Tuesday, May 31, 2011

The Return Of Stagflation?

Those of us around in the 1970s will remember the term stagflation - a combination of economic stagnation and inflation that created a conundrum for bourgeois economists: do you move to rein in inflation by tightening credit and imposing wage and price controls - or do you seek to boost economic growth by loosening credit and "priming the pump" by injecting billions into state directed projects. As it happens the first thing they did was attack workers by imposing wage controls (price controls were bullshit), either through direct legislation (Canada and the UK) and/or by encouraging open war on the collective bargaining right of unionized workers (Reagan's firing of 10,000+ striking air traffic controllers). That was combined with interest rates that went through the roof - up to 20% at their peak. Then, once the working class was defeated, there was a return to loose money - Reagan increased military spending (and thus the deficit) massively, there were big tax cuts for the rich and policies that encouraged the growth in speculative investment (and, thus, stock and property bubbles).

Well, if you liked that economic bloodbath the first time around, get ready for the next round.

First off, the damage - both social and economic - from that first battle against stagflation is still with us. The North American economy is much more "financialized" than it was before. Speculative bubbles - that roam from sector to sector; now in stocks, then in tech, later in housing followed by commodities - continue as a matter of policy in an attempt to keep the economic inflated. In fact, price and credit inflation - combined with social and wage austerity - is the economic policy of western governments to this day.

But they face a problem that is the result of the success of these policies in many ways. The Chinese miracle is, in part, a product of the fact that increasingly squeezed western workers, particularly in the USA but also in Europe, need the cheap goods produced in the sweatshops of China to sustain their standard of living along with access to easy credit. China's export led boom can't be separated from the boom in debt in the west - total US debt, private and public, is now close to 400% of US GDP. Nor can it be separated from the decline in unionization and real wages (which includes the "hidden" social wage of services previously provided by governments and now privatized - from public pools and community centres to welfare and unemployment insurance rates, pensions and healthcare).

The debt/sweatshop model could work for a while but it reaches its inevitable limits when debt simply can't grow any further; consumers and businesses can't afford to add any further to their debt servicing costs. Oh, this can be creatively skirted and hidden for a while - the exotic debt products of the first decade of this century proved that. The crisis of 2008, however, was a sign that the debt shell game was coming to an end. Massive state intervention was able to prevent total economic collapse but it can't wish away the debt loads held by everyone and that means that growth will, at best, remain sluggish after the brief episodes of state intervention end. In weaker countries, like Greece, it means the threat of default as international bankers, the lowest form of human, try to push a program of massive debt privatization - so that they can recoup state loans as though depressing consumer demand will somehow save an already depressed economy.

These recessionary pressures are bad enough but the boom in China - itself fuelled by debt, perhaps half of it bad - has had the effect of jacking up global commodity prices. This creates a conundrum for China - on the one hand capital investment (infrastructure, new manufacturing plants, etc) has led the growth in China, as opposed to a growth in consumer demand. That means that China needs a higher valued currency to lower the costs of imported raw materials. But it needs a cheaper currency in order to keep their goods - for which there isn't a sufficient internal market - cheap for export. The Chinese leadership is trying to change the balance between capital and consumer investment but faces lots of hurdles.

While there is much talk about the "efficiency" of the one-party state in terms of being able to rapidly implement policy shifts, things aren't that simple in a country - and an economy - this size. The rapid growth of China over the last thirty years has created a large, wealthy and very powerful capitalist class, primarily concentrated in the coastal cities. They have regional fiefdoms that are dependent upon cheap and plentiful credit and infrastructural and capital investments (and corrupt kickbacks therefrom). And they have a number of tools at their disposal to resist the central government's attempt to change the priorities of investment. One of them is simply to create an underground credit economy to loan money for projects as they see fit - it's estimated that close to one third of all new loans in China are through this sector. The other mechanism is to simply send money offshore to tax havens before cycling is back into China to invest as they see fit - over half of the $1.1 trillion in foreign direct investment into China is, in fact, money of this sort and not really "foreign" money at all. Foreign investment has, in fact, stagnated for over a decade.

The Chinese government also faces pressure from the ordinary people of China - workers and peasants - who see and feel the results of the "Chinese model" of development first hand. Peasants are expropriated by regional governments for their pet projects - from dams and wind farms to chemical plants and other manufacturing facilities. Workers see the investment boom year after year after year and haven't seen a commensurate amount of wealth "trickle" down to them. This has led to mass - though still fragmented - resistance. In March of last year, in the town of Huaxi, 20,000 people took over the town and threw out the 3,000 local cops, then burned police property and, get this, sold tickets to the rebellion. The revolts are having an effect - many companies are giving pay hikes of 20-40% in order to end strikes and rebellions by workers.

The failure of the Chinese government to effect the sort of change that the entire leadership in China - in words - recognizes is necessary, means that pressure is building that is effecting the global economy. Commodity inflation is killing the fragile economy in Europe and America (oil economies like Alberta aside) as more income and profit goes to just covering the basics. Back in China this translates into a slowing of the export-oriented manufacturing sector - still accounting for about half of GDP (I believe). So, China and the world face the combined impact of an over-heated Chinese capital investment sector, leading to global price inflation (and to wage inflation inside China) and the potential return to recession. With even less room this time around to use the instrument of state investment to prevent the return of economic crisis - because of high debt and high inflation - it's unclear what governments will do this time around. Pray, I suppose. Or fiddle - while Athens, Rome, Madrid, et al burn.

Some links:
FT.com / Comment / Analysis - Global economy: A high price to pay

Brake in manufacturing momentum in Europe, US, Asia - The Economic Times

Dissecting the Chinese Miracle | STRATFOR

10 Global Signs That the Market Is at a 'Tipping Point' - Seeking Alpha
Post a Comment
DreamHost Promotional Codes