Back to stagflation?

31 January by Tomasz Konicz

The end of the financialization of capitalism looks confusingly similar to the beginning.

In recent weeks, a great retro fever has broken out in the business press. In the face of rapidly rising inflation and a mixed economic outlook, memories of the stagflation period in the 1970s are increasingly being evoked [1] when anaemic economic growth, frequent recessions, rapidly swelling mass unemployment and sometimes double-digit inflation marked the end of the phase of postwar prosperity in the centres of the world system. The concept of stagflation – a nested word formed from the words stagnation and inflation – was popularized precisely during this period of crisis, which in a sense paved the way for neoliberalism.

In September, inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. in the Federal Republic of Germany was 4.1 per cent, slightly above the European average of 3.4 per cent, mainly due to the expiry of the temporary reduction in value-added tax, which was intended to support mass demand in the event of a pandemic outbreak. [2] Just one month later, inflation had already reached 4.5 percent, with forecasts predicting an inflation rate of five percent by the end of the year. [3] In the USA, on the other hand, price inflation – measured in terms of so-called consumer inflation – accelerated from 5.3 percent in August to 5.4 percent in September. By October, the figure had risen to 6.2 per cent. This is the highest level in 30 years. [4] For the group of the largest industrialized and emerging countries, the G-20 states, the OECD OECD
Organisation for Economic Co-operation and Development
OECD: the Organisation for Economic Co-operation and Development, created in 1960. It includes the major industrialized countries and has 34 members as of January 2016.
is forecasting an inflation rate of 4.5 percent at the end of 2021. [5]

At the same time, growth forecasts for this year are being trimmed in many key economic areas – despite enormous economic stimulus packages in the USA and the EU: In the FRG, the Ifo Institute lowered its forecast for this year from 3.3 to 2.5 per cent. [6] According to the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
(IMF), the gross national product Gross National Product
The GNP represents the wealth produced by a nation, as opposed to a given territory. It includes the revenue of citizens of the nation living abroad.
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
) of the United States is expected to grow by only six per cent this year instead of seven (despite a budget deficit of 13 per cent of GDP!). China, whose real estate bubble, acting as an economic driver, is in acute danger of bursting, can hope for a growth of 7.8 per cent, according to the latest bank forecasts – originally the figure was 8.2 per cent. [7]

In mid-October, the IMF revised its global growth outlook for 2021 from six to 5.9 per cent, although it should be borne in mind that many economic stimulus programs are still underway, new measures are being discussed (United States) or are only just being implemented (eurozone), and central banks are continuing to print money on a massive scale. The crisis measures of the United States alone are said to amount to ten times the sum spent after the bursting of the real estate bubble in 2008. [8] The state has long since risen – by force – to become a central economic actor in the neoliberal West as well, whose gigantic economic stimulus measures, [9] which far outstrip all the crisis programs of the 2007-09 crisis surge, are having ever weaker effects. Mountains of debt are growing ever faster, inflation is gaining momentum, and the inflated financial sphere is becoming increasingly unstable – it is obvious that the previous measures with which policymakers combated the crisis surges have been exhausted.

A cooling economy with rapidly rising inflation – the parallels to the 1970s are reinforced by the current supply bottlenecks and the price explosion for many intermediate products, raw materials and fossil fuels, [10] which evoke memories of the oil price shock of 1973 when OPEC OPEC
Organization of Petroleum-Exporting Countries
OPEP is a group of 11 DC which produce petroleum: Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, Venezuela. These 11 countries represent 41% of oil-production in the world and own more than 75% of known reserves. Founded in September 1960and based in Vienna (Austria), OPEC is in charge of co-ordinating and unifying the petroleum-related policies of its members, with the aim of guaranteeing them all stable revenues. To this end, production is organized on a quota system. Each country, represented by its Minister of Energy and Petroleum, takes a turn in running the organization. Since 1st July 2002, the Venezuelan Alvaro Silva-Calderon is the Secretary General of OPEC.

curbed its output in response to the Yom Kippur War. In this context, the current surge in inflation appears to be driven to a much greater extent by such "external“ factors, by an insufficient supply of raw materials and energy carriers, than in the 1970s, when the consequences of OPEC’s supply boycott could be mitigated by investments in Western oil production (the North Sea, Gulf of Mexico).

Interaction of inner and outer barrier of capital

Current inflation is in fact driven by an astonishingly close interaction of the inner and outer bound of capital (see also: Three-way Inflation [11]). An over-indebted capitalist world economy running on credit, lacking a new accumulation regime due to constant competitively mediated productivity advances, is increasingly running up against its ecological limits in its debt-driven exploitation compulsion.

The new scarcity of resources, including supply bottlenecks, results not only from the pandemic-related overloading of the ailing infrastructure in many capitalist core countries after it was systematically underfunded or even privatized during the neoliberal decades. In addition, there is the permanently increasing demand of the global capitalist exploitation machine, which burns vast amounts of resources for speculative pyramid projects – such as absurd real estate bubbles, as currently in China and previously in the USA and Europe. The debt-financed and tremendously resource- and energy-intensive construction of real estate for speculative purposes, most of which is vacant and demolished after the bubble bursts, is currently the most important economic driver of state-capitalist China – and it was the same with the real estate boom in the U.S., where entire suburban neighbourhoods were demolished after it ended, although homelessness reached historic highs.

The ever-increasing hunger for resources of money acting as capital, which must become more money through the production of goods, is not only driving up demand for many traditional fossil fuels – such as coal, which is harmful to the climate – but the raw materials needed for ecological transformation are also in hot demand, with supply bottlenecks and shortages on the horizon. [12] Moreover, the consequences of climate change are already causing supply to collapse and demand to rise: Brazil, for example, is having to import more fossil fuels as a prolonged drought increasingly puts the country’s hydroelectric plants out of commission, while global food production is likely to come under pressure due to increasing climatic dislocations.

Not only is the ailing late-capitalist infrastructure already working at its limit in the full onset of the climate crisis, but in several sectors of the economy, there is also the increasing investment anxiety of capital, which often holds back even in the face of a manifest shortage of goods due to a lack of an accumulation regime and the enormous costs involved in setting up new production sites. A prime example of this is the IT industry, where, despite long-lasting supply bottlenecks, the leading corporations act extremely cautiously when setting up new factories so as not to find themselves sitting on investment ruins in the next slump. In order to be able to produce at the global state of the art, investments in the billions are necessary in individual locations. Chip manufacturing factories take years to build, explained one industry insider, and are also „much bigger and much more expensive“ than before. [13]

The interaction of capital’s external and internal constraints thus manifests itself in the permanently increasing hunger for resources of a capitalist global economy that can only sustain its growth compulsion through massive money printing, a proliferating financial sector, and steadily growing mountains of debt, with the run-down social infrastructure overwhelmed by the consequences of the incipient climate and resource crisis.

Retrospect: From Stagflation to Neoliberalism

Despite all the gradual differences, the parallels between the stagflation period of the 1970s and the current wave of inflation are unmistakable. But there is also a causal link between this crisis period and the now eroding neoliberal system, which was able to establish itself precisely in response to the stagflation. In a sense, the specific crisis constellation of the stagflation period formed the basis for the overall social breakthrough of neoliberalism – simply because Keynesianism failed because of stagflation. Stagflation was the crisis swamp from which neoliberalism crawled, which now – after a good four decades – seems to be at an end.

The oil crisis of the 1970s was only a peripheral factor in the formation of the long-lasting period of stagflation, which had its central cause in the expiration of the long postwar boom supported by the auto industry and the “Fordist“ mode of production. The markets created after the war in the course of the”automobilization“ (Robert Kurz) of capitalism were opened up in the 1970s, competition increased, while the resulting, intensified tendencies to automate production led to rapidly rising unemployment. This combination of tightening markets and falling demand caused the rate of profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. in goods-producing industries to collapse in the 1970s.

The world system, characterized by Keynesian economic policy and Fordist production methods, thus found itself in a fundamental crisis in the 1970s, resulting from the exhaustion of “internal expansion“ within the framework of the Fordist accumulation regime and a falling rate of profit, which led to unmistakable tendencies toward stagnation, including the emergence of mass unemployment. (See also: The End of the”Golden Age“ of Capitalism and the Rise of Neoliberalism) [14].

The hegemonic, Keynesian economic policy of the time failed in the face of the crisis because it reacted to the economic slumps resulting from the end of Fordism in the usual way with economic stimulus programs that acted only as flash in the pan and fueled inflation. Similarly, the growing trade union struggles of the period simply set in motion a price-wage spiral and further fueled inflation. Neoliberalism was able to eliminate the unions in the U.S. and the U.K. so quickly in the 1980s precisely because the public was well aware of this connection (And, moreover, this episode illustrates very well the inability of truncated social-democratic class-struggle thinking to grasp the causes of the crisis and ultimately to effectively represent even its own, domestic capitalist interests of variable capital, i.e., the working class).

Consequently, the stagflation period resulted decisively from the increasing disproportion between the stagnating real utilization of capital in the flagging Fordist commodity production and money growth in the form of higher wages (wage-price spiral) and comprehensive stimulus spending by the states. The inability of Keynesianism to confront this period of crisis opened up its opportunity for neoliberalism to rise as the new economic orthodoxy.

What neoliberalism accomplished from the 1980s onward seems absurd at first glance: Reagan and Thatcher managed in the U.S. and the U.K. to break the necks of the unions – which were blamed for inflation – and to freeze real wages for decades. Inflation, moreover, was quickly contained in the U.S. by an extreme policy of high-interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
("Volcker shock“), which triggered recessions in the centres and led the periphery into a severe debt crisis.

And yet, from the second half of the 1980s onward, a certain stabilization of neoliberalism can be noted in the centres (at the expense of the first collapses in the indebted periphery). Building on the abolition of the gold standard during the Vietnam War, the high interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rate phase of the early 1980s, which was used to fight inflation, also provided the initial spark for the financialization of capitalism. The high level of interest rates, which at times climbed to 18 per cent, attracted investment-seeking capital to the U.S. financial markets, which rapidly expanded and became the dominant economic factor – while goods production in the American rust belt withered away. The United States evolved from the “workshop of the world“ to the”financial centre of the world,“ and it was precisely the position of the U.S. dollar as the world’s reserve currency that made this transformation possible.

For ultimately, this neoliberal, financial market Financial market The market for long-term capital. It comprises a primary market, where new issues are sold, and a secondary market, where existing securities are traded. Aside from the regulated markets, there are over-the-counter markets which are not required to meet minimum conditions. -based capitalism was based on a debt dynamic – enabled by the production of fictitious capital in the financial sphere – in which global debt has been rising faster than world economic output since the 1980s. It is ultimately an anticipation of future capital valorization in the financial sphere, which must be moved further and further into the future. This also explains why, despite stagnating wage levels and rising productivity, the U.S. did not experience a fundamental crisis of overproduction, but instead enjoyed a long upswing under Clinton in the 1990s. [15] The upswing was financed on credit – thanks to the dollar as the world’s reserve currency – by means of the rapidly expanding financial markets, which produced the first global bubble in the late 1990s with the dot-com bubble, which collapsed in 2000.

The Crisis Trap

The neoliberal simulation of an accumulation regime in the financial sphere was thus based on a global mountain of debt that has been growing steadily since the 1980s and has been realized since the 1990s by means of ever newer global speculative bubbles that are gaining in size. [16] In a sense, financial market-driven neoliberal globalization fled from stagflation into ever-larger mountains of debt and speculative excesses, making the global financial water head – which produces periodic surges of crisis that increase in strength – ever more unstable. After the Internet bubble Internet bubble The internet or technological bubble was a speculative bubble which affected ‘technological securities’, i.e. the securities of sectors connected to computing and telecommunications, on the stock-markets in the late 1990s. It peaked in March 2000. burst in 2000, the great real estate crash followed in 2008, to be followed in 2020 by the most severe crisis surge to date in the wake of the pandemic, which catapulted money printing and borrowing to unprecedented heights. Over the past 40 years, capitalist financial and monetary policy has thus been primarily concerned with stabilizing in the short term this debt tower that has been driven ever further on the financial markets, by enabling its continued existence after crisis spurts through a flight forward into further speculative spurts – through veritable bubble transfers.

In fact, this is done by a neoliberal adaptation of Keynesian crisis policy, by lowering the interest rate level, which, however, was not used to boost commodity prices in the real economy, but rather financial market commodity prices in the financial sphere. For the past 40 years, interest rates have been consistently lowered to provide fresh liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. to the financial markets again and again after turbulence, with the most important low interest rate phases occurring after the crisis spurts of 2000, 2008 and 2020. [17] From 2008 onward, zero interest rates are no longer sufficient to finance the increasingly indebted global system after a crisis spurt. The central banks are now buying up securities in the financial sphere to provide it with ever more liquidity. [18] By printing money in this way, which can ultimately only delay the collapse of the world financial system, the central banks have in effect turned into hazardous waste dumps for the financial markets.

With the emergence of the current surge in inflation, the unresolved stagflation crisis of the 1970s is returning, as it were (see also: Corona: Ghosts of Crisis Return [19]), which neoliberalism was able to displace through the globalized debt tower construction of the past decades that has been described. The capitalist crisis trap, [20] from which the neoliberal functional elites fled into ever more extreme financial market excesses, is now snapping shut: Inflation can no longer be banished in the financial sphere – also due to the said interaction of economic and climate crisis. The expansive monetary policy of the central banks is causing prices to rise ever faster, which brings with it the danger of this inflationary dynamic taking on a life of its own and becoming hyperinflation – especially in interaction with new bouts of crisis in the financial sphere.

For this reason, the Fed FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank :
announced in early November that it would gradually scale back its monthly $120 billion securities purchase program, which in effect finances U.S. government debt Government debt The total outstanding debt of the State, local authorities, publicly owned companies and organs of social security. and injects fresh liquidity into the financial sphere. [21] Every month thereafter, the Fed’s purchases of government bonds are to be reduced by $10 billion and its purchases of mortgage Mortgage A loan made against property collateral. There are two sorts of mortgages:
1) the most common form where the property that the loan is used to purchase is used as the collateral;
2) a broader use of property to guarantee any loan: it is sufficient that the borrower possesses and engages the property as collateral.
securities by $5 billion until the program expires in mid-2022. Speculation sees the first Fed rate hike, which would end the current zero interest rate policy, also beginning in mid-2022. [22] Similar discussions are likely to emerge soon at the ECB ECB
European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.
, but where the decision-making process is still overshadowed by the clash of national interests between the monetarist German centre and the southern periphery.

But a cessation of central bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

liquidity programs and an increase in key interest rates threaten recessions and debt crises. Public and private debt has already climbed to 425 per cent of GDP in the centres of the world system. [23] This mountain of debt, under which not least American corporations are suffering, is only sustainable at a very low level of interest rates, especially since an increase in key interest rates would lead to an economic slowdown and make it more difficult to service current liabilities Liabilities The part of the balance-sheet that comprises the resources available to a company (equity provided by the partners, provisions for risks and charges, debts). .

Capitalist crisis policy has ridden to death its financial market-driven, neoliberal horse, on which it tried to flee from the inner barrier of capital for over four decades. The neoliberal postponement seems to be nearing its end, and stagflation, forgotten for decades, is returning with a much higher potential. The most important difference between today’s wave of inflation and the historical phase of stagflation is, above all, that a high interest rate phase, such as the one initiated by Fed Chairman Volcker starting in 1979, no longer offers a way out.

The crisis trap that opens up before capitalist politics thus boils down to the fact that inherent in the system, it can only choose the further course of the crisis: Stagflation or deflation. Should inflation be fought – at the price of a recession including a debt crisis and the threat of a deflationary spiral of the kind that devastated southern Europe under Schäuble’s austerity dictates? Or should the stimulus measures, including expansionary monetary policy, be maintained – even at the price of imminent hyperinflation? Deflation or inflation: There are only different crisis paths along which the irreversible devaluation Devaluation A lowering of the exchange rate of one currency as regards others. of value can proceed. Either money is devalued in its capacity as a general equivalent of value (inflation), or the devaluation process takes hold of capital in its form as constant and variable capital, as factories, machines and wage-dependent people who suddenly become economically superfluous.

The course the crisis will take will be determined by politics in the coming months.




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