In what may be its last official action under Ben Bernanke’s leadership, the Federal Reserve announced in December that it would reduce its purchases of U.S. government bonds and mortgage-backed securities from $85 billion to $75 billion a month as of January 2014. This indicates that the Fed hopes to slow down the growth of the dollar monetary base during 2014 from the 39 percent that it grew in 2013.
Considering that before the 1970s the historical growth rates in the monetary base were 2 to 3 percent, and from the 1970s until the mid-2000s they were around 7 percent, a 39 percent rate of growth in the dollar monetary base is viewed by the Fed as unsustainable in the long run.
The bond market reacted to the announcement in the textbook way, with interest rates on the U.S. 10-year government bonds rising to around 3 percent. The last time interest rates on 10-year bonds were this high was just before the Fed put the U.S. housing market on “life support” in 2011.
It seems likely that the latest move was made to smooth the transition from the Bernanke Fed to the Yellen Fed. Janet Yellen, the newly appointed, and confirmed, chair of the Federal Reserve Board of Governors, is considered a “dove.” That is, she is inclined to follow more expansionary monetary policies than Bernanke in order to push the economy in the direction of “full employment.” As defined by bourgeois economists (1), this is the optimal level of unemployment from the viewpoint of the capitalists – not unemployed workers. With this move, the money capitalists are “assured” that the Fed will be slowing the rate of growth of the U.S. monetary base despite the new Fed chief’s “dovish” views, while relieving Yellen of having to make a “tightening move” as soon as she takes office.
The gold market, as would be expected, dropped back towards the lows of June 2013, falling below $1,200 an ounce at times, while the yield on the 10-year bond rose to cross the 3 percent level on some days. This reflects increased expectations on the part of money capitalists that the rate of growth in the U.S. dollar monetary base will be slowing from now until the end of the current industrial cycle.
Though the prospect of a slowing growth rate in the monetary base and rising long-term interest rates is bearish for the stock market, all things remaining equal, stocks reacted bullishly to the Fed announcement. The stock market was relieved that a stronger tightening move was not announced. The Fed combined its announcement of a reduction in its purchasing of bond and mortgage-backed securities with assurances that it would keep short-term interest rates near zero for several more years, raising hopes on Wall Street that the current extremely weak recovery will finally be able to gain momentum. As a result, the stock market is still looking forward to the expected cyclical boom.
Long-term unemployed get screwed over
On December 26, Congress approved a measure, incorporated into the U.S. budget, that ended unemployment extensions beyond the six months that unemployment benefits usually last in the U.S., which added to Wall Street’s holiday cheer. During recessions, Congress and the U.S. government generally agree to extended unemployment benefits but end the extension when economic recovery takes hold. It has been six years since the recession began – 60 percent of a normal industrial cycle – and the Republicans and the bosses agreed that it was high time to end the unemployment extensions.
Some Democrats dependent on workers’ votes have said that they are for a further extension of emergency unemployment benefits. President Obama claims to oppose the end of the extended benefits but signed the budget agreement all the same. The budget agreement as it stands basically says to the unemployed, it is now time to take any job at any wage you can find. If you still can’t find a job, tough luck.
There is speculation that ending the extensions will lower the official unemployment rate, perhaps considerably. Jeff Cox, finance editor of CNBC, explains: “Labor force participation has hovered around a 35-year low for most of the year. Because the BLS only counts those actively seeking jobs as unemployed, the rate has been able to slip.”
Whether or not this will be the case, we will have to be even more suspicious than normal of any claims coming out of the U.S. Labor Department about a “dramatic drop” in the official unemployment rate over the next few months.
What we do know is that ending the extended unemployment benefits will tend to raise the rate of profit on capital invested within the U.S. This fits in with the attempts to halt the continued long-term “de-industrialization” of what was not so long ago the leading industrial country in the world. The reason is that once unemployed workers exhaust unemployment benefits, they are at the mercy of the welfare system or must seek support from their families or turn to private charity and soup kitchens. Under this kind of pressure, many workers will take jobs at wages they would never have considered accepting if there was any alternative. The result is a rise in the rate of surplus value – the ratio of unpaid to paid labor – and consequently the rate of profit.
The bullish thinking on Wall Street
President Obama’s decision to sign the budget deal ending unemployment insurance extensions only added to the already considerable holiday cheer on Wall Street. The current bullish (2) thinking, translated into Marxist terms, goes like this:
Since the crisis we – the capitalists – have succeeded in greatly increasing the rate of surplus value. The biggest obstacle to still higher profits has been the realization of the surplus value that we have been extracting from the workers like never before. Now with the end of the unemployment benefit extensions, the prospects for further increases in the amount of surplus value we are squeezing out of the employed workers here at home is improving even further.
Now, as the industrial cycle moves into its boom phase, the acute problems we have had in realizing the huge amount of surplus value we have been extracting from workers worldwide will fade. The result will be an explosion in profits, as well as dividends that are paid out of profits to the owners of stocks.
Based on this thinking, stock market speculators have driven stocks to record highs in anticipation of the coming dividend feast. In the light of all these positive factors, they have ignored, so far at least, the bearish implications of rising – but still by post-1968 standards extremely low – long-term interest rates. (3) At some point in the further evolution of the current industrial cycle, this will change. Bull markets are always succeeded by bear markets. And this brings us to the current stage of the international industrial cycle.
The current phase in the industrial cycle
The Federal Reserve has announced that U.S. industrial production has finally risen above the last peak reached at the end of 2007. Technically, assuming that the Federal Reserve’s estimate of industrial production is accurate, this marks the end of the depression phase of the current industrial cycle in the U.S. and the beginning of the phase of “average prosperity” that precedes the boom. This also helped put Wall Street in its current cheery mood.
Qualifications must be made, however. Some of the rise in the industrial production index reflected a rise in utility output due to widespread cold weather in the central and eastern United States in November. The industrial production index includes utility output, which is not adjusted by government statisticians for non-seasonal weather fluctuations but only for seasonal fluctuations and mining output. This part of the rise in industrial production was therefore not cyclical and so should be ignored in determining the current phase of the industrial cycle. (4)
More importantly, the narrower manufacturing index, which measures the level of large-scale manufacturing – that is, industrial production proper – is still below its previous peak. This index is of crucial importance since it measures what is the core of “industrial production.” Measured by the manufacturing index, production has recovered only about 75 percent of what was lost during the crisis proper. This is six years after the crisis began!
Since the average industrial cycle is 10 years, and assuming that the current industrial cycle lasts that long, this would mean that 60 percent of the cycle is already over with the manufacturing core of industrial production yet to equal the best levels of the not-very-impressive preceding cycle.
In the entire history of industrial cycles in the United States, it seems that only the Great Depression of the 1930s can rival the current manufacturing depression in terms of length. In terms of manufacturing employment, the situation is even worse.
It has long been a basic feature of capitalist production that industrial production rises faster than employment. This reflects the relentless growth in labor productivity that has marked the history of capitalist production since the industrial revolution at the end of the 18th century. This has certainly been the case in the current industrial cycle that began with the outbreak of the crisis in 2007.
For most of the history of capitalist production, however, the rise in manufacturing output and employment has exceeded the growth in the productivity of labor. Therefore, the decline in the number of jobs in basic industrial production has been a relative, not an absolute, one. However in imperialist countries – the countries where modern industry was born several centuries ago – this is no longer the case and has not been the case for more than 40 years.
The phases of the industrial cycle and change in manufacturing employment
In a normal industrial cycle, employment in industry continues to contract for some time after industrial production begins to recover. The lowest level of employment is therefore reached early in the depression phase of the cycle, some time after the crisis proper has ended. The reason is that in the depth of a crisis many enterprises are forced to operate at levels that are far below the levels that maximize the productivity of their workers.
There is a sharp rise in productivity early in the recovery as business enterprises begin to operate at levels that are far closer to the optimum level for maximizing the productivity of individual workers. The result is that the bosses don’t have to hire additional workers for some time after production starts to recover. Indeed, they can even continue to reduce the number of workers for some time after production begins to rebound. The trough of employment, especially in industrial enterprises, therefore follows the low point in production.
In the United States, while the worst month of industrial production appears to have been June 2009, which would mark the end of the crisis proper and the beginning of the depression phase of the industrial cycle, the lowest level of employment in manufacturing was not reached until the end of 2009. The dates may be different in other countries, but the basic pattern should be much the same.
During the rise of modern industrial production in the U.S. from around the end of the 18th century until 1979, employment in manufacturing – basic material production outside of agriculture and the extractive industries – rose from cycle to cycle. This process was interrupted for the first time by the Great Depression of the 1930s but only for about a decade, after which it resumed.
Since 1979, however, manufacturing employment in the U.S. has reversed its historical direction, showing a decline from cycle to cycle. This means that the losses in manufacturing employment that have occurred during recession/depressions have been greater than the gains in manufacturing during the upward phases of the industrial cycle. When the decline of manufacturing associated with the Great Recession of 2007-09 finally bottomed out at the end of 2009, manufacturing employment was the lowest in absolute terms since 1941. The entire rise in industrial employment between the end of the Great Depression and 1979 in basic manufacturing production had been wiped out!
Since the end of 2009, employment in manufacturing in the U.S. has begun to rise once again. But this rise has been extremely modest. During the recession proper – December 2007 to June 2009 – about 2 million jobs were lost. Since manufacturing jobs began to increase again around the beginning of 2010, only about 543,000 manufacturing jobs have been created. The number of jobs in manufacturing is still well below the best levels that were achieved in the preceding cycle. This reflects both the jobs that have been lost due to rising labor productivity and the fact that manufacturing output has yet to reach the peak of the last cycle.
These figures are only for the United States, the heart of the empire. In Europe – especially if we leave aside Germany – the figures would be even more dismal, while in the rapidly developing countries of China and India, the picture is considerably better. But even the economic performance of India and China, where capitalist production developed rapidly over the last few decades, the current rise in the industrial cycle has been noticeably weaker than its recent predecessors.
The long-term trend in employment
It is important to always distinguish between the cyclical aspects of a capitalist economy and its long-term trends. The media – particularly the Associated Press, as well as Reuters, which is even worse if that is possible – act as cheerleaders for the U.S. economy. They point to any purely cyclical improvement in the U.S. economy as though it indicates a fundamental improvement. This would be like claiming that global warming has been defeated because temperatures in the northern hemisphere have dropped dramatically over the last six months.
Leaving aside purely cyclical fluctuations, the rise in the total numbers of jobs of all kinds created has been declining progressively for decades in the U.S. For example, in the 1970s and 1980s, the total number of jobs increased at about 2 percent a year. It has only been around 1 percent a year over the last two decades, and only 0.3 percent a year for the last decade – which includes the Great Recession.
Consequences of the decline in employment in basic industry
By manufacturing (5) employment, the government means industrial enterprises of some size. From a Marxist viewpoint, flipping hamburgers is industrial production just like the production of steel, but in government statistics hamburger flipping is counted as part of the service sector. In reality, many service workers are industrial workers – productive of surplus value in Marxist terms. However the industrial workers employed in the service sector are almost all low-paid workers. In addition, it is large-scale industry that determines the overall industrial strength of a country and potentially its military and political weight in the modern world.
For example, in the 1930s the U.S., which maintained only small armed forces, appeared to be weak in the purely military sense compared to Nazi Germany and even Japan, both of which were rapidly rearming. But once the war began, the U.S. was able to quickly convert its huge automobile industry, backed by its mighty steel industry, to the production of tanks, bombers and fighter planes, soon dwarfing Germany’s war production, not to speak of that of still only partially industrialized Japan. You cannot convert McDonald’s and Burger King restaurants to war production quite so easily.
When the decline in manufacturing employment began 35 years ago, it was common to hear proposals that former manufacturing workers be retrained as computer programmers. However, while the number of computer programmers has grown, it has come nowhere near being able to compensate for the jobs lost in basic manufacturing, including the number of jobs that would have been created if the historical growth in manufacturing jobs had been maintained. Most computer programmers and other high-tech workers are recruited not from the ranks of former manufacturing workers but from those who studied high-tech subjects in universities. In addition, few people over 40 are ever hired as computer programmers anyway, even if they have worked as computer programmers all their lives.
The great majority of former manufacturing workers and their children, who in earlier generations would have found jobs in automobile factories or steel mills and so forth, instead have had to take low-wage jobs in retail or warehousing, or in fast-food restaurants that often pay the minimum wage – if they can find jobs at all.
Hardest hit have been African Americans. In the heyday of American industry – the years from World War I through the 1960s – the Depression decade excepted – many African Americans were able to find jobs in basic industry, join unions and for the first time earn a living wage. Today, working-class African American youth have to settle for low-wage work or enter the world of street gangs, the illegal drug trade and prostitution – generally leading to long prison terms or an early death.
Increasingly, not only Latinos but even white youth who don’t have the opportunity to go to college to become high-tech workers or medical doctors or at least medical assistants face the same dismal choices. Recently, a low-wage workers’ movement, inspired in part by the Occupy movement, has emerged in the United States. It started in New York City but now has begun to spread around the country. This movement demands a living wage of $15 dollars an hour. The idea here is that if American capitalism can only offer jobs in warehousing or fast food for today’s young workers, it should at least pay them a living wage, or in Marxist terms, the value of their labor power.
Could there be a new recession in 2014?
One of the ways that the Associated Press and Reuters deceive their readers is by surveying professional economists about the chances of recession over the next year, with the vast majority of them predicting continued prosperity. What they do not tell their readers is that most of these economists, with few exceptions, never predict recessions in advance. (6)
Even worse, the media often quote economists who work for brokerage houses that have a material interest in creating a mood of economic optimism among potential customers and therefore are highly unlikely to predict a recession, since that would lower the demand for the stocks they are trying to sell. It is a lot like asking Ford dealers about the quality of Ford automobiles relative to the competition and pretending that they are objective experts.
Not surprisingly, few bourgeois economists are predicting a recession for this year. However, surveys of professional bourgeois economists tell us virtually nothing about the real chances of recession. But this doesn’t mean we should simply reverse the predictions of the bourgeois economists. In that case, we would be predicting recession every year.
There are strong reasons, however, why a new full-scale recession in the global economy in 2014 appears to be unlikely. First, industrial cycles usually last about 10 years – though there are exceptions – and the current industrial cycle will celebrate its seventh year only at the end of the current year – 2014.
More importantly, what government economists call manufacturing production – basic industrial production excluding agriculture and the extractive industries – is still below its previous peak in both the United States and Europe. Only in the newer centers of industrial production, like China and India, is industrial, especially manufacturing, production at record levels – which, by the way, is the normal condition under capitalism, based as it is on expanded reproduction.
Cyclical capitalist crises arise because capitalist production grows faster than the markets grow for the commodities capitalist industry produces. But markets do grow over time. If they didn’t, capitalist expanded reproduction – capitalism can only exist in the long term in the form of expanded reproduction – would be impossible. Because of this, basic manufacturing production would be expected to exceed the previous peaks in all the major industrial countries before a new global crisis of overproduction would be expected to break out.
Using this criteria, it would appear that conditions have not yet matured for a new general global recession. We will need a few more years of further rises in employment, industrial production and world trade before we would expect a new global crisis.
In addition, since capitalist investment has remained weak since the last crisis, we would expect a new wave of investments over the next few years as old machines are replaced, either because they are worn out or have become technologically obsolete. The same is true in the area of durable consumer goods such as automobiles and home computer equipment, though there is some evidence that the peak of this effect may have already passed.
Since the end of the Fed’s “operation twist” policy, which effectively put U.S. residential construction on life support, the rate of interest on U.S. 10-year government bonds has returned to the 3 percent level that last prevailed in 2011 when the U.S. residential construction industry was still flat on its back. Like it usually does, the rise in the rate of interest on long-term government bonds has led to higher home mortgage rates. This has begun to slow the rise in home prices and at the very least makes unlikely continued rapid gains in home construction.
The slowdown in the housing recovery will react on the lumber and concrete industries. It also will react on the furniture and appliance industries, since when people purchase new homes they often have to purchase new furniture, refrigerators, washing machines, dryers and so on. Of course, many of these types of commodities are produced outside the U.S., so the effects will be spread over many countries.
The auto industry will have difficulties maintaining anything like its recent gains as well. Like the residential construction industry, auto sales will be negatively effected by rising long-term interest rates. In addition, the relatively strong sales over the last few years mean that those who purchased new cars because their old cars were facing mechanical breakdown won’t be back in the car market again for the next few years.
There are also indications that the demand for computer-based, high-tech consumer goods is running out of steam. “Global technology sales,” the January 6 (2014) edition of the San Jose Mercury News reported, “fell short of expectations last year, and industry researchers expect them to actually decline in 2014,” thanks in part to smartphone and tablet sales eating into spending on other products. It seems that the market for high-tech commodities is becoming increasingly saturated.
However, if the immediate prospects for durable consumer goods is becoming less favorable, this is not the case with what economists call “capital goods” – basic means of production like new factory buildings and factory machinery. The level of “capital spending” – in Marxist terms the level of expanded capitalist reproduction – exercises a powerful influence on the economic cycle.
Indeed, the pattern that seems to be emerging now – a slowdown in the growth of demand for consumer durables just as capital spending is rising – is actually typical of the industrial cycle. Just as production of the means of producing consumer durables soars, the growth in the demand for more consumer durables is running out of steam. This ends with overproduction in the industries that produce the means of production, and a new crisis. However, historical experience suggests that this new crisis won’t arrive in 2014 but only after several years of overproduction in these industries, which, remember, are following years of underproduction – depression – in the capital goods industries.
Another positive factor will be that, at least in the U.S., fiscal policy will be less restrictive. New severe cuts in federal spending – what economists call fiscal policy – seem unlikely to be imposed, and there are signs that spending is rebounding at the local, state and federal levels. There are, however, head winds, and surprises are always possible, indeed inevitable, in the evolution of capitalist industrial cycles.
One factor working against capitalist prosperity in 2014 is the depressing effects on spending, especially the demand for durable consumer goods, of extended unemployment insurance being terminated, if this move is not quickly repealed. The termination of extended benefits will throw 1.3 million people in the U.S. into extreme poverty immediately and threaten other workers with the same fate who are approaching the end of their unemployment insurance. The resulting fears were reflected in the relatively lackluster level of sales during the recent holiday season.
In a typical industrial cycle, rising investment would be expected to kick in and maintain economic growth over the second half of the cycle. While as we saw above there are good reasons beyond the optimistic predictions of bourgeois economists to expect a rise in capital spending this year, exactly how strong this rise will be remains to be seen. If the expected rebound in capital investment were to be very weak, along with the rise in housing and auto sales tapering off and the demand for high-tech consumer goods also weakening, economic growth could be very slow indeed. In that case, it would not take much to throw growth rates into negative territory – recession. For example, a new war in the Middle East that would send oil prices skyrocketing might bring this about. But leaving aside the war dangers in the Middle East, there are other threats to prosperity, such as it is, in 2014.
The Yellen Fed and the problem of ‘low inflation’
Another force that may be working for a new recession in 2014 is the low rate of inflation. For most of us, the fact that the cost of living is rising only gradually is a positive factor. But that is not how the Yellen Fed will see it.
If the capitalists expect prices to fall in terms of currency, they are likely to put off purchases as long as possible. Therefore, if the current low rate of inflation were to turn into actual deflation, the capitalists might put off purchases of capital equipment, which could abort the expected rise in capital investment altogether.
The same is true to a certain extent for purchases of durable consumer goods. If you expect next years’ automobiles to be cheaper than this year’s models, you will be tempted to hold on to your old car for another year. Not only will you get more computerization later on but you will save money. On the other hand, if you expect new car prices to rise by the time the 2015 models come out late this year, you will want to purchase a new car soon.
Problems of an appreciating dollar
The rise in the value of the U.S. dollar relative to gold that occurred in 2013 is a far less severe problem from the viewpoint of U.S. central bankers than the opposite, a dramatic fall in the value of the dollar relative to gold, would have been. If the dollar had moved in the opposite direction in 2013 – that is, if there had been a sharp rise in the dollar price of gold – the U.S. dollar-based world economy would probably be facing “stagflation” – defined as strongly rising basic commodity prices, wholesale prices and a threatening dramatic rise in retail prices as well. The only way out of such a situation short of a collapse of the currency – true hyperinflation, which would inevitably be followed by a deep depression anyway – is to radically raise interest rates. Once a state of stagflation exists, a deep recession is virtually inevitable over the next 12 to 18 months.
The last time the U.S. faced such a situation was in 2008, just before the panic. A soaring dollar price of gold led to sharp rises in basic commodity prices and wholesale prices. Fearing with good reason that soaring wholesale prices were about to spread to retail prices, the Bernanke Fed did not start to expand the monetary base until full-scale panic broke out with the bankruptcy of the Lehman Brothers investment banking firm in September 2008. It was pretty clear by late 2007 that a deep recession was imminent and that it would extend beyond the “second half of 2008.” This was despite the standard forecast issued by bourgeois economists of only a “mild recession,” at most, in the first half of 2008 followed by an upturn in the second half of the year. This is not the situation we face now.
The fall in the dollar price of gold – or the appreciation of the U.S. dollar relative to its low point in September 2011 – means that in effect Federal Reserve Notes have been bearing a positive rate of interest when measured in terms of gold. We have to be careful to distinguish between changes in the value of currencies relative to each other and changes in the value of currencies relative to the “money commodity.” (7) Here I want to concentrate on changes in the value of the world central currency – the U.S. dollar – relative to the money commodity.
If profits are measured in terms of gold, the banks and corporations that have been hoarding huge quantities of dollars are in effect earning a profit on this hoarded cash. This has so far staved off inflation but has also provided a powerful headwind against economic recovery, preventing it from gaining momentum.
After centuries of currencies with variable gold (and silver) value, economists, central bankers and government policymakers concluded in the 19th century that currencies should be stabilized in terms of gold and that currency notes – banknotes – should not bear interest. By not bearing interest, the capitalists would be forced to spend or lend out the money if they wanted to appropriate surplus value in the form of interest or profit of enterprise. At the same time, the stabilization of currencies against gold would make “stagflation” impossible.
The currency price of gold would never change significantly and capitalists would not speculate on changes in the currency price of gold. At the same time, government policymakers would no longer be tempted to devalue the currency against other currencies in order to grab markets for their capitalists from the capitalists of competing countries like they did in the pre-gold standard world and are tempted in the post-gold standard world as well.
However, modern “stabilization theories” – whether inspired by Keynes or Friedman – call for not a zero rate of inflation but a positive rate of inflation of between 2 or 3 percent, as measured by official government price indexes. Such “inflation targeting” is incompatible with any form of gold standard, which implies periods of falling as well rising general price levels.
Besides losing the advantages of the gold standard, inflation targeting faces the problem that central banks can only control the year-to-year inflation rate within extremely wide parameters. Sure, if the Federal Reserve System were to increase the rate of growth of the monetary base into the thousands or millions of percent, they could trigger hyper-inflation. And if the Fed was to contract the size of the monetary base by half, they could always trigger a deflationary collapse of dollar prices. But these are really only negative powers that policymakers would never normally consider.
But they cannot really achieve an inflation target of 2 or 3 percent a year except by accident. The actual rate of inflation in a given year does not only depend on the quantity of the monetary base – the quantity of token money, which is controlled under the dollar standard by the central bank. The inflation rate also depends on the willingness of the industrial and commercial capitalists (corporations) to spend their cash reserves, and also on the demand for credit and the willingness of the banks to provide credit. All of this is well beyond the control of even the most powerful capitalist central banking system.
Ironically, the problem facing the Yellen Fed would not be so serious if the dollar was appreciating against gold because the new dollars being created by the Federal Reserve were growing at rate below the rate of growth of the world’s total gold hoard. In the last year, the Bernanke-led Fed increased the dollar monetary base by 39 percent. Neither the total quantity of commodities in circulation nor the rise in the total quantity of gold bullion in existence came anywhere close to that 39 percent increase in the monetary base.
Therefore, the rate of growth in the dollar monetary base that the U.S. Federal Reserve System carried out was ultimately highly inflationary and unsustainable, particularly considering the U.S. dollar’s role of providing backing for all other currencies under the dollar system. And yet commodity prices measured in terms of U.S. dollars barely rose, and dollar gold bullion prices dropped by 25 percent.
Instead of expanding production, capitalists preferred to build up their cash reserves, with the velocity of currency – the speed at which a dollar on average changes hands – continuing to slow. This has up to now locked up much of the potential demand for commodities in the form of cash piling up in the banks. While gold production has risen in the years since the crisis broke out, the rise in the world’s supply of gold bullion has not come close to matching the rate of growth of “paper” dollars that the Federal Reserve System has created. The result is that a huge inflationary bomb is ticking away but has so far not gone off.
The problem that confronts the Yellen Fed is how to defuse the inflationary bomb without triggering a new recession. Whether the Fed can do it remains to seen. If the inflation bomb goes off this year, the U.S. and world economy will face a “stagflation” that will soon lead to a new deep recession, not in 2014 but in 2015.
How the real problems will begin
Suppose everything goes as expected over the next year. The industrial capitalists finally start spending the gigantic cash hoard they have built up on new plant and equipment as well as raw and auxiliary materials. This is where the real problems begin. In this situation, the demand for U.S. dollars as a means of payment and hoarding, which soared during the crisis and remained stubbornly high during the ensuing post-crisis depression, will drop.
A drop in the demand for money as a means of payment and hoarding as we transition from stagnation to average prosperity and then to the boom phase of the cycle balances off the increase in the demand for money as a means of payment and hoarding that occurs during the crisis/stagnation phase. This is normal in an industrial cycle.
But what is not normal is the exploding size of the monetary base that has occurred as result of the Bernanke Fed’s unprecedented measures to stave off a financial collapse and stimulate economic recovery – a huge increase in the quantity of dollar-denominated token money far in excess in the increase in the quantity of gold bullion.
Therefore, the normal cyclical rise in capital investment threatens to set off the inflationary bomb the Fed has created. This is why the Fed is slowing the rate of growth in the monetary base. They fear that the sparks set off by the expected and normal rise in capital investment will set off an inflationary firestorm. The Yellen Fed by reducing the rate of growth of the monetary base hopes that the expected, and up to a point desired, drop in the demand for dollars does not degenerate into a collapse in the demand for dollars that would trigger the dreaded stagflation, making a new deep recession inevitable in the very near future.
At the same time, the Fed has to worry that the moves to slow the rate of growth of the monetary base do not raise interest rates so much or lead to a new rise in the demand for U.S. dollars that would abort the current industrial cycle and send the global economy back into recession. This would force the Fed to again accelerate the rate of growth of the U.S. monetary base making severe stagflation and consequent disastrous deep global recession all the more likely within a few years.
Since the outcome of the complex and unprecedented maneuvers the Fed is being forced to undertake is highly uncertain, we cannot rule out a new recession for later this year anymore than we can rule out a new stagflation developing this year that would lead to deep recession in 2015.
Next the current situation in the gold market and the evolution of the global credit system.
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1 Bourgeois economists do not define “full employment” the way workers would define it. Workers would define it as the ability of any unemployed person seeking work to obtain a decent job within a few weeks at most. Such a situation would greatly reduce competition among workers while greatly increasing the competition among capitalists seeking workers. Such a situation would lead to a rapid decline in the rate of surplus value and thus the rate of profit and therefore cannot be sustained under the capitalist mode of production.
By “full employment,” therefore, pro-capitalist economists mean the optimal level of unemployment – that is enough unemployment to maintain, and over time increase, the rate of surplus value, with enough growth in demand so that the capitalists are able to realize in money form – profits – the surplus value they squeeze out of the working class. It also means a situation where individual workers still fear getting fired but not a situation where great numbers of workers would start questioning the capitalist system itself. A situation where unemployment is below the optimal level is defined by bourgeois economists as “over-employment,” where in Marxist terms the price of labor power – wages – are rising faster than the growth of labor productivity, and the rate of surplus value is falling. (back)
2 Financial markets – the stock, bond and commodities markets, the gold market and currency markets – are divided into two parties: the “bulls,” who are betting on higher prices, and the “bears,” who are betting on lower prices. The capitalists who expect higher prices buy the assets whose prices they expect to rise, often on credit, while the “bears” borrow the assets and then sell them – sell them short – betting that they will be able buy back the assets at lower prices. In 2013, the “bulls” won in the stock market while the “bears” won in the gold market. (back)
3 Rising long-term interest rates are bearish for stock market prices because the share prices represent a flow of dividend income. This flow of income is capitalized – transformed into a fictitious capital – by dividing it by the average rate of interest. Therefore, everything else remaining equal, stock market prices rise when long-term interest rates fall and fall when long-term interest rates rise.
In addition, a rapidly rising long-term interest rate indicates a growing shortage of money, a clear symptom production is expanding much more rapidly than the market for commodities and that a crisis of overproduction is approaching that will lead to a sharp if temporary drop in profits or even losses due to the inability of the capitalists to realize the surplus value that is contained in the commodities produced. Lower profits mean lower dividends and therefore lower stock market prices. (back)
4 This also assumes the Federal Reserve’s estimates of industrial production are accurate. The Fed is run by strongly pro-capitalist economists who desire to put capitalism in the most favorable light possible. There is reason to believe that the Fed underestimated the fall in industrial production between the end of 2007 and the middle of 2009. If we believe the Fed figures, industrial production fell a little less than 20 percent, a bigger decline than seen in the 1957-58 or 1975 recessions but still less than the 30 to 40 percent declines reported in the pre-World War II recessions of 1937-38 and 1920-21.
However, the Fed also reported a highly unusual growth in labor productivity during the recession. Generally, labor productivity falls during recessions as enterprises are forced to work below the level that optimizes the productivity of individual workers. There seems no good reason why labor productivity would have increased during the last recession, especially considering the recession’s overall severity. If we assume the decline in labor productivity expected during recessions, which seems to be a reasonable assumption, the decline in industrial production would be more severe, perhaps at least matching the declines in 1937-38 and 1920-21.
Whether nor not industrial production now exceeds the best levels that preceded the last recession is therefore open to question. But the general trend toward a cyclical recovery of industrial production appears clear, so even if industrial production in the U.S. if honestly calculated is still below the 2007 peak, we would expect world industrial production to exceed its previous peak as the world economy enters the boom phase of the industrial cycle. (back)
5 The U.S. government does not use the term “manufacturing” in the same way that Marx used it. Marx used the term “manufacturing” to distinguish between sectors of industry that did not use machinery – far more prevalent in his day than now – compared to sectors that did use machinery, generally powered by steam in Marx’s time. The U.S. government uses the term “manufacturing” to distinguish relatively large-scale production, such as auto production, from small-scale production, such as making cheeseburgers for McDonald’s.
The government also excludes warehousing and transportation of commodities from its definition of manufacturing, though all these activities produce surplus value, and instead lumps them into the vaguely defined “service sector.” Also excluded are the extractive industries and agriculture. Recently, there has been talk of moving the preparation of restaurant meals from the service sector to the manufacturing sector in order to make U.S. industrial production figures look better. (back)
6 All professional economists are trained in the theory of marginalism, which claims that use values have value because they are scarce. This is hard to square with a crisis caused by a general overproduction of commodities. So even the more honest economists really cannot comprehend why recessions occur at all and therefore it is not surprising that unless a recession is well underway they always in their great majority predict continued economic prosperity. (back)
7 It is well known that a devaluation of a currency in terms other countries’ currencies gives the devaluing country temporary “mercantilist” advantages relative to its competitors. These “mercantilist” advantages represent a zero sum game in the sense that one country’s gain is another country’s loss. If a country’s currency rises in value relative to other currencies, this can cause a recession in that country. (back)
A Critique of Crisis Theory 