Editorial for Revolutionary Perspectives 20 (Series 4).

It is easy to forget that when COVID-19 restrictions were first relaxed economists were eagerly awaiting a bounce back of the economy. There was a general clamour among business owners, landlords, and Tory backbenchers to ‘let the economy breathe’. Almost a year after these restrictions began to be reduced to a minimal level in Western countries, the economy still has a hacking cough. There is only doom and gloom from professional economists and central bankers as the ‘cost-of-living crisis’ has become the inescapable backdrop to the current political scene, leading to plummeting approval ratings for most leaders in the capitalist heartlands and food riots in the periphery. Given the centrality of the cost-of-living crisis to current political discourse it is important to be clear about what exactly it entails, what is causing it, and why the purported solutions of the bourgeois class have nothing to offer the working class against whom the cost-of-living crisis is primarily an assault.

The most immediate effects that can be seen are primarily energy and petrol price rises. The energy price cap, the maximum annual price energy companies are allowed to charge, was raised by £700 in March, an increase of 54%, and will be raised again in October by another £600 - a total rise of 100%! The rise in energy prices is part of a generalised inflation of prices, especially in foodstuffs, where an increase in annual grocery bills of £380 is forecast.⁽¹⁾ For all governments out-of-control inflation is a greater problem than a falling standard of living as it threatens the conditions necessary for a stable relationship between creditors and debtors, and thus weakens profit expectations and long-term investment. Christine Lagarde, the head of the European Central Bank (ECB) has worried that:

Inflation pressures are broadening and intensifying (…) eurozone wage growth is expected to double to 4 per cent this year (…) supply bottlenecks are likely to be persistent and there is no sign of an end to high energy and commodity prices caused by Russia’s invasion of Ukraine.⁽²⁾

Of course, energy prices had begun to rise before the invasion in February this year reflecting the fact that it is not the political decisions of one rogue leader causing these problems. Equity markets have seen their greatest devaluation since 1975.⁽³⁾ Even bond markets, which have been seen as safe for 30 years are now considered risky due to inflation.⁽⁴⁾

The central banks of the western world have been hurriedly planning abrupt rises in their interest rates in order to keep inflation down. Some central banks are even requiring higher capital ratios from major banks⁽⁵⁾ in anticipation of further instability. The rate rises of the Bank of England (BoE), the US Federal Reserve Bank (FED), and ECB compared to inflation rates are summarised below:

The job of central banks (and this is the reason why their ‘independence’ was so strongly safeguarded in the first place) is limited to the maintenance of stability in prices and ensuring a ‘healthy’ level of growth. They maintain price levels in periods of inflation by increasing the interest rate offered to commercial banks for loans and deposits to above the inflation rate. The idea is that when commercial banks correspondingly increase their rates, saving will become more profitable than investment for the wider market, and so an ‘overheating’ economy will cool down.

This is the idea – but the reality is more problematic.

A critical issue for the current economic system has been the proliferation of so-called ‘zombie companies’, entities which are only able to maintain the illusion of profitability through creative shadow financing that takes advantage of low interest rates. High interest rates would reveal the shaky foundations of large parts of the economy such as ‘innovative’ start-ups and tech firms which would be suddenly unable to meet their debt repayments. Raising the interest rates above current inflation rates would be such a shock to a heavily debt-laden market that it would probably worsen the economic slowdown, cause an over-shooting of the inflation reduction targets and possibly lead to a generalised deflation and new recession. The bottom line is that an interest rate higher than the rate of profit will cause profits to fall to below zero, destroying the productive basis of the economy. In an economy where profit rates are already razor thin, there is little to no room for manoeuvre. Hence central banks are very tentatively raising rates (which while drastic in terms of recent history are small in comparison to historic rate increases) and coquetting with reductions in quantitative easing in that vain hope that they can reduce the demand for money and bring down the price level without harming investment in value-productive industries. Whether or not this strategy works in reducing inflation and maintaining conditions for investment (and essentially no-one is sure that it will), it is still not a solution in the sense that it provides stability or prosperity to working people. In fact, one of the main intended consequences of reducing investment is to reduce wages by increasing unemployment. Low unemployment caused by workers taking early retirement or otherwise leaving the workforce during the pandemic has been a persistent worry of capitalists as it puts upwards pressure on the price of wage labour, especially in America which has a more ‘dynamic’ labour market.⁽¹⁰⁾ To the uninitiated, low unemployment may seem a good thing. However, current economic orthodoxy understands that there exists a trade-off between inflation and unemployment in the short term. Former US Treasury Secretary Larry Summers has given a crude exposition of this principle by explicitly calling for high unemployment to reduce inflation.⁽¹¹⁾ The idea is that a temporary reduction in demand for labour will reduce wages and thus costs, increasing the profit rates of businesses. The capitalist ‘solution’ is, as ever, simply whatever aims at a return to profitability.

Causes of the crisis

The crisis has been blamed on various factors. These are mainly the impact of COVID-19 and the war in Ukraine. Both undoubtedly are major factors. However, both these explanations are contingent on a deeper problem which is the long running crisis of the capitalist system itself. As we have argued in many texts the secular fall in the rate of profit is the cause of the intensification of the destruction of the natural environment and the irresponsible overuse of antibiotics in factory farms, producing the consequent migration of animal diseases to humans of which COVID-19 is the result. It is also the fall in profitability which lies behind the build-up and explosion of imperialist tensions which has resulted in the Ukraine war. The crisis of the system as a whole is what is behind the cost-of-living crisis.

However, rising prices are also blamed on ‘pent-up demand’ and ‘supply chain issues’, two shadowy figures which are themselves worth investigating.

The story behind ‘pent-up demand’ is that, during the lockdown, many were forced to work from home and forego discretionary spending such as meals out or cinema tickets. They also received money from the government directly through the furlough scheme and indirectly through other government support packages. This meant they were able to save more, and once restrictions were lifted, they consequently had extra money to spend on consumer goods and services, causing prices to rise in order to meet this extra demand. While this story may be true for that small proportion of wage earners (especially those who write economic policy and column pieces) who were able to work from home easily and did not see a reduction in their income during the pandemic, it is not true for the majority of workers⁽¹²⁾ for whom the pandemic meant continuing to commute to work in unsafe conditions in ‘frontline’ roles, reductions in business for the self-employed, and falls in living standards for those furloughed workers already living in or close to poverty.

The other way this argument is presented is by claiming that inflation is caused by there being too much money. Is there a link between the printing of money by the FED and the other central banks, and the recent inflationary spike? A simple link based on the monetarist quantity theory of money (that there is a linear positive relationship between ‘money supply’ and the general price level) would suggest this to be the straightforward result. However, ‘printing money’ has been the default response of the central banks since the financial crash of 2008 and that strategy has been carried on without disruption (though without success in terms of stimulating growth) throughout a historically low and stable inflationary era. The most damming indictment of the quantity inflation explanation is that it necessarily requires a wage-price spiral as its mechanical cause. There has simply been no wage growth over this time (real wages have in fact fallen) and hence why there has been no inflation. The extra money which central banks pumped into the economy, rather than being invested in production, has been used to settle the balance sheets of failing companies (i.e., righting the wrongs of their previous speculation), fill the savings of the already mega wealthy who have an infinitesimal marginal propensity to consume, and inflate the speculative housing and financial sectors.

The principal manner a change in the money supply can have an impact on the general price level is in the circulation (i.e., velocity multiplied by quantity) of money rather than simply quantity by itself. Since COVID-19 struck there has been a massive increase in the circulation of money concurrent with the inflation spike. It doesn’t however follow that the increase is causing the inflation. Energy prices had also started to rise in Summer 2021 and this has had a knock-on effect on the energy intensive fertiliser and agriculture industries which has pushed up food prices. Considering there has been zero wage growth and the only rise has been in food, petrol, and electricity prices which all must pay to secure their daily existence, the blame for the recent inflation spike must fall on cost-push forces from the energy sector rather than demand-pull forces from supposed over-generous wages. As the central banks have increased the amount of money in circulation it has allowed companies to raise their prices with ease in order to maintain their profit rates and avoid the financial and industrial crash that would have happened otherwise. But this doesn’t itself cause these price rises.

This false argument is to blame workers for non-existent wage increases (and this has been the main line of commentary from bourgeois media during the recent railway workers strikes in the UK) even though the price rises have come directly out of their pockets. We have to see through the distortions and mystifications of the present crisis to see the same old story that has been playing out over the last 50 years: an existential crisis for the system being abated via a full fronted assault waged by the government, ‘free’ market, and unions against the working class. When inflation is high, the capitalist class will fight tooth and nail to see that the costs of rising prices are passed onto the working class wherever possible.

This doesn’t however mean that the capitalist class welcome inflation as a means to lower the living standards of the working class – far from it. Inflation threatens the stable relationship between creditor and debtor which is essential to capitalist finance. Indeed, the immediate response of the central banks to the inflation crisis is to renege on their decades-long attempt to revive the capitalist system via low or even negative interest rates aimed at encouraging investment and shift to encouraging saving in order to cool down the economy. For an economy suffering from a prolonged freeze this may seem an odd choice, but it represents the predominance of the financial capitalist interest, over the industrial interest that may have prevailed in more juvenile forms of capitalism. Another issue with inflation for the bourgeoisie is that it raises the possibility, even if it is only a small one, that workers may resist the attempt to shift the costs of systemic failure onto them through price rises and therefore engage in strikes. This was what was happening during the widespread labour militancy of the 70s and 80s which eventually ended in working class defeat and a new more vicious phase of capitalist restructuring.

While rising costs are a succinct way of explaining the cause of the crisis, use of this trope often leads to pinning the blame for them on exogenous forces such as COVID-19 and the war in Ukraine which supposedly have nothing to do with the capitalist mode of production (though, as we have mentioned above, this is not true). Assuming for a moment that these forces are exogenous, while they are certainly calamities of unique proportions and qualities, the effect that these events have on the capitalist system is still conditioned by capitalism’s particular contradiction, namely the need to maintain profit rates in the face of disaster. As such the responses are not neutral, but are opportunities taken by the capitalist class to make the working class pay for the capitalist crisis.

The energy shock

The energy price spike began at the end of Summer 2021 as many nations were reducing COVID-19 restrictions. In the background was declining UK and Norwegian gas production as the North Sea field reaches the end of its life, reductions in gas pipeline flows from Russia along the Yamal-Europe route during rising imperialist tensions over Ukraine, and issues at various LNG (liquefied natural gas) plants around the world (which seem to be related to disruption of maintenance schedules due to COVID-19 and hang-over issues from the cold winter of 2020/2021 in the Southern US and North-east Asia⁽¹³⁾). Since the invasion of Ukraine, Europe has reduced its reliance on Russian gas from 40 to about 20% of total supplies. However, there seems to be little possibility of further reducing this. The extra capacity of the international LNG market has been exhausted.⁽¹⁴⁾ Any further reduction of Russian gas would likely have dramatic impacts on gas prices in Europe. Oil prices increased over a similar time period due to reductions in OPEC production in order to account for maintenance issues and supply outages in Angola, Kazakhstan, and Nigeria; and disruption in supply caused by winter storms and Hurricane Ida in the USA.⁽¹⁵⁾ The outbreak of war in Ukraine at the end of February then sent energy prices skyrocketing and has given the energy shock its particularly sharp edge.

The place of fossil fuels in the global economy is so fundamental that there is no industry the energy shock does not have an effect on. And those most automated sectors with the highest organic composition of capital will be most affected as the industrial constant capital they rely on requires fossil fuels to run. The food and agriculture sector will be especially hard hit due to its reliance on fossil fuels. In the agricultural sectors of the most industrialised nations, the IEA estimates that more than 50% of costs are energy costs either directly (energy bills) or indirectly (fertilisers), and thus especially sensitive to wholesale energy prices.⁽¹⁶⁾

Empirically there seems to be a stronger relationship between energy prices and the general price level than with any other commodity.⁽¹⁷⁾ The case of fertiliser is instructive as to why this may be. The Haber-Bosch process uses fossil fuels (primarily natural gas with the exception of China which for the sake of balance of payments uses the less efficient energy source of coal) to turn methane and air into ammonia (the most common form of artificial fertiliser) by heating and applying hundreds of atmospheres of pressure to enormous sealed containers. Most of the major industrial regions are self-sufficient in ammonia and only export a small portion of their product. Russia is the exception with 20% of their product going to the international market. On the other hand, many countries on the capitalist periphery with large agricultural sectors which export to other countries import nearly all of their ammonia. Brazil, Egypt, and Sri Lanka are examples of this model. In this case, between each stage of production – methane extraction, ammonia production, crop seeding and cultivation, and selling, all of which demand heavy energy inputs – are separate international transportation stages, themselves incredibly energy intensive. One can see how a rise in energy prices is not simply felt once by the consumer when they pay their gas and electricity bills, but again and again for every purchase they make due to the presence of fossil fuels in every stage of production. No matter how far removed from the raw energy product, the cost is added on in a death-by-a-thousand-cuts. Hence why in an economy with a high organic composition of capital inflation is so sensitive to energy prices.

One can see evidence for this in the relative levels of inflation in European countries based on their energy mix. Germany, especially dependent on gas imports from Russia which have so far fallen by half⁽¹⁸⁾, has one of the highest rates of inflation at 8.7% in May. France on the other hand, which has a large domestic nuclear sector, is relatively well off, with inflation rates of only 5.8%.⁽¹⁹⁾ Uranium prices, in contrast to oil and gas, have stayed relatively constant over the last couple of years.

In a similar situation to American oil refineries which are closing (despite the strained pleading of President Biden), gas price rises are so extreme that it is causing some fertiliser production plants to have to shut or wind down production as their business becomes unprofitable. This is at the same time that there is an acute need for fertiliser, and many agricultural producers are expecting to have reduced crop yields. The shortage of fertiliser was the original cause of Sri Lanka’s current economic woes (compounded by economic mismanagement by the local bourgeoisie).

Sri Lanka, which has a heavily subsidised agricultural sector especially in the international purchase of chemical fertilisers, has been going through a phase of economic liberalisation and structural adjustment since the defeat of its Tamil insurgency in the late 2000s. They have used international loans principally from China (although denominated in dollars) and other regional neighbours to pay for a reduction in corporation tax, paying off the (then) low interest rates with income from tourism. Come the start of the pandemic in 2020 this tourism-based model collapsed. The Sri Lankan government then made an ill-advised ban of fertilisers to limit their balance of trade deficit and stabilise their currency. This however has massively reduced their crop yield causing Sri Lanka which is normally an exporter of crops to become an importer, weakening its currency further, making the entire Sri Lankan economy inoperative. The IMF are offering to lend a ‘helping’ hand.

While Sri Lanka was especially poorly positioned, many other peripheral economies find themselves in similar positions and may also be exposed (Zambia, Belize, and Ecuador have already defaulted). The 2010s have seen the largest, fastest, and most broad-based increase in government debt by peripheral countries in the past 50 years.⁽²⁰⁾

Similarities to the 1970s

Capitalist hacks have been making superficial comparisons between the oil crisis of the early 70s and the present inflationary (or stagflationary) moment. It too had an energy crisis precipitated by inter-imperialist conflict (the Arab-Israel conflict back then), in addition to high debt levels in the capitalist periphery. However, the real cause was that the cycle of accumulation had entered the downward spiral caused by a declining profit rate. Today, after half a century of systemic crisis, the situation is worse than that in the 70s. Global growth rates decreased from the 60s to the 70s from 5.5% to 4.1%. Growth in the 2010s was already sluggish at an average of 3%. And the rate of growth is expected to slow by 2.7% during 2021-2024, which is more than twice the amount growth slowed between 1976-1979.⁽²¹⁾ The 2010s was a decade that saw the euro area crisis of 2010-2012, the taper tantrum of 2013, a general slide in commodity prices from 2011-2016, a purposeful slowdown of the Chinese economy, and trade tensions beginning in 2017 leading to tariffs and quotas being erected between major economies. Economists also worry that the limit of productivity gains from improvements to education, health outcomes, and financial complexity has been reached.⁽²²⁾ In short, the capitalist system was in poor health to begin with.

As of yet labour militancy has not reached the levels of that decade. But the question of who will take the hit for the crisis is already being raised. Railway workers in the RMT are just the first of many to strike. Train drivers; railway workers in the TSSA; council workers in Scotland, Northern Ireland, Hackney and Rugby; Post Office workers; binmen; criminal barristers; teachers; junior doctors and nurses; care workers at the St Monica Trust; and bus drivers – all are planning or balloting for strikes over the next couple of months.

There are however other signs that this coming decade will be very different from the 70s. While growth forecasts are worse than the 70s, inflation is not as high nor broad-based. The response of governments to inflation will also be different. In the 1970s governments often vacillated between aiming for high output and full employment, as well as price stability. Now that governments largely only care about price stability, the sword dangling over the head of the working class has the potential to fall much faster.

Trade conflicts, supply chain disruptions due to COVID-19, and now war in Ukraine have all helped to inflate the price of commodities. When workers demand that their devalued wages be correspondingly increased, they are met with spluttering cries that “this will take us back to the wage-price spiral of the 1970s and 80s!” It is true that the conditions of post-war capitalism may have been unable to ensure a continuing standard of living for workers and an acceptable profit rate for capitalists. In the convulsions of that decade the post-war social compromise between labour (i.e. the unions) and capital collapsed as capitalist restructuring led to mass unemployment. The decades after the de-linking of the dollar from the gold standard in 1971 led to a hyper-financialisation of the global economy which, rather than solving capitalism’s problems, has merely reproduced its most basic contradiction.⁽²³⁾ It was not wage demands that created the grotesque bubble which led to the biggest financial crash in history. And it was not wage demands that have created the crisis today. It is still essentially about capital’s attempts to solve the insoluble problem of the low rate of profit, attempts which at every turn involve attacking the wages and living conditions of the people whose unpaid work is the basis for that profit.

What option is left to workers but to fight every attempt at their impoverishment? Ultimately there is no other way for the world working class to maintain a decent existence. But as they struggle it puts in question the rotten system which has placed them in this bind. As we have seen here, the crisis is an international one, and as such any response would have to be international in dimension. Whether the working class will relearn the lessons of its history remains to be seen. But the cost of not doing so, like everything else in this society, is simply too high.

Notes

Image: commons.wikimedia.org

(1) bbc.co.uk

(2) ft.com

(3) ft.com

(4) ft.com

(5) ft.com

(6) CEPR Working Paper DP17381 Global Stagflation June 2022, cepr.org

(7) bankofengland.co.uk

(8) cnbc.com

(9) politico.eu

(10) ft.com

(11) fortune.com

(12) voxeu.org

(13) Oxford Institute for Energy Studies Report Jan 2022, iea.org

(14) ft.com

(15) blogs.worldbank.org

(16) iea.org

(17) Bank for International Settlements annual economic report June 2022, bis.org

(18) ft.com

(19) reuters.com

(20) CEPR Working Paper DP17381 Global Stagflation June 2022, cepr.org

(21) Ibid.

(22) Ibid.

(23) There are literally scores of articles on our site analysing how the crisis has developed since the 1970s but the following three could be a starting point: leftcom.org, leftcom.org, leftcom.org