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Tag: deflation

The hidden conflict within the fascist state for control of economic policy (5)

I have been going through this process in order to clarify for myself the logic of the current discussion of so-called negative interest rates — an oxymoron if ever there was one. This is part five of the series; part one, part two,  part three and part four can be found here. I hope it also will have some use to readers.

Part Five: The dollar and the increasing possibility of 21st Century Currency Warfare

Can monetary policy be rescued from oblivion? Probably not. There are just too many difficulties with the idea of negative interest rates on currency.

As I explained in part four of this series, Haldane proposes that the way around the zero lower bound on monetary policy may be to impose a negative interest rate on the holders of state issued currency. If a way could be found to force the holders of currency to pay interest on the currency in their bank accounts, wallets, pockets — and even in their mattresses — the distinction between credit money and currency could be forcibly imposed on society by the state despite a zero interest rate environment.

Once stripped of its deceptive wrapping as mere monetary policy, what Haldane is proposing is the outright expropriation of your savings account, your checking account and even the currency in your wallet and cookie jar. This goes well beyond monetary policy and begins to encroach on the limits of national economic policy itself. Under the most charitable interpretation, his proposal is well into the sphere of fiscal, even currency, policy despite the attempt to conceal it behind protective coloration as a negative interest rate on currency.

For the moment, however, let’s ignore this potential objection to his proposal. Instead, let’s treat it as a proposal for a measure similar to what FDR did in 1933: pure and simple devaluation of the currency.

What are the difficulties to be considered?

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The hidden conflict within the fascist state for control of economic policy (4)

I have been going through this process in order to clarify for myself the logic of the current discussion of so-called negative interest rates — an oxymoron if ever there was one. This is part four of the series; part one, part two and part three can be found here. I hope it also will have some use to readers.

Part Four: The desperate search for an exit from failed monetary policy

“I think we got the Recovery Act right. The primary objective of our policy is having more work done, more product produced and more people earning more income. It may be desirable to have a given amount of work shared among more people. But that’s not as desirable as expanding the total amount of work.” Larry Summers, Washington Post, November 8, 2009

“We didn’t think it would take that long.” Ben Bernanke, USA Today, October 5, 2015

The disappointment with the weak impact of counterfeiting the currency was admitted by Bernanke in a recent interview. This was not supposed to happen according to the dominant monetary theory, and Ben Bernanke in particular, where the prices of commodities are a function of the supply of currency in circulation. According to Bernanke’s “quantity theory of money”, the government had this technology, the printing press, which it could use to manage the US national capital. In fact, following the financial crisis, the policy rate went to zero without providing any real stimulus at all.

The chief economist of the Bank of England, Andrew Haldane, gave a speech in September on the problems faced by monetary policy. Although Haldane never mentions Larry Summers, his speech addresses the same concerns Summers raised in his own November 2013 “secular stagnation” speech. The problem is that monetary policy, on which the United States has relied since 1979, has run into a dead end, the zero lower bound. Had Washington not stepped in and provided a multi-year, multi-trillion dollar fiscal stimulus, capitalism likely would have collapsed. No one will admit it, but this is in fact what has happened after the 2008-2009 financial crisis.

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The hidden conflict within the fascist state for control of economic policy (3)

Part Three: The Zero Lower Bound and the Collapse of Neoliberal Monetary Policy

I have been going through this process in order to clarify for myself the logic of the current discussion of so-called negative interest rates — an oxymoron if ever there was one. This is part three of the series; part one and part two can be found here. I hope it also will have some use to readers.

To recap my argument so far:

Keynes in his 1930 essay, Economic Possibilities for Our Children, diagnosed the cause of the Great Depression as the improvement in the productivity of labor. Although at first admitting this improved productivity must sooner or later require reduction of hours of labor, in his 1933 essay, The Means to Prosperity, he ultimately proposed to fix it by a two-fold strategy: First, the state should maintain abundant credit at very low interest rates to facilitate private investment; second, the state had to lift total spending on commodities through deficit spending.

By the 1970s, however, this strategy — basically a strategy to avoid reducing hours of labor — ran into the twin economic maladies of stagnation and borderline hyperinflation — sometimes called stagflation in the popular press — leading to the political movement to get rid of state management of the economy entirely. In turn, this effort to get rid of state management is more popularly referred to by the name, neoliberalism, on the Left.

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The hidden conflict within the fascist state for control of economic policy (2)

Part Two: The collapse of the Keynesian policy consensus

As I stated in my previous post, the conflict over control of state economic policy can be traced to the Great Depression. Keynes set the state economic policy framework for this conflict by tracing the cause of the Great Depression to the improvement in labor productivity. According to Keynes in 1930, the depression was caused by capital reducing the need for labor faster than it could find new uses for labor. Of course, capital only has one use for labor: the production of surplus value, production of profit. Keynes was essentially confirming Marx’s prediction that the diminishing need for labor would lead to the collapse of commodity production.

Paul_VolckerAccording to Marx’s labor theory the price of a commodity is only the expression of the “socially necessary labor time” required for production of commodities. This implied that as the labor required for production of commodities fell, so would their prices. When the Great Depression hit, the problem pointed out by Keynes, that the reduction of labor was outrunning the pace at which capital could find new uses for labor, was expressed in deflation, i.e., generally falling prices.

Marx’s argument that the prices of commodities were tied to their labor value carried deadly implications for capitalism. Since prices paid for commodities was the only way the capitalists could recover their investment. Falling prices implies growing pressure on profit. If the capitalists could not sell their commodities at prices to cover their investment plus profit, capitalist production for profit would come to a standstill.

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The hidden conflict within the fascist state for control of economic policy

This article, Devaluations didn’t work, points to what I think is the real reason the Federal Reserve is desperate to raise its policy rate some time this year. It is becoming increasingly obvious monetary policy hasn’t delivered and the bankers are in danger of losing their control of economic policy.

According to the Economist: “Devaluations today haven’t had the positive impacts the end of Gold Standard did in the 1930s”. In the aftermath of the financial crisis of 2008-2009, bourgeois simpletons are deeply divided over how to replace the extraordinary measures taken to prevent collapse of capitalism with a set of policy tools that can be used to manage the crisis long-term. At the heart of this struggle is the question,

“Why aren’t currency devaluation policies creating inflation?”

To answer this question will require a little bit of economic history.

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Deflation is good for you and here’s why

I had a short exchange with someone last night about this tweet on deflation:

@davidkorowicz: Deflation [here] we come, and though not polite to say in civilized conversation, the limits to growth are shadowing our present moment

The conversation the tweet sparked reproduced some of the most often made arguments for why deflation is an unwelcome development in a capitalist economy. Among the most important arguments was the assertion deflation will cut wages and increase debts.

The alleged mechanism of the negative effects of deflation on the working class are these:

  • Your company gets less income so they lay you off or cut your wages.
  • With lower wages or no job, your outstanding debts become harder to repay — which is a big thing if, for instance, you have a mortgage on a house or a car loan.

On the other hand, with inflation you get many of the opposite problems.

  • Inflation constantly increases your real cost of living.
  • With prices rising, you either have to get more frequent raises or work longer hours just to remain at your present standard of living.
  • With rising prices, you tend to become increasingly dependent on debt to make up the shortfall between your wages and prices at the checkout counter.

So which is worse? Losing your job and  facing wage cuts? Or working more hours just to keep your head above water?

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What does it take to beat capitalism when the deck is stacked against us

cardsOn Monday, I showed both the workers and the capitalists view economic choices through the lens of capitalist relations of production. The fact that both classes view the crisis of capitalism through the same filter means the both accept the same false choices in the crisis. It is not true in the least that the working class is brainwashed by the capitalists to act against their own interests. Rather, because both classes see the crisis from their respective positions within capitalist relations of production, they arrive at the same general conclusions.

Those conclusions are consistent with capitalist relations and, therefore, imply a definite outcome: labor exists only to fatten profits.

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“How Capitalism Works” (through the eyes of the working class)

trickledownYesterday, I showed why the inflation\deflation debate is concerned with the consumption of labor power and the debt of capitalist firms. Deflation carries a risk firms will not increase their employment and may go bankrupt because falling prices put pressure on profits.

My post led to the following response on reddit’s Socialism page:

“Too tired to read article but debt becomes worse with deflation because in real terms it is worth more (the corollary is that you can inflate debt away, since the debt which is constant becomes less in real terms after inflation. [Krugman] wrote a good op ed about that on April 4th, called oligarchs and money if memory serves). Aside from that this article seems a little wacky”

So does Krugman’s recent post to his New York Times blog contradict my argument? Well, let’s see:

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“Secular Stagnation” and capitalist destruction of the productive forces

Tyler Cowen has an interesting take on Larry Summers talk at the IMF on so-called “secular stagnation”. According to Cowen, if Larry Summers is correct, the economy is probably contracting.

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Crying Wolf over Deflation

larry-summersProSyn has a post today about why deflation poses such a mortal risk for the fascists. The post is written by Jean Pisani-Ferry, a French economist and public policy expert according to the Wikipedia. Being a public policy expert Pisani-Ferry has decided that a fall in the prices of commodities is bad for “the public” for several reasons: Read the rest of this entry »