Inflation and instability: contradictions mount for capitalism

Governments across the world have spent the last year propping up the capitalist system with unprecedented state support. But these desperate measures have built dynamite into the foundations of the world economy – which is now set to explode.

100 years ago, in June 1921, Leon Trotsky gave a speech to the third congress of the Communist International, in which he analysed the global economic situation, and outlined the perspectives for capitalism.

More ultra-left members of the Comintern had predicted that the war would lead to the ‘final crisis of capitalism’, as all the contradictions within the capitalist system exploded to the surface.

Instead, however, the ruling class internationally managed to stabilise the situation, following the defeat of the revolutionary wave that swept across Europe in the wake of the war. This, in turn, provided the political basis for a certain economic revival.

Trotsky sought to explain this phenomenon, and to answer the giddy excitement of the bourgeoisie towards this ‘boom’.

Trotsky: "it is necessary to determine the general condition of the capitalist organism by the specific way in which it breathes, and the rate at which its pulse beats” / Image: public domain

“By force of its internal contradictions,” Trotsky outlined, “capitalism thus develops not along a straight line but in a zigzag manner, through ups and downs.”

“This is what provides the ground for the following claim of the apologists of capitalism, namely: Since we observe after the war a succession of boom and crisis it follows that all things are working together for the best in this best of all capitalist worlds.”

“It is otherwise in reality,” Trotsky continued. “The fact that capitalism continues to oscillate cyclically after the war merely signifies that capitalism is not yet dead, that we are not dealing with a corpse.”

“So long as capitalism is not overthrown by the proletarian revolution, it will continue to live in cycles, swinging up and down. Crises and booms were inherent in capitalism at its very birth; they will accompany it to its grave.

“But to determine capitalism’s age and its general condition – to establish whether it is still developing or whether it has matured or whether it is in decline – one must diagnose the character of the cycles. In much the same manner the state of the human organism can be diagnosed by whether the breathing is regular or spasmodic, deep or superficial, and so on…

“This means nothing else but that it is necessary to determine the general condition of the capitalist organism by the specific way in which it breathes, and the rate at which its pulse beats.”

Stumbling on

Similarly to a century ago, the ruling class today are breathing a sigh of relief that their system is still alive.

Moreover, capitalism seems to be full of dynamism and vitality, with a strong rebound predicted in the year ahead – for the advanced capitalist countries, at least.

Having seen a fall in global GDP of around 3.3 percent in 2020, the IMF is now forecasting growth of 6 percent this year, and 4.4 percent in 2022; in other words, a relatively rapid return to pre-pandemic levels.

At first glance, this seems like quite a turnaround. When the pandemic first hit, the economy was sent into a tailspin, and a return to the 1930s was on the cards. In the second quarter of 2020, GDP in the USA, Europe, and UK collapsed by between 10-20 percent – the worst three-month fall since the Great Depression.

And even in October last year, the IMF was still predicting a slow recovery from the coronavirus crisis, accompanied by ‘permanent scarring’.

In the end, as a result of the desperate measures undertaken by the ruling class, the capitalists’ worst nightmares did not transpire, and the system was able to stumble on.

As society entered into lockdown, governments kept capitalism on life support through an unprecedented level of intervention in the economy. This is the main reason why a potential depression – and accompanying social explosion – was averted.

According to the latest IMF estimates, $16 trillion has been spent in fiscal support, through government handouts and stimulus. And a further $10 trillion has been pumped into the economy by central banks, in the form of quantitative easing and monetary financing: using newly-printed money to fund public borrowing.

Avoiding complete collapse has come at a cost, however. In the words of Trotsky, “we are not dealing with a corpse”. Nevertheless, it is clear that the “capitalist organism”, as he put it, is breathing more heavily than in the past; its heart and lungs are working harder to pump oxygen to vital organs.

Most notably, having staved off a complete collapse, the capitalists are now concerned about the economy veering in the other direction, with fears of overheating. “A spectre is haunting investors,” remarks Martin Wolf in the Financial Times, “the return of inflation.”

Perfect storm

While the capitalists are busy celebrating the bounceback and ‘return to normality’, a perfect storm is brewing in the world economy.

Firstly, there are, as described by former US Treasury secretary Larry Summers, the “extraordinarily loose financial conditions” and expansionary fiscal policies seen over the past year, as outlined above.

While the capitalists are busy celebrating the bounceback and ‘return to normality’, a perfect storm is brewing in the world economy / Image: Imperial College London

Added to this mix is the large pent-up demand that has built up, with consumers unable to spend – and thus forced to save – due to COVID restrictions. According to some estimates, these accumulated personal savings could amount to as much as 10 percent of GDP in countries like the UK (albeit distributed very unevenly across the population).

Now that lockdowns are thawing and the economy is emerging from its state of suspended animation, these two sources of additional demand – from governments and households – are being released at the same time.

But operating under the anarchy of the market, the so-called ‘invisible hand’, production cannot catch up quickly enough, creating bottlenecks and shortages. Similarly, as globalisation goes into retreat, international supply chains are having to readjust. Indeed, with investment at historically low levels, productive capacity will not keep up.

The result is that a burst of demand is colliding head on with restrictions in supply. This is a recipe for inflation – that is, for a generalised increase in prices.

Warning signs

Indeed, such inflation is already appearing in the figures. In April, for example, an annual inflation rate of 4.2 percent was recorded in the US – the highest level observed since the 2008 crash, and a jump from the 2.6 percent seen the month before.

Across the board, businesses are reporting rising prices: from steel, to shipping, to semiconductors.

And added to this are the various asset bubbles that have already been inflated by the deluge of cheap money: from stocks and shares, to property, to cryptocurrencies and other newfangled vehicles for speculation.

Some commentators and policy-makers – including the US Federal Reserve – are fairly nonchalant about these latest inflation figures. Having seen prices plummet this time last year (including negative oil prices for the first time in history), they say, it is only natural that prices will now rise as economic activity resumes.

The view of the Fed, therefore, is to plough on, based on the assumption that price increases will be transitory, as accumulated savings are spent and producers recalibrate.

Adding weight to their argument, Biden supporters highlight the continued shortfall in US employment compared to pre-COVID levels – a sign that there is slack in the system, and therefore no risk of long-term inflation.

Furthermore, they point to the fact that inflation has remained subdued for decades, even in the face of near-zero interest rates and a steady stream of quantitative easing (QE) since the 2008 crash.

Indeed, Summers himself has previously described the situation as one of “secular stagnation”, with “extraordinarily loose financial conditions” being required just to eke out measly rates of growth.

The reason for this post-2008 scenario is that, whilst central banks were printing money, private banks were creating less, with demand for credit (in the form of loans, mortgages, etc.) from businesses and households slumping.

In this respect, the optimists add, it is better to have a bit of temporary inflation now than the alternative: a downward spiral of deflation and depression.

Others are a bit more concerned, however – not so much about inflation as it stands now, but as it could be in the not-so-distant future.

After all, many countries are still in lockdown; much of the pent-up demand is still in store; and trillions more is still to be released into the world economy, in the form of the Biden administration’s stimulus and spending packages, worth a total of around 18 percent of US GDP.

And this time around, the overall money supply has massively shot up – expanding far more than in the period of QE.

“Dangerous complacency”

A growing chorus is therefore warning President Biden to scale back his Keynesian proposals, fearing the inflationary effects that these could provoke. Such effects, in turn, would hit both capitalist creditors, eroding the value of debts, and workers, eating into real wages.

This is the view of Larry Summers, the aforementioned Harvard economist, who recently rebuked the Fed, accusing the US central bank of “dangerous complacency” for encouraging “inflationary pressures of a kind we have not seen in a generation”.

Summers’ real worry, however, is not so much inflation itself. Rather, like many amongst the ruling class, he is worried that the cure might be worse than the disease.

A growing chorus is warning President Biden to scale back his Keynesian proposals to avoid inflation in the long term, yet this would provoke a collapse in the short term / Image: Gage Skidmore

Faced with runaway inflation, the prominent Democratic economist warned, the Fed would be forced to carry out a “knee-jerk” increase in interest rates, in order to ‘cool’ the economy by restricting the money supply.

But with capitalism addicted to cheap credit, such tightening could prove cataclysmic. Indebted households and governments would be plunged into bankruptcy. Swathes of zombie companies would be buried for good. And money would rush out of stock markets and into other safe-havens, causing bubbles to burst left, right, and centre.

Born in the USA, this crisis would soon spread internationally. After all, as the saying goes: when America sneezes, the rest of the world catches a cold.

Such a chaotic scenario could quickly kill off any nascent recovery, tipping the US – and global – economy back into recession, and pushing millions into unemployment.

That is why the ruling class might think twice about going down this road. Instead, like so many times in the past, Keynesian policies will prepare the way for inflation, which will just pile on even more contradictions.

In other words, after a short-lived boom, one way or another, the crisis of capitalism would return, with a vengeance.

All roads lead to ruin

This Goldilocks dilemma – with an economy that is running first too hot, then too cold – is a reflection of the general volatility and instability of the capitalist system; another symptom of “capitalism’s age and general condition”, to quote Trotsky.

The bourgeoisie’s representatives are damned if they do, and damned if they don’t. Hence the split amongst the US ruling class over the question of stimulus and inflation.

The point is that both sides are right, and yet both are wrong. If they don’t carry on injecting money into the system, then the recovery could stall – and even go into reverse. But if they continue down this inflationary path, it will all end in tears. Under capitalism, all roads lead to ruin.

The ruling class had no choice but to throw money at the situation when the corona crash imploded the global economy. The alternative would have been mass unemployment, with an ensuing ‘pitchfork rebellion’ on the streets.

Similarly, with each new wave of the virus, capitalist politicians have had to continue furloughing workers and bailing out businesses – measures that they originally assured Hayekian headbangers would be temporary.

For all their supposed faith in the ‘free market’, the ruling class can see the scale of the destruction and attacks that are required to bring about economic ‘equilibrium’. And they are not so sure that they can cope with the social dislocation that would accompany this.

“Yes, there is some risk we have economic instability down the road,” remarked Kenneth Rogoff, another influential Harvard economist, commenting on Biden’s new ‘New Deal’, “but we have political instability now.”

But there is no such thing as a free lunch. On the one hand, having turned on the taps, governments are now realising that it is not so easy to turn them off. After all, “taking away the punch bowl” in the middle of the party leaves you with a lot of angry drunks.

On the other hand, all the trillions used to prop up the system appear on the other side of the balance sheet as a ginormous mountain of debt.

The world’s total debt pile – public, corporate, and household – now stands at approximately $281 trillion (or more than 355 percent of global GDP), and has increased by an estimated $24 trillion as a result of the pandemic. According to the IMF, meanwhile, the total government debt worldwide is equivalent to an eye-watering 100 percent of GDP.

One way or another, this bill will have to be paid: either via inflation, with a subsequent erosion of real wages, if the loose fiscal and monetary policies continue; or via austerity, through cuts to services and increased taxes.

Governments in the advanced capitalist countries, which have a greater leeway when it comes to borrowing, have largely been able to delay the day of reckoning, so far. But sooner or later, this judgement day will arrive – as the explosive events in countries such as Colombia and elsewhere portend.

Curve of capitalist development

Exactly how things pan out is impossible to predict. We do not have a crystal ball. The course of events depends on a whole host of interacting factors – not just economic, but also in terms of political decisions and the evolution of the pandemic.

There will likely be a temporary rebound in the advanced capitalist countries, as lockdowns subside (although even this could be cut across by a new wave of the virus). And such a recovery would likely come with a bout of inflation, for the reasons outlined above.

Ted Grant explained the confluence of factors that led to the post WW2 upswing. None of these exist today / Image: In Defence of Marxism

Beyond that, we cannot say for certain. There could be a spiral of inflation, as feared by Larry Summers and others. There could be a quick return to recession, if central banks intervene and tighten up too quickly.

And in the long-term, there could be a ‘Japanification’ of the global economy, with growth flatlining and prices remaining deflated — despite ultra-loose monetary policies — due to continued excess capacity on a world scale.

Others, such as American economist Nouriel Roubini (aka. Dr Doom), meanwhile, have warned of stagflation: rising prices alongside an economic slump, as seen in the 1970s.

The important task, however, is not to try and predict the precise movements of the capitalist system, but – as Trotsky highlighted – “to determine capitalism’s age and its general condition; to establish whether it is still developing or whether it has matured or whether it is in decline.”

For this reason, in the same speech, and in a later letter, Trotsky presented the concept of the “curve of capitalist development”.

As Trotsky states in the earlier quotation, the boom-and-slump cycle is intrinsic to capitalism. But these cycles sit atop a broader curve, indicating the nature of the epoch, with the capitalist system either in a general ascent or decline.

In this respect, Trotksy continued to elaborate: “At issue here is not whether an improvement in the conjuncture is possible, but whether the fluctuations of the conjuncture are proceeding along an ascending or descending curve. This is the most important aspect of the whole question.”

This, again, is the important question that we face in understanding the present period, and the perspectives for capitalism.

Put simply: are we in a period like that following the Second World War, when capitalism experienced a prolonged upswing, which provided the material basis for reforms and reformism?

Or is the present situation more akin to that which Trotsky was examining in the wake of WWI – an “era of capitalist storm and stress”, as he described it, in which crisis and class struggle was on the order of the day?

Epoch of crisis

And on this question, we can be more categorical, and state clearly: there will be no return of the postwar boom. The conditions for such a development do not exist.

Indeed, stepping back and looking at the bigger picture over the last four decades, we can see that all the indicators of capitalism’s health are on a clear downward trajectory: from productivity growth; to capacity utilisation; to business investment; to interest rates.

As Ted Grant explained in Will there be a slump?, the unprecedented capitalist upswing seen after WWII was based on a confluence of factors. These primarily included: the destruction of the productive forces seen during the war, which paved the way for new investment; and the massive expansion of world trade, based upon the hegemonic position of US imperialism and the opening up of new markets.

Similarly, the general period of growth seen in the 1980s and 90s was made possible by the continued expansion of trade (‘globalisation’), including China and Russia joining the world market through the reintroduction of capitalism.

But none of these conditions exist today. Far from world trade expanding, we see protectionism on the march. And avenues for profitable investment – the motor force of real economic growth under capitalism – are in short supply.

At the present time, there are complaints about shortages. The general character of the epoch, however, is not one of scarcity, but of overproduction.

Prior to the pandemic, the symptoms of this could be seen everywhere: saturated markets, glutted with commodities; excess capacity in industries across the board – from soya, to steel, to smartphones; depressed prices; rampant speculation; and hoards of idle cash in the hands of big business.

And rather than resolving this contradiction, all the measures taken by the ruling class in response to the coronavirus crisis have exacerbated the overproduction and instability within the system.

Easy money has further fuelled speculation, and turned even more businesses into zombie firms. Approximately one-in-five publicly-traded US companies is now a zombie (unprofitable, and only able to stay afloat thanks to cheap credit), accounting for over two million jobs and $2 trillion in corporate debt.

And added to this are the millions of zombie workers in Europe – effectively unemployed, but kept in their jobs thanks to government furlough schemes.

Finally, state support acts as a form of protectionism, becoming both cause and effect of greater overproduction on global scale. Every government is using state intervention to protect its own markets and businesses, essentially trying to export the crisis elsewhere. But the overall impact of such ‘beggar-thy-neighbour’ policies is to shrink the world market, heightening excess capacity in all sectors.

Need for revolution

All of this serves to show the limits of Keynesianism; of deficit financing, state intervention, and attempts to manage a profit-driven economy, in whatever form.

Capitalism cannot be managed. It is an inherently anarchic and crisis-ridden system, based not on a rational plan of production, but on private ownership, competition, and the blind pursuit of profit.

As Trotsky correctly asserted: “Crises and booms were inherent in capitalism at its very birth; and they will accompany it to its grave.”

Nevertheless, as Trotsky explained, there is no ‘final crisis of capitalism’. The ruling class can – and will – always get out of a crisis. The real question is: at what cost?

In this respect, Trotsky emphasised in the same speech:

“Each measure to which capitalism is constrained in order to make a step forward in restoring equilibrium, each and all of this immediately acquires a decisive significance for the social equilibrium, tends more and more to undermine it, and ever more powerfully impels the working class to struggle…

“In short, speaking theoretically and abstractly, the restoration of capitalist equilibrium is possible. But it does not take place in a social and political vacuum – it can take place only through the classes. Every step, no matter how tiny, toward the restoration of equilibrium in economic life is a blow to the unstable social equilibrium upon which the Messrs. Capitalists still continue to maintain themselves. And this is the most important thing.”

Only socialist revolution can provide a way forward and put an end to capitalism’s crises / Image: joanbrown61

In other words: in order to maintain political stability over the past year, the ruling class has undertaken the most desperate of measures. But this has sown the seeds for enormous economic instability and crises. And putting out these fires will mean further attacks on the working class, leading to a sharpening of the class struggle in all countries.

Moreover, even a temporary recovery can provoke strikes and struggles, as workers look to regain all that they have lost in the past year – and over previous decades. The sight of blood-sucking billionaires profiting from the pandemic, meanwhile, will further fuel the anger and indignation amongst ordinary people.

Finally, we should remember that all of these events are not taking place afresh, but come on top of over a decade of crisis and austerity, which has already led to a deep political polarisation and mass radicalisation across the world. And the wheel of history cannot be rolled back.

The new generation that is entering into struggle knows of nothing but crisis and oppression. In one country after another, however, these workers and youth are fighting back: searching for a way out of this impasse; looking for an alternative to this rotten status quo.

Only socialist revolution can provide a way forward and put an end to capitalism’s crises, by finishing off this senile system once and for all.