…the Federal Reserve engaged in a massive inflation of financial assets to fend off the deflationary pressures inherited from the 2007-9 catastrophe, presenting investors and bankers with the gift that kept on giving: perpetual asset inflation and an assurance that the Fed would always have their back… It is a misconception to see inflation as only arising in 2021. The first signs of fast-rising consumer inflation were indeed in 2021, but artificially induced asset inflation had preceded this for nearly a decade.
At the end of May, I wrote that these projections were proving to be accurate and ominous and the available tools placed policy makers in a tenuous situation:
The raging inflation that emerged late in 2021 places the masters of the capitalist economic universe in a policy vice. To stem inflation, they must raise interest rates, which invariably dampens economic growth. But economic growth has already slowed-- indeed, turned negative in the US for the first quarter of this year. With so many economic indicators declining or going negative, rising interest rates will only accelerate the slowdown of consumer spending, productivity, wage growth, investment, and social spending, while increasing debt and its costs.
Since then, Jamie Dimon, the head of the US’s largest bank and a celebrity financial pundit, has declared before investors and analysts that it is time to prepare for an economic “hurricane”: “That hurricane is right out there down the road coming our way. You just have to brace yourself.” His counterpart at Goldman Sachs, David Solomon, sees a reasonable risk of a recession. And Solomon’s predecessor at Goldman Sachs and Elon Musk also joined in pointing to the growing danger of recession. Talk of a “soft landing” -- avoiding a deep recession-- has dissipated.
It’s fair to say that today a majority of economists, politicians, even TV stock market cheerleaders expect continued inflation and likely recession-- a cruel brew for all, but especially the working class.
As mid-year approaches, the foretold crisis appears even more inevitable and more severe.
While the growth figures for the second quarter won’t be in for several weeks, the Atlanta Federal Reserve optimistically projects US Gross Domestic Product (GDP) to grow by a mere .9% (annualized). Couple that with the 1st quarter drop of 1.5% and we technically already are in recession.
Both the Organization for Economic Cooperation and Development (OECD) and the World Bank have recently drastically lowered their global growth estimates for 2022, by a third and more than a quarter, respectively.
Inflation continues to rise unabated, hitting another four-decade high with a May annualized growth of 8.6%. Prognosticators thought that the slight drop in April might signal a peak, but the May acceleration put an end to their wishful thinking.
Galloping inflation again took a big bite out of real average hourly wages, with the average dropping .6% from April to May, or 3% for the last twelve months. The 3% May-to-May comparison actually amounts to a 3.9% drop in real average weekly earnings, given a drop in the hours worked.
For the first time this year, consumer spending is down, dropping .3% from April to May. Consumer spending-- by far the largest component of total national economic growth-- was the last bastion of optimism available to the few remaining academic and media pollyannas.
The first signs of a deteriorating housing market are appearing, with mortgage demand at the lowest level in 22 years. For the week of June 5th, applications for home mortgages were down 7%, and 21% against the same week in 2021. And refinancing was down 75% against the same week a year ago.
A revealing, but seldom explored, set of statistics addresses the US economy from the perspective of the capitalist or the investor. Non-farm business sector labor productivity dropped 7.3% in the first quarter, the most since the 3rd quarter of 1947. And unit labor costs increased 12.6%, the highest increase since the 3rd quarter of 1982.
These two results describe the costs of the commodity--labor-- in terms of how much the capitalist pays for that commodity relative to what the capitalist acquires from the use of that commodity, a rough measure of the rate that labor is exploited. Further, taken together, they are an indicator of profit expectations when taking account of the cost of the commodity, labor. Put simply, when labor productivity drops and the cost of labor to the capitalist rises, profits are expected to drop.
In the first quarter of 2022, even though workers worked 5.4% more hours, they produced 2.3% less (reflected in the 7.3% productivity decline). At the same time, their hourly compensation, not adjusted for inflation, rose 4.4%.
So, capitalists paid workers more, worked them longer hours, while the workers produced less. This is not a happy result for the capitalist class.
How could this happen?
With an extremely tight, competitive labor market, capitalists are paying more to acquire and retain workers-- they are hoarding labor, just as they might any other commodity-- even though they are getting less production from them. This has and will result in lower profits.
The Wall Street Journal notes on June 13 (Weaker Earnings Pose New Threat to Markets): “...recent days have cast doubt on the durability of corporate profit growth, further darkening the outlet for stocks. Companies from Target to Microsoft Corp. have warned that their results will be lower than expected, while analysts have trimmed earnings forecasts across industries.”
As in previous downturns with sinking labor productivity, the capitalist class will respond with layoffs in an attempt to discipline labor, to squeeze more from the workers. The resulting unemployment, absent a fighting labor movement, will undermine labor's bargaining power, tend to restore the rate of exploitation, and increase capital’s share of the economic product.
Forced unemployment will surely be the coming corporate response to falling profit.
Though the strategy will remain behind a veil of official obfuscation, the captains of industry and the lieutenants of capital understand the mechanism. A revealing article in the June 14th edition of The Wall Street Journal tells us that: “Federal Reserve officials are beginning to signal that higher unemployment rates might be a necessary consequence of their efforts to damp inflation by raising interest rates.”
A commentator cited in the article advised his clients: “We should prepare ourselves for projections intended to communicate the Fed’s resolve to reduce inflation by targeting a higher level of unemployment.”
Once again, pundits are discussing the mythical “natural rate” of unemployment. The WSJ reminds us that a decade ago, the “natural rate” was seen as between 5 and 6% (it currently is 3.6%). Prepare for more unemployment!
So workers are working more for less, with their wages eaten away by galloping inflation. A recession is here or looming on the near horizon. They have depleted their savings and are maxing out their credit cards. And rising unemployment is imminent.
In the US, neither political party offers any relief for workers. The Republicans preach the ugly, stale, and counterproductive sermon of austerity. The Democrats pretend that everything is or will soon be better.
With economic storms battering the people for the third time in twenty-two years, as inequality continues to expand, as the quality of life is threatened and vulgarized, as stresses erupt in violence and nihilism, as war continues to be the constant of daily life, one must wonder if this is the time for new ideas, new approaches-- out with the old, in with the new.
Are the dominant political parties and organizations in the capitalist world up to these challenges? Are the old social democrats or their new incarnations addressing these catastrophic crises? Do the rising populists of the right or left offer solutions or distractions?
Time is running out.