Is There an Answer to Inflation?

Inflation is a scourge on those cursed with living under the capitalist order. It especially punishes those least able to weather the pain of constantly falling behind rising prices and expanding debt. 

Inflation harms nearly all working people whose income growth trails the rise in prices, including those with union contracts that bridge periods of rapid price increases. 

Small businesses suffer because of their inability to match supplier increases with price hikes of their own. Also, they are more likely to be locked into a cycle of incurring greater and greater debt and ever-higher interest rates.

The pain of inflation is intensified by the customary antidote prescribed by mainstream economists: interest-rate hikes designed to slow economic activity and force pricing restraint. While some decry the harshness of government anti-inflation policies, they can offer no other solution under capitalism. Erdoğan, President of Türkiye, recently experimented with defying anti-inflation orthodoxy with disastrous results.

Higher interest rates add higher interest charges that banks attach to already bloated prices through credit-card usage, mortgages, student debt, and other private borrowing. 

In the post-war period, we have known one period of extended, intractable inflation, and that came after a long period of government military-related spending and an unanticipated economic shock-- the oil crisis-- in the 1970s. As I wrote in 2021: 

The enormous costs of the US’s long, costly Asian war produced great debt and pressure on the gold-backed US dollar. The imperialist alliance with Israel brought a disruptive, unprecedented boycott on the part of the oil-producing nations resisting Israel’s occupation of Arab territories. Intense competition between the dominant US economy and the resurgent Euro-Asian economies was shrinking profit margins.

I thought there were common features with that earlier period and the emergence of high inflation in 2021:

The pandemic, like the oil crisis, has shocked the global economy. The US economy and subordinate economies have been running on the fumes of fiat money and central bank stimulation, exposing remedies that are losing their effectiveness. Despite the lack of even phantom existential threats, the US has conjured costly foreign adventures and an extraordinarily wasteful and large military budget and “security” spending, crowding out social spending and amplifying national indebtedness. Commodity scarcity generates rising prices. And both slow growth and inflation are now reappearing and promise to continue.

This was not a popular view in 2021. 

And it is not popular today, though wars in Ukraine and Gaza are adding even more limitless demand for weapons and more inflationary pressure.

In 2021, economists, government officials, and pundits scoffed at inflation, assuring us that inflation would subside as soon as income support from the pandemic was exhausted and damaged and broken supply chains were repaired. In sharp contrast, I pointed out:

Despite the admonitions of the central bankers and financial gurus, inflation seldom self-corrects. It rarely runs its course. Instead, inflation tends to gather momentum because all the economic actors attempt to catch up and get ahead of it…  And it is important to recognize that this profit-taking has and will continue to fuel inflation. Once again, the commanding heights of the US economy-- the monopoly corporations-- are using the excuse of catching-up to profit-up.

With Wall Street and its minions still clinging to the illusion that inflation was going away and that there was no need for the braking effect of high interest rates, the January and February inflation reports came as a shock. The media likes to jump from one measure of inflation to another to promote the best perception of inflationary trends. Thus, from report to report, they may feature the CPI or the core CPI, or the PCE, computed on a month-to-month or annualized basis, depending on which shows the most optimistic results. But manipulation and wishful thinking cannot hide the bare facts: December to January month-to-month CPI rose .6% and January to February month-to-month CPI by .4%, alarmingly high increases after three straight months of month-to-month decline. Inflation is still with us.

Conformation for the relationship between higher prices and profit-taking comes from an unexpected source. Conservative economist Greg Ip writes of the Big Profits, High Prices: There Is a Link: “Since the end of 2019, prices are up 17%, outpacing both labor and nonlabor costs. The result: Profits grew by 41%. If profits had grown at the same, slower rate as costs, that would have translated to a cumulative price increase of only 12.5%, and an average annual inflation rate roughly 1 percentage point lower.”

So, the monopoly corporations effectively robbed the consumer and small businesses of 1% more of the price of goods and services in each of the last four years, on top of their usual rate of exploitation. During this period, profits reached a rate unseen in the twenty-first century. 

In this election year, is anyone in either of the two major parties addressing the pain of inflation and its cause located in the insatiable thirst for profit on the part of monopoly capital? The monopoly corporations impose a unilateral 1% tariff on all goods and services for four years in a row with no outcry from the mainstream press? This is what the pundits mean by “our democracy”?

The Biden administration answers that, despite inflation, we are doing better. The economy is doing fine.

Consider the facts:

● The New York Federal Reserve reports that “serious” credit-card delinquencies have risen from 4.01% to 6.36% in the year through the fourth quarter of 2023, an increase of more than 50% in one year and indicative of “increased financial stress.” For many workers, the credit card is the mechanism used to address income shortfalls, but with interest on credit debt rising from pre-pandemic 14.9% to 21.5%, the average of the last quarter of 2023, credit cards are exacting a harsh toll. Credit-card usage now constitutes a vicious trap and not an answer.

● Mortgage and auto-loan delinquencies are also on the rise.

● Fox News reports: ”A record-breaking number of Americans are making emergency withdrawals from their 401(k) retirement plans in order to cover a financial hardship amid the ongoing inflation crisis, according to new data from Vanguard Group… Nearly 3.6% of workers participating in employer-sponsored 401(k) plans made a so-called "hardship" withdrawal in 2023, according to Vanguard, which tracks about 5 million accounts. That marks a major increase from the 2.8% rate recorded in 2022 and the pre-pandemic average of about 2%. It marks the highest level since Vanguard began tracking the data in 2004.” 

● The Wall Street Journal explains: “Inflation experienced by the poorest fifth of society was 1.6% higher than for the richest fifth from March 2020 to June 2023…”

● Also: “Pandemic savings have run down. The Federal Reserve concluded at the end of last year that ‘excess’ savings accumulated during the pandemic have been run down, and depending on the method used have either run out altogether or are close to it. Low-income consumers spent their excess-cash cushion earlier, according to other studies, which helps explain why they are struggling more with debt.”

● Consumers are pulling back on purchases. January’s revised 1.1% drop in retail sales has alarmed economists. While February’s numbers increased, they fell below consensus predictions.

● Burger chain McDonald’s, a bellwether for middle- and lower-strata discretionary spending, reports more customers are turning to grocery purchases and dining at home to save money.

● In a January, 2024 Pew poll, 31% of respondents say that US economic conditions are “poor” and 41% say that they are “only fair.”

These facts present a formidable case that inflation is continuing and doing great harm to US citizens, especially the working class. Sadly, there is no-- and likely will be no-- political answer to this scourge expressed in the forthcoming elections. To properly address inflation without advocating the painful remedies now in place would require a critical challenge to the economic system that frequently spawns inflation. That system is capitalism and neither mainstream political party will dare make that challenge.

The US working class needs organizations-- unions, political parties-- that will actually fight against inflation or risk another lost decade of economic stagnation and declining living standards.

Greg Godels

zzsblogml@gmail.com

When Have We Seen this Before?

Fifty years ago, global capitalism came to a crossroads. The enormous costs of the US’s long, costly Asian war produced great debt and pressure on the gold-backed US dollar. The imperialist alliance with Israel brought a disruptive, unprecedented boycott on the part of the oil-producing nations resisting Israel’s occupation of Arab territories. Intense competition between the dominant US economy and the resurgent Euro-Asian economies was shrinking profit margins. Traditional macroeconomic tools failed to meet the challenges of this new situation. The ensuing crisis came to be called the era of stagflation-- stagnant economic growth coupled with persistent, intractable inflation.

Stagflation persisted through most of the decade and ended with shock therapy-- a radical dose of deregulation, privatization, and market fetishism, a regimen of austerity now prescribed by all mainstream parties.

The crisis of the 1970s bears some similarities with today’s turmoil.

The pandemic, like the oil crisis, has shocked the global economy. The US economy and subordinate economies have been running on the fumes of fiat money and central bank stimulation, exposing remedies that are losing their effectiveness. Despite the lack of even phantom existential threats, the US has conjured costly foreign adventures and an extraordinarily wasteful and large military budget and “security” spending, crowding out social spending and amplifying national indebtedness. Commodity scarcity generates rising prices. And both slow growth and inflation are now reappearing and promise to continue.

Does this mean that we are bound to relive the crisis of the 1970s? Are we seeing a replay?

Maybe, maybe not. Time will tell. But we would be foolish not to study the 1970s to distill the lessons that might apply to today.

Despite the admonitions of the central bankers and financial gurus, inflation seldom self-corrects. It rarely runs its course. Instead, inflation tends to gather momentum because all the economic actors attempt to catch up and get ahead of it.

In the 1970s, it was popular with the capitalist media to blame workers who were demanding cost-of-living adjustments (COLAs) to ward off inflation. “Greedy” unions, welfare, senior, and disability advocacy organizations were claimed as the causes of inflation’s persistence and deepening.

Cynically, all were asked to sacrifice equally, while it was monopoly corporations that were raising the prices that constituted the core of inflation. They were using “catching up” as an opportunity to “profit up.” Under the guise of responding to inflation, dominant corporations raised prices beyond their growing costs to expand their profit margins.

Unlike monopoly corporations, small businesses were limited in their ability to raise prices because of intense competition. They were caught in a profit squeeze between their need to remain competitive and the grinding increases in their costs of doing business. They are especially victimized by inflation.

At the same time, inflation cheapened the value of debt, especially corporate debt, while choking new consumer debt with high interest rates.

Today, rising prices are eating up workers’ gains just as they did in the 1970s. Let the Bureau of Labor Statistics (BLS) explain it: “From April 2020 to March 2021, the 12-month changes in real average earnings were all increases, between 4.0 percent to 7.4 percent. Prior to that, from January 2017 until March 2020, the over-the-year change in real average weekly earnings ranged from −0.5 percent to 2.0 percent.” But: “Real average weekly earnings of employees on private nonfarm payrolls decreased 1.6 percent from October 2020 to October 2021. In every month from April 2021 to October 2021, the 12-month changes in real average weekly earnings have been decreases, ranging from −0.8 percent to −2.6 percent” [my emphasis].

In other words, real average weekly earnings exploded with the labor shortages induced by the pandemic, but they were wiped out by the five months of over 5% inflation culminating in the 6.2% rise in October, a 31-year high.

It is not workers’ wages that are driving inflation, but something else.

In a revealing article, The Wall Street Journal exposes the real cause of escalating inflation. Inflation Helps Boost Profit Margins: Companies seize rare opportunity to increase prices and outrun their own rising costs [print edition] tells that “[n]early two out of three of the biggest U.S. publicly traded companies have reported fatter profit margins so far this year than they did over the same stretch of 2019… Nearly 100 of these giants have booked profit margins-- the share of each dollar of sales a company can pocket-- that are at least 50% above 2019 levels” [my emphasis]. The authors note: “Executives are seizing a once in a generation opportunity to raise prices…”

It is apparent from this candid article that monopoly capitalism is leading this profiteering. And it is important to recognize that this profit-taking has and will continue to fuel inflation. Once again, the commanding heights of the US economy-- the monopoly corporations-- are using the excuse of catching-up to profit-up.

If history’s repeat is not to be farcical, the workers’ movement must avoid the mistakes of the 1970s. It must fight against monopoly price increases and not join the purveyors of common sacrifice, like the silly WIN (Whip Inflation Now) campaign of that period.

The workers’ movement must not follow its false partner, the Democratic Party, down the road of wage and benefit restraint. The inflation-directed restraint of the 1970s gave way to the give-backs of the 1980s and 1990s.

Workers must understand that inflation is not a self-inflicted wound, but a feature of the capitalist system, especially in its finance-dominated, monopoly stage. And it must be contained by attacking the profit-taking that spurs the inflationary spiral.

Further, the working class must bring this understanding to the frightened petty bourgeoisie who feel threatened and are threatened by the scourge of inflation, a stratum that otherwise turns in great numbers to the extreme right for answers.

Of course, this task would be made easier if we had a robust Communist movement in all of the capitalist countries.

Greg Godels
zzsblogml@gmail.com

Inflation and Profits

The World Health Organization declared that the Covid emergency ended in mid-2023. Since then, the 500 Standard and Poor's companies (the benchmarks of US capitalism) have enjoyed a steady and significant increase in earnings growth. This remarkable growth persisted quarter after quarter, culminating in “more than 440 S&P 500 companies reporting second-quarter earnings so far [and] 86% have beaten analysts’ estimates, according to FactSet data” as reported in The Wall Street Journal. The WSJ further adds: “Companies are reporting earnings that are around 29% higher than those estimates, on track for a record earnings surprise in data going back to 2008.” [my italics]

So, US capitalism’s leading insider mouthpiece is surprised at the rising profit margins of the system’s leading monopoly corporations.

“These earnings are ridiculous,” said Phil Blancato, chief market strategist at Osaic. “These profit margins are incredible.” 

Yes, they are. These outlandish profits are both ridiculous and incredible. 

The WSJ author, Shradha Dinesh speculates that the mystery may lie in “skyrocketing energy prices from the Iran war.” Alternately, “AI remains a primary driver of profits across the other leading sectors.” 

But the boost from the Iran war cannot account for the earlier steep climb in earnings growth, nor can the AI investment-driven boom, which really became a major factor only in 2025. 

Even more striking than the profit explosion is the widely reported and worsening so-called “affordability crisis.” Inflationary tides have ripped through the customary standard of living of millions of US workers. Since 2021, in order to meet a wave of insidious price increases, workers have reset their purchasing regimen, borrowed from savings or lending institutions, or gone without. 

Interestingly, the pundits and political operatives have either failed to notice the relationship between rising prices and exploding profits or chosen to simply ignore it. In fact, they are connected. The coronavirus epidemic attacked economic activity as well as killing millions. With earnings (profits) depressed, the US government provided $4.65 trillion in relief funds, resulting in a massive increase (and restoration) in S&P earnings in 2021 and unleashing crushing price increases in 2021 and 2022, as corporations exploited the profitability “crisis.” Both painful inflation and profit growth continued unabated for the next four years.

The lessons of the early years of Marxist thought are often forgotten, even by Marxists. Marx went to great lengths to warn against fetishizing social relations, especially economic relations. Economists of every stripe see inflation (and deflation) as a malady of an otherwise functional economy. They separate it from the logic of capitalism, from its incidence as a completely rational development of capitalism under specific conditions. Instead of recognizing inflation as a variant of the social relation between workers as consumers and employers as price setters, they insist that inflation is a separate phenomenon requiring a theory of inflation. Inflation-- in this view-- exists as an interloper on the regular course of a capitalist economy. This view is especially appealing to social democrats who hope to manage capitalism. 

Lost in this fetishizing of inflation is the assuredly obvious fact that inflation is the work of some of the subjects of social relations. It is the CEOs, COOs, boards of directors, and owners of corporations and businesses that choose to raise prices. They do not make their decisions to keep up with their costs, to benefit the consumer, to appease their critics, or because God directs them. They make the decision in order to accumulate more capital. 

That is why a shock like the oil crisis of the early 1970s or the pandemic of the early 2020s generates inflation. The opportunity to press price increases is not lost on the bourgeoisie. And they will pursue this competitive race until it fails to yield profit growth. 

Some may dismiss this account of crisis-sparked inflation as a psychological explanation, an explanation based upon the contingent avarice or self-regard of capitalists. Far from it. Chronic inflation, as experienced in the 1970s and today, is best understood as a social phenomenon: the predictable response of a social class that seizes every opportunity to increase the rate of accumulation. In a capitalist society, shocks like pandemics, wars, and other catastrophes provide the trigger for aggressive and persistent price increases. Increases will continue until they negatively impact profits.

I have been frequently advocating this view of sticky, persistent inflation based on price-gouging since November of 2021, when mainstream economists were shrugging off inflation as a temporary result of supply chain disruptions. 

I noted nearly five years ago:

In a revealing article, The Wall Street Journal exposes the real cause of escalating inflation. Inflation Helps Boost Profit Margins: Companies seize rare opportunity to increase prices and outrun their own rising costs [print edition] tells that “[n]early two out of three of the biggest U.S. publicly traded companies have reported fatter profit margins so far this year than they did over the same stretch of 2019… Nearly 100 of these giants have booked profit margins-- the share of each dollar of sales a company can pocket-- that are at least 50% above 2019 levels” [my emphasis]. The authors note: “Executives are seizing a once-in-a-generation opportunity to raise prices…”

They continue today to exploit this “once-in-a-generation opportunity,” creating a vicious human catastrophe that politicians only now-- after five years-- label an “affordability crisis.” They didn’t want to address it then, and they don’t want to acknowledge it now.

While economists search for a theory of inflation that will enable leaders to tame inflation, to manage the crisis that ensues, workers should recognize that the problem and its solution come from deep in the very logic of the capitalist system. They must understand that it is an axiom that capitalists will always exploit every opportunity to accumulate additional capital at the expense of the worker/consumer. The only way to eliminate that possibility is to eliminate capitalism.

Greg Godels

zzsblogml@gmail.com

Reading the Economic Tea Leaves

Imagine a car careening around dark mountain roads during a rainstorm. The driver has no speedometer, but a set of brakes and plenty of power available at the accelerator. The passengers have both a need to get to their destination and an abiding concern for their own safety. They want to arrive promptly, but safely.

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?

Greg Godels

zzsblogml@gmail.com.

Ruling Class Angst

There is a profound difference between the economic crisis of 2007-2009 and the evolving crisis of 2022. In 2007, capitalists feared the collapse of their own enterprises, but they had no doubt that the system was salvageable, albeit at costs that might prove difficult to impose. They knew that if the politicians could be won over to endorsing Wall Street’s prescriptions, if the people kept their pitchforks tucked away, and if the capitalists, in their greed, could be kept from devouring each other, then there was a good chance that an elite economic version of an “EMS” rescue team could save capitalism from further decline. Sure, the executives at Lehman Brothers, Bank of America, AIG, and many other firms had every right to fear for the future of their companies. But few capitalists imagined an existential threat to the system; few failed to believe in a way out.

This time is different.

Stagflation is a different kind of beast and that beast has the bourgeoisie, its friends, and its hangers-on terrified. The problem is that economic “science,” as they know it, only offers one possible escape and it has dire economic and political consequences. Once they recognized that inflation was not simply a momentary speed bump (as I predicted nearly a year ago), Central Bankers and economic gurus who have studied the 1970s-- the long, painful decade of stagflation-- prescribed a drastic remedy of slamming on the brakes of economic growth to contain inflation. Some nonetheless fear a long period of inflation and stagnant growth.

The 1970s taught that cheerleading, patience, and half-measures would not work. The Whip Inflation Now (WIN) campaign, price controls, and other approaches failed until the then-Federal Reserve chair, Paul Volker, boldly imposed draconian interest-rate increases that threw the economy into deep recession. Inflation tamed. Lesson learned. 

Certainly, no political regime wants to be associated with income-and-wealth-devouring inflation. But neither would it want to suffer through a job-devouring, wage-declining recession. Voters and subjects seek to punish the politicians in office when either situation arises. 

Thus, politicians and rulers are caught on the horns of a dilemma. If they ignore inflation, they pay a political price. If they attack inflation and bring on economic decline, they also incur the wrath of the electorate or their subjects. Either option taken constitutes a deep threat to the incumbent party or the ruling regime. 

Recently, some politicians have chosen to ignore the lesson that bourgeois economists have drawn from the 1970s bout with stagflation. Turkish president Erdogan decided to defy the convention by coercing the country’s central bank into lowering interest rates in the face of growing inflation, betting that the benefits of economic growth would outweigh any increase in inflation. He was wrong. Inflation has soared with devastating results on the people’s living standards and security.

Even more recently, the newly selected Conservative UK prime minister, Liz Truss, out of sheer arrogance or a profound economic ignorance, offered a budget based upon promoting growth (predictably through tax cuts for the rich!) and ignoring the anti-inflation moves of the Bank of England (BOE). Financial markets immediately reacted violently, forcing the BOE to go on a corrective bond-buying spree, and earning a rare rebuke of European government policy from the International Monetary Fund. Once again, the lesson of the 1970s stagnation crisis was harshly driven home.

With an interim election only weeks away, the ruling party in the US fears a severe beatdown from the angry electorate, devastated by sharp price increases imposed by profit-hungry monopoly corporations, declining incomes, and exploding interest payments on loans. At best, President Biden can only browbeat his Saudi allies for sustaining high energy prices in a global market disrupted by US corporate interests and US-instigated war, while the Federal Reserve slams on the economic brakes.

Liberal and social democratic labor leaders, party leaders, and pundits correctly object to the frequent blaming of inflation upon “greedy” workers or bloated union contracts. Even a cursory glance at the Bureau of Labor Statistics demonstrates that throughout this inflationary period income growth trailed and did not lead the growth in prices. That said, what do they think caused this persisting inflation? What can they offer in response to the bitter pill prescribed by bourgeois economists and the Central Banks?

Hell bent on saving capitalism from itself, some liberal and left thinkers like Dean Baker and Richard Wolff see price controls, ration cards, or public commissions as possible approaches (I refute these solutions here). Even if these fixes were likely to be enforced by governments thoroughly captured by capitalism, it would be unlikely that they could even be adopted in today’s volatile political atmosphere. The impending severe crisis cannot be met by wishful bromides or failed tactics.

More seriously, some on the left point to “financialization” as the cause of capitalism’s ills today. While the much-abused term begs many questions, it does describe one side of the restructuring of roles assumed by the leading capitalist countries as a response to the previous, 1970s version of stagflation. That is, so-called “financialization” was the new role of some advanced capitalist countries that deindustrialized after the stagflation of the 1970s. The flight of industry to low-wage countries was part of the answer to 1970s stagflation, stabilizing global capitalism and restoring the rate of profit for most of the next two decades. 

“Financialization” was the accompanying new role for those capitalist countries that surrendered their industries to emergent low-wage countries.

The stagflation of the 1970s caused the demise of the Keynesian consensus that had come to dominate economic policy since the Great Depression. That toolbox contained nothing to fix what was over a decade of roaring inflation. Indeed, many orthodox economists blamed the Keynesian tools for creating the conditions that led to that round of stagflation. In any event, it was the “financialization” era that superseded 1970s stagflation and was then believed to restore capitalist accumulation after its assault by stagflation. Therefore, it’s difficult to envision “financialization” as both a solution and cause of stagflation. 

While it is fashionable, since the crisis of 2007-2009, to see the dramatic rise of financial engineering and activity-- centered on the development of the many new financial instruments-- as the sand in the gears of capitalism, there is no reason to believe that it is any more than another adaptive stage in a resilient, but constantly crisis-plagued socio-economic system. 

It is difficult to foresee an easy, relatively painless capitalist solution to stagflation. That is not to discount the durability of capitalism. But the history of the 1970s teaches that any answer comes with enormous pain. We are only beginning to experience the rising costs from interest payments on top of the rising consumer prices. We are only beginning to feel the effects of galloping inflation compounded by stagnant incomes and growing unemployment. We are only beginning to recognize the strain on retirement funds and 401k’s. The lessons of the 1970s are distant and poorly remembered. But they are there for those who wish to heed them.

It should not be lost to anyone studying those lessons that hourly wages in the US adjusted for inflation have remained stagnant since the 1970s. More families now have two or more earners to compensate. Household debt has risen to counteract the loss in earning power. And income and wealth inequality has exploded, topping any other historic period. 

With a lost decade to stagflation and forty subsequent years of a tepid, crisis-ridden “recovery,” it is hard to imagine how people can endure another round of stagflation. It is hard to imagine how people can fail to explore the alternative to the capitalist system that brings so much unnecessary pain and misery.

Of course, part of the reason for ideological stagnation lies with the political parties, institutions, and misleaders that are so deeply invested in seeing capitalism persist. There would be no “social justice” industry-- the tens of thousands of foundations, NGOs, and charities-- without capitalism. Their criticism of capitalism ends, when the subject of socialism arises. Similarly, educators, writers, and media figures cannot risk alienating those who guarantee their stature and incomes. It goes without saying that both major US political parties are entirely invested in capitalism.

Yet their cynicism and hypocrisy would evaporate if it weren’t for the enormous material resources that capitalism makes available to those who safeguard the system's future. That will not change until the masses of the people use the power of their numbers to change it.

Whatever joy we may derive from the ruling class’s fears and anxiety over the current crisis is overshadowed by the hardships yet to disrupt the lives of millions of working people. 

Socialism is the alternative.

Greg Godels

zzsblogml@gmail.com

Sinking in the Economic Quicksand

In late November of last year, I wrote of the dangers of stagflation-- stagnant or declining growth and price inflation-- suggesting that the global economy was heading for a history-repeating reckoning: “The crisis of the 1970s bears some similarities with today’s turmoil.”

In January, I explained the source and persistence of inflation, thusly:

…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.

Stock markets continue to deflate, losing trillions of dollars in nominal value. US equity markets have lost value for ten of the last twelve weeks. As of Monday, June 13, the Standard and Poor’s market index fell 21% from its January high, officially becoming what investors call a bear market, associated with recessions. Equity losses affect most those who are farther up the economic ladder; they create a negative wealth effect, discouraging spending on the part of the upper income, wealthiest sector. A bear market also applies pressure on middle and lower strata retirement funds, especially for those employed in the public sector.

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.

Both parties obsess over symbols, cultural choices, and manners, while the material foundations of social life rapidly deteriorate. Both parties worship at the altar of individualism and herald the singular value of free choice, while the conditions necessary for informed choices and wise decisions are swept away by a cynical, corrupted capitalist media. Both parties place the claims of capital ahead of the urgent needs of the working masses and oppressed peoples.

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.

Greg Godels
zzsblogml@gmail.com

Report Card on a Failing Economic System

On Friday, May 6, the Federal Reserve released data showing that consumer credit (debt) has been accelerating since the fourth quarter of last year, with revolving credit (largely credit card debt) speeding up at an even greater pace since the third quarter of 2021. Total consumer credit grew by an annualized rate of 7% in the fourth quarter of last year, increased to 9.7% in this year’s first quarter, and expanded to 14% in March.

At the same time, revolving credit-- the debt largely incurred through credit cards-- grew 8.3% in the third quarter and 12.7% in the fourth quarter of 2021, and then 21.4% in the first quarter of this year, and an astonishing 35.3% in March!

Clearly, the US economy’s reliance on consumer spending is more and more dependent upon consumer debt, especially the credit card. For months, the business press has been hailing the continued expansion of consumer spending-- a huge contributor to overall economic growth-- as the one bright spot in the news. Now we see that consumer spending is built on the sands of consumer debt.

Likewise, personal savings (as a percentage of disposable personal income) in April, 2022 reached a low unseen since September of 2008, a sure sign that people are dipping into savings to make ends meet.

And subprime-- low credit score-- loans are failing. Subprime car loan and lease delinquencies hit a record high in February.

To make matters worse, the Federal Reserve has, after more than a decade of unprecedented near-zero Federal funds target interest rates, raised the rate by half a percentage point, the greatest one-time increase in 22 years. Without a doubt, this will translate into higher credit card interest rates going forward, applied to a broad, rapidly growing mass of consumer debt.

Thus, the consumer is turning to the credit card-- incurring debt-- precisely when the cost of using the card is rising.

Higher interest rates are exploding mortgage rates-- and dampening the over-heated housing market-- in some cases, doubling this year. Because of rising mortgage rates, new home sales fell 16.6% in April from March, yet prices of homes continue to rise: the median existing home price rose 14.8% from April, 2021 to April 2022. While it’s dramatically costlier for the homebuyer to finance a new home, the price of a house continues to rise alarmingly-- a perfect, classic housing-market bubble on the verge of bursting!

But the plight of the consumer gets worse: inflation continues to drive the cost of living for the average consumer higher and higher. For eight months, the annualized rate of inflation has been rising, culminating in an 8.5% rate in March and 8.3% rate in April-- rates rarely seen in the last 40 years. Food prices alone-- the most critical consumer goods for the least advantaged-- are up 10.8% for the year ending in April, 2022, the greatest 12-month increase since November, 1980.

When inflation raised its ugly head last year, pundits and the Federal Reserve dismissed it as temporary, an anomaly caused by dislocations following the Covid pandemic. In response, I wrote:

Despite the admonitions of the central bankers and financial gurus, inflation seldom self-corrects. It rarely runs its course. Instead, inflation tends to gather momentum because all the economic actors attempt to catch up and get ahead of it.

Today, the central bankers and financial gurus agree that inflation will be around for some time, eroding the buying power of the average worker.

Despite the dire accusations in the business press that increases in worker compensation is driving inflation, the truth is the opposite. The average worker’s hourly income-- adjusted for inflation-- has dropped by 2.6% from last April! Whatever gains are made, they are soon devoured by inflation.

Nor does the future portend well. US economic growth (GDP) sunk by 1.5% in the first quarter of 2022. As they did with the inflation crisis, pundits are shrugging this off as a self-correcting aberration. Yet, it is hard to imagine that the shrinking incomes, expanding debt, and fierce inflation will not take its toll on consumer confidence and spending, the factors that contribute far-and-away the most to US growth.

A powerful indicator of roadblocks ahead for growth was the first-quarter collapse of labor productivity. Thus, labor productivity dropped by an astonishing 7.5% in the nonfarm business sector, the largest decrease since the third quarter of 1947-- nearly 75 years ago! This collapse was brought on by a 5.5% increase in hours worked and a 2.4% drop in economic output (this is a broad measure of hours worked, including employees, proprietors, and unpaid family workers).

Companies continue to compete for employees and hire new employees, while the economic product shrinks, a formula-- under capitalism-- for future slowing accumulation, a coming decline in the rate of profit. Some of the US’s largest retailers are reporting a decline in earnings.

This employment boom arose especially in the technology sector, where tech start-ups round up capital, borrow heavily, and hire furiously on the faith that profits will come later. Risk taking, future high return-seeking venture capitalists and the extremely low cost of borrowing, combine with a young, educated, competitive workforce to create the perfect conditions for inflated expectations and recklessness. With interest rates rising and uncertainty growing, the tech bubble is now leaking-- hiring freezes, layoffs, and austerity are occurring or in the offing.

The technology sector is the most vulnerable sector of the capitalist economy because of a long period of easy access to capital and a long incubation period before returns on investment appear. Banks have become impatient for profits from the latest glitzy app, just as they gave up waiting for returns on their investment in promiscuous fracking a few years ago (that is being corrected with the greatly increased demand for energy in Europe as a result of the Ukraine war).

The tech sector's troubles are reflected in equity markets, with the tech-based NASDAQ sinking faster, yet dragging down the S&P index as well. So far this year, as of May 20, the NASDAQ composite has dropped well over a quarter, with the S&P falling 19%, the S&P’s worst start to a year since 1970. With 8 straight weeks of losses, the Dow Jones Industrial Averages has incurred its worst stretch since 1932. For those whose only exposure to the stock market is their 401(k) retirement plans, stock performance is a disaster-- investment advisors and managers have put a greater proportion of their funds into stocks (as opposed to other investment instruments like bonds) than in the past. This will be catastrophic for those planning to retire in the next few years.

Bonds, a usual safe haven when the markets are down, are also down for the year. And bitcoin, the darling of the financial hipsters and the crooks, has lost a third of its value this year.

Nonetheless, investors are buying in the face of a deepening bear market, seduced by the old saw of “buying on the dip” -- buying stocks when they are at the bottom and, therefore, a bargain. Despite the market's abysmal performance in March, individual investors bought a net $28 billion in stocks and ETFs-- a record. This would appear the greatest exercise in wishful thinking since the 2007-2009 crash. Maybe it's an omen!

Certainly, if equity markets continue to lose trillions of dollars of hypothetical wealth (the top six Standard and Poor’s companies lost $3.76 trillion of nominal value through May 20), the negative wealth effect will restrain spending, especially among those in the middle strata and in the bourgeoisie. Bloomberg estimates that global stocks have lost over $11 trillion in value: “Investors continue to reduce their positions, particularly in technology and growth stocks,” said Andreas Lipkow, a strategist at Comdirect Bank. “But sentiment needs to deteriorate significantly more to form a potential floor.”

What does all of this bad economic news mean?

The end of the Cold War brought not a peace dividend, but a gift to the victorious capitalist ruling classes. It was, after all, a struggle between capitalism and socialism, despite what the bogus left thought about Soviet socialism. Without question, the capitalist class understood the Western confrontation with the Soviet Union as an existential battle.

With capitalist triumphalism came decades of super-exploitation of millions of workers thrust into the global labor market. Billionaires abounded, income and wealth inequality exploded, and the resultant accumulated capital sought new and creative destinations. To a large extent, the financial sector enthusiastically accommodated this need by devising innovative, complex instruments, new investment structures, and opaque financial operations.

Capital’s imperative to reproduce itself took it into riskier and riskier places; the growing volume of accumulated capital became more difficult to productively reinvest; investors booked “profits” that were more and more contingent or hypothetical; the euphoria of hyper-accumulation invited greater and greater leverage; and the accumulation mechanism finally crashed under the weight of tenuous, hypothetical, and “fictitious” capital in 2007.

The history of the twenty-first century since the 2000 tech collapse has been one continuous struggle on the part of the Central Banks, international economic organizations, government administrations, and financial institutions to rescue capitalism from the giddy orgy of speculation and overinvestment triggered by capitalist triumphalism.

These actors have attempted to seal off the trash-- bad investments, overvalued, unredeemable bonds, unrecoverable debt-- from the healthier economy, while injecting massive volumes of no- or low-cost (near-zero interest rates) liquidity into a shell-shocked economy.

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.

This is truly a bleak picture and it's not clear what useful tools remain in the hands of the policy makers to brighten it. The NATO/Russia/Ukraine blunder of a disruptive, grinding war can only worsen global economic conditions for everyone except the arms makers.

We can only hope that people will make the connection: capitalism breeds misery and war.

Greg Godels
zzsblogml@gmail.com