By: Yanis Varoufakis
ATHENS – Now the blame game for rising prices has started. Were central banks pumping too much money for too long the cause of high inflation? The responsibility lies with China, where most physical production moved before the pandemic closed the country and disrupted global supply chains? Was it Russia whose invasion of Ukraine cut off much of the world’s supply of gas, oil and fertilizer? Was the reason for the veiled shift from pre-pandemic austerity to unfettered financial generosity?
The answer is not the kind that test takers will ever encounter: all of the above and none of the above.
Often, crucial economic crises call for multiple explanations, all correct but misplaced. When Wall Street’s institutions collapsed in 2008, sparking the global Great Recession, divergent explanations were offered: regulatory takeovers by financial agencies that replaced industrialists in the troublesome capitalist system; the cultural propensity for risky financing; the failure of politicians and economists to distinguish between a new model and a big bubble; And other theories. All of these explanations were correct, but none of them came to the core of the truth.
The same is true today. In fact, the monetarists who “did not tell you” and who have expected high inflation since central banks dramatically expanded their balance sheets in 2008 remind me of the jubilation felt that year by leftists (like me) who “Consistently expected “. capitalism is approaching death – like a stopped clock progressing twice a day at the right time. To be sure, by creating large overdrafts for bankers, in the false hope that money will seep into the real economy, they have caused epic asset price inflation (the stock and housing boom, the crypto-fad, and so on).
But the monetary story can not explain why large central banks during the 2009-2020 period did not even succeed in promoting the amount of money circulating in the real economy, let alone from consumer price inflation to the 2% target to float. It must have been something else that fueled inflation.
The disruption of supply chains centered in China has clearly played an important role, as has Russia’s invasion of Ukraine. But none of the factors explained the sudden “regime change” of Western capitalism from prevailing deflation to its opposite: the rise of all prices simultaneously. It requires wage inflation to overcome price inflation and thus create a self-sustaining spiral, with wage increases causing more price increases, which in turn pushes up wages even indefinitely. Only then does it make sense for central bankers to demand that workers “sacrifice” and deter them from seeking higher wage settlements.
But to ask workers today to abandon wage gains is absurd. All the evidence suggests that, unlike in the 1970s, wages rose much more slowly than prices, but the rise in prices not only continued but accelerated.
What’s really going on then? My answer is: Half a century of show-by-force tactics led by corporations, Wall Street institutions, governments and central banks have ended in failure. As a result, Western authorities are now faced with an impossible choice: drive cartels and even states to bankruptcy on a regular basis, or let inflation rise unhindered.
For fifty years, the U.S. economy maintained net exports to Europe, Japan, and South Korea, followed by China and other emerging economies, while the bulk of these foreigners’ profits flowed to Wall Street in search of higher returns. Against the backdrop of this tsunami of capital destined for America, financiers were building pyramids of private money (such as options and derivatives) to build corporate construction of a global labyrinth of ports, ships, warehouses, warehouses and roadways. and to finance rail transport. When the 2008 crash set these pyramids on fire, the fully funded maze of just-in-time global supply chains was in jeopardy.
To save the bankers, and even the labyrinth itself, the central bankers intervened to replace the pyramids of financiers with public money. On the other hand, governments were eager to cut public spending, jobs, and services. It was nothing less than generous socialism in favor of capital and draconian austerity for the workers. Wages have shrunk, prices and profits have stagnated, but the prices of assets bought by the rich (and therefore their fortunes) are rising. Thus, investment (relative to available cash) fell to an all-time low, capacity declined, market power flourished, and capitalists became richer and more dependent on central bank money than ever before.
The performance of power tactics was of a new kind. The traditional struggle between capital and labor has continued to increase each side’s share of total income through profit margin increases and wage increases, but it is no longer a source of most of the new wealth. After 2008, general austerity led to lower investment (demand for money), which, combined with ample central bank liquidity (money supply), kept the price of money (interest rates) closer to zero. With productive capacity dwindling (even in new housing), scarce jobs scarce and stagnant wages, wealth has triumphed in stock and real estate markets, which have been disconnected from the real economy.
Then came the pandemic, which changed one big thing: Western governments were forced to divert some new rivers of central bank money to the masses trapped in economies that for decades had exhausted their ability to produce things and now disrupted supply chains faced. As the captured masses spent their holiday money on scarce imports, prices began to rise. And companies with large paper wealth have responded by exploiting their huge market power (due to their declining production capacity) to drive up prices.
Twenty years after a boom in asset prices and central bank-backed corporate debt, all that was needed was simple price inflation to end the power projection tactics that shaped the post-2008 world in the form of a revived ruling class. What can happen now?
The expected events are unlikely to be good. To stabilize the economy, the authorities must first end the excessive power of the few through a political process of paper wealth and cheap debt creation. But the couple will not give up power and authority without a fight, even if it means plunging them into fire, and society in its aftermath.
* Yanis Varoufakis, former finance minister of Greece, professor of economics at the University of Athens, leader of the European Realist Insurrection Front (MIRA.25).