This story is a simple metaphor for the situation facing the US economy today. The dangerous roads represent the precarious state of the US economy still in disrepair in the aftermath of the 2007-9 systemic meltdown and suffering the devastation wreaked by the extra-systemic pandemic a decade or so later. The conjunction of these two unexpected disasters make the road ahead uncertain.
The lack of a speedometer represents the modern absence of any objective, material, universally accepted measure of value. In the past, the convention of measuring value by some rare metal like gold or silver would anchor the circulation of money and credit in something beyond the judgment or interests of central bankers or treasury officials who can set the “speed” of currency by fiat. But not today.
In the US, officials-- our economic “drivers” --have been pressing hard on the accelerator: buying up US debt and mortgage debt so that their growth will not devalue existing assets. In fact, their actions have more than met the challenge of devaluation-- asset deflation-- left by the 2007-9 crisis; they are now pumping up financial, home, and other asset values to new, seemingly limitless heights.
The “drivers” have suppressed interest rates which makes the cost of borrowing virtually zero, allowing corporations to access easy money for mergers, acquisitions, and stock buy-backs, further swelling asset values without touching corporate earnings.
Finding that pressing the accelerator on dangerous roads has not resulted in a crash, the emboldened bankers and policymakers have been pushing even harder, producing inflated values of assets and profits, while debt remains fixed and with little associated costs. Ruling elites and corporate executives fully support and reward these policies.
Thus was created a policymaker’s utopia: a limitless stimulus to the capitalist economy with no associated danger. Ruling class policy makers drink the same magic elixir that many on the left have urged: Modern Monetary Theory (MMT), the notion that fiat currency (currency free of any basis in a common material standard) allows currency expansion without any necessarily negative consequences. But they have hitched it to the interests of wealth and power. While US economic czars will not admit it, they have quietly tossed out their faith in the infamous Phillips curve, the close relationship of government spending and inflation, budget balancing and fiscal restraint.
Once, when Keynesian demand-side economics was popular, many policy makers also took to hiding this once-universal consensus for political reasons. Just as many read Keynes as justifying welfare spending and public-sector investment, ruling-class apologists insisted that “pumping up” the economy (bourgeois economics floats on metaphors) would result in massive inflation and crisis, while contradictorily endorsing obscene military spending and massive corporate subsidies and bailouts to do their “pump priming”!
Similarly, today’s elite policymakers mask their commitment to MMT remedies behind bluster about budget deficits and pay-as-you-go: they urge austerity, while government and quasi-government institutions spend money like drunken sailors, scarfing up assets and locking them up on their balance sheets in order to evade a deflationary crisis and to promote the stock market’s wild ride.
The limitless utopia imagined by US policymakers resulted in the Federal Reserve accumulating $8.76 trillion in assets by December 29, 2021, nearly $6 trillion of which they acquired since 2013. Had the assets (Treasury securities and mortgage securities) remained in the marketplace, the value of ALL securities would have dropped dramatically and the yield necessary to entice buyers would have risen sharply, discouraging future borrowing and retarding economic growth.
Instead, 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.
But eventually, the driver of a speeding car or those steering the US economy run into a sharp curve in the road and realize that they must slow down.
For the US economy, that curve in the road is consumer inflation. 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. Indeed, it was this asset inflation in conjunction with the shock of a collapse in supply brought on by pandemic lockdown and an even more dramatic rebound in demand that spurred the consumer inflation that now plagues the US economy.
How the masters of the economic universe thought that they could perpetually spur financial asset inflation without inducing inflation in more mundane, real-world markets-- autos, bacon, and eggs-- is truly astounding and hubristic. Most of us have the sense to slow down for the curves in the road.
Inflation will be with us for a while. Despite their initial Pollyanna assurances of a temporary inflationary blip, most of our economic gurus have come around to acknowledge that inflation has considerable staying power. The December year-to-year consumer price index (CPI) accelerated to 7% from November’s 6.8%, with December’s CPI constituting the biggest increase since June 1982.
Core producer-prices leaped a stunning 8.3%, the fastest on record, according to The Wall Street Journal, an ugly foretell of future consumer prices.
As I noted in late November, inflation is, ironically, itself like a virus, intensifying and spreading far and wide. Enterprises and institutions scramble to catch up to price increases with further price increases. Monopoly capitalism seizes on this opportunity to increase profit margins well beyond any catching-up level and driving inflation ever further. Small businesses and labor unions lag behind inflation, while the monopolies push it forward. It is the mega-firms, the giant monopolies, and not Labor or small business, that push the inflation spiral to greater and greater heights.
As they have in past inflationary periods, officialdom-- awakened to the danger-- are now set to “put the brakes” on the economy. Through raising interest rates and discontinuing buying securities, even selling off some locked in the Federal Reserve, they hope to slow down the economy. Of course, this “braking” will also slow down the tepid recovery from the earlier lockdown in response to the Covid pandemic.
Though clearly prescribed by the accelerating inflation, the slowdown could not come at a worse time. Nearly all of the retail and manufacturing figures for December 2021 were already trending down long before any Federal Reserve or Treasury braking was to occur. Total retail and food service sales dropped 1.9% from November, led by an 8.7% drop in online stores and 7% drop in department stores. Industrial production fell, with manufacturing down .3% from the previous month.
Fourth quarter 2021 reports also showed a significant drop in profits for two of the largest US banks, a departure from the unprecedented profit growth of the financial sector during the pandemic, an omen of pressure on profitability that will undoubtedly affect prices and interest rates.
What will inflation, higher interest rates, and slowing growth (In January, The World Bank revised its global growth estimate downward by roughly 25%) mean for 2022?
For some time, obscenely growing profits and nearly free money have generated an intense search for yield, as they did in the lead-up to the recession of 2000 and the 2007-9 crash. The growth of “blank check” companies, special-purpose acquisition companies (SPACs) and the surging of “unicorns” (privately-owned start-ups valued at over a billion dollars) places a lot of capital in a risky environment of slowing economic growth, rising costs, and higher financial costs. Even before the slowing economy and high inflation, start-ups were struggling. When investors, swollen with funds, seek out these dark, less regulated areas of economic activity in search of higher yields, trouble is often on the horizon. At the end of 2021, two thirds of initial public offerings (IPOs) traded below their opening price, according to The Wall Street Journal.
Rising interest rates may also endanger the mortgage/home-buying bubble, a phenomenon that has seen home prices soar at near-record paces, thanks to low-interest loans. Those pundits who derided the Chinese Communist Party’s pre-emptive strike on its own wildly anarchic residential construction boom may live to eat their words as the US home-buying spree unwinds.
With low union density, 2022 will likely see a loss in relative income of workers to inflation. A slowing economy and a squeeze on corporate profits will bring an increase in labor exploitation, more unemployment and more intense working conditions.
At best, we face a revisiting of the stagflation of the 1970s. At worst, a deflationary overshoot-- a deep recession like the early years of the Reagan administration.
How will we respond?