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
We have to change the terms of the debate on jobs and debt. We need to insist a job is nothing more than wage slavery and we don’t need Washington’s effort to create more of it by adding to this wage slavery even with more debt slavery. It is not like we have to argue existing jobs need to go away; why is Washington creating more of them, when existing hours can be reduced to solve the problem of unemployment rather than more debt?
2. Monetary Policy, or what happens when a hyperinflationary collapse of the dollar is NOT the worst possible outcome
The media is abuzz with speculation following the Federal reserves announcement of quantitative easing version 3.0. This version calls for the Federal Reserve to pour unlimited quantities of currency created out of nothing into the market, buying up worthless assets on a monthly basis to the tune of $40 billion per month. The result could be the printing of nearly a half trillion dollars in new, freshly produced, token money being forced into the economy every year until further notice.
The implications of this monetary insanity can be understood simply by reading the opinions of any number of economists and market watchers who are very delicately raising the spectre of a Zimbabwe style hyperinflation. Still subdued but growing talk of such an event has moved from the periphery of “financial advisers” and gold bugs into the mainstream argument of some pretty staid experienced players.
Take, for instance, a recent comment by Art Cashin, a veteran of the stock market who has probably seen every high risk moment in the market since well before Nixon closed the gold window in 1971, up to and including witnessing the market plunge 25% in a single day in 1987. Cashin oversees the management of more than $600 billion in assets and is not given to losing his head over every minor fluctuation in the S&P 500. A market crash is not Cashins concern, however — he fears hyperinflation. Cashin notes Weimar Republic hyperinflation did not burst out all at once, but was preloaded by continuous money printing that only made its way into the market over time:
“It (the inflationary spiral) was in fact delayed for a couple of years. But once it started, it could not be taken back. So here in the United States and in the European Union, there are very few, if any, signs of inflation because people are so concerned (that they are hoarding money).
“[You] will have to keep an eye on the velocity of money. Watch figures like, here in the United States, the M2 (figure), and see if it begins to grow through velocity, and get very cautious at that point. There are some potentially eerie parallels (today vs the Weimar Germany era). The United States trauma was unemployment and deflation (in the 30s), but in Germany in the 20s, it was money that ruined an entire society.”
Events are not yet to the point where Cashin is advising his clients to take their worthless fiat currency and sell it for gold, silver and other precious commodities, but he is suggesting there is such a heightened level of potential for a monetary catastrophe at present to warn people should begin to look for indicators of hyperinflation in the data:
“I think you are certainly at a ‘flashing yellow alert.’ You have in place a variety of things that could begin to react somewhat domino-like. As I said, there are measures and items that the listeners (and readers) can look for themselves. Look at, what is the growth in the money supply, M2? It comes out every week.
If [the M2 measure of the money supply] begins to grow rapidly, then the money that the Fed has created will be seen as moving through the system. That will create the high risk of accelerated inflation, and perhaps, God forbid, runaway inflation.”
Even if we discount Cashin’s argument as just another example of fringe hysteria, Zero Hedge recently explained, there are voices within the Federal Reserve’s own research department that echo Cashin’s argument:
Yes, it is ironic that the Fed is talking about “common sense”, we know. But the absolute punchline you will never hear admitted or discussed anywhere else, and the reason why the Fed can no longer even rely on its models is that…
Carlstrom et al. show that the Smets and Wouters model would predict an explosive inflation and output if the short-term interest rate were pegged at the ZLB (Zero Lower Bound) between eight and nine quarters. This is an unsettling finding given that the current horizon of forward guidance by the FOMC is of at least eight quarters.
In short: the Fed’s DSGE models fail when applied in real life, they are unable to lead to the desired outcome and can’t predict the outcome that does occur, and furthermore there is no way to test them except by enacting them in a way that consistently fails. But the kicker: the Fed’s own model predicts that if the Fed does what it is currently doing, the result would be “explosive inflation.”
You read that right: if Bernanke does what he not only intends to do but now has no choice but doing until the bitter end, the outcome is hyperinflation. Not our conclusion: that of Smets and Wouters, whoever they are.
And these are the people who are now in charge of everything.
Is there anything worse than a hyperinflation for capitalism?
The warnings by Cashin and the writers at Zero Hedge suggest Bernanke’s Federal Reserve is engaged in an extremely risky gamble on a policy that could lead to the dollar replacing Kleenex as the preferred method of catching sniffles during cold and flu season. I think it is safe to say the Fed would not be undertaking this gamble just to move unemployment a few points. A high risk gamble on this scale with the world’s reserve currency clearly hints what is at stake is likely much worse than a mere outburst of hyperinflation.
So what is worse than a hyperinflation of the dollar? What threat could there be to capitalism right now that risks reducing the dollar to a worthless piece of scrip with no purchasing power whatsoever? How about, a hyperdeflation, an inverse condition where all prices instead of going to infinity and beyond go to zero?
But there is a big problem with this argument: There is not a single recorded instance of hyperdeflation in history, we are told, and logically it cannot happen. Zero Hedge remarks on the question in a caustically titled post “The Monetary Endgame Score To Date: Hyperinflations: 56; Hyperdeflations: 0″:
We won’t waste our readers’ time with the details of all the 56 documented instances of hyperinflation in the modern, and not so modern, world. They can do so on their own by reading the attached CATO working paper by Hanke and Krus titled simply enough “World Hyperinflations.” Those who do read it will discover the details of how it happened to be that in post World War 2 Hungary the equivalent daily inflation rate of 207%, the highest ever recorded, led to a price doubling every 15 hours, certainly one upping such well-known instance of CTRL-P abandon as Zimbabwe (24.7 hours) and Weimar Germany (a tortoise-like 3.70 days). This and much more. What we will point is that at no time in recorded history did a monetary regime end in “hyperdeflation.” In fact there is not one hyperdeflationary episode of note. Although, we are quite certain, that virtually all of the 56 and counting hyperinflations in the world, were at one point borderline hyperdeflationary. All it took was central planner stupidity to get the table below, and a paper with the abovementioned title instead of “World Hyperdeflations.”
The Cato Institute’s paper presents a very powerful empirical argument against the case for deflation and hyperdeflation. Unfortunately it rests entirely on two fallacies that are hidden in its very title: First, hyperdeflation has nothing to do with the fate of any fiat currency, even the world reserve currency, the US dollar. A hyperdeflation is not the death of any particular currency nor even a series of currency collapses — it is the death of money itself.
The second fallacy in the Cato paper will take a bit longer to explain and once explained will show why it is so important to every anarchist, libertarian and Marxist.
Can there be such a thing as a hyperdeflation?
A hyperdeflation might possibly be defined as a situation where prices of commodities declined even as the supply of money increased. As the Cato Institute paper explains — there is no recorded instance of a hyper-deflation in the historical record. Of course, mild and even very severe deflations did occur several times up until the Great Depression; but history has many more examples of hyperinflations, as the Cato paper argues.
The problem with the Cato paper, however, is that its argument rests on the “quantity theory of money” fallacy — which according the Wikipedia states “that money supply has a direct, proportional relationship with the price level.” Which is to say, the Federal Reserve can force prices to increase — create inflation — if it increases the quantity of currency in circulation. In fact, this theory is wrong. The prices of commodities do not depend on the quantity of money in circulation, but on the quantity of socially necessary labor time required for their production. And here, at least theoretically, the case against hyper-deflation falls apart.
Here is the problem at the end of capitalism’s life: If the Marxist writers Moishe Postone and Robert Kurz are correct, the socially necessary labor time of commodities now have two distinct and contradictory measures: its labor time as a simple commodity and its labor time as a capitalistically produced commodity — yielding two quite different potential prices.
To put this in simpler terms, the price paid in a store for a typical commodity like an iPhone is mostly a reflection of the costs of economically wasted labor. The iPhone itself takes very little direct labor to produce, but, if its production is to be profitable, the accumulated costs of waste within the economy requires a massive mark up in the price you pay for it at the checkout counter.
What is this waste? Well, one source is the overhead created by the costly burden of government at present. Since the government doesn’t produce anything, its entire cost is borne by the rest of society. If, for instance, government accounts for about 50% of GDP, this means every product has a 100% markup just to pay for the operating expense of federal, state and local government. So about half the cost of your iPhone goes to cover things like drone attacks on Afghanistan civilians or corn subsidies to agribusiness. These cost don’t appear anywhere unless it comes directly from your wages in taxes, but even in this case the costs must be passed on in commodity circulation and will accumulate there in the costs of each commodity.
So every commodity essentially has two prices: the one that you pay at the checkout counter, which includes all the wasted economic activity in society, and the other, hidden, true price, which is the actual direct cost of producing to commodity. Surprisingly, this latter price is now only a negligible fraction of the total price of an iPhone, a pair of shoes, or even an automobile — the overwhelming bulk of the price of every product you buy consists of the hidden costs of economic waste within society that has accumulated over the past eighty years.
This is why, as I discussed in part one of this series, it now takes as much as seven dollars of debt, or even more, to create a single dollar of wages through fascist state economic policies designed to create jobs. Simply put, this internal discordance in the price of every commodity is a hyperdeflation weapon of mass destruction just waiting for a triggering event. What is making the Federal Reserve risk even the total collapse of the dollar on an insane gamble is the fact that this implosion can be triggered by the mildest hint of deflation. To prevent this event, the Federal Reserve must restart the failed system of debt accumulation that crashed in the financial meltdown of 2008.
Anarchists, libertarians and Marxists have a chance to put sand in the gears of the fascist state and bring it down along with the entire mode of production. All it requires is for us to change the debate over jobs and debt — opposing both Federal Reserve monetary and Washington fiscal policy aimed at expanding still further the system of wage slavery through policies designed to promote economic waste and debt.
But we can do this only if we are willing to take capital and the state head on by demanding an immediate reduction in hours of work until everyone who wants to work has a job, along with the elimination of all public and private debts, and abolition of all taxes.
Tags: Barack Obama, budget deficit, Depression, economic policy, Employment, Federal Reserve, financial crisis, political-economy, shorter work time, shorter work week, stupid economist tricks, Stupid progressive tricks, stupid Washington tricks, The Economy, Trickle Down Economics, unemployment, Wall Street
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
We have to change the terms of the debate on jobs and debt. We need to insist a job is nothing more than wage slavery and we don’t need Washington’s effort to create more of it adding to this wage slavery even with more debt slavery. It is not like we have to argue existing jobs need to go away; why is Washington creating more of them, when existing hours can be reduced to solve the problem of unemployment rather than more debt?
1. Fiscal policy, or how to create one job on Main Street by borrowing five jobs from Wall Street
In 2011, a congressman made the argument that Obama’s stimulus program had produced jobs at the cost of $278,000 per job. Although the charge was nothing new, it made its rounds on the conservative GOP talking points circuit, and even ended up in the congressional record. This number, of course, was so outrageous by any measure of efficiency that it had to be analyzed by what we might call “clear thinking persons with no agenda”, i.e., the news media.
One “news source” in particular known for its ability to vet these things is PolitiFact.com, and it went after the congressman’s charge. PolitiFact established that the congressman, a Republican, was deliberately distorting facts against Obama’s stimulus program.
At $666 billion, the bill was estimated by the White house to have “saved or created” between 2.4 to 3.6 million jobs. What the congressman did, was employ the low end of the number of jobs “created or saved” and apply it to the total of the bill.
The Obama administration responded that this was unfair, since the money went to more than just creating jobs, it also invested in infrastructure, energy, education etc. Which is an odd response, since obviously the administration included those “investments” in its estimate of jobs “created or saved”. The Associated Press made the further argument that,
“Any cost-per-job figure pays not just for the worker, but for the material, supplies and that workers’ output — a portion of a road paved, patients treated in a health clinic, goods shipped from a factory floor, railroad tracks laid,”
So what AP is stating is that a job created by economic stimulus must account not just for the labor power directly expended, but also the constant capital used up in the course of this expenditure. But then AP performs an almost unnoticed sleight of hand and counts everything twice. So we count the money spent to build a road in terms of wages and materials, then we count the road as a finished product; we count the wages and material employed to build a clinic, and then we count the clinic as an operating concern.
Once we remove the misleading double counting from our calculation in the argument in the AP version of this story, how this differed from what the congressman said, is unclear. Indeed his criticism was later refined by one conservative media outlet this way:
“He says he never said that $278,000 per job went to salaries, but ‘rather that each job has cost taxpayers $278,000.’”
Five dollars of debt to produce one dollar of wages
So what the worker actually receives of the $278,000 spent to create her job is one thing, and the cost of creating that job is another. Assuming the worker received an average hourly wage of around $19, she would have an annual wage of $38,760, minus taxes. But to receive this $38,760 minus taxes in wages, the taxpayer must pony up $278,000 minus the taxes paid by the worker.
Which is to say, it roughly takes about 7 dollars of spending to create 1 dollar worth of wages using fiscal stimulus. Moreover, this fiscal stimulus must be newly created money, through debt, and, therefore, created out of nothing. If we take the administrations preferred figure of $185,000 per job, this still amounts to 5 dollars of new debt to produce 1 dollar of wages.
Between the GOP and the Democrats, then, there is agreement that it takes somewhere between $5 and $7 of debt to create $1 of wages. For some reason, despite the general validity of the congressman’s claim, PolitiFact.com decided it was not true on a technicality:
“Contrary to Dewhurst’s statement, the cited cost-per-job figure was not aired by the Obama administration. At bottom, his statement leaves the misimpression that the money went solely for jobs rather than a range of projects and programs, including tax breaks. We rate his claim False.”
There is, of course, another way of looking at this from the point of view of Wall Street banksters. From their point of view, it only takes 1 dollar of wages to create 5 dollars of new debt. Since the banksters are only interested in the accumulation of debt, which sits on his book as an asset, this is a fine ratio.
If the fascist state wants to create one job, it has to borrow the equivalent of five jobs to create this one job. The accumulation of the public debt outruns the income of the members of society who must eventually pay off the debt with their income. For every dollar they get in increased income, their debt obligation increases by five dollars. They must work to pay off this debt, requiring a further extension of wage slavery beyond what is required just to satisfy their needs.
Since after the housing market meltdown citizens can no longer be relied upon to accumulate this debt on their own (they have all become subprime borrowers) the state now takes on this obligation on their behalf, and raises the funds to service it by slashing their retirement and health benefits, reducing their access to public services like education, and inflating the prices of commodities by depreciating the currency.
This is how the scam works, folks!
You vote for Obama and the Democrats, and they mortgage your life and labor to banksters. They call this mortgaging of your life “progressive fiscal policy”, and sell it to you as a benefit.
However, since the congressman hails from the GOP, an avowed political opponent of the democrat president, he failed to add this additional fact: The argument does not change if, instead of democrat spending, we substitute GOP tax cuts, except that tax cuts are even more inefficient at “creating jobs” than fiscal spending. With GOP tax cuts, as the research suggest, the actual relation between the debt accumulated and the jobs created is aimless and dispersed and rather a bit more difficult to assess. Rather than aiming at some specific form of wage slavery as the democrats do, GOP tax cuts aim solely at subsidizing all wage slavery.
Tax cuts only have some definite targeted effect to the extent they increase the deficit and the flows of state expenditures into the coffers of banksters. While both spending and tax cuts result in a massive expansion of the public debt, in general, the less targeted the accumulation of the public debt, the more it directly favors only the banksters, who, in any case, underwrite this debt. The question is only one of degree, not result.
With democrat spending, the accumulation of debt takes a specific form — a road, a school, or an industry. It is targeted, and, therefore, can be more precisely applied, no matter that is still wasteful. What’s more, as Democrats and Republicans alike already know, the produced product can now be renamed the Obama Bridge-Tunnel Highway to Nowhere, or the Obama Elementary School, or the Obama Green Energy Research Park, or, as is always inevitable, no matter which party incurs the debt, the USS Obama.
If the outrageous cost of creating unnecessary jobs by fiscal policy is staggering, just wait until I next explain what knowledgeable insiders are saying about the cost of the Federal Reserve’s monetary policy.
Tags: Barack Obama, budget deficit, Depression, economic policy, Employment, Federal Reserve, financial crisis, political-economy, shorter work week, stupid economist tricks, Stupid progressive tricks, stupid Washington tricks, The Economy, Trickle Down Economics, unemployment, Wall Street
Since Occupy Wall Street appears to be undertaking a concerted push toward addressing the growing debt servitude of the mass of working families to Wall Street banksters, I thought it might be interesting to understand how the Federal Reserve is now doubling down on a policy of manufacturing an even greater debt burden for working families under the guise of stimulating the economy.
Comments and suggestions for improvement to this post are welcomed.
Tags: Bailout, debt, Depression, economic collapse, economics, fascist state economic policy, Federal Reserve, Finance, financial crisis, Hyman Minsky, inflation, international financial system, Krugman, monetary policy, political-economy, qe3, quantitative easing, Quantitative easing and debt, stupid economist tricks, Wall Street Crisis, william white
I 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 want to recommend everyone read John Weeks’ paper, “The theoretical and empirical credibility of commodity money“, because he presents a key to the analysis of neoclassical economic theory that unlocks its inner logic. I missed the juicy goodness of his argument in my first read because I have an aversion to mixing math with social criticism. However, in his math Weeks uncover why money is not a commodity-money in neoclassical theory, and why it cannot be a commodity-money.
Weeks tries to make sense of a troubling rejection by neoclassical economic theory to admit to the obvious internal consistency of Marx’s commodity-money theory:
Th[e] theoretical superiority of commodity-based monetary theory has had little practical impact because of a perceived empirical absurdity of the commodity money hypothesis.
I came to my understanding of fascist state issued fiat money based on one closely held idea that neoclassical economics is not irrational, capitalism is. Yes, capitalism is as irrational as it has been declared by Marxists to be, however no one but an idiot would buy into the neoclassical argument unless it made sense in the context of fascist state economic policy. Since capitalism itself is irrational, a rational person looks like an idiot when he buys into its propositions; on the other hand, accepting the irrationality of capitalist relations of production as the basis for formulating fascist state economic policy is rational.
Tags: Andrew Kliman, Bailout, commodity money, Depression, economic collapse, economic policy, ex nihilo currency, ex nihilo money creation, Federal Reserve, financial crisis, Fred Moseley, Frederick Engels, Henry Paulson, Jonh Weeks, Karl Marx, Marxism, MELT, monetary policy, neoclassical economics, noeclassical money theory, otma, stupid economist tricks, The Commune, Wall Street Crisis
(Or, more importantly, why should anarchists, libertarians and Marxists be as well)
So, has any reader of this blog heard that economists have conceded Marx was right after all? Have you at any time during the past 40 years heard an economist admit that Marx was correct in his transformation argument? I am really confused by this, because although Paul A. Samuelson declared Marx’s labor theory of value irrelevant in 1971, it is still being studied by BIS economists today. If I told you Marx’s theory was being studied by economists because Samuelson was a bald-face liar and a practiced dissembler, you would probably just yawn.
Of course, he was lying — he’s an economist. Economists are paid to lie and distort reality. They are employed by Washington not to explain economic processes, but to obscure them. To call an economist a bald-face liar, is simply to state he is breathing — nothing more.
But, to understand why Samuelson was lying, and why it was necessary that his lie stand unchallenged for forty years, we have to figure out the problem posed by Marx’s so-called “transformation problem”.
Marx’s transformation problem could be called the “paradox of capitalist price”, and we could state it thus:
Simple commodity price is an expression of the value of the commodity, but capitalist profit is the expression of surplus value wrung from labor power. To realize the surplus value wrung from the worker, the realized price of the commodity in the market has to include both the quantity of value created when it was produced plus a quantity of surplus value wrung from the unpaid labor time of the worker — capitalist price is the cost of producing the commodity plus the capitalist’s profit.
However, in the classical labor theory of value, the price of the commodity can only express the value of the commodity alone, not surplus value. Thus, for the price of the commodity to include both its value and a quantity of surplus value wrung from the worker, the capitalist price of the commodity must, of necessity, exceed the value of the commodity. The law of value is thus violated by the realization of capitalist surplus value — capitalist prices of commodities must always exceed the socially necessary labor time required to produce them.
The realization of capitalist profit violates the basic rule of classical economic theory: equal exchange of values in the market — but, as we shall see, this is far from a merely theoretical violation.
Now, Marx provides a number of caveats that work to stabilize the capitalist process of production — he called them “countervailing tendencies”, and they include things like the export of capital, etc. If we ignore all of these countervailing tendencies, however, the result is that prices of commodities must rise above their values, or alternatively money must exchange for these commodities below its value. (By money, I mean here only commodity money, i.e., gold or some other metal.)
What must occur when this happens is that money fails to circulate — the economy experiences a so-called credit, or financial, crisis. So, Marx’s labor theory of value explains why the dollar was debased in 1933 by the Roosevelt administration. It explains why your currency today is worthless pieces of paper or dancing electrons on a computer terminal. Marx’s transformation predicts and explains the debasement of the dollar and all other currencies on the planet.
Given this, how does Samuelson say Marx’s theory has no market predictive power? Because he was an economist — not a scientist, but a propagandist on behalf of the fascist state. I thought we already answered this — are you paying attention?
Eventually, Marx’s labor theory of value stated, gold could no longer serve as money because its function as measure of value conflicted with realization of the surplus value wrung from you — the unpaid labor time you work in addition to the value of your wages. At a certain point, the realization of surplus value — converting this surplus labor into profits — becomes incompatible with commodity money. Prices can only increase to reflect the average rate of profit if the currency is removed from the gold standard.
Samuelson once famously declared Marx’s theory could not explain the American and European economies between 1937 and 1971 — but, I just did, so fuck Samuelson!
Moreover, Marx’s transformation states you now work as many as 36 more hours per week than is necessary. The labor theory of value shows 90 percent of the current work week is being performed solely to maintain the rate of profit. Another way to understand this: essentially the labor time that is necessary under a regime of capitalist prices is about ten-fold that needed if capitalism is abolished.
On the other hand, maintaining such a long work week is the sole cause of inflation in our economy — it is labor wasted on a vast scale. This is why in this crisis the sole concern of Washington has been to maintain or increase the rate of inflation. The conversion of surplus value into profits demands the constant increase in the total hours of labor by the working class. While the unpaid labor time of the working class is the sole source of surplus value, the realization of this surplus requires still more unpaid labor time.
Based on the above, we can make four general statements — which can be empirically substantiated — about the implications of Marx’s labor theory of value and the paradox of capitalist prices. If these turn out to be true, Marx’s theory is vindicated and anti-statists have a weapon with which to change the terms of political debate.
If Marx is right, we should be able to prove:
- prices have generally increased faster than value for the past 40 years — this implies not simply that there was inflation, but that this inflation did not in any way result from an increase in the value of commodities, but increased despite a general decline in the value of commodities.
- total hours of work have increased faster than was socially necessary for the past 40 years — this implies the additional hours of work per person did not result from any cause necessary from the standpoint of social needs, but despite growing social needs.
- total employment has increased faster than productive employment in the past 40 years — this implies the employment of labor has become less efficient over time,despite increased addition of labor saving techniques to production. It also suggests growth has been in those part of the economy where productivity is impossible to measure.
- total output has increased faster than total wages in the past 40 years — this implies output has increased most rapidly in precisely those commodities that do not enter into the consumption of the working class.
Basically, these four general statements come down to one thing with regards to the great mass of society: In the past 40 years, people have had to work more hours, and more of them have been forced to work, even as they have become poorer. We should, in other words, be able to demonstrate beyond question that labor no longer adds any value to the economy, and the increase in output, in hours of work, and in additional jobs, does not increase the living standards of the great mass of society. The more work performed, the greater the increase in poverty.
The “paradox of capitalist price” is the paradox of more work for less real income. The paradox suggests only those measures which reduce the size of government can increase the living standards of the mass of working people. Of course, because, this argument is counter-intuitive — since, theory is only necessary when things are not as commonsense suggests they should be — making this argument requires it be buttressed with considerable empirical support from the anti-statist community.
Moreover, Marx’s labor theory of value has an additional aspect which recommends it even over what I just stated. Since, in Marx’s labor theory of value, socially necessary labor time is the material barrier to the realization of a classless, stateless society — which has been the avowed aim of communists for nearly two hundred years — his theory is also the concrete measure of the extent to which the productive capacity of society has developed to make this aim a realistic possibility. Contained in the labor theory of value is also the material measure of the possibility of society to immediately achieve a stateless and classless society on the basis of the principle of “each according to his need.”
I think every anarchist, libertarian and Marxist should understand Marx’s transformation of surplus value into profits and the paradox of capitalist prices, because in it is the entire argument against the existing state, and all the ugly mess bound up with it.
Tags: bank for international settlements, bieri, Bohm-Bawerk, Depression, economic collapse, economic policy, Federal Reserve, financial crisis, great depression, international financial system, Karl Marx, labor theory, monetary policy, necessary labor, Paul A. Samuelson, political-economy, recession, stupid economist tricks, transformation problem, unemployment, Wall Street Crisis, werner sombart
In reality, there was nothing in Bohm-Bawerk’s argument to be disproved. Bohm-Bawerk had indeed cited the essential contradiction at the core of capitalism. His problem, however, was to imagine the contradiction to be a defect of Marx’s theory, and not a fatal flaw laying at the heart of the capitalist mode of production itself.”
Bohm-Bawerk had inadvertently confirmed the rather grim future arrived at by Marx’s theory: Capitalism would kill the so-called free market, and in so doing, would destroy itself. It was, as Marx argued, creating its own gravediggers, a mass of directly social laborers who did not need it, and would see it as an impediment to their very survival, owing to obstacles it put in the way of its own operation.
By the 1970s, economists finally were forced to acknowledge there was in fact no inconsistency in Marx’s argument. Marx had, just as Bohm-Bawerk accused him, arrived at a theoretical description for why prices, although resting on the socially necessary labor time required to produce commodities, nevertheless appeared to reflect the prices of production of these commodities and not their labor times. It was not, as Werner Sombart feared, that from Marx’s labor theory of value “emerges a ‘quite ordinary’ theory of cost of production”, but precisely that Marx’s theory predicted from the first that the value of commodities must appear in the form of prices of production.
Moreover, Marx had demonstrated his proof almost in real time, so to speak, in front of his audience in a painstakingly detailed series of volumes — subject to the critical purview of his opponents. He had, as it were, made the elephant in the room — socially necessary labor time — disappear before the disbelieving eyes of his skeptical audience. It was a performance so dramatic and unprecedented, it took decades for the skeptics even to figure out what they had just witnessed with their own eyes.
The acknowledgement of Marx’s triumph took the form of a paper by Paul A. Samuelson, and was couched in the form of the complaint echoing that leveled against Marx by Sombart, as previously quoted by Bohm-Bawerk :
“…if I have in the end to explain the profits by the cost of production, wherefore the whole cumbrous apparatus of the theories of value and surplus value?”
Taking a cue from Sombart, Samuelson, in a paper titled “Understanding the Marxian Notion of Exploitation: A summary of the So-Called Transformation Problem Between Marxian Values and Competitive Prices”, introduced his so-called erasure method arguing,
It is well understood that Karl Marx’s model in Volume I of Capital (in which the “values” of goods are proportional — albeit not equal — to the labor embodied directly and indirectly in the goods) differs systematically from Marx’s model in Volume III of Capital, in which actual competitive “prices” are relatively lowest for those goods of highest direct-labor intensity and highest for those goods of low labor intensity (or, in Marxian terminology, for those with highest “organic composition of capital”). Critics of Marxian economics have tended to regard the Volume III model as a return to conventional economic theory, and a belated, less-than-frank admission that the novel analysis of Volume I — the calculation of “equal rates of surplus value” and of “values” — was all an unnecessary and sterile muddle.’
Samuelson gave a simple straightforward explanation of his “erasure method”:
I should perhaps explain in the beginning why the words “so-called transformation problem” appear in the title. As the present survey shows, better descriptive words than “the transformation problem” would be provided by “the problem of comparing and contrasting the mutually-exclusive alternatives of `values’ and `prices’.” For when you cut through the maze of algebra and come to understand what is going on, you discover that the “transformation algorithm” is precisely of the following form: “Contemplate two alternative and discordant systems. Write down one. Now transform by taking an eraser and rubbing it out. Then fill in the other one. Voila!
For all his genius, Samuelson argued, Marx had produced a theory which offered no greater insight into the social process of production than was already present in the form of mainstream economics. It could, for this reason, be entirely ignored.
Ignored also, however, would be the entire point of Marx’s “unnecessary and sterile” detour: namely, to demonstrate in comprehensive and theoretically ironclad fashion why the capitalism mode of production is doomed.
This only deepens the mystery of David Bieri’s interest in a theory routinely dismissed by economists as, at best, a vestigial remnant of classical political-economy. Why would this former bureaucrat of the Bank for International Settlements still be reviewing an obscure technical problem of a long dead theory?
Tags: bank for international settlements, bieri, Depression, economic collapse, economic policy, Federal Reserve, financial crisis, great depression, international financial system, Karl Marx, monetary policy, Paul A. Samuelson, political-economy, recession, stupid economist tricks, transformation problem, unemployment, Wall Street Crisis
In the previous blog post, I argued that in each of the three great capitalist catastrophes of the 19th and 20th Centuries — the Long Depression, the Great Depression and the Great Stagflation — economists scurried to bone up on Marx in an effort to understand practical problems of state economic policy confronting them at the time.
Naturally, the connection between these catastrophes and interest in Marx intrigued me, since this guy Bieri is now interested as well. If Bieri were just another Marxian economist I could understand his interest but his connection to the BIS and Bankers Trust, London intrigued me. Bankers Trust, one of the many institutions with which Bieri has been associated, is not exactly your typical local community credit union. It was up to its neck in the dirty dealings that led to financial crisis, and has long been implicated with equally shady dealings in the market in general. Here is what Wikipedia has to say about it:
“In 1995, litigation by two major corporate clients against Bankers Trust shed light on the market for over-the-counter derivatives. Bankers Trust employees were found to have repeatedly provided customers with incorrect valuations of their derivative exposures. The head of the US Commodity Futures Trading Commission (CFTC) during this time was later interviewed by Frontline in October 2009: “The only way the CFTC found out about the Bankers Trust fraud was because Procter & Gamble, and others, filed suit. There was no record keeping requirement imposed on participants in the market. There was no reporting. We had no information.” -Brooksley Born, US CFTC Chair, 1996-’99.
Several Bankers Trust brokers were caught on tape remarking that their client [Gibson Greetings and P&G, respectively] would not be able to understand what they were doing in reference to derivatives contracts sold in 1993. As part of their legal case against Bankers Trust, Procter & Gamble (P&G) “discovered secret telephone recordings between brokers at Bankers Trust, where ‘one employee described the business as ‘a wet dream,’ … another Bankers Trust employee said, ‘…we set ‘em up.”
Perhaps I am just being a tad paranoid, but when a guy with these kinds of connections starts sniffing around dusty old volumes of Capital just before the outbreak of the financial crisis of 2008, I begin to wonder what’s up.
But, I’m getting ahead of myself, am I not? I have not yet even explained what all the fuss is about. This tale begins with a little known simpleton scribbler, whose name is probably unfamiliar to anyone outside of the field of economics: Eugen von Bohm-Bawerk.
Tags: bank for international settlements, bank of international settlement, bieri, Depression, economic collapse, economic policy, Federal Reserve, financial crisis, great depression, international financial system, Karl Marx, london school of economics, monetary policy, political-economy, recession, stupid economist tricks, transformation problem, unemployment, Wall Street Crisis
I’m reading, “The Transformation Problem: A Tale of Two Interpretations”, by David Bieri.
According to his profile,
David studied economics at the London School of Economics and international finance at the University of Durham (UK). In 2006, he started his Ph.D. studies in SPIA.
From 1999 until 2006, David held various senior positions at the Bank for International Settlements, most recently as the Adviser to the General Manager and CEO. From 2002 to 2004, he held the position of Head of Business Development in which capacity he was responsible for new financial products and services and reserve management advisory for central banks. From 2004 to 2005, David worked as an economist in the BIS’ Monetary & Economics Department.
Prior to joining the BIS, David worked as a high-yield analyst at Banker’s Trust in London and in fixed-income syndication at UBS in Zurich.
What caught my attention is the notable resume of this author, which is quite unlike that of the typical Marxian economist. High-yield analyst, central bank bureaucrat, mainstream economist? This is not the sort of person you will find at your local Occupy campsite.
Why, I wondered, is the Bank of International Settlement interested in an obscure technical problem of Marx’s theory? So, I decided to give the paper a read.
Tags: Depression, economic collapse, economic policy, Federal Reserve, financial crisis, great depression, international financial system, Karl Marx, monetary policy, political-economy, recession, stupid economist tricks, unemployment, Wall Street Crisis
This is my final installment on the hyperinflationists section of theories of the current crisis for now. As I find in any good examination of a theory out there, I come away from this one with a better understanding of some of the problems of capitalism under conditions of absolute over-accumulation. The hyperinflationist argument forced me to confront several problems from the standpoint of the law of value, including, world market prices versus existing prices; ex nihilo currency and price behavior; definitions of price deflation, inflation and hyperinflation; definitions of depressions and recessions; the purchasing power of ex nihilo currency; and the rivalry between the monetary policies of the various nations states in relation to the Fascist State.
One of my conclusions from this examination is that FOFOA, properly understood, should not be in the hyperinflationist camp. I have no idea why he is advocating for dollar hyperinflation, since he, more than any other writer in the hyperinflationist camp, realizes the relationship between the purchasing power of an ex nihilo currency and the circulation of commodities. In 2010, he wrote:
Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero. This is backwardation!
Fekete says backwardation is when “zero [gold] supply confronts infinite [dollar] demand.” I am saying it is when “infinite supply of dollars confronts zero demand from real, physical gold… in the necessary VOLUME.” So what’s the difference? Viewed this way, can anyone show me how we are not there right now? And I’m not talking about your local gold dealer bidding on your $1,200 with his gold coin. I’m talking about Giant hoards of unencumbered physical gold the dollar NEEDS bids from.
Don’t let the term “backwardation” throw you. It is one of those insider terms among commodity traders, which, for our purpose, can be safely ignored, since it adds nothing to FOFOA’s essential argument. What FOFOA is saying in this excerpt is that the purchasing power of an ex nihilo currency rests on the willingness of gold owners to accept it as means of payment in exchange for their commodities. Unfortunately, FOFOA limits his argument to gold and misses the significance of his insight. This is because, for reasons previously mentioned, he articulates the viewpoint of the petty capitalist, who, unable to operate independently, must of necessity hand his meager wealth over to Wall Street investment banksters if it is to operate as capital, or, failing this, accept the depreciation of its dollar purchasing power, or, convert it to a hoard of useless gold.
There is, however, no reason to limit FOFOA’s insight to gold. Having been displaced in circulation as money, gold is simply another commodity whose particular use value is that it serve as a store of value. It is excellent in this regard, but broccoli is excellent as a vegetable, while gold is not. The specific quality of gold is its limited use as mainly a store of value, and, in this regard, it has few substitutes, while broccoli has many substitutes. This, however, should not blind us to the fact that it is now an ordinary commodity like any other. The true significance of FOFOA’s insight is that the purchasing power of any ex nihilo currency is directly a function of the willingness of commodity owners to accept it in exchange for their commodities.
If commodity owners are unwilling to accept an ex nihilo currency in exchange for their commodity, or prefer another currency in exchange for their commodity over that particular currency, its purchasing power will quickly fall toward zero — hyperinflation. This is precisely what happened in the case of the Zimbabwe dollar, which was undermined not only by the profligacy of the state, but also, by the preference of commodity owners for dollars and euros as a result of this profligacy. As FOFOA knows, the dollar is not likely to suffer such a fate, since its purchasing power rests on the fact that it is accepted for any commodity on the world market, and, consequently, is “undervalued” against all other ex nihilo currencies. Even if the purchasing power of a single ex nihilo dollar falls, the purchasing power of the total sum of dollars in circulation is not affected — it is still “undervalued” in relation to all other ex nihilo currencies, and must be undervalued as long as the total quantity of all other currencies is greater than zero.
By the same token, FOFOA’s insight demonstrates why, despite the constant depreciation of a single ex nihilo dollar, the sum of existing prices within the world market must be higher than world market prices denominated in dollars. No matter the depreciation of a single ex nihilo dollar, the sum of world market prices must fall toward world market prices denominated in dollars. Thus, the monetary policies of other nations is determined by the monetary policies of the Fascist State. Any nation wishing to pursue a so-called loose monetary policy, as Zimbabwe did, must find its ex nihilo currency displaced by dollars as commodity owners demand dollars in place of the national currency. On the other hand, the “tightening” of monetary policy by other nations cannot save these national currencies, since such “tightening” only leads them to the same fate as gold itself — they are withdrawn from circulation in a deflation of prices.
The end result, in either case, is the demonetization of all ex nihilo currencies except the dollar, and the equalization of the sum of prices within the world market with world market prices denominated in dollars. Hyperinflation and deflation do occur, but they occur in every other ex nihilo currency except the dollar.
From John Williams and FOFOA, I better understand the likely consequence of Fascist State economic policy — the front-loading of a series of events leading to the collapse of ex nihilo currencies by the fall of the sum of prices within the world market to the price level imposed by the dollar. This is because, as opposed to the deflationists, the hyperinflationists show the Fascist State will not sit by and let its dominant position be threatened by mere accounting identities. It will defend that position even at the expense of all other currencies. FOFOA is clearer on this point than Williams, but Williams implies it as well.
Paradoxically, FOFOA’s argument lends support, not for the hyperinflationist camp, but Modern Monetary Theory (MMT). His insight confirms the assumptions of the modern money theorists that the Fascist State faces no external constraint on its expenditures, since all ex nihilo currencies are only worthless dancing electrons on the computer terminals of central banks. The question raised by Fascist State expenditures is not its effect on national accounting balances, but the effect of these expenditures on other ex nihilo currencies. The accelerated spending of the Fascist State drives all of these currencies out of existence.
I look forward to examining this in a similar survey of modern money theory at another time.
Tags: Bailout, budget deficit, commodity money, CURRENT ACCOUNT DEFICIT, debt, deflation, Depression, economic collapse, economic policy, ex nihilo money, falling rate of profit, Federal Reserve, financial crisis, FOFOA, great depression, hyperinflation, inflation, international financial system, Karl Marx, law of value, Modern Monetary Theory, political-economy, recession, stupid economist tricks, The Economy, unemployment
In a recent post, Deflation or Hyperinflation, FOFOA begins the meat of his argument with investment adviser Rick Ackerman (who, until recently, predicted this present crisis will end in a debt deflation) by directly addressing Ackerman’s core deflationist argument, which originally was set forth in a 1976 book by C.V. Myers, The Coming Deflation:
My instincts concerning deflation were hard-wired in 1976 after reading C.V. Myers’ The Coming Deflation. The title was premature, as we now know, but the book’s core idea was as timeless and immutable as the Law of Gravity. Myers stated, with elegant simplicity, that “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” Inflationists and deflationists implicitly agree on this point — we are all ruinists at heart, as our readers will long since have surmised, and we differ only on the question of who, borrower or lender, will take the hit. As Myers made clear, however, someone will have to pay. If you understand this, then you understand why the dreadnought of real estate deflation, for one, will remain with us even if 30 million terminally afflicted homeowners leave their house keys in the mailbox. To repeat: We do not make debt disappear by walking away from it; someone will have to take the hit.
FOFOA’s response to the deflationist argument was both simple and fatal for the deflationist argument:
Yes, someone will pay. But there is a third option that is missing from Myers’ dictum. “The hit” can be socialized…
What the deflationist miss, says FOFOA, is that Washington will never accept the collapse of its failing economic mechanism. It will create whatever quantity of ex nihilo dollars it takes to socialize the losses of financial institutions, pension funds, etc. — even if this threatens the viability of global financial system and the dollar itself.
Like FOFOA, I want to begin this post by directly addressing the core argument of both camps, that this crisis must end either in the deflation or hyperinflation of dollar prices, or both. As FOFOA has argued, the present crisis will likely end in both hyperinflation and deflation at the same time. I agree with this analysis, but I disagree with his targets. Both hyperinflation and deflation of prices will occur, but they are likely to hit every ex nihilo currency on the planet except the dollar. If other currencies survive at all, they will do so only as boutique items marketed to private collectors, like their predecessor, gold. The deflationary/hyperinflationary hit will be not just socialized, but globalized as well.
Is this argument true? I don’t know for sure. To be honest, there are so many variables in the current crisis that any attempt to make a firm prediction must end in embarrassment for someone — a whole lot of “someones”, in fact. But, let’s assess the probabilities determining the outcome of this crisis using Marx’s Law of Value, rather than Austrian economics:
Zero divided by zero equals ?
To be absolutely clear at the outset, there is no difference between the fundamental facts underlying the dollar and the fundamental facts underlying all other national currencies — they are all worthless and possess infinitely more purchasing power than their actual value. From the standpoint of the law of value, any exchange rate between any two ex nihilo currencies is meaningless, since it is merely the ratio between one object that is entirely worthless and another object that is entirely worthless. For the past decade, the purchasing power of the euro has risen against the dollar despite the absolute worthlessness of either currency. The Zimbabwe dollar is collapsing into hyperinflation, but not so far as to actually represent in circulation its actual value — a Zim$1.00 note has exactly the same value as a Zim$1,000,000,000.00 note (and exactly the same value as a one hundred dollar bill for that matter).
Likewise, prices denominated in any ex nihilo currency are meaningless, since they can never rise to actually reflect the values of the commodities which the ex nihilo money denominates. An increase in the purchasing power of an ex nihilo currency would, in any case, conceal the utter worthlessness of the currency. And as to the fall in the purchasing power of any currency, it suffices to state no matter how far the purchasing power of Zimbabwe dollars fall, Zimbabwe dollar denominated prices of commodities never reflect how worthless the currency really is.
What both the hyperinflationist camp and the deflationist camp need to explain is why, despite the absence of value of all ex nihilo currencies, no major currency was put back on the gold standard after Washington closed the gold window in 1971? Why was gold, despite its value as money, relegated to the basements of major central banks or the private collections of hoarders? Why was it necessary for all major trading nations to remove a commodity standard for the general price level from the world economy? The questions answer themselves: a commodity standard for the general price level is incompatible with an economy founded on capitalist social relations at this stage of its development — absolute over-accumulation. The rather stunning fact presented by gold is this: if prices of commodities were denominated in gold, no commodity would be “worth” the gold standard price quoted for it, i.e., the purchasing power of gold as money would be below its value as a commodity — a situation previously found only during over-production of commodities is now a permanent feature of the capitalist mode of production. It is this situation that initially drove gold from circulation as money, that compelled it to strip off its monetary form.
Without understanding this piece of the puzzle, it is not possible to understand the nature of the present crisis, which, despite appearing as the product of a massive accumulation of worthless debt threatening all existing currencies, is actually the cause of this accumulation of fictitious capital. It is futile to try to understand the current crisis by comparing the attractiveness of various existing or imagined alternative ex nihilo currencies on the world market, since each is worthless, and are as prone to sudden and unexpected hyper-depreciation of their purchasing power as the dollar — and which, moreover, owe their role as money to the fact the gold has ceased to be able to function as money. Since there is nothing about the currencies themselves that set them apart from each other or from the dollar, predictions about their respective fates as currencies must rest, not on the respective attraction of the currencies themselves, but solely on the material relation between respective national states — we must ignore the apparent differences in the purchasing powers of various ex nihilo currencies and delve into the actual economic relations between and among the various states.
World market prices versus existing prices
No matter the differences in the exchange rate between dollars and all other currencies, the following conditions hold: on the one hand, world market prices are denominated in dollars, while, on the other hand, the total sum of present prices throughout the world market as a whole are determined by the ratio of the total sum of currencies of every nation to the total quantity of commodities in circulation throughout the world market. If the dollar was the only currency in circulation there would be no difficulty with regards to world prices and existing prices — they would be identical. However, if we have two currencies — we will call them ex nihilo dollars and an ex nihilo “Rest of the World Currency” (rotwocs) — the situation is changed. Although the dollars and rotwocs are identical — i.e., both are worthless — in circulation the effect on the total sum of world market prices is the ratio between all ex nihilo currency in circulation (X dollars plus Y rotwocs) to the total quantity of commodities in circulation throughout the world market.
Despite this fact, world prices are determined by dollars alone, and under the following circumstances: the dollar is not accepted for all commodities because it is world reserve currency; rather, the situation is precisely the opposite: because it is universally accepted in exchange for any commodity, it is the world reserve currency. This means the dollar’s purchasing power is absolute, while the purchasing power of the rotwoc is only relative — the rotwoc can purchase any commodity whose price is denominated in rotwocs, but to purchase a commodity denominated in dollars, it must be exchanged for dollars before the transaction can be completed. If we assume the world market is divided into two zones — a dollar only zone and a combined dollar/rotwoc zone — of equal size, it is obvious that the existing stock of dollars can readily serve as means of purchase in the entire world market, while the existing stock of rotwocs can serve as means of purchase only in the rotwoc zone. The purchasing power of the stock of dollars is, therefore, twice that of the stock of rotwocs, i.e., there are twice as many commodities available to be purchased by dollars as there are by rotwocs.
It should be obvious now that the sum total of all other ex nihilo currencies provide no additional purchasing power to global demand — they are entirely superfluous. On the other hand, the dollar actually exchanges with all other ex nihilo currencies at a rate significantly below its purchasing power throughout the world market — even against ex nihilo currencies that are, at any given moment, appreciating in purchasing power against it. Since the purchasing power of any ex nihilo currency is not inherent in the currency itself, but depends solely on the total quantity of commodities available to be purchased by it, it follows the purchasing power of the ex nihilo dollar is not limited to the commodities available to be purchased in the dollar zone alone, but all commodities that are available to be purchased by it throughout the world market.
On the other hand, it should be equally obvious that the total sum of prices in the world market must be above world market prices. Since world market prices are here determined solely by the ratio of the total sum of ex nihilo dollars in circulation to the total sum of commodities in circulation within the world market, but the actual sum of prices is determined by the ratio between total sum of dollars in circulation plus the total sum of all other currencies in circulation (x dollars plus y rotwocs) to the total sum of commodities in circulation, any quantity of non-dollar national currencies in circulation above zero results in prices that are above world market prices.
The endpoint of this crisis
The question is how all this works out in the crisis as it is now unfolding. While I don’t have a crystal ball, I will attempt to outline a likely course.
As we have seen in this crisis, no matter how profligate the Fascist State is in its spending on a massive global machinery of repression, and on socialization of the losses of incurred by the failed economic mechanism, the more expenditures it undertakes, the greater the pressure on other national monetary authorities to tighten their own monetary policies in response — to impose naked austerity on their citizens, to further constrain domestic prices in the face of rising global prices. Rising global prices translate into a falling rate of profit in the non-dollar states. To offset this falling rate of profit, the domestic labor forces of the various non-dollar states must be squeezed still further, and the resultant surplus product exported. The profligacy of the Fascist State and the austerity regime of these non-dollar states are only two sides of the same process, feeding on each other, each reinforcing the other.
The two do not merely reinforce each other, however, they also act to make their opposite insufficient in resolving the crisis. Insofar as the profligacy of the Fascist State increases, the pressure on the non-dollar states toward domestic austerity increases, and with this also increases its exports. Insofar as exports increase, global overaccumulation is intensified and the world market settles even more deeply into depression. But, as we have already seen, with an ex nihilo currency regime depressions are now associated not with deflation of prices, but the inflation of prices — so actual prices rise still faster in response to domestic austerity.
A straight-line assumption of the crisis indicates constantly rising world market prices, combined with increasing austerity and monetary policy contraction of non-dollar states. However, living processes do not move in a straight line; in any event non-dollar currencies are likely to experience an existential endpoint — separately, or in groups — since the collapse of any one of them involves fewer complications than replacement of the dollar as world reserve currency. Moreover, replacing the dollar with another currency does not solve the problem that these non-dollar currencies are superfluous. Non-dollar currencies are likely finished; nothing in this crisis appears to offer them another fate.
The question provoked by the above is not “What is the fate of the dollar?” Nor, is it, “What is the fate of non-dollar currencies?” Rather, the real question posed by my analysis is this:
“Why should any of these worthless currencies survive?”
Tags: Bailout, budget deficit, commodity money, CURRENT ACCOUNT DEFICIT, debt, deflation, Depression, economic collapse, economic policy, ex nihilo money, falling rate of profit, Federal Reserve, financial crisis, FOFOA, great depression, hyperinflation, inflation, international financial system, Karl Marx, law of value, political-economy, recession, stupid economist tricks, The Economy, unemployment
I know I promised to examine John Williams’ argument that hyperinflation hinges on an exogenous political event: the rejection of the dollar as world reserve currency by other nations. I will return to this point. But, before I do, I want to respond to Neverfox, who asked me to evaluate the argument of the writer FOFOA’s theory of the imminent hyperinflation catastrophe:
To summarize the argument of John Williams: The economy is spiraling into a severe depression of the 1930s or 1970s type. To meet its various present public obligations, future promises, and prop up the economic mechanism — which, for the moment, we can call debt-driven economic growth — the Federal Reserve is forced to monetize Washington spending. This monetization is itself producing a collapse in the credibility of the dollar. Sooner or later this loss in credibility will result in the outright rejection of the dollar as world reserve currency, triggering a hyperinflationary depression. In the course of this hyperinflationary event, lasting about six months or so, the dollar will become worthless.
To a great extent, although differing on some subtle points with Williams, FOFOA throws light on Williams’ own thinking. In FOFOA’s description of events, the hyperinflation event is front loaded with the essential dry tender: the accumulation of fictitious assets denominated in dollars over an 80 year period produced as a by product of the economic mechanism — debt fueled economic expansion. The event is triggered by a collapse of debtors’ ability to make good on their debts. This, in turn, is followed by an attempt by the Fascist State to rescue the financial institutions on whose books the fictitious assets reside, which produces a loss of confidence in the currency and its rejection as world reserve currency. It is only at this point, government begins printing money to survive and pay its obligations, generating the onset of extremely rapid price increases and the core hyperinflation event..
A deflationary episode can, and probably will, proceed the actual hyperinflation of prices. The hyperinflation episode does not invalidate the arguments of those who predict a deflationary depression; in fact, the hyperinflationary episode will in all likelihood start out as a deflationary episode. Those predicting a deflationary depression, however, miss the response of the Fascist State. Moreover, the deflation does occur just as those who predict deflation assert; only the deflation takes place in gold terms, not dollar terms. Expressed in gold terms, it is a deflation; however, in dollar terms, it is a hyperinflation. FOFOA believes the difference between a deflation measured in gold and a deflation measured in dollars is key to understanding the hyperinflation that is imminent:
“What’s the difference between a deflation denominated in gold versus dollars?” Well, there’s a huge difference to both the debtors and the savers. In a dollar deflation the debtors suffocate but in a gold deflation they find a bit of relief from their dollar-denominated debts. And for the savers, the big difference is in the choice of what to save your wealth in. This is what makes the deflationists so dangerous to savers.
A deflation imposes an extremely heavy burden on debtors, requiring them to repay their debts with ex nihilo denominated debt whose purchasing power is increasing, and which, therefore, requires increasing amounts of effort to repay. By contrast, a hyperinflation reduces the burden of accumulated debt by depreciating the purchasing power and burden of ex nihilo denominated debt. In the thinking of those predicting deflation, as the debt bubble of the last 80 years bursts, the Fascist State will find it impossible to reflate the debt bubble and will be forced to accept deflation. Thus, a full scale debt deflation depression is in the offing.
FOFOA argues that while it is not possible to reflate the debt bubble, the Fascist State can save the paper assets of financial institutions that are the fictitious claims on these debts. Decades of debt fueled growth has swollen dollar-denominated assets held by these institutions to fantastic dimensions. FOFOA argues the Fascist State will not and cannot let these institutions fail because it is merely the political expression of these financial institutions. The aim of Fascist State intervention is not to save the debtors — which it cannot do even if it wanted to — but, as events of the last three years show dramatically — the Fascist State aims to save the the assets of these institutions. FOFOA quotes another writer from whom he derives his own name, FOA:
hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today’s dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)
The process of actual hyperinflating prices begins with the attempts to monetize bad debts — to socialize the losses of big capital — not with money printing; the money printing only begins in earnest once monetization of bad debt leads to a loss in the credibility of the dollar.
…it is the US Govt. that will make sure this becomes a real Weimar-style hyperinflation when it forces the Fed to monetize any and all US debt. And as dollar confidence continues to fall, that’s when the debt must go exponential just to purchase the same amount of real goods for the government. One month the debt will be a trillion, the next month it will be a quadrillion just to buy the same stuff as the previous month. How long will this last? Less than 6 months is my guess.
According to FOFOA, on the balance sheets of the failed banks there now is more than enough reserves to fuel a sudden burst of hyperinflating prices should society suddenly lose confidence in the dollar. As this base is pulled into circulation by a general demand for goods in the face of rising prices, the Fascist State will be forced to begin printing money to cover its own obligations. Each month the amount of ex nihilo dollars needed to fill the same demand for government spending increases, and with this increase, the amount of new ex nihilo money created will increase. This compounding growth in the supply of ex nihilo currency will provide added impetus to the explosion of prices. The explosion of prices will not be contained short of a new monetary regime in which assets and debt are somehow tied to gold.
The problem is that the present monetary system, in FOFOA’s view, is that lending and saving both take the same form — either a gold backed system or an ex nihilo money system. FOFOA argues money lent out inevitably dilutes the value of money being saved, since they both come out of the same pot:
The problem is that the expanding money supply due to lending always lowers the value of a unit of currency. Even if it is gold. If I loan you a $1 gold money, you now have $1 gold and I have a $1 gold note. The money supply has just doubled, and the value of $1 gold just dropped in half.
This is a fact of money systems. We can try to get rid of it by outlawing lending, but that is like outlawing swimming in the summertime, or beer drinking.
The solution is quite simple. And I didn’t come up with it. The problem is that at the point of collapse, some of the savers are wiped out, whether gold money or fiat. Think about those at the back of the line during the bank runs of the 1930′s. They didn’t get their gold. They lost their money.
Today we don’t have this problem anymore. The guy at the back of the line gets all his money, it’s just worthless in the end. We solved the problem of bank runs (bank failures) but not the problem of value.
This problem, which is often referred to as debt deflation, is inherent in the prevailing monetary system, and will lead to financial crises even if the United States went back to a gold-backed dollar. He proposes instead to bring gold back into the money system, but within strict limits: split the functions of store of value and credit into two separate monetary systems — ex nihilo for lending, and gold for saving — so that ex nihilo currency lent out will indeed be diluted, but the gold-backed value of saving will freely rise to express this dilution:
The solution is that the monetary store of value floats against the currency. It is not the same thing that is lent! It is not expanded through lending and thereby diminished in value. Instead, as $1 is lent, and now becomes $2 ($1 to the borrower + $1 note to you the lender) and the dollar drops to half its value, the saver, the gold holder will see the value of his gold savings rise from $1 to $2.
I don’t want to get into the weeds on this proposal by FOFOA, since it is entirely beside the point of the examination of non-mainstream theories of the current crisis, and, in any case, a non-sequitur from the standpoint of capital. But, he inadvertently touches on a salient point for my examination: suffice it to say, capital is not and cannot be thought of as the accumulation of gold or any other commodity. It is the process of self-enlargement, or self-expansion, of the capital initially laid out in the capitalist process of production. At any given moment, this capital can take the form of money-capital, fixed and circulating capital, wages, and final commodities, but it is not identical with any of these momentary identities — it is relentlessly converted from one form to another constantly — both serially, and simultaneously in what, over time, comes to resemble a vast cloud of interrelated transactions — as it passes through the process of self-expansion. FOFOA’s proposal imagines the point of self-expansion is precisely what it is not: to assume the form of a hoard of gold — or any other store of value. This is true only insofar as we are thinking of capitals that are no longer capable of functioning as capitals — that are incapable of acting on their own as capitals, owing to the ever increasing scale of capitalist production, which renders these petty capitals insufficient to function on their own as capitals. Unable to operate on their own, they must be placed at the disposal of larger agglomerations of capital in order to continue functioning as capital, resulting in great stress for their owners, who now have to turn their otherwise lifeless hoards over to giant vampire squids of the Goldman Sachs type or cease being capitals at all.
This is, in part, what Marx meant by the concentration of capital, which is not simply the concentration of ownership of the means of production, but also the concentration of owners of capital who can continue to operate independently as capitalists. The existence of even very large savings does not permit these owners to operate independently as capitalists, given the scale of productive undertaking now required. Marx described the process 150 years ago:
A drop in the rate of profit is attended by a rise in the minimum capital required by an individual capitalist for the productive employment of labour; required both for its exploitation generally, and for making the consumed labour-time suffice as the labour-time necessary for the production of the commodities, so that it does not exceed the average social labour-time required for the production of the commodities. Concentration increases simultaneously, because beyond certain limits a large capital with a small rate of profit accumulates faster than a small capital with a large rate of profit. At a certain high point this increasing concentration in its turn causes a new fall in the rate of profit. The mass of small dispersed capitals is thereby driven along the adventurous road of speculation, credit frauds, stock swindles, and crises. The so-called plethora of capital always applies essentially to a plethora of the capital for which the fall in the rate of profit is not compensated through the mass of profit — this is always true of newly developing fresh offshoots of capital — or to a plethora which places capitals incapable of action on their own at the disposal of the managers of large enterprises in the form of credit. This plethora of capital arises from the same causes as those which call forth relative over-population, and is, therefore, a phenomenon supplementing the latter, although they stand at opposite poles — unemployed capital at one pole, and unemployed worker population at the other.
FOFOA’s proposal seems to confirm my identification of the social base of the hyperinflationist camp: a motley collection of petty speculative minnows, who are desperately trying to avoid the predation of the very biggest financial sharks and vampire squids — not to mention the Fascist State itself, which represents the interests of these predatory vermin. The hyperinflationists as a group imagine the dollar has reached the end of the line. They imagine this will lead to a revaluation of gold and the creation of a new monetary system to replace the dollar, driven by the dissatisfaction of the majority of the planet with the monetary policies of the United States.
So, we need to move on and examine this thesis.
Tags: Bailout, budget deficit, commodity money, CURRENT ACCOUNT DEFICIT, debt, deflation, Depression, economic collapse, economic policy, ex nihilo money, Federal Reserve, financial crisis, FOFOA, great depression, hyperinflation, inflation, international financial system, Karl Marx, political-economy, recession, stupid economist tricks, The Economy, unemployment
Even if we assume John Williams’ prediction of a hyperinflationary depression turns out to be correct — and the global economy is plunged into an apocalyptic nightmare as prices rise with blinding rapidity, while economic activity shudders to a standstill — his argument for this outcome is so defective as to merely represent the chimes of an otherwise broken clock for the following reasons:
First, his prediction rests on mere accounting identities, and assumes the Fascist State can be counted on, or forced, to observe these accounting identities. As a counter-argument, I offer the historical evidence of Washington’s behavior over the past 80 years, when it routinely ignored whatever accounting identities as were forced upon it by circumstances and left the rest of American society and the global population as pitiful bag-holders of worthless ex nihilo currency. Williams offers no argument why the Fascist State will act differently in this crisis. In all likelihood, Washington will effectively renounce its debts and continue business as usual — leaving China and other exporters to absorb the impact.
Second, Williams does not understand hyperinflation. His definition of hyperinflation is entirely defective, because he doesn’t realize ex nihilo currency is not made worthless by hyperinflation; rather, it is already a collection of worthless dancing electrons on a computer terminal in the Federal Reserve Bank. Ex nihilo currency was worthless the moment the Fascist State debased the token currency from gold in 1933 and 1971. Hyperinflation and inflation are not the more or less sudden depreciation of money, but the more or less sudden depreciation of the purchasing power of an already worthless money.
Third, Williams does not understand depression, and in particular the Great Depression. Depressions are produced by the overproduction of capital — whether this overproduction is momentary or persistent. They are characterized by a general surfeit of commodities, fixed and circulating capital, and a relative over-population of workers. These are periodic occurrences, owing their genesis not to simple fluctuations of economic activity, but to constraints imposed on consumption by the necessity that all productive activity is carried on, not with the aim of satisfying human needs, but for profit. All depressions result in the sudden devaluation of the existing stock of social capital, of the existing stock of variable and constant capital, which is the absolute precondition for the resumption of self-expansion of the total social capital.
Before the Great Depression, this last point always meant a rather pronounced and sudden deflation of prices. After the Great Depression, this devaluation is accompanied, not by a sudden and spectacular collapse of prices, but a sudden and spectacular explosion of prices. The event itself has not changed — it is still a devaluation of the total social capital. What has changed is the expression of this devaluation in a general fall in the price level. I argue the source of this change was the debasement of national currencies during the Great Depression.
What the three points made above tell me is that Williams and the growing community of hyperinflationists do not understand ex nihilo money; they do not understand how prices behave under an ex nihilo regime; and, finally, they do not understand why ex nihilo money was a necessary result of the Great Depression. They are an odd collection of petty speculative capitalists concerned only with preserving their “wealth” through what are likely to be very interesting times.
Understanding ex nihilo money
Like money in general, ex nihilo money, is not simply a “thing” — a currency without commodity backing — rather, it is a social relation that appears to us in the form of this thing. It is a social relation that takes the form of worthless currency because this social relation itself can only take the form of things. The social relation, of course, is a global social cooperation in the act of labor. Since, this social cooperation does not by any means result from conscious decisions of the members of society and proceed with their conscious direction, the requirements of this social cooperation impose themselves on the members of society as necessities — as the law of value, as the value/prices mechanism.
What is peculiar about ex nihilo money as a form of money is that the relation between value and price has been completely severed — the two most important functions of money have devolved on entirely different objects. By debasing the currency from gold money’s function as standard of price was completely severed from its function as measure of value. This much is acknowledged by the hyperinflationist, who place the blame for this separation on the Fascist State; however, historical research shows impetus behind this separation did not first appear as a matter of State policy, but as a matter of financial common sense.
Every depression begins with money exchanging for commodities below its value, or, what is the same thing, with the prices of commodities at their apex for the cycle. Prices near the top of the cycle rise to unsustainable levels, and the competition to dump commodities on the market under favorable price conditions gets fairly intense. Everyone is optimistic about the economic outlook, profits expand, credit flows freely, workers are hired, factories furiously churn out commodities around the clock, the stocks of goods begin to pile up in the warehouses. And, then, BOOM! — depression erupts just as wages, prices, profits and interest are at their highest, and the purchasing power of money is at its lowest.
As the disorder spreads, profits and prices collapse, credit is choked off, debtors default, factories grind to a halt, millions of workers are laid off… yadda, yadda, yadda — we all know the drill. Side by side with this disorder, money is with drawn from circulation. Gold money disappears into hoards, as capitals attempt to avoid the worst of the devaluation of the existing social capital. The competition at this point is not to see who can sell the most commodities, but who can avoid taking any of the losses that the social capital as a whole must suffer. While this total social capital must take the hit, which capitals actually take this hit is a matter of entirely other circumstances.
As Marx put it:
The class, as such, must inevitably lose. How much the individual capitalist must bear of the loss, i.e., to what extent he must share in it at all, is decided by strength and cunning, and competition then becomes a fight among hostile brothers. The antagonism between each individual capitalist’s interests and those of the capitalist class as a whole, then comes to the surface, just as previously the identity of these interests operated in practice through competition.
How is this conflict settled and the conditions restored which correspond to the “sound” operation of capitalist production? The mode of settlement is already indicated in the very emergence of the conflict whose settlement is under discussion. It implies the withdrawal and even the partial destruction of capital amounting to the full value of additional capital ΔC, or at least a part of it. Although, as the description of this conflict shows, the loss is by no means equally distributed among individual capitals, its distribution being rather decided through a competitive struggle in which the loss is distributed in very different proportions and forms, depending on special advantages or previously captured positions, so that one capital is left unused, another is destroyed, and a third suffers but a relative loss, or is just temporarily depreciated, etc.
The total social capital is devalued; and, this devaluation takes place both in terms of the values of the capital — prices fall, etc. — and by a winnowing out of the players — some definite portion of the total social capital is pushed out of productive activity altogether. Capitals go bankrupt, factories are shuttered, the reserve army of the unemployed expands. At the lowest point in the ensuing depression, prices and profits have fallen to their lowest point in the cycle, while the purchasing power of money is at its highest point in the cycle. Assets can be snatched up at bargain basement prices, labor power can be had for a wage below its value. If the capitalist has survived the wash out, he stands to accumulate on a prodigious scale, since unemployed productive capacity is just laying around collecting dust.
There was one problem with this scenario during the Great Depression: the economy hit this point and just laid there like the decaying carcass of a beached whale; the condition for the “‘sound’ operation of capitalist production” were never restored, money just sat in hoards as investors, waiting out the crisis for better times, clung to their useless gold stocks for dear life. There was, as usual, a general over-accumulation of capital, i.e., an overproduction of commodities, an excess of fixed and circulating capital, and an excess population of workers, but these excesses were rather persistent. As with any general over-accumulation, it was not a matter of “consumer confidence” returning, but the necessary actual devaluation of the existing total social capital. Absent this devaluation, attempts to increase production would merely result in an over-supply that further forced down prices and profits. Under these circumstances, a portion of the existing stock of commodity money could not circulate until the devaluation of the existing stock of social capital had taken place.
So, it was not the Fascist State that expelled gold from circulation as money; rather, because gold money could no longer circulate as money, the Fascist State was forced to replace it with ex nihilo currency. The Fascist State debased the currency from commodity money, because the circulation of commodity money had already halted. This action was no American exceptionalism, however; within a short period of time all industrialized nations went off the gold standard domestically.
I want to emphasize an extremely important point here, a point that is vital to understanding the present crisis: going off the gold standard did not simply convert money into a worthless, debased, token — entirely fictitious from the standpoint of the law of value — it also changed the behavior of prices, i.e., the behavior of the purchasing power of the currency itself. On this basis alone the Fascist State could take control of the social process of capitalist production.
The behavior of prices under ex nihilo money
Ex nihilo money is not commodity money, it is not token money, it is not fiat money — it is an altogether different animal entirely. For instance, under a commodity money regime an over-accumulation of capital produced falling prices during depressions, while the purchasing power of the commodity money rose. As I will show, ex nihilo currency inverts this relation after the Great Depression — now prices denominated in the debased ex nihilo currency rise as economic activity contracts, while the purchasing power of the ex nihilo currency falls.
So far as I know, there is no instance of a commodity money suffering a hyperinflation. Hyperinflation does not render a currency worthless; rather, the currency is immediately rendered worthless during debasement from a commodity that can serve as standard of price. Debasement can result in hyperinflation, but hyperinflation is not the necessary result of debasement. Hyperinflation must be defined as the extreme and rapid depreciation of the purchasing power of a currency that is already worthless, that already has been debased. Historically, while hyperinflation follows the debasement of the currency from gold, not every debasement of currency from gold has led to hyperinflation. Hyperinflation is historically associated not with commodity money per se, but with ex nihilo currency.
Here a distinction must be made between money — the commodity which performs the function of universal equivalent — and ex nihilo currency, which has no relation to commodity money at all. While this ex nihilo currency can replace commodity money in circulation like token money under certain definite circumstances, what makes it different from token money is that it has no definite relation with a commodity that serves as money — it is not “honest” money, i.e., tokens whose purchasing power is held within limits governed by the laws governing the circulation of commodity money. However, like the circulation of tokens of money, ex nihilo currency is subject to certain laws, the most important of which is it can only represent in circulation the value of the commodity money it replaces.
When we speak of the purchasing power of ex nihilo money, we are in fact only referring to the quantity of commodity money this ex nihilo currency actually represents in circulation. In this case, the commodity money on which I base my discussion is gold; so, the purchasing power of an American ex nihilo dollar represents the quantity of gold having a price of one dollar. If gold has a price of $22.67 an ounce, the purchasing power of one ex nihilo dollar is equal to the value of 0.044 ounce of gold; if gold has a price of $1525, the purchasing power of an ex nihilo dollar is equal to 0.0006557 ounce of gold. If the price of gold falls from $800 per ounce to $250 per ounce, the purchasing power of ex nihilo currency has risen from 0.00125 ounce of gold to 0.004 ounce of gold. If the price of an ounce of gold rises from $250 to $1525, the purchasing power of ex nihilo currency has fallen from 0.004 ounce of gold to 0.0006557 ounce of gold.
In any case, the purchasing power of ex nihilo currency refers only to the quantity of gold that would otherwise be in circulation circulation had not it been replaced by ex nihilo currency. It does not refer to the purchasing power of ex nihilo currency in relation to any other commodity. But, the quantity of gold in circulation at any point is not given — at one point it may be higher, while at another point it is lower. If, despite these fluctuations, the amount of ex nihilo currency in circulation is unchanged, it will, in the first case, represent more commodity money, and, in the latter case, represent less commodity money. The purchasing power of the ex nihilo currency will rise or fall with the fluctuation of economic activity which it denominates in itself. Since, when actually in circulation, the currency of commodity money is only a reflex of the circulation of commodities — rising and falling with this circulation — the purchasing power of the ex nihilo currency will only represent this quantity of commodity money irrespective of the absolute quantity of ex nihilo currency in circulation.
The circulation of commodity money is only a reflex of the circulation of commodities. Assuming the value of commodities and the velocity of money are fixed, when the circulation of commodities increases, the quantity of commodity money in circulation must increase. When the circulation of commodities decreases, the quantity of commodity money in circulation must decrease. Consequently, a fixed quantity of ex nihilo currency will represent a larger or smaller quantity of commodity money respectively as economic activity expands or contracts. If a fixed quantity of ex nihilo currency is in circulation when the circulation of commodities is increasing, the purchasing power of this fixed quantity of ex nihilo currency must increase. If a fixed quantity of ex nihilo currency is in circulation when the circulation of commodities is decreasing, the purchasing power of this fixed quantity of ex nihilo currency must decrease.
The supply of commodity money and the supply of ex nihilo currency are not the same thing. While the circulation of commodity money is naturally driven by economic activity, the amount of ex nihilo currency available to circulate is always dependent on the State issuance of ex nihilo currency. Moreover, once ex nihilo currency is in circulation, it will tend to remain in circulation. Thus, while the quantity of commodity money in circulation rise or falls with the circulation of commodities, the purchasing power of the ex nihilo currency replacing commodity money tends to increase or decrease with the circulation of commodities instead. For this reason, ex nihilo currency presents us with the paradox that prices tend to fall as economic activity increases and rise with the fall in economic activity.
If all else is given, we are forced to the following conclusion regarding the purchasing power of ex nihilo currency :
- the purchasing power of ex nihilo currency rises during periods of economic expansion, i.e, a given quantity of ex nihilo currency can purchase a greater sum of values. This is precisely the opposite of what we would expect from commodity money. While,
- the purchasing power of ex nihilo currency falls during periods of economic contraction, i.e, a given quantity of ex nihilo currency can purchase a smaller sum of values. Again, this is precisely the opposite of what we would expect from commodity money.
The behavior of prices are the inverse of what we would expect if ex nihilo currency behaved like commodity money. With commodity money, we should expect to find commodities being over-valued during expansions and devalued during periods of contraction. But. with ex nihilo currency, we find instead that commodities are devalued during expansions and over-valued during periods of contraction. Prices denominated in ex nihilo currency fall during expansions and rise during contractions.
When an economic contraction takes place, the sum value of commodities in circulation falls; since the circulation of the commodity money is only a reflex of the circulation of commodities, the circulation of commodity money too must fall. A given supply of ex nihilo currency now represents the value of a smaller quantity of commodity money. The values expressed by commodity prices fall, or, what is the same thing, a given value is expressed in higher ex nihilo currency prices. On the other hand, when an economic expansion takes place, the sum value of commodities in circulation rises; since the circulation of the commodity money is only a reflex of the circulation of commodities, the circulation of commodity money must rise as well. A given supply of ex nihilo currency now represents the value of a larger quantity of commodity money. The values expressed by commodity prices rise, or, what is the same thing, a given value is expressed in lower ex nihilo currency prices. The result is that, absent a commodity to serve as standard of prices, prices denominated in an ex nihilo currency will tend to rise during periods of economic contraction, but fall during periods of economic expansion.
Moreover, in a pure ex nihilo money economy where no commodity serves as standard of prices, prices of commodities are subject to disturbances in the ratio of the existing supply of ex nihilo money in circulation and the quantities of commodities in circulation that are denominated in the ex nihilo currency.
- Should the quantity of commodities in circulation suddenly increase, while the supply of ex nihilo money remains unchanged, the general price level expressed in ex nihilo money will just as suddenly decrease. Should the quantity of commodities in circulation suddenly decrease, while the supply of ex nihilo money remains unchanged, the general price level expressed in ex nihilo money will just as suddenly increase.
- Should the supply of ex nihilo money in circulation suddenly increase, while the supply of commodities remains unchanged, the general price level of commodities expressed in the ex nihilo money will just as suddenly rise. Should the supply of ex nihilo money in circulation suddenly decrease, while the supply of commodities remains unchanged, the general price level of commodities expressed in the ex nihilo money will just as suddenly fall.
In either case, the sum of prices are not related to the sum of values of commodities, but only to the ratio of the sum of ex nihilo money to the sum of commodities in circulation. In fact I question whether money exists at all. Insofar as money function as a measure and store of value, it cannot circulate within society; insofar as is circulates within society and serves as a standard of prices, it cannot be a measure of value. What is left after the debasement of money is money, the social relation, irretrievably broken.
Actually, we’ve been in a depression since 2001
Whatever the outcome of the present crisis, John Williams’ prediction rests on such a defective theory of money and ex nihilo price formation that his prediction is useless to us. Ex nihilo money appears to allow the formation of so-called monopoly pricing in the economy. By restricting production, monopolies can, in fact, pad their profits, even as society descends into abject scarcity and want under an ex nihilo monetary regime. Rising prices during a depression is not a defect of an ex nihilo monetary regime, but the way prices would be expected to behave under that regime as capital is devalued. From the standpoint of the capitalist mode of production, inflation of ex nihilo prices is to be expected, and is the expression of the mode’s attempt to establish the sound basis for its future operation.
When I look at gold prices, I find evidence that the economy actually has been in a depression since 2001. According to my figures, gold prices bottomed in 2001 at around $271.04, and have been rising steadily for most of the decades after this. This is the first time gold prices have risen so consistently since the 1970s great depression/great stagflation. It follows from this that Williams’ depression, at least, has nothing to do with a hyperinflation of prices itself. At the same time, hyperinflation, in his model, does not coincide with a depression, but hinges on an exogenous political event: the rejection of the dollar as world reserve currency by other nations. To this we will turn next.
Tags: Bailout, budget deficit, commodity money, CURRENT ACCOUNT DEFICIT, debt, deflation, Depression, economic collapse, economic policy, ex nihilo money, Federal Reserve, financial crisis, great depression, hyperinflation, inflation, international financial system, Karl Marx, political-economy, recession, stupid economist tricks, The Economy, unemployment
I am examining economist John Williams prediction of an imminent hyperinflationary depression published in March, 2011. Williams’ prediction appears to rest on a rather questionable hypothesis that this hyperinflationary depression is made inevitable by mere accounting identities — that is, by the logic of book-keeping, which suggests the Fascist State will be unable to stop a spiral into depression by depreciating the purchasing power of the US Dollar. Efforts to depreciate the dollar, Williams argues, will lead the world to reject the dollar as world reserve currency; setting into motion a series of events leading to it becoming worthless.
I am a bit skeptical on this point for no other reason than I saw the fate of Argentina when it could no longer pay its bills in 1999. I am forced to ask, since the US had not the slightest sympathy for Argentina in 1999, why would it have any sympathy for its own creditors in 2011? Indeed, Washington showed no hesitation in 1933 when it came to dispossessing society of its gold stocks, nor did it hesitate to close the gold window and renounce its obligations under the Bretton Wood agreement in 1971.The Fascist State sets the rules; there is nothing in the historical record to suggest it observes these rules except when those rules favor it.
Nevertheless, I want to give Williams the benefit of the doubt on this. So, I will continue to examine his argument.
Williams on Deflation, Inflation, Hyperinflation and Prices
Williams assumes the standard definition of inflation: a general rise in the prices of commodities. As is typical of this view, he completely neglects both consumption and production of commodities in his definition of inflation. He further defines hyperinflation as a particularly virulent form of inflation where prices rise multiple — hundreds or thousands — times a normal inflation.
Inflation broadly is defined in terms of a rise in general prices usually due to an increase in the amount of money in circulation. The inflation/deflation issues defined and discussed here are as applied to consumer goods and services, not to the pricing of financial assets, unless specified otherwise. In terms of hyperinflation, there have been a variety of definitions used over time. The circumstance envisioned ahead is not one of double- or triple- digit annual inflation, but more along the lines of seven- to 10-digit inflation seen in other circumstances during the last century. Under such circumstances, the currency in question becomes worthless, as seen in Germany (Weimar Republic) in the early 1920s, in Hungary after World War II, in the dismembered Yugoslavia of the early 1990s and most recently in Zimbabwe, where the pace of hyperinflation likely was the most extreme ever seen.
As is the standard thinking on the issue, Williams believes the most significant force behind dollar hyperinflation is the creation of money ex nihilo by Washington, not over-accumulation of capital. While inflation is a moderate expression of the chronic tendency of states with fiat currency to live beyond their means, hyperinflation is only an extreme expression of this chronic tendency.
The historical culprit generally has been the use of fiat currencies—currencies with no hard-asset backing such as gold—and the resulting massive printing of currency that the issuing authority needed to support its spending, when it did not have the ability, otherwise, to raise enough money for its perceived needs, through taxes or other means.
Excessive money creation takes the form of spending by the state that is otherwise unable to borrow from or tax society to the extent needed to fund its operations. In this case, the chief causes identified by Williams are unfunded promises in the form of social programs like retirement, health care and the social safety net, combined with the costs of bailing out the failed economic stabilization mechanism. (Missing, of course, is any reference to either service on the existing public debt, or spending on a massive global machinery of repression.) The point, however, is pretty much unoriginal: inflation begins with government spending, not over-accumulation of capital.
Deflation is simply defined as the opposite of inflation, i.e., “a decrease in the prices of consumer goods and services, usually tied to a contraction of money in circulation“; Hyperinflation is an “extreme inflation, minimally in excess of four-digit annual percent change, where the involved currency becomes worthless.” Thus all three — inflation, deflation and hyperinflation — are merely state driven monetary phenomenon; the result of changes in the supply of money in circulation within the economy provoked by state spending. The source of the changes in the money supply are said to be state monetary and fiscal policy.
However, with regards to hyperinflation, Williams adds one additional, critical, definition, not with regards to prices, but with regards to the currency itself: it becomes worthless. In Williams’ opinion, the currency becomes worthless as a result of rapidly escalating prices. However, both logically and historically the case is precisely the opposite: prices escalate rapidly because the currency is already worthless — because it has already been debased from gold or another money commodity. With the currency debased from gold, prices became a creature of state monetary and fiscal policy pure and simple. Moreover, with the currency worthless as a result of its debasement, prices and their movements no longer transmit meaningful information about market conditions as is generally assumed to be the case.
Williams on Recession, Depression and Great Depression
Williams outlines a similar set of definitions with regards to recession, depression and great depression.
Recession: Two or more consecutive quarters of contracting real (inflation-adjusted) GDP, where the downturn is not triggered by an exogenous factor… Depression: A recession, where the peak-to-trough contraction in real growth exceeds 10%. Great Depression: A depression, where the peak-to-trough contraction in real growth exceeds 25%. On the basis of the preceding, there has been the one Great Depression, in the 1930s. Most of the economic contractions before that would be classified as depressions. All business downturns since World War II—as officially reported —have been recessions.
Williams defines recessions, depressions and great depressions by levels of economic activity. In contrast to his previous definitions for inflation, deflation and hyperinflation, he focuses not on price, but actual output of goods and services. In discussing inflation, deflation and hyperinflation, Williams makes no reference to the general level of production and consumption of commodities; likewise, when discussing recessions, depressions and great depressions, he makes no reference to the general level of prices. But, both recessions and depressions are associated with definite changes in the level of prices in the economy. Historically, depressions clearly have been associated with deflations, or a general fall in the prices of commodities; while recessions clearly have been associated with inflation, or a general rise in prices of commodities.
The significance of this association is revealed if we assume great depressions are associated with hyperinflations — a hyperinflation not understood in the sense of breathtaking annual increases in the price level, but with the currency becoming worthless. Is there a basis for making such an equivalence? Remember, Williams asserts that historically hyperinflation is associated with fiat currencies — currencies that are not backed by some commodity that serves as a standard for prices. These are also currencies that can be created ex nihilo by the state. He associates hyperinflation not just with the general price level rising at a fantastic rate owing to the inability of the state to pay its obligations, but with the nature of the money used to pay those obligations — that is, with the fact that these currencies are not backed by gold or another commodity. It is important to remember in this regard that the US and all industrialized powers debased their monies during the Great Depression. But, just as important, the US also reneged on its obligation to pay its international debts in gold in 1971 — thus imposing on other nations a world reserve currency that was as worthless abroad as it was domestically.
For whatever reason, writers like Williams confuse the issue by treating debasement of the currency and hyperinflation as one and the same thing. In actuality, debasement of the currency — that is, the separation of the currency and gold — has been the signal monetary event of the post-Great Depression period. Hyperinflation — the rapid collapse of the purchasing power of a debased currency — is an entirely rare event. It is not rapidly rising prices that render money worthless, rather, because the money in question is already worthless prices can, under certain circumstances, rise at a fantastic rate.
How is this related to recessions and depressions? Before the Great Depression, and the debasement of the currency, depressions usually resulted in deflations. During the Great Depression, however severe and unprecedented deflation was interrupted by the debasement of all major currencies. In this debasement currency was rendered worthless, i.e., without any definite relation to a commodity which might serve as a standard for the general price level. The definition of worth being simply the dictionary definition of an equivalent in value to a sum or item specified, i.e., a specific quantity of gold or some other money commodity. Gold gave token currency its worth, that is, gave it some definite equivalent to other commodities which could be expressed as prices of those commodities in units of the money. After the Great Depression, and the 1971 abrogation of the Bretton Wood agreement, with money having no definite worth, depressions are now associated not with rapidly falling prices, but with rapidly rising prices — a condition that has been labeled recession.
The economic picture is cleared up once we realize the general price level is irrelevant for analyzing depression-type events after the dollar was debased. Precisely because money was rendered worthless by its debasement, prices, after this debasement, provide little useful information on the actual state of the underlying economy. Prices, at this point, are serving an altogether different function: they are an instrument of state economic policy. On the other hand, hyperinflation of prices does not lead to a worthless currency; instead, the debasement of the currency is a necessary precondition for hyperinflation.
Williams’ historical examples of hyperinflation
While a debased, worthless, currency can lead to hyperinflation, it is obvious that every debasement of the currency does not end in hyperinflation. Today, almost all national currencies are debased, yet hyperinflation occurs only rarely in history. Moreover, the extraordinary hyperinflations of history do not result primarily from the profligacy of the state. The United States, for instance, is by far the most profligate state in history — accounting for nearly half of all military spending. What triggers hyperinflations are definite economic circumstances in addition to this state profligacy.
The economic conditions leading to hyperinflation can be seen most clearly if we compare the current economic environment to historical examples of hyperinflation cited by Williams. Williams’ examination of examples of hyperinflation suffer from defects along the lines of his examinations of inflation/deflation and recessions/depressions. However, while he overlooks obvious connections in the latter cases, in the case of historical examples of hyperinflation he overlooks obvious differences.
Williams recounts the case of the Weimar Republic:
Indeed, in the wake of its defeat in the Great War, Germany was forced to make debilitating reparations to the victors—particularly France—as well as to face loss of territory. From Foster (Chapter 11):
By late 1922, the German government could no longer afford to make reparations payments. Indignant, the French invaded the Ruhr Valley to take over the production of iron and coal (commodities used for reparations). In response, the German government encouraged its workers to go on strike. An additional issue of paper money was authorized to sustain the economy during the crisis. Sensing trouble, foreign investors abruptly withdrew their investments.
During the first few months of 1923, prices climbed astronomically higher, with no end in sight… The nation was effectively shut down by currency collapse. Mailing a letter in late 1923 cost 21,500,000,000 marks.
The worthless German mark became useful as wall paper and toilet paper, as well as for stoking fires.
Germany suffered defeat in a war that left it exhausted and stripped of territory, population and productive capacity by the victors to pay for reparations; it was the scene of intense class conflict and intense economic dislocation. The hyperinflation of the Weimar Republic Germany, therefore, began not with absolute over-accumulation of capital — with overproduction of commodities and a surfeit of labor power — but decidedly the reverse: a massive loss of productive capacity — a loss the government then tried to paper over, without success, by issuing worthless paper. The government sought to stabilize the economy by printing money to offset these crippling economic losses. The subsequent explosion of prices occurs not merely because the Weimar Republic sought to paper over a disaster, but because it was not possible to paper over such catastrophic material losses with money printing. The lesson of the Weimar Republic is obvious: while debasement of the currency can artificially inflate the purchasing power of state issued token currency, it must ultimately fail in an explosion of prices if the state attempts to paper over real material losses.
Where in this litany of disaster are conditions similar to those faced by the United States? Despite Williams’ assertion that, “The Weimar circumstance, and its heavy reliance on foreign investment, was closer to the current U.S. situation…“, in fact, the two have nothing in common. While Germany was systematically stripped of its productive capacity, the US is experiencing capital flight caused by decades of debt-driven inflationary domestic policy, including not only social spending “to assuage social discontent,” but also thoroughly wasteful and excessive national security expenditures and a failed economic stimulus mechanism.
Moreover, it is not merely a question of foreign investors propping up the dollar. While Germany’s ex nihilo currency was not considered money beyond its borders, the dollar is the world reserve currency; commodities world wide are priced in dollars. At the same time, the United States accounts for a quarter of global consumption demand, and this demand takes the form of ex nihilo dollars exclusively. The global producers of commodities are facing severe over-accumulation of capital and insufficient money-demand for their output. They are looking precisely for currencies with the sort of excess money-demand that is typical of inflation driven growth economies. The question is not whether trillions of dollars of social wealth denominated in dollars can withdraw from the dollar in time should there be a crisis; rather, we have to wonder if any exit from the dollar is possible or probable.
Tags: Bailout, budget deficit, commodity money, CURRENT ACCOUNT DEFICIT, debt, deflation, Depression, economic collapse, economic policy, ex nihilo money, Federal Reserve, financial crisis, great depression, hyperinflation, inflation, international financial system, Karl Marx, political-economy, recession, stupid economist tricks, The Economy, unemployment
I took some times off to really dig into the competing theories of the present crisis and to see if redwoods are really all that much of a big deal.
- There are a lot of theories about this crisis.
- Most of them are worthless, and
- Redwoods are really huge — I mean HUGE!
John Williams and the imminent hyperinflationary depression
I want to begin this series of posts on various non-mainstream theories of the present crisis by examining some of the assumptions and definition proposed by John Williams, economist at the website Shadow Government Statistics, in his prediction of an imminent hyperinflationary depression. Williams is serious about his prediction — up to, and including, warning his readers to store guns, ammo, gold and six months of basic necessities.
In his recently published special report, Williams — a self-described conservative Republican economist, with libertarian leanings — advances a number of questionable arguments typical of theories of the current crisis floating around out there. The most significant of these questionable arguments is Williams’ assertion that the crisis begins with an unsustainable fiscal and monetary environment, not with over-accumulation. Despite the jarring nature of his prediction, for Williams’ an imminent hyperinflationary depression results purely from rather boring accounting identities:
By 2004, fiscal malfeasance of successive U.S. Administrations and Congresses had pushed the federal government into effective long-term insolvency (likely to have triggered hyperinflation by 2018). GAAP-based (generally accepted accounting principles) accounting then showed total federal obligations at $50 trillion—more than four-times the level of U.S. GDP—that were increasing each year by GAAP-based annual deficits in the uncontainable four- to five-trillion dollar range. Those extreme operating shortfalls continue unabated, with total federal obligations at $76 trillion—more than five- times U.S. GDP—at the end of the 2010 fiscal year. Taxes cannot be raised enough to bring the GAAP- based deficit into balance, and the political will in Washington is lacking to cut government spending severely, particularly in terms of the necessary slashing of unfunded liabilities in government social programs such as Social Security and Medicare.
This crisis, Williams explains, could be avoided if the US were to raise taxes sufficiently, or reduce spending accordingly, or some combination of either; however, these solutions are not possible for purely political reasons. To resolve this impasse, Washington has turned to inflating prices instead.
Key to the near-term timing [of an outbreak of hyperinflation] remains a sharp break in the exchange rate value of the U.S. dollar, with the rest of the world effectively moving to dump the U.S. currency and dollar-denominated paper assets. The current U.S. financial markets, financial system and economy remain highly unstable and increasingly vulnerable to unexpected shocks. At the same time, the Federal Reserve and the federal government are dedicated to preventing systemic collapse and broad price deflation. To prevent any imminent collapse—as has been seen in official activities of the last several years—they will create and spend whatever money is needed, including the deliberate debasement of the U.S. dollar with the intent of increasing domestic inflation.
This response has, in turn, provoked a reaction from the world community that will lead to a rejection of dollars and dollar denominated assets, a circumstance that must end in hyperinflation and depression.
The damage to U.S. dollar credibility has spread at an accelerating pace. Not only have major powers such as China, Russia and France, and institutions such as the IMF, recently called for the abandonment of the U.S. dollar as the global reserve currency, but also the dollar appears to have lost much of its traditional safe-haven status in the last month. With the current spate of political shocks in the Middle East and North Africa (a circumstance much more likely to deteriorate than to disappear in the year ahead), those seeking to protect their assets have been fleeing to other traditional safe-havens, such as precious metals and the Swiss franc, at the expense of the U.S. currency. The Swiss franc and gold price both have hit historic highs against the dollar in early-March 2011, with the silver price at its highest level in decades, rapidly closing in on its speculative historic peak of January 1980.
According to Williams, existing domestic fiscal commitments and further demands to shore up the current failed economic mechanism cannot be funded under existing political arrangements; these needs can only be satisfied by assuming creation of money ex nihilo by Washington; the assumption of increased ex nihilo money creation to fulfill existing commitments and shore up the failed mechanism is damaging the credibility of the dollar as world reserve currency; the loss of credibility should weaken the dollar and eventually lead to panicked dumping of dollar and of dollar-denominated paper assets, triggering hyperinflation.
When I follow this logic backward, the first question I encounter regards the panicked dumping of dollars and dollar-denominated assets. Assuming hyperinflation is triggered by panicked selling of dollars and dollar-denominated assets, for what is this currency and these assets to be exchanged? Who would step in to buy the assets when everyone else is selling them in a panic? In theory, the Federal Reserve can step in to buy treasuries, but it can only offer dollars in exchange for the treasuries. Other assets, since they are denominated in dollars, can only be exchanged for dollars. Moreover, if the sellers have dollars to dump, they can only use these dollars to buy other currencies, precious metals, or commodities. If they use the dollars to buy other currencies, the dollar’s exchange rate will fall. If they use the dollars to buy precious metals, the prices of the metals will rise. If they use the dollars to buy ordinary commodities, the prices of these commodities will rise still further. If Washington intends to inflate the general price level to fix its problems, creating at least the appearance of a selling panic on the dollar would be precisely the means of accomplishing this aim.
Moreover, what do the sellers of currencies and assets denominated in various currencies seek when it comes to selling? I can only assume they want what everyone else wants: to receive, in return for their asset, the greatest quantity of another currency for the one they are selling, or the greatest quantity of money in any currency for their asset. In a panic, however, the opposite situation obtains: they must accept massive losses on their currency and assets. If they want to sell dollars, for example, they would be selling these dollars for fewer euros. If they were selling euros, they would be selling euros for increasing amounts of dollars. In my assumptions, sellers tend to prefer situations where prices are rising for their commodities, not falling as is assumed under a panic selling situation.
A further problem exists: the dollar is the world reserve currency because world commodities are priced in dollars. To remove the dollar as world reserve currency requires the sellers of commodities to price their commodities in some other currency than dollars. If the dollar is weakening, the prices paid for commodities is rising in dollar terms. Against what currency are these commodities to be priced? Will they be priced in currencies where prices of the commodities are generally falling or currencies where the prices of commodities are generally rising? Assuming general over-accumulation of capital, sellers will be very interested in those currencies where prices are constantly rising not falling. Producers would appear to have a decided interest in seeing inflationary policies by the various national states.
Although Williams’ argues rapid inflation will induce holders of dollars to abandon it, he paints a bleak economic picture where the biggest problem is not rising prices but faltering demand:
Despite pronouncements of an end to the 2007 recession and the onset of an economic recovery, the U.S. economy still is mired in a deepening structural contraction, which eventually will be recognized as a double- or multiple-dip recession. Beyond the politically- and market-hyped GDP reporting, key underlying economic series show patterns of activity that are consistent with a peak-to-trough (so far) contraction in inflation-adjusted activity in excess of 10%, a formal depression (see Recession, Depression and Great Depression). The apparent gains of the last year, reported in series such as retail sales and industrial production, should soften meaningfully in upcoming benchmark revisions. The revised patterns should tend to parallel the recent downside benchmark revision to payroll employment, while the July 2011 annual GDP revisions also are an almost certain bet to show a much weaker economy in recent years than currently is recognized in the markets. (See Section 4—Current Economic and Inflation Conditions in the United States.) Existing formal projections for the federal budget deficit, banking system solvency, etc. all are based on assumptions of positive economic growth, going forward. That growth will not happen, and continued economic contraction will exacerbate fiscal conditions and banking-system liquidity problems terribly.
From Williams’ own analysis, economic conditions are worsening to levels not seen since the Great Depression. He is assuming that global sellers of commodities will face, in addition to weakening demand, increased liquidity problems created by a failed economic mechanism that previously was necessary to maintain economic stability in the face of absolute over-accumulation. If policy actions to reverse this situation are not sufficient to stabilize the global economy, what will be the result? From the point of view of economic policy the danger at this point seems not to be hyperinflation, but a rather pronounced deflation of prices. However, a more nuanced view of the situation is called for to confirm this conclusion.
Tags: Bailout, budget deficit, commodity money, CURRENT ACCOUNT DEFICIT, debt, deflation, Depression, economic collapse, economic policy, ex nihilo money, Federal Reserve, financial crisis, great depression, hyperinflation, inflation, international financial system, Karl Marx, political-economy, recession, stupid economist tricks, The Economy, unemployment
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"