Rising Inflation, Falling Production: In the Midst of a Global Economic Crisis

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Since the collapse of the housing bubble at the beginning of 2007 economists and government representatives have been betting on the odds of a recession in the US economy. Currently we are mid-way through 2008 and still the ‘experts' have not made up their minds about its likelihood. Meanwhile the signs of crisis are everywhere: the mortgage debacle continues unabated, driving down house prices and leaving in its wake a wave of foreclosure, company bankruptcies and shaking to its core the entire financial system, where profits have been going up in smoke as fast as they were created in the boom days of the real estate market. Furthermore, the economic troubles are not limited solely to the industries related to the housing market. The same devastating picture can be seen in the airlines and automobile industries for example, which in fact collapsed well before the bursting of the real estate bubble.

The US government's response to the unfolding crisis has been yet again more of the same monetary tricks that it's used to manage its chronically sick economy every time it has shown signs of a sudden decline: in essence pumping huge amounts of cheap money into the economy in the hope that this will stimulate demand and keep the consumers partying on. For instance, since last September the Federal Reserve has lowered its basic interest rate 7 times and has kept a semblance of order in the financial system through a constant flow of cheap money. However, even though government policies in the short term have saved the economy from a total collapse there seems to be a very high price to pay in store (no pun intended!) One of the main consequences of the Fed's policy of cheap money is to have driven down the value of the dollar, which has set record lows against the Euro and other major currencies, thus pushing up the price of commodities in the world market, which are priced in dollars. In other words, the Fed's policy has sharply increased inflationary pressures around the world.

Faced with the obvious fact of rising prices, the US government has acknowledged in recent weeks that inflation is escalating. The latest government data shows that in May inflation in the US is running at a yearly rate of 4.2%.  In one of his latest public speeches Mr. Bernanke, the Fed chairman, has hinted that - given present inflationary trends - the Fed will not lower interest rates any more in the immediate future. Therefore the Fed seems to be changing gears and making the fight against inflation its main priority, putting the attempts to jump start the economy on the backburner.

To be sure, inflation has surged in the US recently and no worker would need bourgeois economic ‘specialists' to tell them this, as the working class has been feeling the pinch of higher prices in everything from food to shelter, heating fuels and gasoline. If the government inflation estimate seems suspiciously low it's because it has a conscious policy of underestimating inflation, just as the bourgeoisie has a conscious policy of understating the rate of unemployment. For the last three decades, using statistical gimmicks on the way the CPI (consumer price index) is calculated, the US bourgeoisie has managed to showcase a relatively low rate of inflation compared with the double digits hyper-inflation of the 1970's. Some of these statistical tricks deserve to be mentioned. Until 1983, the Bureau of Labor Statistics measured housing inflation by looking at what it cost to buy and own homes, considering factors like house prices, mortgage interest costs and property taxes. Based on some dubious reasoning, this component of the CPI disappeared and was replaced by a so-called "owner's equivalent rent" instead of the real cost of home ownership. It has been calculated that this manipulation alone has served to understate inflation during the recent housing boom by 3 to 4 percentage points.  In the 1990's the CPI was subject to three other downward adjustments. Firstly, ‘product substitution': very conveniently, if a product (say high quality meat) gets too expensive, it is moved out of the CPI, because people are assumed to shift to a cheaper substitute, say hamburger. Secondly, ‘geometric weighting': goods and services for which costs are rising most rapidly get a lower weighting because of a presumed reduction in consumption. Thirdly, something called ‘hedonic adjustment', which pretends to measure consumer satisfaction due to improvements to products and services.

In August 1971, when inflation in the US reached 4%, it was considered a national crisis and the Nixon administration imposed price and wage controls. Today a 4.2 % inflation rate is merely sounding some alarm bells. What's worse, according to non-government calculations, this supposed 4% inflation rate seems to be in reality much closer to a 7 to 10 percent yearly rate, as it has been on average since 1980 if one ignores the government manipulation of CPI statistics.

Obviously the bourgeoisie doesn't go to all this trouble to manipulate the real rate of inflation just for the sake of it. In addition to its value as an ideological mystification - presenting capitalism as being in much better shape than it really is - there is a very practical reason behind it. Since CPI calculations are used to measure social security benefits (and other state entitlement programs) as well as pension, salary and benefit increases, its downward estimation means that the worse effects of the chronic crisis of the system are passed on directly to the working class. In fact, inflation and especially its official underestimation have contributed greatly to the pauperization of the working class in the last forty years of open economic crisis. For instance, by some calculations if one were to roll back changes made to the CPI calculations since the Carter years, Social Security checks would be 70% greater than they currently are!

The specter of inflation haunts the world

Evidently the recent spike on inflation is not just a US phenomenon. Raw material prices have been on an upward spiral for most of this decade, and since 2007 global food and energy prices have been rapidly increasing. The international market price of wheat doubled from February 2007 to February 2008. Rice prices also reached ten years high, while in some parts of the world milk and meat prices have more than doubled. Also, soy and corn prices have increased dramatically. Finally, the price of oil has skyrocketed, doubling in the last year.

Here are some examples of the developing inflation around the world. In May of this year, the Euro zone inflation rate was reported at 3.7%, up from 3.3% and the highest since modern records began in the mid-1990s. Now the UK has reported its own record-breaking 3.3%, up from 3% the previous month, when just last January the annual rate was as low as 2.2%. Not even China, often cited as a showcase of capitalist dynamism and health, has been spared. The jump in China's inflation rate to a 12-year high of 8.7% last February sent chills around the world. In the last year food prices jumped in China by 23%, with vegetable prices 46% higher and pork a dramatic 63%.

Moreover, what has cause increased worry in capitalist circles is the fact that this acceleration of inflation is happening at the same time that the system is suffering a generalized slowdown spearheaded by the developing convulsions of the US economy.  The word "stagflation" is more and more on the lips of the economic ‘specialists.' What they are not saying is that in the last 40 years of growing capitalist economic crisis, through cycles of bubbles and busts, inflation has been a permanent phenomenon of world-wide capitalism.  In fact one of the main goals of the economic policies of the government central banks in every nation is to keep inflation pressures in check. However, government policies not withstanding, inflation has spiked out of control quite often. During the ‘70s, following on the collapse of the Breton Woods Accord in 1971, inflation broke loose internationally, reaching double digits in the central countries of capitalism. In the ‘80s the so-called ‘third world' went through a round of hyperinflation that brought down the economies of many Latin American countries.

Bourgeois economists have debated to no end the causes for these inflationary spikes, but what they never say is that the reasons for inflation are contained in the capitalist system itself and the policies of the dominant class:

The anarchic nature of capitalist production.  Capitalist production is social production only in the sense that what is produced is not produced for individual consumption but for the use of others.  Production is bound to produce excesses (over supply) in one sector of production and shortages (over demand) in another. In a system based on the law of value prices changes reflect a lack of conscious, social planning.

Capitalism's drive for maximum profits without regard for social need. The recent rush for the diversion of staple foods like corn and soybeans from human and animal feed to the ‘feeding' of the  fashionable ethanol bio-fuel industry is a point in case. There is no doubt that the bourgeoisie's present obsession with bio-fuels has driven up the price of commodities as much as it has filled up the coffers of big farmers and driven millions to the point of starvation around the world, who have long been dependent on cheap food products coming from the dominant world food producers.

Capitalism's lack of foresight. The consequence of an economic system that is basically geared to the present is well illustrated by capitalism's historic dependence on fossil fuels for its energy needs. This dependence has on the one hand created a nightmare scenario of increasing climate change that is affecting worldwide food production. On the other hand, by putting oil at the center of production and circulation of commodities (and the running of its military machine) it has created a permanent shortage of this commodity. Except for very short intervals, there is never too much oil in the world market -- hence the oil price volatility.

The bourgeoisie's own economic policies in face of the chronic state of crisis of its system are also inflation inducers. The abuse of the money printing machine, the permanent monetary manipulations, the abuse of the mechanism of credit, the ballooning budget deficits -- all contribute to keep inflation going.

Imperialist policies drive also up energy and food prices. The instability in the Middle East and in Nigeria have contributed greatly to driving up the price of oil. In fact the war in Iraq has had a double impact on the recent spike in inflation. On the one hand the war has totally devastated the oil production in that country, cutting down the supply in the world market; and on the other hand, the fact that the US has been running this war ‘off budget' has contributed to the dollar devaluation and the concomitant rise in commodity prices.

To rising inflation workers have to oppose the class struggle

Often enough the bourgeoisie tries to blame workers for rising inflation. The so-called wage/prices spiral is often blamed for the hyperinflation of the 70's in the central countries of capitalism. However in reality wages have never been able to keep up with the pace of inflation. Today rising food and energy prices are squeezing workers' living standards around the world. Workers are facing vanishing real salaries in a time in which lay-offs are everywhere on the agenda. No wonder that food riots and protest against skyrocketing energy prices are multiplying around the world (see article in this issue of Internationalism). Only the working class has the power to stop this madness. Capitalism has no future to offer humanity other than wars and growing pauperization.

Eduardo Smith June 23, 2008.

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