Then and now.
In the US (and elsewhere) the last period of strong inflation (over 5%) was from 1973 to 1982, with peaks in 1974 (11%) and 1980 (14%). These peaks coincide almost perfectly with those of the price of a barrel of crude oil (1), which led everyone to conclude that inflation was a mere consequence of oil supplies being disrupted (an oil embargo in '73, and the Iranian revolution in '79 followed by the Iran/Iraq war a year later). However, when the price of a barrel rose from $30 in 2002 to $60 in 2006, and to $145 in July 2008, then dropping to $40 before settling in the $90 range, inflation kept well below the 5% mark. Did a similar cause have no effect, or was the effect diverted and has yet to come back to its usual course?
Crude oil is the raw material for most of the world's synthetic substances and motor fuels, and it contributes to the production of electricity and heating. It is such an essential commodity that some twelve billion litres are consumed every day. This being so, it is logical that its price has repercussions on prices all the way up the production chain. Since the price peak of 1980, the world's energy supply has diversified, with coal, gas and nuclear producing electricity in vast quantities. But electricity is not polymeric, nor does it propel cars and planes, container carriers and scooters. The non-effect, on prices in general, of tripling the price of crude oil is only partly explained by the reduced importance of petroleum as a source of energy. There must be other factors in play.
One of these could be the attitude of the major central banks. Their priority is to keep inflation as low as possible, and their tool is the money supply. Central banks decide the price of money – its rate of interest – on a daily basis. More precisely, a central bank offers to lend, for 24 hours and at a given rate of interest, to any bank that cannot find a better deal elsewhere. This basic rate gives the tone for all the other time spans of lending. High rates of interest inhibit borrowing and spending, which can lead to insufficient demand and falling prices. Whereas low rates favour lending and spending, which can lead to excessive demand and rising prices. The balancing act of stable prices needed “fine tuning”, the dark art of a magician, or so it seemed. But consecutive years of historically low basic rates have not set off a spending spree, which seriously contradicts the conventional hypothesis. Except that they come at a time when consumers have already been granted more credit than they can bear, and when corporations are in a phase of “creative destruction” (Schumpeter). Having established the ineffectiveness of low interest rates, central banks turned to quantitative easing (QE). Banks would not borrow, but they were easily convinced to sell their less profitable equity. (The European central bank has not yet followed this path, which is one of the reproaches made of its policies). This transmutation of junk into gold has had little effect on general demand, though it may have kept growth on the positive side. It may also have fuelled the speculative buying of commodities. And still no signs of monetary inflation.
Crude oil prices are multiplied by three, trillions of extra currency are circulated and, at the end of the production chain, consumer prices are as stable as ever. (This should be nuanced. Basics such as food have gone up more than the average. Whereas industrial goods have gone up less than the average. Car makers received government support and other industries have cut profits, improved productivity and reduced capacity). Neither fuel prices nor monetary creation produce inflation, which leaves another trail, wages and salaries. The graph of median household income in the US shows very similar curves for the periods 1973 to 1983 and 2000 to 2010 (2), a peak, a slump, a flat period and another peak followed by another slump. However, the graph is based on 2010 dollars, which means that a similar shape in a period of high inflation (73/83) and in a period of low inflation (00/10) is explained by rises in nominal incomes. There was more money in everybody's pockets, but it was buying less than it did before. Back in the 70s, wage increases were the easiest and fastest solution to the conflicts that opposed employers and employees (security, working hours, career prospects, etc.). And the cheapest, because they were immediately offset by increasing prices. The sudden rise in the cost of petroleum derivatives set off wage/price escalations, which did not happen thirty years later for a variety of reasons. As the apparent futility of upward moving wages was recognised – and no alternative was on offer – labour organisations lost their bargaining role and, to a certain extent, their raison d'être. Meanwhile, the Cold War ended and the world's trade and finance was transformed.
1945 consecrated the USA as the major power, militarily with atomic bombs, economically with half the planet's production of wealth, and ideologically as leader of the “free world”. A year earlier, at Bretton Woods, British and American negotiators agreed that the US dollar would be the post-war reserve currency and, to Keynes' despair, would be backed up by gold and convertible. By the 70s the sheer mass of circulating dollars put an end to the gold standard (it was not quite as simple as that and was only finalised in Jamaica in 1976), but the dollar kept its status of universal money for half of humanity. The other half were having non of it. Or, rather, those opposed to capitalism and colonialism had made the dollar the symbol of all they abhorred. The ideological schism between East and West, the Cold War and post-colonial resentment had built a wall separating two different and almost autonomous economic structures. The non-aligned nations had a foot in each camp, but their colonial past and their often violent independences made them favour the soviet model, blinded to the fact that the USSR was an empire of nations under constraint. Forty years ago the world was partitioned, and events in one division had little effect on the others. In America, wages and prices were free of government control and inflation was an option. With public debt at a historic low (25% of gdp) and held by nationals, and with a positive trade balance, inflation was a sovereign decision that only affected US vassals in Europe, Latin America and the Middle East. But, at the dawn of the new millennium, the situation was radically different.
In 1974 the Nixon administration began using treasury bonds to settle the US trade deficit with Saudi Arabia, and there seems to have been some compulsion (3). The practice soon became a habit, and a growing proportion of America's public debt was sold to foreigners who had trade balance surpluses, notably the Germans and Japanese, and more recently the Chinese. At present, almost a third of US treasury debt has been sold abroad. After the euro was circulated as legal tender in 2002, members of the euro zone backed by a strong currency adopted the Nixon strategy, and paid off their trade deficits with their budget deficits. A flow of goods and services, and a counter-flow of bonds. The process was dynamic for growth, but the trickle became a torrent when Spain, Italy and France joined the usual culprits in exploiting this bonanza. Then the North-South stream inside the euro zone overflowed and went global, with euro bonds for sale in London, New York, Tokyo and Shanghai.
The planet's finances have been submerged by the rising tide of treasury paper. The signs are that the tide has reached its turning point, and as it ebbs the wreckage will become apparent. The first victim will probably be currency. The value of treasury paper is printed on it. When that value is no longer the market value, the currency it is measured in must follow the same path. When a sovereign debt is devalued by rising interest rates, or overvalued by falling interest rates, there will be an effect on that currency's exchange rate, on trade and on local prices. The new difficulty is that sovereign debts in dollars and euros have been used to pay off foreign trade deficits. They have lost their sovereignty. Asia, America and Europe have holds on each other, as producers and consumers, as creditors and debtors. But, as their trade surpluses shrink, China and Germany will stop buying sovereign debts from the US and the Greek/Spanish/French/etc. And then they will start selling the debt they own already, though Germany has a serious handicap. It shares the same currency as its debtors. If it devalues bonds labelled in euros, by buying less, not buying or selling, it devalues its own money. This is the dilemma facing German leaders. But the linkage between the yuan and the dollar puts the Chinese leaders in a similar predicament, which may explain the talk of monetary union with Japan.
The intertwining of national economies (their finance and their production/consumption) really got under way twenty years ago, after the collapse of the USSR and the end of the “communist” dream. And the hands doing the twisting used strands of debt to bind everything together. However, the coil of dollars that started at Bretton Woods was resisted in Europe by the mark/franc – the basis of the euro – who started a twine of their own, on the same model as the dollar and entangled with it. There was even talk of the euro replacing the dollar, but that was just a fanfaronade. Now that the model's incoherence is producing its effect, the euro is the first to fail because it is the frailer of the two. The dollar Will hold out long enough to be declared master of the world.
The pressure on wages, facilitated by out-sourcing and unemployment, has avoided inflation at the cost of massive heaps of credit and debt. As it was essentially consumer borrowing (investment bubbles also took their toll), including housing and conducting several wars, all that monetary creation has been consumed. It no longer exists. Trillions of scriptural money have fuelled consumption and growth, on what seemed an endlessly expanding scale and into insolvency. Just stopping the increase in lending halts growth, while being repaid causes recession. So what can be done with all this red writing? Quite obviously there is no painless solution, nor can any nation hope to go it alone except at the extreme periphery. Unfortunately there are no indications that humanity is prepared to negotiate a common front to face an impending catastrophe, be it economics or environmental issues, which means everybody will be putting the blame on others. Banks were the first culprits to be stigmatised because they are at the centre of the web. But banking is no longer associated with an ethnic minority, so that the object of public anger stayed very abstract. Wall Street is run and staffed by ordinary people from all spheres of society. The object is too amorphous to excite the wrath of crowds. Ethnic and cultural minorities will get, and are already getting a share of the hate. But the strongest reaction will be against the dollar, as the symbol of American imperial hubris. The master of the world will have the world against him.
1. Crude oil prices:
http://en.wikipedia.org/wiki/File:Oil_Prices_1861_2007.svg
US inflation:
http://en.wikipedia.org/wiki/File:US_Historical_Inflation.svg
2. Household incomes:
http://en.wikipedia.org/wiki/File:US_real_median_household_income_1967_-_2010.jpg 3. More on this in the following interview by Standard Schaefer: http://www.counterpunch.org/2003/04/21/an-interview-with-michael-hudson-author-of-super-imperialism/
Crude oil is the raw material for most of the world's synthetic substances and motor fuels, and it contributes to the production of electricity and heating. It is such an essential commodity that some twelve billion litres are consumed every day. This being so, it is logical that its price has repercussions on prices all the way up the production chain. Since the price peak of 1980, the world's energy supply has diversified, with coal, gas and nuclear producing electricity in vast quantities. But electricity is not polymeric, nor does it propel cars and planes, container carriers and scooters. The non-effect, on prices in general, of tripling the price of crude oil is only partly explained by the reduced importance of petroleum as a source of energy. There must be other factors in play.
One of these could be the attitude of the major central banks. Their priority is to keep inflation as low as possible, and their tool is the money supply. Central banks decide the price of money – its rate of interest – on a daily basis. More precisely, a central bank offers to lend, for 24 hours and at a given rate of interest, to any bank that cannot find a better deal elsewhere. This basic rate gives the tone for all the other time spans of lending. High rates of interest inhibit borrowing and spending, which can lead to insufficient demand and falling prices. Whereas low rates favour lending and spending, which can lead to excessive demand and rising prices. The balancing act of stable prices needed “fine tuning”, the dark art of a magician, or so it seemed. But consecutive years of historically low basic rates have not set off a spending spree, which seriously contradicts the conventional hypothesis. Except that they come at a time when consumers have already been granted more credit than they can bear, and when corporations are in a phase of “creative destruction” (Schumpeter). Having established the ineffectiveness of low interest rates, central banks turned to quantitative easing (QE). Banks would not borrow, but they were easily convinced to sell their less profitable equity. (The European central bank has not yet followed this path, which is one of the reproaches made of its policies). This transmutation of junk into gold has had little effect on general demand, though it may have kept growth on the positive side. It may also have fuelled the speculative buying of commodities. And still no signs of monetary inflation.
Crude oil prices are multiplied by three, trillions of extra currency are circulated and, at the end of the production chain, consumer prices are as stable as ever. (This should be nuanced. Basics such as food have gone up more than the average. Whereas industrial goods have gone up less than the average. Car makers received government support and other industries have cut profits, improved productivity and reduced capacity). Neither fuel prices nor monetary creation produce inflation, which leaves another trail, wages and salaries. The graph of median household income in the US shows very similar curves for the periods 1973 to 1983 and 2000 to 2010 (2), a peak, a slump, a flat period and another peak followed by another slump. However, the graph is based on 2010 dollars, which means that a similar shape in a period of high inflation (73/83) and in a period of low inflation (00/10) is explained by rises in nominal incomes. There was more money in everybody's pockets, but it was buying less than it did before. Back in the 70s, wage increases were the easiest and fastest solution to the conflicts that opposed employers and employees (security, working hours, career prospects, etc.). And the cheapest, because they were immediately offset by increasing prices. The sudden rise in the cost of petroleum derivatives set off wage/price escalations, which did not happen thirty years later for a variety of reasons. As the apparent futility of upward moving wages was recognised – and no alternative was on offer – labour organisations lost their bargaining role and, to a certain extent, their raison d'être. Meanwhile, the Cold War ended and the world's trade and finance was transformed.
1945 consecrated the USA as the major power, militarily with atomic bombs, economically with half the planet's production of wealth, and ideologically as leader of the “free world”. A year earlier, at Bretton Woods, British and American negotiators agreed that the US dollar would be the post-war reserve currency and, to Keynes' despair, would be backed up by gold and convertible. By the 70s the sheer mass of circulating dollars put an end to the gold standard (it was not quite as simple as that and was only finalised in Jamaica in 1976), but the dollar kept its status of universal money for half of humanity. The other half were having non of it. Or, rather, those opposed to capitalism and colonialism had made the dollar the symbol of all they abhorred. The ideological schism between East and West, the Cold War and post-colonial resentment had built a wall separating two different and almost autonomous economic structures. The non-aligned nations had a foot in each camp, but their colonial past and their often violent independences made them favour the soviet model, blinded to the fact that the USSR was an empire of nations under constraint. Forty years ago the world was partitioned, and events in one division had little effect on the others. In America, wages and prices were free of government control and inflation was an option. With public debt at a historic low (25% of gdp) and held by nationals, and with a positive trade balance, inflation was a sovereign decision that only affected US vassals in Europe, Latin America and the Middle East. But, at the dawn of the new millennium, the situation was radically different.
In 1974 the Nixon administration began using treasury bonds to settle the US trade deficit with Saudi Arabia, and there seems to have been some compulsion (3). The practice soon became a habit, and a growing proportion of America's public debt was sold to foreigners who had trade balance surpluses, notably the Germans and Japanese, and more recently the Chinese. At present, almost a third of US treasury debt has been sold abroad. After the euro was circulated as legal tender in 2002, members of the euro zone backed by a strong currency adopted the Nixon strategy, and paid off their trade deficits with their budget deficits. A flow of goods and services, and a counter-flow of bonds. The process was dynamic for growth, but the trickle became a torrent when Spain, Italy and France joined the usual culprits in exploiting this bonanza. Then the North-South stream inside the euro zone overflowed and went global, with euro bonds for sale in London, New York, Tokyo and Shanghai.
The planet's finances have been submerged by the rising tide of treasury paper. The signs are that the tide has reached its turning point, and as it ebbs the wreckage will become apparent. The first victim will probably be currency. The value of treasury paper is printed on it. When that value is no longer the market value, the currency it is measured in must follow the same path. When a sovereign debt is devalued by rising interest rates, or overvalued by falling interest rates, there will be an effect on that currency's exchange rate, on trade and on local prices. The new difficulty is that sovereign debts in dollars and euros have been used to pay off foreign trade deficits. They have lost their sovereignty. Asia, America and Europe have holds on each other, as producers and consumers, as creditors and debtors. But, as their trade surpluses shrink, China and Germany will stop buying sovereign debts from the US and the Greek/Spanish/French/etc. And then they will start selling the debt they own already, though Germany has a serious handicap. It shares the same currency as its debtors. If it devalues bonds labelled in euros, by buying less, not buying or selling, it devalues its own money. This is the dilemma facing German leaders. But the linkage between the yuan and the dollar puts the Chinese leaders in a similar predicament, which may explain the talk of monetary union with Japan.
The intertwining of national economies (their finance and their production/consumption) really got under way twenty years ago, after the collapse of the USSR and the end of the “communist” dream. And the hands doing the twisting used strands of debt to bind everything together. However, the coil of dollars that started at Bretton Woods was resisted in Europe by the mark/franc – the basis of the euro – who started a twine of their own, on the same model as the dollar and entangled with it. There was even talk of the euro replacing the dollar, but that was just a fanfaronade. Now that the model's incoherence is producing its effect, the euro is the first to fail because it is the frailer of the two. The dollar Will hold out long enough to be declared master of the world.
The pressure on wages, facilitated by out-sourcing and unemployment, has avoided inflation at the cost of massive heaps of credit and debt. As it was essentially consumer borrowing (investment bubbles also took their toll), including housing and conducting several wars, all that monetary creation has been consumed. It no longer exists. Trillions of scriptural money have fuelled consumption and growth, on what seemed an endlessly expanding scale and into insolvency. Just stopping the increase in lending halts growth, while being repaid causes recession. So what can be done with all this red writing? Quite obviously there is no painless solution, nor can any nation hope to go it alone except at the extreme periphery. Unfortunately there are no indications that humanity is prepared to negotiate a common front to face an impending catastrophe, be it economics or environmental issues, which means everybody will be putting the blame on others. Banks were the first culprits to be stigmatised because they are at the centre of the web. But banking is no longer associated with an ethnic minority, so that the object of public anger stayed very abstract. Wall Street is run and staffed by ordinary people from all spheres of society. The object is too amorphous to excite the wrath of crowds. Ethnic and cultural minorities will get, and are already getting a share of the hate. But the strongest reaction will be against the dollar, as the symbol of American imperial hubris. The master of the world will have the world against him.
1. Crude oil prices:
http://en.wikipedia.org/wiki/File:Oil_Prices_1861_2007.svg
US inflation:
http://en.wikipedia.org/wiki/File:US_Historical_Inflation.svg
2. Household incomes:
http://en.wikipedia.org/wiki/File:US_real_median_household_income_1967_-_2010.jpg 3. More on this in the following interview by Standard Schaefer: http://www.counterpunch.org/2003/04/21/an-interview-with-michael-hudson-author-of-super-imperialism/
posted by le Lézard at 5:13 AM
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