The world’s ten richest men more than doubled their fortunes from $700 billion to $1.5 trillion in the last 2 years. Billionaires today have accumulated wealth of over $5 trillion. Anybody confronted with these current figures of whatever political hue must logically ask, can this really be an optimal economic system for 8 Billion people on the planet and is it at all sustainable given the levels of environment damage and human suffering we are presently experiencing. These incredible wealth accumulation figures are mirrored by today’s global crisis in food insecurity and extreme poverty, with an estimated 800 million people at risk of starvation and billions of people trapped in abject poverty. Interestingly, this extreme capital accumulation is perfectly described by Marx’s Das Kapital (chapter 25: the general law of capital accumulation). Central banks and owners of private equity work in unison on a specific agenda. This agenda has only one purpose, the prolonging of an economic system that enables the absolute accumulation of capital wealth for a tiny minority at the detriment of everything else. Marxist theory can explain why this agenda will worsen the situation, ultimately fail, and lead to political repression and fascism.
Independent central banks and Interest rate target settings a recipe for recession.
Central banks have a key role in controlling the quantity of money in the global economy. Any actions they take to change its availability will have large dramatic effects on peoples lives.
Before we examine central bank’s actions, let us better understand the term “independent” and what it means. Since the late 70’s there has been a continued line of argument amongst orthodox economic and political thinking that central banks are above and separated from politics. There is a commonly held belief in the mainstream media that a well-functioning economy can only work with an “independent” central bank. The term independence is equated to other pillars of society, like an independent judiciary or a free press. Underlying this claim is the idea that democratically elected people’s representatives could make “biased” or “politically” driven decisions and that central bankers are technocrats and therefore politically neutral, working for the best of the economy. This all-pervasive view has even led to the IMF including central bank independence as one of its lending criteria to third world countries without any real evidence that this is at all beneficial for them. This premise of independence is irrational, based on the real-world examples, clearly untrue and their actions, in stark contrast to the claim, are always politically motivated with dramatic effects on society without any recourse from democratically elected representatives. Irrational why? Interest rate target setting seems to have become the only instrument of control for central banks. Capital controls are seen as an anathema to the free flow of global capital, thought to be needed in a “free market”. Yet at any given level of economic output, it is illogical to believe that a single interest rate and, indirectly, an associated inflation rate will serve both profit-taking capital and wage-taking labour at the same time. There can be no “goldilocks” interest rate that somehow serves the whole of society. Central banks will always attempt to set very low interest rates. Why, because their greatest fear is inflation. Price rises with immediate associated profit taking are inelastic and very rapidly reach an upper limit, but higher inflation in the mid and longer term will also drive the desire and a fight for higher wages as the cost of living rises. This in turn runs the danger of suppressing profit rates. Keynesian-like cost push wage / price spirals inducing inflation were rejected by Marx and, to his justification, have actually been notoriously difficult to prove empirically. Given this fact it is interesting that central bank policy makers only ever warn of the effect of rising wages on inflation and never on rising profit taking. The morally more sinister effect of low inflation and undershooting a low target interest rate is to suppress growth rates through deflation, causing cycles of recession by rising interests to crush demand, leading to increased unemployment and lower wage growth. Reading the transcripts of central banker’s presentations at the recent Jackson Hole meeting, many talked of the troubling “tight” labour markets that they admitted must be counteracted by higher interest rates. There is also no evidence that the relationship between incremental increases in rates and decreasing demand is at all linear. Thus, there are no “soft landings”. Orthodox models of inflation are woefully poor at predicting future movements in inflation. Simply increasing rates each month and waiting for an effect leads to overkill, crushing demand and tipping economies into deep recessions, but as mentioned above, this seems to be, by general consensus, a sacrifice worth taking to defend both profit levels and unhindered capital accumulation. So non-elected individuals are taking far-reaching financial and deeply political decisions to cause recession, knowing full well and cynically hoping that working people will lose their jobs and can’t afford their mortgages, reducing demand and inflation just to prevent wage growth and preserve profit levels. The other part of the argument that central bankers are neutral technocrats and thus not influenced by politics is just untrue. In the vast majority of cases, they come from and often move back to private investment banking careers. So, we as a so-called democratic society have given up one of the major levers of economic and political power to unelected super-rich private financiers that select rates designed to prevent inflation in wage growth to protect profits.
Quantitative easing, keeping the patient on life support as the rich get richer.
But central banks go beyond interest rate target setting and have a critical role in trying to stabilize the economy by providing credit liquidity to banks. Taking a historical perspective, long periods of economic deflation and stagnating prices have been the norm. Marx’s theory of value creation gives us an explanation of why this should be. He argued that capitalist production will continually strive to create more units in less time per worker. So, labour time per unit as a proportion, will fall as the production of units rises. As the only labour from real people creates intrinsic value, any new increase in productivity will dilute the value of each new unit of a finished commodity. Profit gained on invested capital is reflected in surplus value. As productivity produces more units and capital accumulates, rates of profit per commodity fall as its new share of value drops. This causes the owner of capital to look for higher returns in new sectors or speculate and move capital into pure financial assets. Prices are also a monetary reflection of value, so over time there is a deflationary tendency of new value and thus, prices. Evidently these deflationary trends prevent new productive investment and cause inflated financial asset bubbles. This leads to a crisis in the real economy and overvalued financial assets, (just what happened in 2008). To counter this effect, central banks increase the money supply, in that they print their own currency and purchase government and corporate bonds at a nominal rate. This drives down the yield on those bonds. It makes re-financing for governments manageable and lending money cheaper, prevents governments and large banks from collapsing and hopes to kick start investment. Paradoxically, this gives private equity holders even more cash assets at low interest rates. The theory is then that national banks and other credit institutes will lend out this newly acquired liquidity to firms who will invest in new productive equipment and jobs, boosting the economy. It works to a degree in preventing collapse, but there has been no major investment in the productive economy and this extra liquidity mainly flows into financial assets where the owners receive better returns. The asset bubbles get bigger recessions and low growth last longer and the risk of market crashes increases. All the while, inequality increases in all capitalist economies. In the advanced G7 the policies create low wages, poverty and property price inflation preventing ownership. In the developing world, we see sovereign bankruptcy and starvation or food insecurity.
We have been here before.
We have had very similar periods in history before. The gold standard created in the 1870’s and with it a liberalization of global finance and imperial expansion led to massive accumulation of wealth for a tiny few industrialists. By the early nineteen hundreds, the system was becoming unstable with huge levels of inequality which led to both war and revolution. After the war and the following flu outbreak, the working population shrank, not unlike the baby boomer demographic changes we see today. The terrible loss of life on the western front had discredited the ruling class. At the Paris peace conference of 1919 however, any major changes to restrict finance proposed by visionaries like Keynes were rejected. The propaganda of fiscal discipline, balanced budgets and austerity were used to suppress wage demands and conditions. Instability and inequality increased, resulting finally in the Wall Street crash and the great depression. In the 30’s fascist populists were backed by these industrialist elites to secure political power, and suppress unionized labor and attack left-leaning groups. This led to fascism and World War II. There are very strong parallels today with talk of balanced budgets, Schwarze null etc. The national balance of payment and central bank finance are very unlike normal household budgets and to compare them, although it makes easy simple comparisons, is delusional. If they were comparable, countries would all be bankrupt and quantitative easing would be unable to happen. But it serves the austerity story or why we are not allowed to question the orthodox view and must accept poor pay and conditions. There is no reason why the super-rich elite will side with democratic institutions in the future, if they see more personal advantage from fascism. Neo-liberal capitalism is driving this perverse wealth accumulation for a tiny few, just as Marx said it would. Instability of financial markets caused by speculation, massive inequality with global population displacement can only lead to fascism. Maybe this time we won’t survive it.