The Mother of All Snowballs

To understand the constant fluctuation of prices, it is wise to begin by looking at the way prices are determined. The value of a commodity is the sum of the values that went into its production. The different costs of production concern the matter to be transformed, the depreciation of buildings, machines and tools, the energy consumed and the work force. The market price should cover this value, plus taxes, land rent, interest and profit. Alternatively, it can be said that the market price of a commodity should cover the value invested plus the added value. The value invested comprises the tools, machines and buildings, the matter to be transformed and the energy consumed. (In fact, investments are no more than an accumulation of past added values. That the added values are from the past usually means their variations have a belated effect on prices.) The value added by labour comprises wages, taxes, interest, land rent and profit. These five elements of value are liable to variations, either up or down. However, some may rise while others fall, and the overall effect on prices can be nil.

What seems to have happened is that wages (outsourcing), taxes (rebates) and interest (Allan Greenspan) were consistently reduced. This left the lion’s share of value to rent and profit. It also allowed for a considerable reduction in market prices, during a ferocious competition that completely modified the distribution of production around the world. Then, once the downward trends of wages, taxes and interest had reached their limits, they could only move up again. This means that either both rent and profit fall, with a subsequent depreciation of real estate and stocks, or the market prices of commodities rise, resulting in inflation, or both.

There is, however, another side to the variations of prices on the commodity market, the monetary side. Supply is the quantity and the price of the goods on offer. Demand is the quantity and the value of money (credit, etc.) in circulation. If the quantity or, less likely, the value of money increases, so does demand. (An increase in the speed of circulation, and hence of spending, also increases demand. But electronic speed has reached a limit that is hard to beat. And how far in advance can incomes be spent?) There used to be a time when the quantity of money in circulation could increase without necessarily affecting consumer demand. Extra money would be put aside for a rainy day. But savings are no longer hidden under a mattress, or buried in a jam jar. They are converted into derivatives. All circulating money that does not become demand is exchanged for “almost-money”, and recirculated. Savings are merely spent by someone else, notably governments who balance their budget deficits by selling treasury bonds. Savings are not deducted from demand. The demand is simply resituated elsewhere, and its value is doubled by treasury and corporate emissions of “almost-money”. The money has been spent and is circulating, but the potential demand of the saver persists.

What seems to have happened is that the long term savings that had been paying off budget deficits were essentially pensions and life insurance set aside by the post-WW2 baby boom generation and, fatally, they are beginning to spend what they had saved. Past savings that had not been withdrawn from circulation are coming back on the market as an increased demand. Just when present savings are at an all time low. This in turn means that treasury bonds are in lesser demand. Just when budget deficits are in full expansion.

Demand for goods is sustained by spent savings. But demand for bonds is weakening at a time of predictable XL supply. The price of essential goods can increase but, as a consequence, the market value of bonds must drop and interest rates rise proportionally. This will affect already failing rent and profit, and already rising prices. At some point in the near future, sinking buying power will lead to a general claim for higher wages, countered by rising prices, etc. The start of an inflationary cycle that will deflate the going value of past debts in general and of treasury bonds in particular. A similar process took place in the 1950’s, wiping out the massive war-bond emissions and the reconstruction borrowing of the 1940’s. The comparison stops there, however, as the balance of power and wealth has completely changed since then.

A currency has two distinct values. One on its national market, and the other on the international market. The use of a currency is restricted to its national boundaries (except for the US dollar that is legal tender in a number of countries, and the particular multinational Euro zone). This means that foreign trade is ultimately an exchange of commodities, and woe to those nations with no or insufficient commodities to offer. They must sell their work abroad and send home the wages. As no nation is completely self-sufficient, the exchange of commodities is a necessity. This regularly leads to a trade deficit for some, and a trade surplus for the others. An unbalance that used to be settled by transfers of bullion. But very few of the new post-colonial nations had gold reserves (in the ground). So, for numerous other reasons, the gold standard was finally abandoned in 1973. To be replaced by a standard based on the US dollar. First by paper money (petro-dollars), provoking great movements of liquidities and wild fluctuations in the exchange rates between currencies, then by paper bonds.

What seems to have happened is that growing trade deficits have been settled with treasury bonds. The example was given by the Nixon administration (see Michael Hudson’s account). Then, progressively, the practice became universal. Up to the junk-bond crisis of 1997, when numerous nations of South America, Africa and Asia found themselves on the verge of bankruptcy. Since then, only the wealthier nations have been able to continue paying their trade deficits with treasury bonds, notably some members of the euro-group (France, Spain) and the USA.

Paying a trade deficit with a budget deficit is a convenient way of borrowing what is already owed, for a prolonged period. Except that the method relies on a strong foreign demand for treasury bonds, and this is no longer the case. In fact, the likelihood of a weak demand and a strong supply of treasury bonds on the international market will push up interest rates and bring down the market price of existing bonds. This will affect the exchange rates of currencies, and should make it easier for the depreciated ones to export a larger quantity of cheaper goods. But, coming at a time when demand is weakening, this could lead to protective commercial barriers. A depreciated currency will also make imports more expensive. Thereby reducing them and the trade deficit, while having an inflationary effect on prices. As for budget deficits, they will be ever harder to finance.

The question is, “Can the present situation snowball into something gigantic?” And the answer is that there seems no way to avoid it. As all the factors are linked together by a world market and a master currency, the US dollar. The only difficulty is to estimate how long the central banks can go on filling the breaches to hold back the flood, and to foresee when the salvaging process will be forced to the forefront of political debate. It is ultimately the nation’s wealth that has been squandered.

KENNETH COUESBOUC can be reached at kencouesbouc@yahoo.fr






More articles by:
July 18, 2018
Bruce E. Levine
Politics and Psychiatry: the Cost of the Trauma Cover-Up
Frank Stricker
The Crummy Good Economy and the New Serfdom
Linda Ford
Red Fawn Fallis and the Felony of Being Attacked by Cops
David Mattson
Entrusting Grizzlies to a Basket of Deplorables?
Stephen F. Eisenman
Want Gun Control? Arm the Left (It Worked Before)
CJ Hopkins
Trump’s Treasonous Traitor Summit or: How Liberals Learned to Stop Worrying and Love the New McCarthyism
Patrick Bond
State of the BRICS Class Struggle: Repression, Austerity and Worker Militancy
Dan Corjescu
The USA and Russia: Two Sides of the Same Criminal Corporate Coin
The Hudson Report
How Argentina Got the Biggest Loan in the History of the IMF
Kenn Orphan
You Call This Treason?
Max Parry
Ukraine’s Anti-Roma Pogroms Ignored as Russia is Blamed for Global Far Right Resurgence
Ed Meek
Acts of Resistance
July 17, 2018
Conn Hallinan
Trump & The Big Bad Bugs
Robert Hunziker
Trump Kills Science, Nature Strikes Back
John Grant
The Politics of Cruelty
Kenneth Surin
Calculated Buffoonery: Trump in the UK
Binoy Kampmark
Helsinki Theatrics: Trump Meets Putin
Patrick Bond
BRICS From Above, Seen Critically From Below
Jim Kavanagh
Fighting Fake Stories: The New Yorker, Israel and Obama
Daniel Falcone
Chomsky on the Trump NATO Ruse
W. T. Whitney
Oil Underground in Neuquén, Argentina – and a New US Military Base There
Doug Rawlings
Ken Burns’ “The Vietnam War” was Nominated for an Emmy, Does It Deserve It?
Rajan Menon
The United States of Inequality
Thomas Knapp
Have Mueller and Rosenstein Finally Gone Too Far?
Cesar Chelala
An Insatiable Salesman
Dean Baker
Truth, Trump and the Washington Post
Mel Gurtov
Human Rights Trumped
Binoy Kampmark
Putin’s Football Gambit: How the World Cup Paid Off
July 16, 2018
Sheldon Richman
Trump Turns to Gaza as Middle East Deal of the Century Collapses
Charles Pierson
Kirstjen Nielsen Just Wants to Protect You
Brett Wilkins
The Lydda Death March and the Israeli State of Denial
Patrick Cockburn
Trump Knows That the US Can Exercise More Power in a UK Weakened by Brexit
Robert Fisk
The Fisherman of Sarajevo Told Tales Past Wars and Wars to Come
Gary Leupp
When Did Russia Become an Adversary?
Uri Avnery
“Not Enough!”
Dave Lindorff
Undermining Trump-Putin Summit Means Promoting War
Manuel E. Yepe
World Trade War Has Begun
Binoy Kampmark
Trump Stomps Britain
Wim Laven
The Best Deals are the Deals that Develop Peace
Kary Love
Can We Learn from Heinrich Himmler’s Daughter? Should We?
Jeffrey St. Clair
Franklin Lamb, Requiescat in Pace
Weekend Edition
July 13, 2018
Friday - Sunday
Brian Cloughley
Lessons That Should Have Been Learned From NATO’s Destruction of Libya
Paul Street
Time to Stop Playing “Simon Says” with James Madison and Alexander Hamilton
Jeffrey St. Clair
Roaming Charges: In the Land of Formula and Honey
Aidan O'Brien
Ireland’s Intellectuals Bow to the Queen of Chaos