Michael Roberts once again has a post up foretelling another recession brewing within the next 1 to 3 years. I don’t necessarily disagree that much on the timing. I think 1 year is a bit too soon. Three years sounds about right, though.
The main difference between Michael Roberts’s forecast and mine, however, is that Roberts sees the economy’s trajectory gradually rounding the top and worsening in these next three years, starting from right now. I, however, think that we have yet to really enter the boom phase proper. I think we will see quite a bit of improvement in the meantime before the next full-blown crisis hits in about 3 years.
In other words, whereas Roberts sees the economy as gradually stalling towards recession starting now, I predict that the economy will begin to accelerate. I still think that a recession is about 3 years away, but I think the period immediately before the recession is more likely to look like a prosperous boom than the current sluggish stall.
Why do I think the economy still has a lot of potential left in it to accelerate before hitting another recession?
I agree with Sam Williams’s crisis theory that the main reason why there have to be crises under capitalism from time to time is that production inevitably gets expanded beyond the monetarily-effective demand needed to buy up that production.
What, ultimately, determines long-run monetarily-effective demand? World production rates of the money commodity (which currently is gold).
Why does the production of all other commodities inevitably race ahead of the production of the money commodity? Because the expansion of credit in a cycle artificially inflates the prices of all non-money commodities above their values and artificially inflates the profits on paper of producing them (while simultaneously deflating the price of the money commodity below its value and artificially reducing the incentive to produce the money commodity just when the world needs it the most).
According to this theory, leading up to a full-blown crisis of overproduction (of all non-money commodities relative to the money commodity), one should see:
- A. Declining world money-commodity production (relative to world GDP growth, but even more so if there is even an absolute decline in the rate of money-commodity production). Our money commodity in the present world is gold. So, look at gold production. If it is lagging behind reported world GDP growth, and especially if it starts declining in absolute terms for several years in a row, a crisis cannot be far off.
- B. The expansion of credit to unsustainably create the appearance of increasing demand for non-money commodities in the absence of enough commodity-money (or token money representing commodity-money) to really purchase all those non-money commodities.
- C. Increasing interest rates as hard money and credit become more scarce. How high can interest rates go before triggering a crisis? As interest rates approach the average rate of profit, then you know that the profit of enterprise is getting squeezed out of existence, and factory shutdowns, layoffs, and consumer debt/mortgage defaults cannot be far off.
- D. A stall and decline in housing starts (as high mortgage interest rates become unsustainable). This, not investment in fixed capital, is the leading indicator to watch out for. Investment in fixed capital is a lagging indicator of crisis, contrary to what Michael Roberts argues.
- E. A high and increasing velocity of money.
- F. A build-up of excess inventories.
What do we see currently?
B. Bank Loans
Of all those indicators, only B and F point to the possibility of an imminent crisis of overproduction. (And I still think B can go way higher before hitting a limit based on how much capital there is still sitting idle as excess reserves).
In his recent column linked to above, Michael Roberts alleges that there is currently a problem of profitability, and that sluggish or falling profitability will lead us into a new crisis.
I agree that profitability is important. But I think that, so long as profitability is still substantially above the rate of interest that industrial capitalists must pay for capital, then there is still plenty of incentive to invest. Consider: the risk-free interest rate on excess reserves (charitably being paid by the Federal Reserve to banks on their excess reserves) is currently 0.5%. Assuming that the “prime rate” that banks will charge capitalists has to be a little bit above that (in order to make it worth their while to process the loans, pay overhead, etc.) Let’s say the prime rate is 3%.
The rate of profit needs to be substantially above that to justify the risk of risking money in the uncertain industrial capitalist circuit of M-C-P-C’-M’. Let’s say, 5% above the prime rate, or 8%. Are you telling me that the average rate of profit is currently below 8%? If so, then capitalism is truly screwed. Because that means that, even with interest rates at the lowest that they will ever go, industrial capitalists will not see a reason to risk their capital (or borrow capital) to go into production of most commodities.
If the rate of profit truly is sliding below 8% or so, then there’s what I predict you would see: negative interest rates as far as the eye could see. Which would logically lead to the taxing of depositors with negative interest rates—in effect, subsidizing banks’ appropriation of surplus value on the front end to make up for the fact that they will not be able to appropriate as much surplus value “on the back end” with their interest rates to industrial capitalists being limited to something like 1% or 2%. (Limited, that is, by the industrial capitalists’ willingness to pay higher rates of interest for that loan money).
Of course, banks might still go out of business in this situation if depositors withdrew all of their money and tried to hold it as (unpenalized) cash or gold. There are a number of things that could happen at that point:
- The government could try to outlaw physical cash and/or gold ownership (such as with FDR’s Executive Order 6102 in 1933).
- Perhaps we would evolve to a system where savers loaned money to industrial capitalists directly rather than go through the middle-men of banks who would shave off their traditional 3%.
- Perhaps the government would step in and perform the banks’ traditional financial intermediary services at a loss, with tax revenue making up the shortfall.
Anyways, determining the average rate of profit is above my pay-grade, but unless someone can show me that the average rate of profit has plunged below about 8%, then I’ll regard this permanent negative interest rate scenario as unlikely for the near future.
Michael Roberts has pointed out that one reason that profit rates are low currently is that fixed investment is low, and thus the Department I industries (heavy industries that produce means of production) are doing badly. However, this is not a sign of a coming recession. This is to be expected at the bottom of a business cycle, not on the approach to the top. On the approach to the top, you would expect to see Department I industries booming as businesses expand production on the (mistaken) assumption that the boom will keep going forever. Rates of profit in Department I industries are a lagging indicator of the business cycle, not a leading indicator. Once the boom phase of our current cycle and credit inflation gets some momentum, we will see the Department I industries taking off.
As I have said in recent posts, the Federal Reserve could retard the coming boom a bit by increasing the Federal Funds rate, which it can only do now by increasing its rate of interest on excess reserves, and thus discouraging banks from making loans on those reserves…or by unwinding QE, which it will not do any time soon. In that case, if the Federal Reserve hikes too quickly, we could see a bit of a prolonged malaise before the boom period proper picks up again. But we are not primed for another full-blown crisis of overproduction just yet in any case.
A crisis of over-production of non-money commodities relative to the money commodity requires over-reliance on credit and a resulting credit crunch. There can’t be a credit crunch if credit is not already over-extended, and right now credit is not especially over-extended.
When those 2.3 trillion dollars currently in excess reserves become required reserves serving as the base for $23 trillion in new loans on top of them, THEN you will know that we are primed for another crisis of overproduction and credit crunch. (And in the meantime, we will be riding one hell of an inflationary roller-coaster with all that new loan money flooding into the economy…unless the Federal Reserve unwinds its QEs).
Instead, in addition to the Fed being aggressive in tightening, what might be going on right now is an “Inventory Cycle” or “Kitchin Cycle.” This could explain the recent rise in the inventory to sales ratio.
The basic idea is, now that the economy is starting to exit the depression phase and is getting set for the boom phase, money capitalists anticipate an increasing level of demand for credit. So these money capitalists start to anticipate being able to get industrial capitalists and consumers to sign onto higher-interest loans in the near future. So the money capitalists start to, in a sense, get ahead of themselves in demanding higher interest rates before the economy is really ready to support those higher rates. And so, especially at a point when demand for Department I goods has not really taken off yet to help the expansion along, you get a temporary hiccup in the expansion, a temporary apparent dearth of available credit at reasonable rates, a temporary lack of apparent demand, and a temporary accumulation of unsold inventories.
However, as soon as money capitalists re-adjust their expectations downwards and begin to offer credit again at more reasonable rates that the (slowly expanding) economy can support, credit and demand should pick back up again, inventories should drop, and the boom phase proper of the industrial cycle should commence.
That’s my forecast, and I’m sticking to it.