Eric Byl is a member of ISA’s International Executive.
The Latest Phase of the Global Crisis
Even before the outbreak of the Omicron variant, euphoric expectations of a strong post-pandemic recovery based on the release of pent-up consumer spending and corporate investments, gave way to major worries. In many countries, consumers are confronted with the sharpest price hikes for decades. Worst hit are food, energy and housing, which consume the largest share of the spending of working-class and poor households. Living standards are taking severe hits and workers are demanding compensation for the loss in spending power. But the bosses and the capitalist media are increasingly beating the drum for wage restraint to prevent an “inflationary spiral.”
What causes inflation?
In many countries, consumers are confronted with the sharpest price hikes for decades. Worst hit are food, energy, and housing, which consume the largest share of the spending of working-class and poor households.
On November 11, 2021 USA Today carried an article titled: “Wages are rising, but so are consumer prices. Is this a wage-price spiral?” In the article they state: “Rising commodity costs, supply chain snarls and labor shortages are forcing Americans to pay more for items from meat to gasoline. … As a result, employees are demanding higher wages to provide their families with everyday supplies. And as employers pay for higher labor costs, business prices will rise.”
Is this true? In a word, no. The price an employer can sell the product for is not fundamentally determined by the wages paid but by competition in the marketplace. All things being equal, if two manufacturers produce exactly the same product, but one pays his workers more than the other and then tries to increase the price of the product, the customer will simply buy the product produced by his competitor at a lower price. So if this manufacturer wants to stay in business, the price will have to be lowered again. So when wages go up, they do not tend to increase the price, but rather to decrease the profits made by the employer.
So what then is the role of “supply and demand”? If the economy was in equilibrium, meaning that producers produced exactly enough products to meet the needs of consumers, then the price of the product would be determined by its actual value, as Marx put it the amount of “socially necessary labor time” used to produce the product. This includes both the labor directly expended in making the product and the labor required to produce the machines etc. But if the market is not in equilibrium and there is a shortage of a particular good for which there is strong demand, then the price will go up. Supply and demand changes mean that prices will vary but on average they will reflect the underlying value defined by the labor they embody. This is why for now, when supply chain disruption means producers cannot meet demand, prices are increasing as companies make extra profit. This explains why some think when the supply chains are back in equilibrium, price rises will fall.
But even this is not the whole story. Goods are purchased using money. A currency in its most basic form is simply a convenient means of exchange, and one unit of currency represents one unit of material wealth. But governments have long increased the money supply to go to war or pay off debts, or as we see now injected money into financial markets to prop them up. Increasing the money supply significantly without a corresponding increase in society’s wealth will tend to devalue the currency and be inflationary. Pumping money into markets and blowing up speculative bubbles also has an inflationary effect at least in those markets.
There are many factors driving the price hikes. Among them supply disruptions. In the mainstream press these are mainly explained as resulting from pandemic lockdowns, and thus considered “temporary” or “transitory.” That was how Federal Reserve chair Jerome Powell described them until even he had to drop that term. The lockdowns undoubtedly are important contributors, but there is more at play, and the effects will outlast the pandemic.
Supply Chains Disrupted
Globalization stalled after the 2008/9 Great Recession. While the historical trend towards the increased international division of labor means globalization cannot be fully reversed, the decoupling of the global integrated supply chain has speeded up, with the diversification, relocation and, to a lesser extent, even re-shoring of production. This has developed as China’s growth is no longer seen as an opportunity but as a threat, mainly by the US establishment. The process speeded up during Trump’s presidency, and has continued to accelerate since to a qualitatively new level. With the advent of the pandemic, the global supply chain is disintegrating into less stable regional supply chains.
The supply disruptions expose the vulnerability of “just in time” production. This very high integration of production, shipping and storage systems requires stable international relations, but we are now seeing increasing international tensions, especially the mounting US/China cold war, which is intruding into everything everywhere. There is no reasonable prospect that these tensions will recede, rather there is an accelerating and dangerous build-up over the issue of Taiwan. So while supply chains will reach new, less secure equilibriums at some stage persistent problems will remain well beyond the current prediction of stabilization by mid-2022.
Just-in-time production means reducing costs by keeping stocks low. This meant that when the pandemic forced the major economies into lockdowns, and there was not sufficient storage capacity to continue purchasing for the future, countries simply stopped buying crude oil, and its price even turned negative. This severely slashed the income of some weaker oil-producing economies like Venezuela and others.
Global inflation rates fell during 2020, in the Eurozone it slid towards zero at the end of the year. But with the reopening of economies, purchases that were postponed during the early stage of the pandemic were accelerated, while cars and trucks returned onto the roads. Capitalists were unprepared to cope with this scale of demand and seized the opportunity to hike prices, either to compensate for losses during lockdowns, or simply to make a quick buck. Steel prices went up 60–70%, copper by more than 50%, wood by over 80% by the end of 2021. Energy prices, fuel, petrol, gas and electricity soared as winter in the northern hemisphere approached.
On top of that, the reopening of economies has not been simultaneous. This has meant regular relapses creating imbalances and interruptions of production. Ships loaded with liquid gas have ended up in the wrong place, while the lack of shipping containers and computer chips for car production have caused a 20–30% rise in the prices of second-hand cars.
One of the main imbalances has been the unequal distribution of vaccines. At the time of writing, over 66% had received two shots in the G20 countries, but only 6% in Africa. This is correctly called vaccine-nationalism or vaccine -imperialism. Because of this Omicron has emerged, and new variants will probably be a recurring phenomenon for years to come.
As Omicron demonstrates, it takes weeks to gain sufficient knowledge of whether new variants are more or less vaccine resistant, more or less dangerous, thus allowing governments to decide what new measures are needed. Despite business resistance to new lockdowns, it is inevitable there will be new supply disruptions, provoking more inflation, or new travel restrictions reducing travel and hospitality. This will lessen pressure on prices, but in a situation where public debt and deficits are already sky high.
Flood of Money
In response to the 2008/9 Great Recession, central banks slashed interest rates to zero or even to negative values. During the pandemic “easy money” monetary policy has again been supplemented by massive fiscal stimulus.
The main effect these measures had was not to help the productive economy, but to expand the real estate and financial assets bubbles. Two thirds of global net worth is actually stored in real estate with only 20% in other fixed assets. This is a result of the longer-term trend of low profitability in the productive sectors as a result of the over-accumulation of capital. Investors can make more money from “capital gains” — profits made from the rise of stock and property prices — than they can make by investing in factories, machinery, research, and the labor force.
According to McKinsey Global Institute, less than a third of net growth since the beginning of the century has been based on new investment. Nearly three fourths of growth has been driven by price increases, in other words by making highly leveraged “fictitious” capital out of speculative activity instead of labor exploitation. Since 2011, across a selection of ten countries, the value of corporate assets grew by 61% relative to GDP, but the value supposed to underpin them, the corporate profits, declined by 1% to global GDP. Correctly McKinsey is worried, and points to a potential financial and property meltdown.
Both private and public investment have been lagging behind the massive global need to make resources available for health, education, social services, affordable housing, and infrastructure renewal, including the transition to green energy.
The only way the economy is kept afloat is by pouring in gigantic amounts of extra money. The combined balance of the US Federal Reserve (Fed), European Central Bank (ECB), Bank of Japan (BOJ) and the People’s Bank of China (PBOC) was already $5 trillion before it doubled during the 2008/9 Great Recession. Growth continued to $20 trillion, and accelerated again during the pandemic to reach a staggering $31 trillion today. The Fed’s balance, historically equivalent to 6% of GDP, is now approaching 40%, a level similar to that of the PBOC. The ECB balance reached 60% and that of BOJ 130%.
In the longer run this is untenable. It means any economic recovery will face the danger of overheating, unless a consistent growth path, similar to the post World War II expansion of the 1950s and 60s, allows goods and services to absorb this flood of money. Such growth is excluded in todays’ capitalism, even in the state-capitalist China. The Evergrande crisis is but a first warning of a possible collapse of China’s gigantic debt fueled $5 trillion real estate bubble, its main growth driver over the past decade. Even if Beijing is able to avoid the uncontrolled collapse of Evergrande, it will still drastically reduce China’s growth path, possibly leading to recession. In any case, this will have enormous global repercussions.
In the advanced capitalist countries, the flood of cheap money has fueled asset and credit bubbles with high price-to-earnings ratios and low-risk premiums. It has inflated tech assets, high-yield corporate debt, meme stocks, and other assets and stimulated irrational crypto-mania.
Venture capital, used to finance high-risk enterprises, has expanded exponentially with annual returns of 17% over the past decade. US venture capital funds alone have seeded firms worth at least $18 trillion. In the past this approach was limited to exclusive US funds, but has now become a global feature, involving mainstream financial firms. The risks they take are reckless, from excessive cash-burning — based on soaring valuations and abundant capital inflow — to the squandering of pension funds. Of the top 100 venture capital firms listed in 2021, 54 are in the red with cumulative losses of $71 billion!
In state-capitalist China, real estate rather than stock markets serves as the main source of speculation. It now represents 27% of GDP, as opposed to the US, where it is 14–18%. This doesn’t mean that property speculation is a specific feature of China. Over the past 40 years, average home prices in the US increased by 420%, strengthened by the fact that the last two decades new-home construction was lagging behind by five to seven million units in comparison to the three previous decades. Home prices have risen even more dramatically with the pandemic, by 16% in 2021 alone. This is partly because of the 14.5% increase in the cost of construction materials and energy by November 2021. The pandemic has also served as a wake-up call, which has led to the expansion of work from home and stimulated those who can to move out of the city centers into bigger and greener locations. Property developers have fully exploited this opportunity. Inevitably higher prices for homes translate into more people renting, and rent increases. Housing costs are responsible for up to one third of inflation in the US.
Food prices are also running ahead of general inflation. In the third quarter of 2021, the US Agricultural Commodity Price Index was up 33% on an annual basis, with maize and wheat respectively 44% and 38% higher than pre-pandemic levels. Like housing and energy, food weighs far more in the household budget of working-class and poor families, even more so in the middle and low-income countries. Globally, the World Bank has confirmed that Covid 19 has increased dramatically the number of people facing acute food insecurity.
In the likely scenario of a financial or property crisis, we can expect speculators to massively flood the harvest futures market in a similar way to what happened over a decade ago, which became an important element in the so-called Arab spring. A repetition of such a scenario, especially in a period when shortages create many speculative opportunities, is perfectly imaginable, but the effects of it would be even more disastrous in the context of climate disasters, overpriced financial markets and a raging pandemic. Already food shortages and price hikes have been important elements driving movements and riots in Lebanon, Sudan, Algeria, South Africa, Madagascar and, recently, the Solomon Islands.
The Debt Enigma
Every major country is running a government budget deficit. In the US it has reached almost 14% of GDP, higher than any other G7 country. The use of fiscal stimulus has become a necessary tool to keep the system afloat and prevent massive social explosions. As a result global public debt has risen to $88 trillion, close to 100% of global GDP. While the cost of this is relatively cheap for now because of historically low-interest rates, in the longer run this will have to be addressed before interest rates pick up significantly and refinancing these debts becomes an unbearable burden ending up in a “debt snowball.”
Central banks in the imperialist countries will try to gradually reduce (taper) the program of buying billions in bonds to support the markets (also known as Quantitative Easing) while beginning to slowly raise interest rates, hoping this does not plunge their economies back into recession. This is being called the “end of the era of easy money.”
In November the Fed decided to reduce its monthly purchase of $80 billion of Treasury bonds and $4 billion of mortgage-backed securities by $10 billion and $5 billion respectively. In December, the Bank of England (BOE) raised its base rate from 0.1% to 0.25%, and it is expected further increases will take it to 0.5% in an attempt to fight inflation. Discussions in the ECB over tapering became even more intense as inflation in the Eurozone reached 4.9% in November, its highest level since Eurozone records began in 1997. It has already reached 6% in Germany.
Weaker economies don’t have this luxury and are forced to act more decisively. Of the 38 central banks tracked by the Bank for International Settlements (BIS), 13 have already raised their key rate at least once and more will follow. Chile’s central bank for example increased its interest rate in October by 1.25% to 2.75%, its biggest rate increase in 20 years. Peru and Colombia also tightened their monetary policy, as have Sri Lanka, Russia, Norway, and many other countries.
The notable exception has been Turkey, where President Recip Erdogan illogically pushes for a cap in rate rises in a situation where inflation already exceeds 30%. During 2021, the Turkish lira lost 40% of its value against the dollar. This is causing major social unrest while Erdogan’s popularity is decreasing.
Higher global interest rates though will complicate debt refinancing especially for poorer countries. Payments to creditors accounted for 14.3% of government revenue of poor countries in 2021, up from 6.8% in 2010 and the highest level since 2001. The Jubilee Debt Campaign estimates 54 countries face a debt crisis. This could lead to a chain of defaults dragging down some major private lenders, and provoke further inter-imperialist tensions over who will take the loss. It would also cut across cheap credit, push up risk premiums, threaten a credit crunch, undermine investment and plunge economies back in recession.
Total global debt, including public, private and corporate debt had jumped to a record $296 trillion by June. At the beginning of the century, 11% of global firms were considered zombie companies, unprofitable companies only able to survive through cheap credit. Fifty percent of these companies were expected to stay zombies. Today 16% of global firms are zombies, 90% are likely to stay that way. A study by two Argentinian economists shows that the main cause for the existence of such companies is not the size of their debt, but, more organically, the low rate of profit they get from production, thus forcing them to borrow. If debt refinancing becomes more expensive, a chain of bankruptcies will pull down other companies and banks, which are today considered healthy, with them. That’s why the question of tapering quantitative easing and raising interest rates is like walking on a tightrope.
Class Struggle
The crisis is such that symptom relief won’t suffice. Capitalism has landed itself in the situation, where no matter which measures it takes, this will tend to provoke new problems, or revive old ones. If loose monetary policies continue, inflation could spiral into double digits, and, in combination with low or stagnant growth, provoke prolonged stagflation, the combination of high inflation and slow growth that plagued many key economies in the 1970s. In some countries, hyperinflation could occur. If loose monetary policies are stopped too early, however, the economy could plunge into the mother of all recessions. The reality is that this crisis, a perfect storm, has been brewing for decades.
Capitalism has been gorging itself on the product of human labor and natural resources, turning what Marx called the metabolic rift between humans and the environment into a yawning abyss. It has underfinanced health systems, reducing them to a hollow shell unable to cope with the inevitable crises. It has done the same with all social and emergency services, from firefighting to civil protection. It has increasingly turned education, health, and other public services over to the private profit-making sector at the expense of quality, price, and working conditions. It has stripped production of all safety nets, reduced supplies to the bare minimum, introduced unbearable flexibility in working hours and labor contracts so as to exploit every fraction of spent labor time. It has turned every aspect of human existence into mere commodities to be exchanged on the “free” market.
While some capitalists might object that this argument is just insulting, the whole logic of their system, its functioning, its ideological outlook is based on the need to brush all humanitarian concerns aside to make way, first and foremost, for “investment opportunities.”
Big Pharma has been making billions out of the corona pandemic, as have the energy companies, property developers and so on. This year’s $80 billion forecasted revenue for Pfizer is an all-time record for any drugmaker. Global dividend payments to the shareholders of the 1200 largest global companies listed on the stock markets were expected to increase by 16% this year, reaching a record of $1.46 trillion.
Despite this, the capitalist media is more worried that inflation will lead to higher wage demands, and that the capitalists will then “pass on” increased labor costs to consumers. This is presented as some kind of natural law, but in reality it’s a class struggle over who will carry the burden, the workers out of their wages or the bosses out of profits. There is no automatic mechanism, as Marx explained, where higher wages lead to higher prices.
For several decades, the share of wages in GDP in all advanced capitalist countries has been waning. It is estimated that if the share of wages in the US as part of GDP had remained at the level of the 1960s, American workers today would have an extra $1 trillion to spend every year. On average, in the advanced capitalist countries the share of wages, which was 60–65% of GDP in the 1960s, increased to 65–70% in the mid-1970s, but was then brought down drastically during the neo-liberal era to 50–55% of GDP today.
With the exception of a few sectors and companies, wages are strongly lagging behind inflation. According to data from the corporate “Conference Board” median US salary increases in 2021 reached 3% with an overall inflation level of 6.2%. Inflation figures however include the prices of an array of goods and services. Not all of them increase at the same speed. If you are, like the overall majority, on the lower end of the income spectrum, you will spend proportionally more on food, energy and housing with price rises well above average, and your perceived inflation will be much higher than the official figure.
During the neoliberal era, unfortunately often with the help of the so-called labor and trade union leaders, workers were rendered voiceless. This resulted in expanding low wage sectors, extreme flexibility requirements, insecure labor contracts and an untenable work rhythm.
This also undermined the belief in the benefits of collective action, but even if collective action for many seems far away, concrete conditions will force workers to look for a way out.
Terrible working conditions and low wages combined with the labor shortage and a changed consciousness as a result of the experience of the past couple years help explain why a record of 3% of the US workforce quit their jobs in September 2021. This has become known as the “Great Resignation.” The bosses are at a certain disadvantage and are forced to offer slightly better pay and working conditions to keep workers. But workers would be in a far stronger position in the US if unionization was on the level it was 40 years ago.
In Britain, such resignations explain the record high job-to-job transfers in the third quarter of the year. Workers are just not putting up anymore with worsening conditions. In response to a lack of truck drivers, the British government simplified driving tests, but it proved to be poor wages and conditions that were to blame.
While the pandemic briefly paralyzed the workers’ movement, it did raise the understanding of workers in a whole series of sectors of their critical role in keeping society functioning. On the other hand, they saw the complete incompetence of the ruling class in dealing with the pandemic.
All of this, including the whip of inflation, inevitably leads to demands over wages and working conditions. Strike waves, sometimes victorious, are developing in the US, Spain and India, to name just some. Workers are no longer willing to carry the burden of the crisis.
Readiness to fight in and of itself however is not enough. The capitalists are preparing for confrontation all the time. They use divide and rule tactics to weaken workers and the poor. Today this is supplemented by ongoing repressive measures by the state, sometimes introduced in a disguised way, sometimes openly and brutally. It is no accident we have seen over the past years more authoritarian figures coming to power in a growing number of countries. At the same time, monopolistic multinationals have amassed considerable power and use it to impose their own agenda.
In order to withstand the ideological offensive and direct attacks of the capitalist class, workers and the poor need their own unifying organizations with democratic structures, discussions, activities, papers and social media. We need democratic and combative trade unions supplemented, if needed, by ad hoc organizations to broaden and strengthen the struggle. We need workers’ parties basing themselves on social struggle with democratically elected leaders, ready to mobilize and take initiatives which correspond to the challenges ahead. Since the general orientation of society today is decided on a national and international level, we need our own international political organizations with democratically elected representatives living on the same wages as the working class.
If the working class fails to deliver on this, is poorly organized, without decisive action, a clear program, and a tested leadership, right-wing populists and extreme right groupings will exploit the massive anger over the unbearable conditions present in society to further divide and weaken the workers and poor and deliver serious defeats.
A program that can offer a real way out is needed, that links up immediate demands to fight inflation to the necessity for socialist change, translating them into concrete action and mobilization. We call for:
- Trade unions and consumer groups to monitor prices and measure the real increase of the cost of living based on a basket of goods and services reflecting real expenses for working people.
- An immediate hike of low wages and benefits to a living wage in line with the real cost of living with no undermining of gross wages.
- The immediate implementation of a sliding scale of wages to automatically compensate workers for increases in the cost of living.
- The books of companies, especially those that enriched themselves during the crisis, should be opened for inspection to determine their real costs, profits, executive pay and dividend payouts.
- Companies avoiding taxes or involved in fraud should be immediately taken into public ownership and run under democratic workers’ control.
- An immediate windfall tax on companies that made huge profits from the pandemic or price increases.
- These measures should prepare for the taking into public ownership the assets of the big pharmaceutical and utility companies, to be run as public companies under workers’ control and management, to meet the needs of the majority of society.
- An immediate moratorium on rent and mortgage interest rises; The immediate cancellation of the foreign debt of developing countries.
- The abolition of off-shore zones, and speculative markets with the expropriation of the resources they currently contain.
- For the banks and financial institutions to be taken into public ownership and their unification into one public financial tool under democratic control and the resources used for the transformation into a green, sustainable, planned economy.
- The creation of a green jobs program, with guarantees that those transfering work maintain at least previous wage levels.
- A program of public investment in publicly owned carbon neutral and quality social housing for all at affordable prices.
- A plan for public works to improve neglected infrastructure and reduce waste caused by the lack of maintenance and repair.
- The creation of a free, high-quality integrated public transport system based on sustainable energy sources.
- For international mobilization and cooperation of workers’ organizations across borders in preparation of voluntary confederations of socialist workers’ states based on democratic economic and ecological planning according to needs as opposed to the profit-dominated chaos of capitalism.
