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Socialist Party of Great Britain - Capitalism In Crisis - Inflation, Quantitative Easing and Hoarding.

Marx and Inflation.

For Marx the key factor determining changes in the general level of prices is the amount of “money” (notes and coins) in circulation in relation to the amount needed in given conditions of production and trade.

Writing about Britain in which the government, through the Bank of England, controls the issue of notes and coin, Marx showed that the government can adopt one or other of three policies: push more currency into circulation and raise the general price level – inflation; keep the amount of currency under control – a relative stable price level as in the century before 1914; or reduce the amount of currency in circulation and so bring down prices – deflation.

Marx set out his theory of inflation in CAPITAL, VOLUME 1, Chapter 3, section 2, part c, Coin the symbol of money. He based it on his law of value and he use as his illustration the gold standard as it existed in Britain at the time.

Marx wrote:

If the quantity of paper money represents twice the amount of gold available, then in practice £1 will be the money-name not of ¼ of an ounce of gold, but 18 of an ounce…the values previously expressed by the price of £1 would now be expressed by the price £2 (Penguin p.225).

Several qualifying factors need to be taken into account.

Modern economists, both the Keynesians and the Monetarists, and the Treasury and the Bank of England use the term “money supply”, but they do not mean what Marx meant by money. For them “money supply” is predominantly bank deposits. They all reject the idea that notes and coins are a governing factor in determining the price level.

A stable price level, as it existed from 1850 to 1914, does not mean any price change at all. Prices rise moderately in booms and fall in depressions. Further, the “needed” amount of currency rises with growth of population and production and falls with monetary developments such as the growth of the banking system (to which Marx drew attention) and later on the use of credit cards and the like. So Marx never subscribed to the theory that every change in the amount of currency produces an equal change in prices.

Finally, it should be noted that Marx did not subscribe to the Quantity Theory of Money as the late economist Milton Friedman mistakenly thought he did. Marx was not a Monetarist. He was not, to use an expression of Margaret Thatcher “one of us”. Marx showed that an excess issue of inconvertible paper currency depreciates the currency and causes prices to rise, though it is not the only factor affecting prices.

What is Quantative Easing?

Quantitative Easing (QE) simply means the Bank of England transferring a pre-determined quantity of money to the commercial banks in return for the purchase of their financial assets, which consists largely of government bonds.

A question arises about the impact of QE on inflation. One of the trenchant critics of QE is the Austrian School of Economics which is predominant in the US but influential through “free market” organisations like the Cobden Society, the Adam Smith Institute and the Institute of Economic Affairs. When the Federal Reserve and the Bank of England initiated QE in 2008 supporters of the Austrian School stated that it would automatically increase the rate of inflation to levels once experienced in Germany during the Weimer period. Although inflation has increased, hyper-inflation has not occurred. As the economic journalists observed about QE: “…very little of this money gets to the industrial and commercial borrowers…Instead it gets stuck in the banks or finds its way into the markets, where it creates financial bubbles… “ (INDEPENDENT 15th September 2012)

QE is supposed to be an expansionary monetary policy designed to promote economic recovery. The rationale behind the policy is that the addition of new funds to the capital base of the commercial banks (at or near zero interest rates) will enable them to, in turn, extend new credit to capitalists at reasonably low rates. Capitalists, so the theory goes, would then be encouraged to borrow, to expand, to hire workers and, therefore, create growth and prosperity.

The Bank of England thought that the buying gilts would generate growth but did not understand two consequences of its policy. Firstly, many gilt-sellers are foreign investors who use the money received from the Bank to buy overseas assets. Secondly, the banks are desperate to rebuild their balance sheets and have tightened lending conditions. Why should they lend to potential bad risks. Banks are not charities.

Who are the winners of QE? According to the financial economist, Jeremy Warner, it is the bankers:

…they (the bankers) have been…bailed out by it (QE)…there is not much evidence of it doing anything to restimulate demand and growth, and you wonder what’s become of all that newly printed money – worth a third of the national debt in Britain in the last count (DAILY TELEGRAPH 3rd August 2012).

Another winner is the government who has lower borrowing costs although this has not stopped governments having to borrow more through the depression and the national debt rise to £1 trillion in January 2012.

One side effect of the QE policy not anticipated by the Bank of England was that its £375 billion injection into the commercial banking system undermined the annuity rates determining pensions. Someone who retired in 2012 would now get a pension worth a third less than in 1990. Annuity rates are linked to gilts, the bonds which the Bank of England has been buying through QE. When the price of gilts increases it costs more to buy the same income. Insurance companies are dependent on gilts to pay out annuities and it is costing insurers more and as a consequence they are paying out less money to pensioners through lower annuity rates.

Another beneficiary is the Government itself. Writing in the FINANACIAL MAIL (5th May 2012), the economic journalist, Dan Atkinson wrote:

The first £8billion of gilts – Government bonds – bought under the Bank of England’s quantitative easing scheme will be due for repayment from the start of next year. That means the Treasury will give the Bank £8billion to redeem gilts that the Bank bought …. The Bank, a nationalised industry whose shares are owned by the Treasury, could then return the £8billion to George Osborne and his colleagues….

QE and Hoarding

Why Quantative Easing? Economist journalists, like Jeremy Warner, believe that it is the shortage of investment funds and the inability of capitalists to get credit. This appears not to be the case.

Borrowing and investing in the production of commodities is weak not because there is a shortage of investment funds but because capitalists do not see a profitable outcome to invest. Within the British economy, businesses are estimated to be holding £731.4 billion in cash hoards, the highest level on record. This hoard of money capital (£118 billion) is six times bigger than the total UK business investment for 2011 (WHAT TO DO WITH CORPORATE CASH, Deloitte Press release, 7 February 2012).

One example of current hoarding of money capital by businesses is Rolls Royce. This is what THE ECONOMIST recently wrote about Rolls Royce, one of British capitalism’s most successful companies:

Like much of corporate Britain, Rolls Royce has been piling up money for a rainy day. At the end of 2010 it had £2.9 billion in cash stashed away. Its net cash (i.e. excluding debt) rose to £1.5 billion last year, equivalent to around 15% of revenues (19 May 2011).

It is not because the cost of borrowing is too high, as is implicitly assumed by supporters of QE, but because the uncertain market conditions British capitalism is currently experiencing does not warrant investment and expansion.

Estimates of the money capital hoards vary, but the situation is similar in Europe and the US. In the Eurozone countries, the cash hoards are estimated to be almost €2 trillion – most of it held in short-term, overnight deposits (Cash-Hoarding Companies Seem Unable to Splash Out, FINANCIAL TIMES, 11th March 2012).

Using their surplus cash to provide jobs for the unemployed is not what the capitalists are in business to do. When the economic conditions improve and there are prospects of making a profit, companies will be only too willing to invest.

QE: A failed policy for a failed economic system

The US Federal Bank is now initiating phase 3 of its QE policy in an attempt to lower the unemployment rate to 7.5 per cent in two years’ time. The policy of quantitative easing was first tried in the 1930s to bring down unemployment by the US Federal Reserve and did not work then just as it is not working now. The depression in the US only really ended with the country entering the Second World War in 1942 and production was largely switched to producing armaments and the unemployed were drafted into the armed forces. And the same QE policy was used unsuccessfully in Japan in the 1990’s after every other economic policy had failed.

Wherever it has been tried QE has not succeeded to achieve its objectives. Even its supporters struggle to argue that QE has been even a partial success taking refuge in the assertion that “if QE had not been tried the situation would have been worse” forgetting the claim by its proponents that QE would end the current depression and all would be back to normal.

Take, as an example, the experience of Japan where QE has been used since the mid 1990’s in an attempt to pull the economy out of a deep and prolonged economic depression. Whereas the US and Britain are on phase 3 of QE, Japan is on phase Q7 with little or nothing to show for it. The Japanese economy has been in stagnation for about 20 years.

This is what the free-market economist Jeremy warner recently wrote about Japanese policy:

…neither QE, nor indeed massive, Keynesian-style, deficit spending, have managed to achieve the hoped for economic revival” (DAILY TELEGRAPH 21st September 2012)

Instead of growth Japan continues to experience poor economic performance and strong deflationary pressures which according to the Bank of England it is the one thing QE is supposed to be able to resolve.

There is no visible signs in the US and Britain of success for the policy of QE. The US has continued to experience poor growth and high levels of unemployment, rising to some 8.13% of the workforce in August 2012. The unemployed rate in the US has remained above 8 per cent for more than three years – the longest period of time since the depression of the 1930’s. In Britain the economy is still in negative growth and although unemployment has fallen most of the new jobs are part-time or “self-employed”; all vulnerable if the economy falters again.

The wild-eyed free-marketers have their solution. “Do nothing”. According to Milton Friedman:

If you go back to the 1930’s, which is a key point, here you had the Austrians sitting in London, [Friedrich] Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You’ve just got to let it cure itself. You can’t do anything about it. You will only make it worse


What economist today would tell politicians you cannot do anything about a trade depression; let unemployment go up, wages fall, allow firms go bankrupt, watch people losing their homes and see a rise in crime and social disorder? What economist would be brave enough to tell politicians: “let it cure itself”. So politicians are told instead they, the Treasury and the Bank of England have economic powers they do not have.

Capitalism is immune to the theories of economists and the policies of governments. Ben Bernanke, Chairman of the Federal Reserve, is supposed to be a “scholar” of the 1930’s depression believing the cause of the depression was a monetary failure rather than contradictions within the heart of commodity production and exchange for profit. However, there is no economic policy that can anticipate an economic crisis and no economic policy that can resolve the crisis and subsequent depression once it takes place.

The trade cycle passes through its own periods of boom, crisis, slump and up-turn even though class exploitation takes place no matter where capitalism is along the trade cycle. And the social cost of the economic depression falls on the working class in the form of high levels of unemployment, social upheaval, insecurity and social alienation. In the light of the failed reforms of politicians Socialists advise the working class not to “let capitalism cure itself” but to organise consciously and politically for the swift abolition of anarchy of commodity production and exchange for profit and its replacement with Socialism.

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