The blame game on soaring prices is on. Was it too much central bank money pumped in for too long that caused inflation to take off? Was it China, where most physical production had moved before the pandemic locked down the country and disrupted global supply chains? Was it Russia, whose invasion of Ukraine cut off much of the world’s supply of gas, oil, grain and fertilizer? Was it a surreptitious shift from pre-pandemic austerity to unlimited fiscal largesse?
Western authorities now face an impossible choice: push conglomerates and even states into cascading bankruptcies, or let inflation run wild.
The answer is one that candidates never encounter: all of the above and none of the above.
Critical economic crises frequently invoke multiple explanations that are all correct but miss the point. When Wall Street collapsed in 2008, triggering the global Great Recession, various explanations were offered: regulatory capture by financiers who had replaced industrialists in the capitalist hierarchy; a cultural propensity for risky finance; the inability of politicians and economists to distinguish between a new paradigm and a massive bubble; and other theories too. All were valid, but none got to the bottom of the problem.
The same is true today. The “we told you so” monetarists, who have been predicting high inflation since central banks massively expanded their balance sheets in 2008, remind me of the joy felt that year by leftists (like me) who “predicted “constantly the impending death of capitalism — like a stopped clock that is right twice a day. Indeed, by creating huge overdrafts for bankers in the false hope that the money would trickle down to the real economy, central banks caused epic asset price inflation (booming stock and property markets, craze for cryptography, etc).
But monetarist history cannot explain why the major central banks failed from 2009 to 2020 even to increase the amount of money circulating in the real economy, let alone push consumer price inflation to their level 2% target. Something else must have triggered the inflation.
The interruption of China-centric supply chains clearly played an important role, as did The Russian invasion of Ukraine. But none of these factors explains the sudden “regime change” of Western capitalism, moving from the current deflation to its opposite: all prices soaring simultaneously. This would require wage inflation to outpace price inflation, thus causing a self-perpetuating spiral, with wage increases feeding through into further price increases which, in turn, lead to further wage increases, at the same time. ‘infinite. Only then would it be reasonable for central bankers to require that workers “take one for the team” and refrain from seeking higher wage settlements.
But, today, demanding that workers give up wage gains is absurd. Everything indicates that, contrary to the 1970s, wages are climbs much slower than prices, and yet the rise in prices not only continues, but is accelerating.
So what’s really going on? My answer: A half-century power game, led by corporations, Wall Street, governments and central banks, has gone awry. As a result, Western authorities now face an impossible choice: push conglomerates and even states into cascading bankruptcies, or let inflation run wild.
For 50 years, the U.S. economy supported net exports from Europe, Japan, South Korea, and then China and other emerging economies, while the lion’s share of those foreigners’ profits went rushed to Wall Street in search of higher returns. On the back of this tsunami of capital heading for America, financiers were building pyramids of private money (such as options and derivatives) to finance corporations building a global maze of ports, ships, warehouses, stockyards and roads and railways. transportation. When the crash of 2008 burned down these pyramids, the whole financialized maze of just-in-time supply chains was in danger.
It was nothing less than lavish socialism for capital and severe austerity for labour.
To save not only the bankers but also the labyrinth itself, the central bankers intervened replace the financial pyramids with public money. Meanwhile, governments cut public spending, jobs and services. It was nothing less than lavish socialism for capital and severe austerity for labour. Wages fell, and prices and profits were stagnantbut the the price of assets bought by the rich (and therefore their wealth) has exploded. Thereby, investment (relative to available cash) fell to historic lows, capacity shrank, market power soared, and capitalists became both richer and more dependent than ever on central bank money.
It was a new power play. The traditional struggle between capital and labor to increase their respective shares of total income through markups and wage increases continued, but was no longer the source of most new wealth. After 2008, universal austerity produced low investment (money demand), which, combined with ample central bank liquidity (money supply), kept the price of money (interest rate) close from zero. With production capacity (even new housing) declining, good jobs scarce and wages stagnating, wealth triumph on the stock and real estate markets, which had become decoupled from the real economy.
Then came the pandemic, which changed one big thing: Western governments were forced to channel some of the new rivers of money from the central bank to the masses trapped within economies that over decades had exhausted their ability to produce things and were now in the face of fragmented supply chains to start. As the locked-in multitudes spent some of their leave money on scarce imports, prices began to rise. Corporations with great paper wealth reacted by exploiting their immense market power (generated by their reduced production capacity) to drive up prices.
After two decades of a central bank-backed bonanza of soaring asset prices and rising corporate debt, all it took was a little price inflation to end the power play that shaped the post-2008 world in the image of a revived ruling class. What shall we do now?
Probably nothing good. To stabilize the economy, the authorities must first end the exorbitant power bestowed on the very few through a political process of paper wealth and cheap debt creation. But a few will not give up power without a struggle, even if it means collapsing with society in tow.