist aims to produce more socially necessary labor time than is expended in the production process. Since, at every point in the development of Capital, the existing value of labor power in the form of wages is given, the new value created must result in still more labor power in the form of additional wages — the number of laborers under the direction of one capitalist constantly expands, fed by the millions of smaller, less productive, capitalists and property owners who a driven to ruin by the advance of Capital itself.
For our purpose in understanding inflation, what is important to note is that the very process of capitalist production itself presupposes that value, or, socially necessary labor time, exists in two contradictory forms: first, in the value of the wages paid out by the capitalist for labor power; and, second, in the form of additional value over these wages, which, having been newly created in the production process, can now reenter production as additional capital only if it is realized through sale. If we assume for purposes of this argument that the wages paid out are immediately realized by the existing mass of laborers in the form of food, clothing and shelter, we still have to consider how the additional sum of newly created value is realized.
Making a straight-line assumption for the sake of simplicity, this newly created value has to find a market beyond the existing social capital — i.e, it has to enlarge the market for the existing social capital. If this cannot be done, the newly created value cannot be realized, and further expansion of Capital cannot occur. The periodic crises when Capital momentarily out runs the conditions of its own process, is converted from its merely relative form into its absolute form as the capitalist can no longer realize profit on his production and ceases productive activity altogether — industry grounds to a halt, millions of laborers are idled, along ten of thousands of factories, prices of commodities collapse and lay unsold and the flows of money capital cease. While Capital presupposes the constant reduction of socially necessary labor time in the form of wages paid out, it simultaneously presupposes the expansion of socially necessary labor time in the form of additional wages for additional labor powers.
The contradiction inherent in value comes to the fore: to resume production socially necessary labor time must expand, but, since this socially necessary labor time is, in this example, limited to the wages paid out to the laborers, it can expand only on condition that wages increase. On the other hand, the increase in wages must reduce the profits of the capitalist, and the portion of existing socially necessary labor time that the capitalists claims as their rightful profits. Since, on no account are the capitalists willing to part with one additional cent in wages, they opt to maintain their profits by reducing wages still further; however, since this further reduction of wages only reduces still further socially necessary labor time, their actions only increase the problem. Wages are too high, yet, paradoxically, they are also too low.
Price and value reconsidered
Under the assumptions I am using of a very bare-bones description of the problem posed by the inherent contradiction in value, I need to sum up some of the characteristics of the contradiction. First, there is a contradiction between the actual labor time expended on the production of a commodity and the socially necessary labor time required for its production. Second, there is a contradiction between the value of the commodity itself — i.e., the socially necessary labor time expended on the production of a commodity — and the expression of the value in the form of the price of the commodity.
To these two already identified contradictions we must add a third: there is a contradiction between the price of the commodity denominated in units of the money and the socially necessary labor time required for the production of the object that serves as the money. While money denominates the price of a commodity, and thus express the value of the commodity, it does not necessarily follow that the money itself contains the same socially necessary labor time as is contained in the commodity. This much is already obvious, since prices fluctuate for innumerable reasons away from the value of the commodity, likewise this fluctuation is accompanied by corresponding fluctuations away from the socially necessary labor time contained in the money for equally innumerable reasons — for instance, a sudden discovery of a huge new source of gold which serves as the money, may force gold to exchange with commodities below its value for a time, which is to say, it takes a larger than “normal” quantity of gold to purchase a given commodity.
This is further complicated when we consider that gold was often not used directly in transactions, but substituted by a placeholder like paper money. In fact, Marx assumed that, for most transactions, gold was not even necessary even when it was formally designated as the money. The replacement of gold by paper tokens in circulation was entirely possible within certain limits. It was only a step from here for our economist to come up with the ‘brilliant’ idea that is didn’t matter what served as money. In this sophomoric reasoning, since money itself only played a token role when it served to facilitate transactions, anything could serve as money as long as it could fulfill this token role. The value of commodities could forthwith be expressed in units written down on paper or embedded in the dancing electrons on a computer terminal. As long as the State legally determined that these tokens were money, they could serve the role as effectively as any commodity money like gold.
This idea, although floating around in society for several decades, did not actually become the dominant view of money until conditions very much like those I described in the preceding section of the post burst into full bloom in the Great Depression. Those conditions brought all the contradictions inherent in value to the surface in a rather awesome fashion: to address the impasse created by the fact that wages were too high, and, at the same time too low; that socially necessary labor time in its wage form stood in complete contradiction with socially necessary labor time in its profit form; and, that, therefore, the value of commodities stood in direct conflict with the prices of commodities; within a short period of about five years every industrial nation devalued its currency and went off the gold standard. The contradictions inherent in value led society to sever the relation between value and price — not just in theory as previously, but in reality and throughout the World Market.
To be continued
Tags: capital, Civil Society, commodity, consumption, exchange, Federal Reserve, fiscal policy, gold, Gold Reserve Act of 1934, gold standard, inflation, monetary policy, negative rate of profit, prices, production, stupid economist tricks, value versus "real value"
I made the following points in the first part of this series:
- As regards the definition of inflation: The definition of inflation found in the Wikipedia entry is deficient because it assumes that the value of money is simply the reciprocal of the prices of commodities. This argument is a tautology which provides us with no real understanding of the problem of inflation. We are led to believe that inflation can be thought of as a rise in the price of commodities or, alternately, the depreciation of the “real value” of money. And, what is the “real value” of money? According to the economist, the “real value” of money is its purchasing power, i.e., the reciprocal of the price of the commodity. I will show why this definition of the depreciation of money is inadequate.
- Prices versus consumption: The Wikipedia definition is superficial, i.e., it is limited to generally rising prices. This only looks at the problem from the least important aspect of inflation, the increase in prices of commodities. But, if the amount of money in circulation is fixed, as it is more or less for each member of society, we can see also that inflation implies the reduced consumption of the mass of society — the impoverishment of society.
- Consumption versus production: Moreover, the Wikipedia definition of inflation only examines the effects of rising prices on consumption. Once we go beyond money as mere means of purchase and consider it as the money form of capital, i.e., once we leave the world of consumption and enter the world of production, we find that these rising prices act to reduce the profitability of productive economic activity. The depreciation of money acts to reduce the average rate of profit. It can be thought of as a negative rate of profit resulting from the depreciating purchasing power of money-capital over time.
- Money and demand: The Wikipedia’s explanation of the causes of inflation is nothing more than a tautology. First, the two causes identified as the cause of inflation: 1. an excess of the rate of growth of the money supply over the general rate of expansion of economic activity; and 2. the imbalance between the rate of expansion of demand for commodities over the rate of growth of the supply of commodities, resolves themselves into one and the same cause: the excess in the money-demand for commodities over the production of these commodities to satisfy this money-demand, or, alternately, the decline in the production of commodities relative to the money-demand for those commodities. Second, whenever we find that the rate of growth of the supply of commodities falling behind the rate of growth of the money-demand for these commodities, we cannot be speaking of imaginary demand — such as the human need created by a hungry belly — but “real” money-demand — i.e., a hungry belly with a wallet full of cash. The capitalist is not in the business of producing for people who imagine they are hungry, homeless, and naked, but only those who can prove they are hungry, homeless, and naked, by presenting him with sufficient cash to purchase food, shelter and clothing. On the other hand, money-demand is not limited to satisfying hungry bellies — it is still money-demand even if the demand to be satisfied is that of generals, national security agencies, or failed banksters. The authors of the entry discuss the imbalance of money-demand over the supply of commodities to satisfy this demand as if this is the entire story.
- Inflation as a policy: Only in the fourth paragraph does the Wikipedia entry hint at the most important characteristic of inflation: that it is not a naturally occurring economic malady — the result of actual processes arising from the production, exchange and consumption of commodities, but is a matter of Fascist State policy. Thus, only here do we find that it is the deliberate policy of the Fascist State to reduce the consumption power of society, its productive capacity, and to ensure a general and secular, i.e, chronic, inadequate supply of means of consumption in relation to the money-demand for those means of consumption — that the economic policy of the Fascist State is to maintain society in a condition of a wholly artificial scarcity.
The Fascist State as a mode of Capital’s own existence
Before we continue further we have to deal with the unstated assumption of the Wikipedia entry that Fascist State policy can be treated apart from and independent of the capitalist process of production and distribution. This notion, which is the standard thinking on all economic issues, and permeates the thinking not only of economists, but also of social revolutionaries and society generally, divides society into Civil Society, on the one hand, and the State, on the other. The fallacy of this sort of thinking is revealed whenever we investigate the causes of social maladies like inflation. We begin with the notion that inflation, poverty, hunger and scarcity arise solely from Civil Society and natural conditions, only to discover, under the capitalist mode of production, that, in addition to the invisible hand of the market, there is also the iron fist of the Fascist State — that the very real material conditions determining the capitalist mode of production have their ideal expression in State action.
Our picture of Capital is incomplete if we naively consider it a purely economic relation. For his part, Marx understood Capital as a social relation that permeated society — penetrating, reconstructing, reconstituting and revolutionizing the sum total of those relations, and, by these means, transforming society in its own image. It is clear from Moishe Postone’s work, “Time, Labor and Social Domination“, that this process, in Marx’s mind, was far more insidious — pernicious, subtle — than is generally understood even by Marxists — who never miss the opportunity to reduce his ideas to caricature — and most certainly by the outright opponents of his ideas, for whom most of his argument passes overhead cleanly and without effect.
In Marx’s theory, the State is not simply, nor even primarily, a sphere of politics; it is, itself, a mode of Capital’s own existence. In every stage of human development up to the present, the State has been inseparable from Civil Society, a mere part of society’s greater division of labor in the social act of production. In capitalist society, however, the State appears indifferent to Civil Society — aloof from it — and, it is under these conditions that Civil Society begins to imagine its own independent existence apart from, and in conflict with, the State. Although Civil Society is no more than a collection of petty interests in continuous conflict with its own very real, flesh and blood, communal interest, because this communal interest is not the starting point of individual activity, this communal interest arises as an abstraction, in the conception of a General Interest — e.g., the so-called “National Interest” — standing over against the individual’s very real material flesh and blood interest. This abstraction finds its ideal expression in the form of a State that is aloof and indifferent to the many and varied individual interests of society, and, only represents them in the abstract.
In Marx’s theory, I believe (and I stand to be corrected if I am wrong), this conflict between Civil Society and the State arises from the mutual conflict of all of these petty interests with each other that arises from their increasingly universal and all-sided competition, and because their innumerable separate activities are not subjected to their common control and direction. To really represent the General Interest of society, the State must be increasingly indifferent to the many petty interests that constitute Civil Society; yet, at the same time, it must be continually reconstituted by Civil Society in proportion as ever newer petty interests emerge.
Hence, the bewilderment of the progressive activist, who finds, despite all of her fulminating and effort to overturn a political regime that favors the “Rich”, the greater her effort, the more surely politics is subjugated to the interests of the very biggest owners of Property. Hence, also, the Tea Party activist, who rebels against the increasing encroachment of the State on her “constitutional liberties”, that the more forcefully she attempts to throw off this oppressive interference in her private commercial activities, the more completely the State dominates them. Hence, finally, the bizarre counsel of the economist, who, trying to solve the riddle of stagnating economic growth in capitalist society, recommends precisely the policy that only deepens this stagnation and destroys the productive capacity of society: Inflation.
Fascist State policy and Civil Society
The problem posed for us by Marx’s theory of social revolution is not why the Fascist State embarks on a policy that maintains society in a wholly artificial condition of scarcity. We can consider and discard any number of competing theories regarding the motives of the Fascist State: that is seeks power for its own sake; or, that it represents the interests of the very wealthiest members of society against the rest of society; or, that it is a body of individuals committed to a collectivist vision of society; or, that it is an instrument of a small group of men and women engaged in a far reaching conspiracy against society bound up with their financial interests, and/or their industrial interests, and/or their political, religious, ethnic, national, regional etc. interests. And, we can also advance any number of anecdotes and statistics to sustain any one or all of these arguments.
Yet, all of these arguments come down to one of two explanations: The Fascist State maintains society in a condition of scarcity for its own purpose, or, for the purposes of individual interests arising from the ongoing conflicts within Civil Society that proceed from whatever source among the innumerable divisions within Civil Society. Thus, even if we accept all of these competing motives as partial explanations for the policies of the Fascist state, all that these competing explanations can tell us is that both for its own interest and the interests of the whole of Civil Society, the Fascist State is engaged in the systematic destruction of the productive capacity of society, and an ongoing degradation of its consumption power — that, for any the reasons advanced (yet, at the same time, for all of them together) the Fascist State is deliberately and systematically trying to maintain a general condition of scarcity for mankind. From this point of view, all of the reasons for the policies of the Fascist State are merely accidental and transitory, as first one and then another reason for these policies come to the fore, and assumes in our mind the position of THE general explanation for Fascist State policies, beside which all the other explanations are merely specific expressions.
Thus, in one instance, the Tea Party activist can assert that the economic policies of the Fascist State result from the collectivist impulse of the Obama administration, while the progressive activist counters that these same policies result from the subjugation of the Fascist State to the interests of the rich; still another faction of society asserts that these very same policies result from the Fascist State’s aggressive foreign policy, while a fourth blames these policies for an alleged loss of national sovereignty and the conspiracy of men and women committed to a New World Order. What none of these competing theories can explain is why any of these alleged causes must lead to the systematic destruction of the productive capacity of society, and the ongoing degradation of its consumption power. All of these explanations cannot tell why, as the productivity of labor increases, the actual productive capacity of society must fall, and society remain trapped in conditions of scarcity.
We are thus forced to assume what Marx’s theory assumes:
First, under the capitalist mode of production the productivity of labor advances under conditions that tend toward what Marx called the absolute development of the productive forces of society — of the capacity to produce an entire world of commodities in a dazzling array and seemingly endless variety. This implies not an excess of money-demand, but its opposite: circumstances under which the production of commodities constantly run into the limited conditions of consumption, which threaten social production with a continuous crisis and wholesale ruin — not just a depression, but an unprecedented Great Depression erupting not in just one country, but throughout the whole of the World Market and at once — which brings society itself to the brink of catastrophe and threatens the very existence of Civil Society itself. And, under which, as a result of this crisis and the Hobbesian environment of universal competition it provokes, the actual flesh and blood material relations of Civil Society escape its control completely and take the form of the Fascist State — absolutely indifferent to it, absolutely hostile to it, and standing over against it as a totalitarian power existing for, and answerable to, no other mandate than its own logic.
Second, insofar as the productive capacity of society advances toward its absolute development, and, therefore, insofar as the onrush of a catastrophic collapse of existing society itself looms on the horizon, and Civil Society experiences this onrush with the level of horror appropriate to it — since it implies, above all, the abolition of all of the existing conditions that are its own premise, and, thus, sounds the death knell for Civil Society itself , and for the State — the State detaches itself completely from Civil Society, and, in turn, seeks to destroy the very productive forces that threaten the whole of existing society.
To be continued
Tags: Civil Society, commodity, consumption, exchange, Federal Reserve, fiscal policy, inflation, Mish Shedlock, Moishe Postone, monetary policy, negative rate of profit, prices, production, stupid economist tricks, value versus "real value"
With the clock counting down to an alleged shutdown of federal government operations, I thought I’d take this moment to discuss and inflation and Fascist State economic policy.
This is what Wikipedia has to say about inflation:
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.
Inflation’s effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions), and encouraging investment in non-monetary capital projects.
Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.
Today, most mainstream economists favor a low, steady rate of inflation. Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.
In the first paragraph, inflation is defined as a general rise in the price level of an economy over a period of time. The authors of the entry also state that this general rise in the price level can be thought of as the depreciation in the purchasing power of money — a decline in the “real value” of money. By “real value” the authors of the entry do not mean the classical notion of value — a measure of the socially necessary labor time contained in a certain quantity of dollars — but the ratio by which these dollars can be exchange for a commodity in the market, the reciprocal of which is the price of the commodity. The term “real value” is here only another way of saying the price of the good. Thus, as the price of the good increases, the “real value” of the money declines. It is a tautological statement, and therefore, meaningless.
By the same token, we could say that Bob is taller than Jane, because Jane is shorter than Bob. Nothing of the meanings of “taller” or “shorter” is revealed in the statement. Do these terms describe their respective heights, or weights, or skin tones, or education levels, etc. For someone who enters our conversation from the outside — for instance, a Martian — the meaning of the terms “taller” and “shorter” would essentially be undefined until we explain the concept of height. Similarly, when the economist employs the terms “price” and “value” in a discussion with us (economic Martians) he does not in the least clarify for us what inflation is. We can only walk away with the idea that rising prices and an increase in the number of dollars needed to purchase a commodity are the same thing — a piece of information we already had at the outset of the discussion.
Inflation as a fall in the consumption power of society
There is, however, a more important problem with the definition given in the Wikipedia entry. The authors state that inflation is a general rise in the price level in the economy. They are satisfied with this statement and pursue it no further. We are led to consider inflation from the point of view of the prices of commodities, or, alternately, the purchasing power of the money in our pocket with which we buy these commodities. When the prices of these commodities increase, we must part with a greater sum of dollars from our pocket to exchange for them. But, if the cash in our pockets is finite, the rise in the prices of commodities translates into a fall in the quantity of commodities we can purchase. In this sense, at least, the increase in prices is the same as our impoverishment. A conclusion the authors of this entry are rather reluctant to express.
We can, therefore, make the following statement:
In economics, inflation is a fall in the general level of consumption in an economy over a period of time. When the general consumption level falls, each commodity costs a larger amount of dollars. Consequently, inflation also reflects an erosion in the material living standard of a country – a general decrease in the availability of commodities per unit of dollars. An increase in the price of a commodity is, at the same time, the decrease in the availability of that commodity per unit of money. If the total sum of money in the pockets of the members of society is unchanged, inflation would be reflected in fewer commodities available for purchase in return for this total sum. We can define inflation in terms of prices, or we can define inflation in terms of the actual quantity of commodities available to be consumed by society.
If, 100 loaves of bread are available to be purchased at $1.00 per loaf, an inflation rate of ten percent can be reflected in the quantity of loaves available for purchase falling from 100 to 90; or, it can be reflected in the prices of each loaf rising from $1.00 to $1.10.
So, the question immediately arises: “Why are the prices of commodities rising”, or, alternately, “Why is the quantity of commodities available to society falling.” In the third paragraph of the entry, the authors put forward two different theories:
Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.
Here, the causes of inflation are divided into two: 1. High rates of inflation are said to be caused by excessive growth in the supply of money; and, 2. low rates of inflation are said to be caused either by increased demand for commodities relative to supply, or a decrease in the supply of commodities relative to demand. The division between these to causes is, of course, disingenuous. As Mish Shedlock has argued time and again, if we immediately doubled the amount of money in the bank accounts of every person in society, this mere doubling of their accounts would have no effect on prices unless their behavior changed: unless they took this additional money and actually pumped it into the economy by spending it. In this case, an increased supply of money is nothing more than a sudden increase in the demand for commodities due to a sudden increase in the amount of money everyone had to spend — an increase not in money, but in money-demand. As usual, the economist pretends to have an explanation for inflation that amounts to a tautology. Leaving aside the velocity of money, i.e., the frequency with which a dollar changes hands, there is no way to get an increase in demand unless there is also an increase in the amount of money available to express this demand. Prices do not increase because people suddenly desire more things, but because they have the means to buy those additional things.
But, at least the authors now admit inflation can also come about as a result of a contraction of the supply of commodities even if demand is unchanged. Rising prices can result either from a persistent increase in money-demand in excess of the supply of commodities, or, as we argued above, it can result from a fall in the availability of commodities even as money-demand for those commodities are unchanged — a fall in the real consumption power of society.
The real consumption power of society is only a function of the commodities available for it to consume and has nothing to do with the amount of money in the hands of individuals seeking to purchase those commodities. The amount of money individuals may have in their possession may double overnight, but unless this doubling is accompanied by a proportional doubling in the amounts of commodities available to be purchased, it has no effect on this real consumption power. Likewise, if the amount of commodities available for purchase by the members of society fall, and the amount of money in their possession is unchanged, the real consumption power of society will fall without any change in the amount of money in their wallets. Thus, the Federal Reserve Bank’s massive quantitative easing program and Washington’s equally massive federal fiscal deficits, despite creating trillions of dollars each year out of nothing, cannot increase the material consumption power of society, because this ex nihilo money creation does not in any way create more commodities..
While the demand for commodities in a capitalist economy can only be expressed in money-demand for those commodities, the supply of commodities to be purchased is determined only by production. Only production can increase the availability of commodities, and only this increase in commodities can increase the ability of society to consume. It is, therefore, impossible to understand inflation by referring only to the money-demand for the existing stock of commodities, we must also consider inflation and its effects on the actual production of these commodities.
Inflation or the Negative Rate of Profit
In relation to the price of a commodity inflation is expressed as a rise in the price of the commodity; in relation to the quantity of the commodity available to be purchased, inflation is expressed by fall in the quantity of commodities available to be purchased by a given sum of money-demand. But, how is this quantity of commodities determined? In a capitalist economy, production is determined by profit, and undertaken solely with the eye to realizing profit. However, profit is the rate of return on an investment of a given sum of capital. The capitalist lays out so many dollars of his capital in the form of labor power, and necessary materials of production, and he expects to realize this investment plus a certain rate of profit upon final sale of his commodities.
As we have shown in previous posts, if the capitalist advances $100 in labor power and the other necessities of production, and the average rate of profit is 10 percent. He expects to realize $110, or his original $100 plus a profit of $10. On the other hand, inflation during this same period reduces the purchasing power of his capital by ten percent, leaving the capitalist with little or no real return. He has advanced $100 with the expectation of realizing $110, but he has, in fact, only realized $100 of actual purchasing power. His capital, having nominally increased from $100 to $110, has actually remained unchanged in its purchasing power of $100 — despite his nominal success as a capitalist, he has realized no real profit on his investment. While the average rate of profit is nominally 10%, once we subtract the rate of inflation the real rate of profit is 0%.
While the consumer experiences inflation as a loss in purchasing power of her money, from the standpoint of the capitalist, inflation is a negative rate of profit. Since, he is an intelligent person who is not interested in beating his head against the wall of the Federal Reserve, and knows the Feds action will drive up the prices of commodities generally, our capitalist removes his capital from productive employment and uses it to speculate in the oil futures market. Thus, the productive capacity of society is reduced in proportion as inflation rages within the economy, and this loss of productive capacity reduces also the consumption power of society. Side by side with the increase in the prices of commodities, the availability of commodities shrinks; side by side with the falling productive capacity of society, the consumption power of society falls.
At this point you are scratching your head, because you notice in the fourth paragraph of the Wikipedia entry the following:
Today, most mainstream economists favor a low, steady rate of inflation. Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.
Could this be right? If, inflation, a general rise in the prices of commodities, expresses both the reduced capacity of society to produce and a reduction of its power to consume, why would economists advocate for “a low, steady rate of inflation”? Why would they advocate for policies that drives productive capital into the arms of speculators? Why would they advocate for policies that deliberately impoverish the mass of society?
These questions are, of course, deliberately misleading. For quite mischievous reasons, I am asking you to consider the issue from the standpoint of the economist, who, more than any other single profession in society, is constantly examining the problems of society through some completely bizarre lens that turns the whole of the world upside down. While we have seen thus far that the amount of money in the hands of society has absolutely no impact on its consumption power, and that this consumption power is solely a function of its productive capacity — its capacity to produce commodities for the satisfaction of human need, the economist, who sees the problem entirely from the perspective of money, tries to explain the consumption power of society with reference to a change in the given supply of money. While money has no role in the productive and consumption capacity of society, and only serves as a means of exchange — a necessary bridge between the act of production and the act of consumption — this bridge is turned by the economist into the entire explanation for both the progressive collapse of production and the progressive collapse of consumption.
The collapse of production and consumption — the growing impoverishment of society as a whole — becomes, through the eyes of the economist, a problem of price inflation.
To be continued
Tags: commodity, consumption, exchange, Federal Reserve, fiscal policy, inflation, Mish Shedlock, monetary policy, negative rate of profit, prices, production, stupid economist tricks, value versus "real value"