By the PCUSA Political Economy Committee.
Inflation for urban wage earners hit 9.1% in July, the highest rate of inflation since 1979 when Paul Volker jacked up interest rates to astronomical heights to curb an earlier inflation crisis. Now the Federal Reserve is trying to apply the same medicine to kill inflation again, only this time it might kill the patient.
Since 1980 the US money supply has ballooned from $2 trillion to now a shocking $22 trillion (see graph), eleven times greater than it was in 1980. In the 42 years since then, US industrial production, the only thing that supports a currency in an honest, non-imperialist economy,[1] has collapsed,[2] beginning with Reagan’s brutal destruction of the US steel industry. The proof that the US is not producing anything anymore is that manufacturing employees as a percentage of the population are now less than half they were in 1979; they have fallen from 8.8% of the population in 1979 to 3.9% in 2019 (calculated from BLS data).
The Federal Reserve piggy bank has been pumping out money for its friends in investment banking like mad. They all got rich; we got raging inflation. This is the way it works, according to Richard Cantillon: The people who are close to where the new money comes into the economy—investment bankers—can benefit from the new money before prices rise. They buy new homes, land, gold and stocks. But
“Those who will suffer from these higher prices and increased consumption will be…all the workmen or fixed wage earners who support their families on a salary. They all must reduce their spending in proportion to the new consumption [by the rich]” (Cantillon, Essay on Economic Theory, Pt. 2, Ch. 6).
That’s the “Cantillon Effect.” So, the NY bankers grab up all the value in the economy with the new money pumped out by their friends at the Federal Reserve. What’s left for us is the inflation they caused by expanding the money supply without expanding the real economy of manufacturing, construction, transportation and energy production. Look at the Bureau of Labor Statistics reports on inflation and you will see that wage earners suffer the highest rate of inflation in the country, a 9.1% annual rate in July, while the average rate for everybody, bankers and wage workers included, was 8.5%. Under the Cantillon Effect wage earners suffer higher inflation that anyone else. This is one of the processes that drives inequality.
What especially aggravated the financial system in the last few years was the government’s response to the crisis in the Repurchase (Repo) Market. The Repo Market is where giant financial institutions borrow trillions of dollars from each other and from central banks every day, often just for overnight. The Repo Market was what brought down the economy in 2008. From 2010 to 2019 it was relatively calm: Banks and corporations traded Repos with no seeming problem. Then in Fall 2019 lenders began to distrust the collateral that their Repo borrowers were putting up to secure their loans. They refused to extend credit! The Fed stepped in as in 2008 and bought up the outstanding Repos that lenders refused to buy. Again, the Fed bailed out the investment banks that had gotten themselves into trouble as in 2008. The amount of Repos purchased by the Fed per day grew from zero on September 4, 2019 to 200 Billion in October and exploded to 450 Billion in March 2020. The government then had two responses: First, the lockdowns. Because they shut down the economy, they eliminated pressures on financial markets, and the Repo market began to settle down, Then the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) provided the biggest bailout to NY banks in the history of the country—at first $2 Trillion (including $290 Billion in payments to taxpayers who had to hand it back to the banks again in Covid-19 Lockdown emergency spending). Regarding the reasons given for these actions, as Marx wrote in his Preface to A Contribution to a Critique of Political Economy, the reasons people give for doing something are ideological and usually not the reasons for which they actually do them, which are economic. In 2020 and 2021 the money supply increased by $4.8 trillion. Inflation exploded in 2021 and jumped from 1.7% per year in February to 5% in May (Bureau of Labor Statistics).
In 2022 the Fed finally began to raise interest rates from the absurd 0.25% at the beginning of the year to 2.5% now. For the Fed to have any effect on inflation it must raise its interest rate ABOVE the rate of inflation (i.e. at least 10%) so that speculators cannot make money off the difference between the inflation rate and the Fed’s interest rate. So far, the interest rate hikes haven’t had much effect on the economy. Over the past 3 months employers hired 1.3 million workers (BLS).
Watch the Fed raise rates higher and higher as inflation rages. This is not a popcorn moment. Our lives will be wrecked. The economy will eventually crash into a recession, with bankruptcies and mass unemployment. A recession traditionally wipes out a lot of valueless financial paper and mismanaged banks and other companies that act as a drag on the economy. But now the financial system is so interlocked, that if one bank or corporation fails, many more follow. So, the Fed might scale back its rate hikes before it tames inflation in order to avoid a financial blowout. Then the inflation will resume unimpeded, and we get a blowout that way.
References
[1] How imperialist policies reduce the rate of inflation in the host country is explained in “Where There’s Smoke, There’s Fire: Finance Capital’s Looting and Wrecking of the World Economy,” The Communist, Vol. II (2022), pp. 58-59.
[2] On the collapse of US industrial production, cf. Table 1, The Communist, pp. 65.