The new recession is arriving?
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I was going to quote that sane passage from Mattick too as it explains well enough why and how “quantitative easing” raises stock market prices. However, his explanatoion as to why it has not caused general inflation is still based on the assumption that businesses have the ability to raise – or not raise — prices at will.
His argument is that, because businesses are making capital gains from the stock exchange boom QE generates, they don’t need to raise prices
“Basically, none of this costs business anything, while the rise in stock prices disproportionately benefits the small super-wealthy minority who disproportionately own stocks, so there is no motivation to raise prices—especially under the deflationary conditions of a global business slowdown—producing an inflation-free expansion”.
So, he is saying that businesses are choosing not to raise prices even though they could do. But why would they not do so if they could since that would enable them to make more profit, which after all is their primary “motivation”?
The fact is that businesses don’t have a choice in the matter. They sell at a price that the market can bear and in a recession the market will not bear an increa. Mattick in fact undermines his whole argument by adding “especially under the deflationary conditions of a global business slowdown.” Precisely. In other words, they don’t raise prices even with QE because they can’t. It’s not that they choose not to since they are already making enough money from capital gains on the stock market, but because they can’t.
The reason why QE hasn’t led to general inflation is that the extra money is injected only into the financial system but not into the general economy. So it inflates only the price of shares not prices generally, as explained in this article:
It is government policy to inflate the general price level by about 2 percent a year. This they do by increasing the supply of “basic money” (M0) in the usual way of allowing banks to withdraw money from their accounts with the Bank of England in the form of bank notes.
Paul Mattick’s comment on posts https://www.worldsocialism.org/spgb/forum/topic/the-new-recession-is-arriving/page/12/#post-208177 to https://www.worldsocialism.org/spgb/forum/topic/the-new-recession-is-arriving/page/13/#post-208187 is the following;‘I wish these critics would address the issue in the Rail. They forget, of course, the “oil crisis”, a successful attempt to increase prices by restricting supply, which forced a general.price increase. But it is also generally recognized that increased taxation and interest rates also impelled businesses to raise prices.’Thanks. I’ll take up his offer and send something to the Brooklyn Rail. Actually, the disagreement with the original article is essentially only on the one point as to whether or not businesses have the power to increase their prices at will and cause prices generally to rise.
Meanwhile, here’s the opening section of the Party’s Study Guide on Inflation, which explains that not every rise in prices is a case of “inflation” in its strict sense:
“The word inflation has come to be used very loosely in recent years to mean any rise in prices, so that it has in fact almost become a synonym for price increase. Words are of course always changing their meaning in line with changed social practices and ideas. We can’t complain about that. But this particular change reflects an underlying confusion, amongst professional economists and the general public alike, about the cause of the enormous rise in prices that has taken place since the beginning of the last world war.
First, let us distinguish between a rise in the price of a particular Commodity and a rise in the prices of all commodities, between a rise in individual prices and a rise in the general price level. This is not always easy in practice since a rise in the general price level will also of course involve a rise in individual prices. But there is a real distinction here which it is essential to make .
A rise in the general price level can be defined as a rise in the prices of all commodities such that their prices relative to each other remain unchanged. Individual prices, on the other hand, can rise for a number of reasons besides as part of a rise in the general price level. The demand for a commodity night temporarily exceed its supply; monopoly conditions might exist; its cost of production might go up. All these no doubt have operated since the war to cause particular prices to rise at particular times, but then at other times other forces – supply exceeding demand, falling costs, government subsidies – will have worked to reduce particular prices. But in any event none of these could explain a general rise in the prices of all commodities.
What could cause such a rise? Only, it will be argued here, some change in the standard of price, some monetary change. A general rise in prices, or inflation in its strict sense, is a purely monetary phenomenon. Marx was amongst those who recognised this.”
As we expected, workers to pay the cost of Covid-19
corporations are going to boost their profits by crushing ordinary workers’ wages when the crisis is over, the Nobel economic prize winner and inequality expert Sir Angus Deaton has warned. Many economists have attributed the surge in equities in recent months to a flood of new money printed by central banks, but Sir Angus, who won the economics prize in 2015, attributed it to expectations from investors that companies will be able to boost their profits in future by squeezing their wage bills….
Here is Paul Mattick jnr’s reply;
https://brooklynrail.org/2020/11/field-notes/Inflation-Government-Policy-and-Profits-an-Exchange
First error is about Marx and the Quantity Theory of Money. He did indeed “roundly criticise” it where gold and/or a paper currency convertible on demand into a fixed amount of gold was the currency. He argued that it only applied when there was an inconvertible paper currenc
Paul Mattick is right that the prices of commodities can rise for all sorts of reasons other than a depreciation of the currency but this does not alter the argument that over-issuing an inconvertible paper currency does cause a rise in the general price level. Obviously, contrary to what he supposed to be the argument, this does not happen immediately it one go; it spreads throughout the economy as sellers have occasion to increase their prices.
Here is what Marx wrote in chapter 3 section 2c of volume 1 of Capital, alluding “here only to inconvertible paper money issued by the State and having compulsory circulation”:
”The State puts in circulation bits of paper on which their various denominations, say £1, £5, &c., are printed. In so far as they actually take the place of gold to the same amount, their movement is subject to the laws that regulate the currency of money itself. A law peculiar to the circulation of paper money can spring up only from the proportion in which that paper money represents gold. Such a law exists; stated simply, it is as follows: the issue of paper money must not exceed in amount the gold (or silver as the case may be) which would actually circulate if not replaced by symbols. Now the quantity of gold which the circulation can absorb, constantly fluctuates about a given level. Still, the mass of the circulating medium in a given country never sinks below a certain minimum easily ascertained by actual experience. The fact that this minimum mass continually undergoes changes in its constituent parts, or that the pieces of gold of which it consists are being constantly replaced by fresh ones, causes of course no change either in its amount or in the continuity of its circulation. It can therefore be replaced by paper symbols. If, on the other hand, all the conduits of circulation were to-day filled with paper money to the full extent of their capacity for absorbing money, they might to-morrow be overflowing in consequence of a fluctuation in the circulation of commodities. There would no longer be any standard. If the paper money exceed its proper limit, which is the amount in gold coins of the like denomination that can actually be current, it would, apart from the danger of falling into general disrepute, represent only that quantity of gold, which, in accordance with the laws of the circulation of commodities, is required, and is alone capable of being represented by paper. If the quantity of paper money issued be double what it ought to be, then, as a matter of fact, £1 would be the money-name not of 1/4 of an ounce, but of 1/8 of an ounce of gold. The effect would be the same as if an alteration had taken place in the function of gold as a standard of prices. Those values that were previously expressed by the price of £1 would now be expressed by the price of £2.”
Comment from comrade DAP who is not on this forum:
Yes, he hasn’t read that passage that says that as soon as money becomes inconvertible the position is effectively reversed!
While some of the other things he says are not that controversial, this is also odd:
‘Contrary to Adam Buick’s conception of inflation, all prices do not rise simultaneously, and in particular the price of labor power, wages, rises more slowly than commodity prices, improving business profitability.’
Firstly a general rise in the price level doesn’t mean every price rises at the same time or indeed at the same rate. In slumps in particular, some prices can still fall against the general trend.
But it’s the last part of that sentence that’s really odd – does he have any empirical evidence for it? Despite setbacks in recent times, we all know real wages have risen enormously since the inception of capitalism. But have commodity prices kept pace in real terms? There’s been a long term increase in average real commodity prices (presuming this is what he means) but it’s well behind long-term real wage growth in most advanced countries from what I’ve seen, though admittedly it’s difficult to get exact comparative data. Similarly business profitability (rate of profit?) hasn’t increased over the long-term, even if the accumulated stock of capital has increased hugely.
Also, his example of Amazon/Uber is an example of companies setting prices below the market rate (and being able to do so because of their disruptive business model and the scale of capital invested in them).
Prices rising from government protection are rents, and even they are limited, ultimately, by the extent of effective demand in the economy.
I put together a blog post from the comments made here
UK facing risk of ‘systemic economic crisis’, official paper says | Politics | The Guardian
The government has privately admitted the UK faces an increased likelihood of “systemic economic crisis”
Economic chaos could raise the risks of a breakdown in public order and a national mental health crisis, while reducing the “financial levers” available for the government to respond to other risks, this description of “planning assumptions” warns.
A confidential Cabinet Office briefing seen by the Guardian also warns of a “notable risk” that in coming months the country could face a perfect storm of simultaneous disasters
The boom in the shares of U.S. technology giants is a bubble that will burst once interest rates increase or “over exuberance” in the tech story fades, Pascal Blanque, chief investment officer at asset manager Amundi said.
Tech stock boom a ‘bubble waiting to burst’: Amundi CIO | Reuters
“It’s a perfect bubble waiting to burst. It’s not if, but when,” Blanque told the Reuters Global Investment Outlook Summit, adding that you “cannot justify the current valuations.”
Not according to the optimists.
“Nick Nelson at UBS was among the braver UK analysts to actually put a number on what will happen in 2021: he said the FTSE 100 would end the year at 7200 points, roughly a 10% gain compared to the 6460 mark at the end of 2020.
In the US some investors are more bullish: Goldman Sachs predicted the S&P 500, the US benchmark, would end the year near 4300 points, an increase of about 15%, even if a clutch of other Wall Street investment banks think 3900 is a more realistic target.”
For some it is definitely ok.
Richest 1% have almost a quarter of UK wealth, study claimsOfficial figures have missed £800bn of private assets, says thinktank, amid calls for wealth tax to fund Covid recovery.
https://www.theguardian.com/inequality/2021/jan/03/richest-1-have-almost-a-quarter-of-uk-wealth-study-claimshttps://www.theguardian.com/business/2021/jan/06/ftse-100-stock-market-bubble-risk
Jeremy Grantham, the British co-founder of the US investment firm GMO, said in a letter to clients that current investor behaviour bore the hallmarks of the mood in the run-up to the 1929 Wall Street crash.
“Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behaviour, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000… my personal favourite Tesla tidbit is that its market capitalisation, now over $600bn, amounts to over $1.25m per car sold each year versus $9,000 per car for General Motors. What has 1929 got to equal that?”
This is about a possible stock market crash rather than an economic recession. Stocks and shares might well be over-priced but any bubble is not likely to burst until central banks stop the “Quantitative Easing” which has fuelled this.
There is no sign of this happening. In fact it is being stepped up in the pandemic and could be a reason why it is unlikely to be reversed (as in the theory behind it, it is eventually supposed to be). If/when it were to be, that would provoke a downturn in bond prices as the central bank sold off those it has been buying and also in share prices as this would be taking money out of financial markets.
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