From a Marxist labor theory standpoint, there are a number of paradoxes in how current economic conditions are behaving. Reading Jehu’s blog lately at therealmovement.wordpress.com has crystallized some observations I’ve been mulling over for some time.
One observation is the peculiar lack of consumer price inflation in the United States over the last seven years. On the one hand, there has been a massive expansion in the money supply due to the availability of cheap credit and “quantitative easing” (the Federal Reserve using newly printed money to buy government bonds to help finance the U.S. federal budget at low rates of interest). On the other hand, contrary to expectations, there has been little inflation in the price of consumer goods. Indeed, the lack of inflation has been so pronounced that even bourgeois economists (such as Federal Reserve chair Janet Yellen) are concerned enough to take it as a sign that more low-interest-rate credit stimulus is warranted for the time being, despite the fact that keeping the federal funds rate at this nearly zero level for so long is unprecedented.
If we take Marx’s theory of value seriously, we must start from the premise that paper dollars are not real money. Paper money is a token for real money. Even today, I think this holds true. Jehu talks about us being in the era of “incontrovertible fiat currency,” but I don’t think it is incontrovertible at all. You can very easily convert your fiat paper tokens for real money by buying a commodity money such as gold that represents real socially-necessary labor time (“SNLT” for short) necessary for its production. The only difference between the Gold Standard era or the Bretten Woods era and now is that the representational ratio of the paper token now fluctuates wildly because the printing of the token is not so tightly constrained by the U.S. government to match a certain ratio of gold in the vaults of the U.S. But I believe that this printing is still constrained somewhat for reasons that I will explain below.
Anyways, taking gold as real commodity money, what do we find has happened over the last 7 or 8 years? Well, the value of labor power has dropped significantly. People now work for much less in gold wages than they used to. As Jehu points out, this was John Maynard Keynes’s whole strategy for exiting a depression—cut wages through devaluation of the currency, so that it happens to everybody at once and nobody will notice what is going on at first.
However, despite this devaluation in workers’ gold wages in the U.S. in the last 7 or 8 years, people have not felt the sting of declining living standards TOO MUCH (certainly they have to some extent, but not as much as one would imagine from their gold wages dropping by more than half). People are still able to purchase, on average, similar sorts of use-values that they used to be able to purchase before the Great Recession. Why is that?
It is because, just as the value of labor power has gone down, so has the value of most other consumer goods. The gold price of bread, milk, housing (in most places outside of a few freak markets such as New York and San Francisco), etc. has likewise plummeted by more than half.
What this should be telling us Marxists, if we are thinking consistently about these things, is that there is drastically less socially-necessary labor time (SNLT) required to produce most goods now compared to 7 or 8 years ago. This also applies to reproducing people’s ability to survive—the production of labor power. It requires much less SNLT to keep an American human being alive and in condition to work now than it did 7 or 8 years ago.
If prices were measured in gold, we would see that there have been tremendous productivity gains over the last 7 or 8 years, partially as a result of technological improvement, partially as a result of the most inefficient businesses (and the most inefficient uses of labor power) being out-competed into bankruptcy or liquidation during the Great Recession. The digital revolution marches on, although over the last 7 or 8 years most ordinary people have not experienced improvements in their standards of living to match this productivity increase, but rather merely a maintenance of their previous standards of living.
If there had not been this cheapening of consumer goods in terms of gold over the past 7 or 8 years, then we would have seen massive inflation in the price of consumer goods in dollar terms as the ratio between the commodity money of gold and its paper tokens got massively inflated. The real productivity increase in the efficiency of the use of SNLT has been the one factor that has allowed the Federal Reserve to inject the monetary tokens that it has been able to without causing inflation in dollar terms. If this productivity increase were to stop, and the gold prices of goods were to stop dropping, then the Federal Reserve would have been much more politically constrained. They could not have injected the same amount of monetary tokens into the economy without causing inflation in the dollar price of consumer goods. This is a constraint that the Federal Reserve will continue to face going forward. There is indeed a limit to what they can print and inject into the economy.
Another problem with inflating the ratio between gold commodity money and its dollar tokens is that this will cause the dollar price of gold to continue to go up. This would become especially harmful to capitalist production when investors started getting used to the idea that “investing” in a lifeless hoard of gold promised better profits in dollars than investing in real productive activities. Investment money would flow out of the production of consumer use-values and into gold speculation and gold mining, thus prompting even more investor and speculative interest in gold and accentuating the process.
With less real production of consumer goods occurring, goods would become temporarily more expensive, not just in dollar terms, but in gold terms as well, until a new, higher-price equilibrium was reached where the profit incentive for producing consumer goods was just as good as the profit incentive from mining or speculating on gold.
Consider the fact that banks can get loans from the Federal Reserve at 0.25% interest currently. Pad that will a little bit of margin for the banks, and assume that banks can give out loans to entrepreneurs at, let’s say, 2% (the exact number is not important for the moment). Nevertheless, even at 2%, investors aren’t biting. If these were normal times, investors would be engaged in a feeding frenzy for this cheap credit, confident that they could operate at a rate of profit of maybe 5% and take home the 3% spread as the “profit of enterprise.” But there is no such confidence that even 5% profit rates are possible out there. So investors are not biting. Net productive investment is low. Idle dollars are sitting in banks, as well as untapped credit offerings.
You can also tell that investors aren’t biting because, instead of using their money to invest in setting up real production, they are settling for 3% returns on a 30-year treasury bond. That basically tells you right there that most don’t expect they could do much better than that at being entrepreneurs to justify the added risk of being an entrepreneur with their money.
In this context, it would not take much over-printing of fiat paper monetary tokens to cause gold to be competitive with real productive investment.
Consider that, over the last 10 years, gold has gone from $400/oz. to about $1200/oz., where it is today. That’s more than a 10% annualized increase. Just think: capitalist investors would have nearly as well investing in gold over the past decade as investing in the stock market, or starting their own enterprise. Of course, gold is currently still seen as “risky,” so there is still a risk premium attached to it. But if the Federal Reserve continues printing money, and does it at a rate faster than productivity gains? If the profitability of real productive investment declines in another recession? Well, then investing in lifeless hoards of gold will suddenly seem like the way to “get rich quick” while real productive investment will look unattractive by comparison.
As Jehu has pointed out, the difference between paper tokens and real commodity money is that paper tokens always circulate, whereas commodity money becomes hoarded in a crisis. Another way of saying this is, the price of commodity money goes up in a crisis. In former times, this happened because capitalists, in their heart of hearts, knew the difference between real commodity money and its mere paper tokens, and they wanted to be paid in the former. Well, in the Great Depression, there was not enough gold, at its existing valuation, to settle all of the debts, and so people sought to get their hands on gold at any price. One place they could still get it for pretty cheap was from the U.S. government, at about $20/oz. The U.S. government soon found that it did not have enough gold to meet demand for gold at that price; the U.S. government was going to run out of gold, after having sold it all off at what the market understood to be quite below its true value. And so FDR had to step in and declare two things:
- The U.S. government will now only sell gold at $35/oz. (closer to its real value at the time).
- By the way, it is now illegal to own gold anyways.
With FDR’s executive order establishing the above, the U>S. government hoped that it could replace gold with paper tokens and get people to value paper tokens just as well as that “barbarous relic.” Keynes was sure that the price of gold would plummet as soon as the government gave up the fiction of acting as if it had value, this leading the way for everyone else to do the same. Unfortunately for the U.S. government, capitalists still know, in their heart of hearts, what is real commodity money, real representation of socially-necessary labor time that cannot be counterfeited, that can only be increased by the expenditure of a certain amount of labor time, and what is mere token paper—monopoly money.
In the current day, here’s how a new recession could trigger a monetary crisis. Private capitalists, having produced “too much” stuff relative to the “effective” market demand for such items to be sold at an average rate of profit (one that is competitive with gold mining and speculation, at the very least), will plead for a final “buyer of last resort,” or will threaten to cut production and layoff millions of workers, thus depriving consumers of purchasing power and worsening the crisis of overproduction. The government will be pressured to step in and buy off the excess (for which they will need loans. And if private buyers of treasury bonds will not prove sufficient, then the Federal Reserve will step in with more “quantitative easing” to buy the treasury bonds and supply the government with case); OR, the Federal Reserve / Federal Government will be encouraged to print money and helicopter-drop it into the banks, and/or into people’s banking accounts, so that investors and/or consumers can buy this excess. This will cause the ratio of the paper dollar tokens to gold commodity money to increase.
Either the price of gold doesn’t increase, in which case gold miners will be buying less and less of the total social product with their gold, incentivizing them to get out of gold mining and into other sorts of business (which would be disastrous for gold production, crimping the supply of gold and initiating more panic in a crisis when capitalists will be desperate to get their hands on real money), or the price of gold will increase, incentivizing some capitalists to switch out of the consumer and investment goods business and into the gold mining business. The latter will mean that fewer real consumer goods will be produced, sending the price of those up, and initiating politically-disastrous inflation.