Modern Money (Pt 5)

In recent weeks, U.S. politics were dramatically shaken by the Republican drive to get Trump’s Supreme Court nominee Judge Brett Kavanaugh confirmed by the U.S. Senate despite charges that he violently sexually assaulted women in high school and later while a student at Yale University. Though Kavanaugh was an extremely right-wing federal judge, his nomination was expected to go smoothly, with virtually unanimous support from the Republicans and some Democrats. That changed when a respected California professor of clinical psychology, Dr. Christine Blasey Ford, revealed that a drunken Kavanaugh had tried to rape her at a high school party. According to Dr. Ford, when she attempted to cry for help, Kavanaugh put his hand on her mouth causing her to fear that he might accidentally kill her.

Normally, a nominee for high office, let alone the Supreme Court, facing charges for crimes far less serious than attempted rape would be expected to withdraw his candidacy for the sake of “the nation and his family.” But not this time. Demonstrators, mostly women, descended on Washington demanding that the Senate reject the Kavanaugh nomination. After riveting testimony by Dr. Ford and a temper tantrum rebuttal by an outraged Kavanaugh, the Senate by a 50 to 48 vote confirmed Kavanaugh as one of nine Supreme Court justices. Every Republican with the exception of Senator Lisa Murkowski of Alaska, who voted “present,” voted for Kavanaugh’s confirmation. Every Democrat, with the exception of West Virginia Senator Joe Manchin, who voted to confirm Kavanaugh, voted against the nomination.

The Republicans hope the backlash against the women protesters, horrified that an accused rapist like Kavanaugh could ever be seated on the high court, will electrify their racist misogynistic base and limit the expected Democratic gains in the November 2018 mid-term elections. The conventional wisdom is that while the Democrats will win a somewhat larger majority than previously expected in the House they will face defeat in their bid to retake the Senate. If the Democrats against current expectations do win a majority in the Senate, they will have the power over the next two years to reject future Trump nominations to the Supreme Court.

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3 thoughts on “Modern Money (Pt 5)

  1. This post was well worth the wait! It pretty much stands on its own as a summation of the entire series on MMT…and of the implications of this blog’s unique understanding of world capitalism as being still constrained by commodity money production in a practical sense despite the end of the legal gold standard. I shall be posting this over at Bill Mitchell’s MMT blog to see what kind of response it will garner. I shall also try to incorporate this article into my DSA chapter’s monthly reading/study group next month.

  2. In addition, I have a question for your upcoming posts on the current condition of the world industrial cycle.

    I see you have lately been implying that we may be on the cusp of a crisis of overproduction. However, based on the very same criteria that you used in your series of articles early in the blog on “Phases of the Industrial Cycle,” it seems to me that the best prediction for a new crisis of overproduction would be several years away at the very least.

    I know that not every cycle is the same. Although subject to the same abstract laws, there are different concrete factors in each one that influence the timing (sometimes including unforeseeaable events such as major imperialist wars). In addition, not every apparent crisis is a crisis of overproduction. I don’t doubt that we may be on the cusp of an “inventory recession” or even a 10-year “fixed-capital” or “Juglar Cycle” recession (or a combination of the two), which can have severe consequences on workers by themselves even if not coinciding with a long-wave crisis of overproduction.

    That said, here is what I’ve noticed about our current place in the industrial cycle:

    1. At roughly $1200/gold oz., the golden prices of consumer commodities (and probably commodities in general) are still below their long-term average.
    Unless the labor-value of gold has drastically increased relative to the labor-values of typical consumer commodities, this would seem to indicate that the golden prices of commodities are still below their values, whereas the golden prices of commodities must typically be above their values in order to produce a crisis of overproduction.

    Over the last 150 years, the labor-value of gold has increased ever-so-slightly relative to the labor-values of commodities in general (as shown by the barely downward-sloping red trend line for commodity golden-prices over that time frame). Of course, the labor-values of both gold and commodities in general have fallen drastically in that time, but the labor-value of gold has declined by slightly less (and so has risen *relatively*). But for the golden prices of commodities to now be above their values, the labor-value of those commodities would have had to have recently dropped sharply relative to the labor-value of gold (i.e. gold’s *relative* labor-value would have had to have recently increased sharply).

    2. Another clue that the golden prices of commodities are generally still below their values is that world gold production remains profitable (on average) and world gold production continues to grow year over year in terms of weight…albeit lately at a decreasing rate verging on a sort of plateau that, according to current projections among gold producers, may peak and begin to decline after 2019. Typically, past crises of overproduction have been preceded by outright declines in gold production year-over-year…although one might imagine a crisis of overproduction of commodities (relative to an underproduction of the means of realizing the value of those commodities in the form of gold-money) breaking out even with minor year-over-year increases in world gold production if those increases (and their yearly rate of addition to the world gold stockpile) fail to keep up with the rate of growth in commodity production generally over an extended period of time, creating pent-up overproduction.

    3. One way to diagnose whether the golden prices of commodities are below or above their values would be to calculate their “direct prices” (to use Anwar Shaikh’s terminology) and compare whether those direct prices are above their present market prices (in which case market prices are below values, indicating additional room for a boom), or whether those direct prices are below their present market prices (in which case market prices are above values, in which case a crisis of overproduction would be looming in the near future). How could we calculate these direct prices?

    4. As a proxy measure for direct prices, maybe we could compare the profitability of the world gold mining industry on average with the average rate of profit for world commodity production generally? Both are more tractable problems than calculating a basket of direct prices, no? The idea is, if gold mining profitability is below average, then that implies that the golden prices of commodities are above their values, suggesting a crisis of overproduction in the near future (or that world commodity production is on an unsustainable path). If gold mining profitability is above average, then that implies that the golden prices of commodities are below their values, suggesting much more room for the long-wave boom to play out before another crisis of overproduction hits. Of course, the calculation of gold mining profitability for this purpose must take into account not just “sustaining costs,” but the full costs to reproduce the gold commodity in the future, which includes exploration costs.

    5. Speaking purely heuristically, previous golden waves (cyclical swings in the golden prices of commodities, as seen on the graph posted above) had tended to take about 30 years on the upswing and 10 years on the downswing to play out…although there has been a trend towards this cycle becoming more compressed in time in recent cycles. Still, it would be surprising if this ongoing long-wave boom lasted less than a decade.

    6. The velocity of money (whichever way you define “money”) is still at historic lows, which is the opposite of what we would expect leading up to a crisis of overproduction.

    7. Interest rates are still relatively low in historic terms. Unless the average rate of profit has fallen so low as to make the net profit of enterprise threatened even by 3-4% interest rates, it would be surprising to see the rising interest rates stop the boom already. Sure, interest rates will eventually rise to a point that stops the boom in its tracks, but are we really there yet? In fact, the dollar-“price” of gold dipped after the most recent Fed hike, which suggests that the Fed did not strictly need to hike short-term interest rates so quickly in order to balance the supply and demand for money-materiel (gold) at its then-existing dollar-“price” of $1200/oz. (in baseball terms, call it an “unforced error”).

    Whereas, if we see the dollar-“price” of gold start to relentlessly march upwards *despite* Fed attempts to hike interest rates and restrict the dollar money-supply to stay within the bounds of world gold production…as we witnessed during the early/mid 2000s…then that will be a sign that the Fed will need to get even more aggressive with interest rate hikes in order to balance the supply and demand for money-materiel at the existing dollar/gold exchange-rate, meaning that it will be *forced* to increasingly threaten the net profit of enterprise.

    Just some things to think about. Looking forward to the next post,

    Matthew Opitz

  3. These questions about the current state of the capitalist economy have additional importance for myself because I have been dabbling ever-so-slightly in the stock market lately, as even Herr Marx himself was known to do.

    My recent decisions to buy some shares of XME (an index fund focusing on primary commodities such as steel) and PAVE (an index fund focusing on basic industrial commodities) were based on the analysis I gave above in my previous post, plus two additional factors:

    1. Capacity utilization rates are climbing back to near their historic highs. I took this as evidence that businesses will be under increasing pressure to build additional means of production *extensively* in order to meet sudden increases in demand for their commodities and not lose market share to their rivals.

    2. Unemployment (as the bourgeois economists define it) has approached historic lows. I took this as evidence that businesses will be under increasing pressure to build additional means of production *intensively* and thereby replace increasingly expensive and combative living-labor with dead labor.

    Taken together, I took these two indicators as signs that we may be exiting the phase of “average prosperity” (during which the capitalist economy can still make-do with the means of production that it inherited from the previous cycle) and entering into the “boom” proper, during which the demand for Department I goods (additional means of production) will come into their fullest bloom…including especially the types of Department I goods produced by the companies in those two index funds above. I figured that XME, for example, would be set to approach its historical highs around $70-$80/share (that it attained during the lead-up to the previous crisis) sometime within the next 10 years. So I bought some shares at $35 (not buying any more than I could afford to lose in their entirety, knowing that during the last crisis these volatile shares went as low as $12/share!) (not to mention purchased those shares of XME and PAVE with the expectation that, over the next ~5 years, they would outperform the

    Lately though, the stock market has been reacting to rising interest rates and bond rates by declining across-the-board. Even my shares specializing in Department I goods have been hit with a 10% decline. I understand that, all other things being equal, the “capitalized” (fictitious) market-value of stocks will halve if interest rates double…although there would be no change if the stocks’ dividend rates also doubled in that time. (And typically during a boom, stock dividend rates rise along with interest rates, reflecting temporarily higher profit rates which sooner or later will become increasingly reliant on credit in the economy and increasingly incompatible with a stagnant or declining rate of world gold production to realize the values of commodities and thereby generate profits).

    My interpretation of the stock market jitters so far has been to remain convinced that the boom still has some distance to go (at least several years) before it has played itself out, and to dismiss the stock market jitters lately as speculation based on traders’ superstitious fears that we are in the 10th year of a “recovery” (if you can call it that) and are “due for a recession” (I say “superstitious” because no bourgeois economist can give a solid reason for why there should be anything special or of fundamental significance about this 10-year anniversary, or why a recession should be imminent, aside from incidental external “shocks” such as the trade war with China). Based on this preliminary interpretation, my response has been to hold my stocks…and even contemplate buying a bit more during this “dip.”

    However, if the boom is mostly already played out, and a crisis of overproduction is imminent, then the logical course of action would be to take the 10% hit and sell now while I can.

    I convey this personal story, not as if I had any serious amount of money on the line and desperately need advice, nor as if I wished to brag about the prospect of obtaining any amount of money from the unpaid labor of the global working class, but merely as a concrete example of how the evolution of the current cycle might manifest itself in certain concrete symptoms or outcomes that bourgeois financial media would consider worthy of “headline news.”

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