Inflation and recession, the cyclical crisis of capitalism

The prices for things keep rising: why?

Nothing is untouched by inflation, not even books.

The Economist recently reported that some publishers are actually starting to shrink the white space between characters and run text closer to the ends of the pages in books printed for popular consumption. This is in order to cut costs, because the paper British publishers use has increased 70% in price in the past year.

Since then, Google trends clearly show a huge spike in the number of people searching “what is inflation?” This is hardly a shock, given how often politicians and economists talk about inflation as some inexplicable, incurable plague.

Looking around, it’s not hard to see examples of inflation. After all, the price of nearly all commodities has skyrocketed since 2021.

The Bureau of Labor Statistics reported consumer prices rose 6.5% since December of 2021, and that only covers outright price increases for commodities. Just as many companies are quietly downsizing products while keeping the prices the same, a long-running phenomenon known as “shrinkflation.” In fact, there’s now even an official shrinkflation Subreddit for people to document the shrinking size of products. Just recently, Gatorade reduced its 32 oz. bottle to a 28 oz. bottle by introducing a new design.

12-month percentage change in prices of goods, according to the Consumer Price Index, Dec. 2022.

What is inflation?

One of the oddest things about modern economic life is the tendency of the price of all commodities to rise over time. In 2023, 1 U.S. dollar buys you the same amount of stuff as 3 pennies did in 1904. This persistent increase in the level of consumer prices, or decline in the purchasing power of money, is what we call “inflation.”

What makes inflation happen?

Inflation can happen in any economic system. It goes as far back as paper and tokenized money itself, to the stamped metal tokens of ancient times. Inflation is caused by an increase in the money supply, either directly by the issuing of more banknotes and coin, or indirectly by the granting of bank credits. Any system where there is an increase in the circulation of money can experience a fall in the value of that money, no matter how that society produces goods.

Capitalist theories of inflation

While it’s possible for any economy to experience inflation, it’s only under this stage of monopoly capitalism where it’s taken on a “universal” and “chronic” character. Controlled inflation of about 2% per year is considered the “model” for all nations to strive for. This idea comes from the bourgeois economist John Maynard Keynes, who argued for a small amount of controlled inflation and for some small increments in wages and some social spending. All as a means to save capitalism, since if workers do not buy the goods they themselves have produced — as they simply cannot afford it — capitalists are in a bind.

Many capitalist economists, academics, and politicians would be happy with 2% annual inflation to continue on forever, because they describe this as the “normal and desirable” state of affairs for a thriving free market economy. This is because inflation encourages spending, and therefore drives consumption in favor of the capitalist class.

How does inflation encourage spending?

When inflation is high, it’s perceived by some workers as better to spend money now than to save it, since money in savings will simply be devalued over time. This causes an immediate effect in the economy when people realize the cost of a certain commodity is going to go up, and that it’s better to buy it now. Deflation, the opposite of inflation, is a reason not to spend money. When the value of money goes up, people hold onto it instead of spending it, which holds back economic development in general.

The Keynesian theory follows that workers benefit from small-to-moderate amounts of inflation, since economic growth drives an increase in the demand for labor.

This creates an odd paradox: as inflation rises, unemployment rates become lower and prices rise for all commodities, including labor, since under capitalism labor is a commodity to be bought and sold like any other.

Keynesians often argue that data shows that as inflation rises, unemployment rates become lower and prices rise for all commodities, including labor, since under capitalism labor is a commodity to be bought and sold like any other. This is the so-called “Phillips Curve.” However, more recent data appears to contradict this view. Even pro-capitalist economists such as Paul Krugman, a “soft” Keynesian, agree.

Nonetheless, this supposed link between low unemployment and inflation is a convenient myth. It allows Central Banks and capitalists to continue to justify raising unemployment overall. From the capitalists’ viewpoint, higher unemployment (i.e. the reserve labor army) enables them to lower wages because of “competition.”

The flaw in the logic

The capitalist class uses inflation as a means to manage wages in relation to their own profits.  The main myth the capitalists push is that wage demands from the working class cause inflation and push the cost of everything up. But wages don’t keep pace with inflation the way they’re supposed to according to this myth, even though labor is now more productive than ever before. The Economic Policy Institute reported that hourly compensation rose just 9% from 1973 to 2013, while productivity increased 74%.

A graph showing the disconnect between productivity and typical worker’s compensation, 1948–2013, via EPI analysis of Bureau of Labor Statistics and Bureau of Economic Analysis data.

This is not to mention that any actual rise in wages is usually depressed beneath the increase in prices. So even if they rise nominally, real wages actually fall since their purchasing power is decreased. This means that the working class bears the brunt of inflationary pressure.

Inflation is really about keeping business profitable, since ordinary people who save money are punished, but debtors and private business owners benefit. Some stockholders — those in an industrial base or in businesses relying on selling commodities — make gains from increased business profits. Bondholders lose money because fixed percentages diminish in buying power over time, since the future value of the money is reduced by definition. So financiers and stockholders in financial affairs lose money. Debtors also indirectly benefit from inflation, in that over time their debts are reduced in value.

Fictitious capital

Throughout history most currencies, including the U.S. dollar, were linked to valuable commodities like gold or silver so that the maximum amount in circulation was dependent on a government’s precious metal reserves. This controlled runaway inflation. But there is simply no longer enough gold in the world to return to the gold standard without a massive shrinkage in the money supply. In fact, no country in the world is on the gold standard today. The last to abandon it was Switzerland, over two decades ago.

The fuel that runs the modern post-WWII global economic system is what Marx called “fictitious capital,” meaning money thrown into circulation as speculative capital without any material basis in commodities or productive activity. These include things such as stocks, shares, and bonds that are issued by private companies.

The calls of free market ideologues for a return to the Gold Standard are simply not based in reality: the creation of this “fictitious capital” has been the engine driving the entire global capitalist economy since the Great Depression. Not tying the currency to gold allows the government to adjust the amount of money in circulation and interest rates. A state returning its currency to being backed by precious metals cedes control of the money supply during an economic crisis.

The rate of inflation is not linked to wage increases, but to the money supply as a matter of government policy, through which the capitalist class attempts to keep up the general rate of profit. In simple terms if the Central Bank printed more money, when released into the general circulating pool it would “cheapen” the money.

In the United States, the Federal Reserve raises and lowers the interest rate at which banks borrow and lend money to one another. Central Banks elsewhere attempt to do the same. Raising the interest rate increases the cost of borrowing, which cools down the creation of new fictitious capital, which slows inflation.

Inflation is easing, recession is likely coming, and corporate profits are at all-time highs

An article in the Wall Street Journal on January 15th reported that economists still expect a recession in the near future. The good news is that inflation was measured at 6.5% in December, down from its peak of 9.1% in June; the bad news is that the “soft landing” promised by politicians and economists is looking less and less likely. The WSJ surveyed 71 business and academic economists, who collectively forecasted a 61% probability of recession in the next 12 months.

It’s almost impossible to find a single business or political leader not bracing for a recession, which workers are simply asked to accept as inevitable. This is all part of the cyclical crisis of capitalism, or “business cycle” of boom and bust. Inflation and recession are inseparably linked:

“The business cycle arises from the ‘distance’ that opens up between the production and the consumption of a commodity, bridged by debt, and the huge mass of fictitious capital which builds up on the basis of the credit system. As this mass of paper value and speculative capital grows, the system becomes more and more unstable, the recession more devastating. Tweaking the interest rates and money supply to stave off this crisis is like driving a Formula One racing car; the central bankers of the capitalist powers are very skilled at the art, but the task of avoiding a crash gets harder and harder and fictitious capital circulates around the world in greater and greater masses.”

Inflation peaked at 9.1% back in June, 2022. Fittingly, the Wall Street Journal reported that job gains were well in excess of what was expected, bringing unemployment to its lowest in 53 years. Meanwhile after that same jobs report, stocks closed on a severe downturn, causing worries of a recession.

This is that same paradox at the heart of capitalism in practice: like any other commodity, low unemployment means a rise in the value of labor, which means workers will expect more wage increases, and that means it will eat into profits of private business owners.

Thus, something that should be good economic news — record low unemployment — is considered a disaster heralding recession.

How the capitalist class exploits inflation

Companies claim these recent price increases are necessary and are just passing costs onto customers. The problem is corporate profits are somehow still hitting record highs since the pandemic, to the tune of $2.08 trillion, an increase of 80% in the last two years.

This represents a change of strategy on the part of the capitalist class from the time-honored tactic of suppressing wages, to raising prices. Apologists will likely say that prices are just keeping up with inflation because the costs of production have gone up, but all available data says that these record profits disproportionately come from increased prices. The Economic Policy Institute confirms this is “not normal:”

“Since the trough of the COVID-19 recession in the second quarter of 2020, overall prices in the NFC [non-financial corporate] sector have risen at an annualized rate of 6.1%—a pronounced acceleration over the 1.8% price growth that characterized the pre-pandemic business cycle of 2007–2019. Strikingly, over half of this increase (53.9%) can be attributed to fatter profit margins, with labor costs contributing less than 8% of this increase. This is not normal. From 1979 to 2019, profits only contributed about 11% to price growth and labor costs over 60%[.]”

Even more disturbing, the Wall Street Journal itself is even forced to admit that average wages have “showed no corresponding leap” to keep up with inflation. Predictably, the WSJ spun this into a positive step to keep the economy growing, blaming the current inflation rate on wage increases.

Even the most business-minded individual will have a hard time coming to a conclusion other than an additional $0.8 trillion of wealth has been looted from the economy overnight, by the private sector price-gouging goods at more than the rate of inflation in order to avoid the social unrest associated with cutting wages.

And this is the central point: inflation is portrayed as something to be managed as part of a growing economy. But in reality under capitalism, it is weaponized to reorganize wealth allocation in favor of the capitalist class.

In the end, this was the real flaw in Keynesianism from the start.

Perhaps Karl Marx said it best in the manuscript for the second volume of Capital, in which he famously scribbled the following note:

“Contradiction in the capitalist mode of production: the labourers as buyers of commodities are important for the market. But as sellers of their own commodity — labour-power — capitalist society tends to keep them down to the minimum price.

—Further contradiction: the periods in which capitalist production exerts all its forces regularly turn out to be periods of over-production, because production potentials can never be utilised to such an extent that more value may not only be produced but also realised; but the sale of commodities, the realisation of commodity-capital and thus of surplus-value, is limited, not by the consumer requirements of society in general, but by the consumer requirements of a society in which the vast majority are always poor and must always remain poor.”

Categories: Economic Exploitation, Economics, Economy, Editorials, Imperialism, Theory, U.S. News

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