The shift of profit-striving from the real- to the financial-economy lowered economic growth Unemployment and atypical jobs soared. The welfare state was weakened. At the same time, financial wealth grew exorbitantly (the DAX increased 14-fold since 1988). The development of financial derivatives made possible profiting from short-term changes in stocks, currencies and bonds.
Inflation in the Age of Finance Capital
by Stephan Schulmeister
[This article posted in June 2022 is translated abridged from the German on the Internet, WSI Mitteilungen.]
The current inflation is the result of the dominant form of capitalism. While the striving for profit concentrated on creating goods in the 1970s (“real capitalism”), financial-, raw material, and real estate assets have been the most important sources of profit since the 1980s (“finance capitalism”) – from asset inflation to flow inflation. Price increases for indispensable goods
make profits soar – whether one looks at the “fossil speculators” (OPEC plus non-OPEC), raw material trading houses in Switzerland or retail chains. The breeding ground for this is the uncertainty in a multi-dimensional crisis.
From Real- to Finance-Capitalism
Experiences from the world economic crisis led to new macro-economic conditions after 1945. The financial markets were regulated and the commodity markets were gradualized and integrated. Therefore, the profit-striving could only develop in the real-economy. The welfare state was built and investments and consumption boomed. Under these “real-capitalist”
incentive conditions, full employment was reached and inflation began to increase, especially in southern European countries. Inflation remained moderate in Germany (1969: +2%). Businesses did not entirely shift the piece-labor costs to prices.. The profit rates were enormous…
The framing conditions changed in the 1970s. The transition from real-economy to financial market capitalism occurred step by step. This process began with the abandonment of fixed exchange rates by the US (1971) accompanied by two massive inflation spurts. By 1973, the dollar lost 25% of its value. The oil exporters reacted with the first “oil price shock” and the world inflation rose dramatically. This sequence was repeated in 1976 and led to the second “oil price shock” in 1979. This time the inflation push was fought with a radical high-interest policy and wage reserve. The economy collapsed and unemployment skyrocketed.
Finance-capitalist incentive conditions were established. The instability of exchange-rates and raw material prices along with interest-rates permanently above the growth rate made real-economic activities unstable and increased the attraction of speculation on the financial markets. This certainly had consequences.
The shift of profit-striving from the real- to the financial-economy lowered economic growth Unemployment and atypical jobs soared. The welfare state was weakened. At the same time, financial wealth grew exorbitantly (the DAX increased 14-fold since 1988). The development of financial derivatives made possible profiting from short-term changes in stocks, currencies, bonds and raw materials – whether the prices rose or fell. One only had to bet on the
right direction. Businesses did not depend on prices increases as an instrument in the distribution battle. The profit rates rose, the tax burden of the higher earners sand and financial- and real-estate assets gained in value.
However this hope did not last. In 2007/2008, the asset inflation (“bull markets”) with stocks, real estate and raw materials capsized into an asset deflation (“bear markets”) – for the first time since 1929. The threefold asset devaluation caused financial crisis and economic breakdown.
Inflation in a multi-dimensional crisis
The Euro-crisis followed the financial crisis. While the economy in southern Europe collapsed recently, Germany gradually changed its political-economic course. The (extreme) wage reserve was abandoned, social benefits were raised, minimum wages introduced and investments in the “energy turn” were encouraged. With a delay, redistribution in favor of profits came to a halt in other countries.
An important step in combating global warming occurred with the Paris Agreement (2015). Slowly it became clear to the “fossil speculators:” their business was a phase-out model. When the cost of CO2 constantly increased through taxes or the emission trade, the industrial states could pocket profits from the higher prices of fossil energy. Raising prices would be hard for the “fossil-speculators” on account of the global oversupply. The reserves of crude oil and natural gas amount to 50-times the annual consumption and coal is even 150-times. “Fossil speculators” can only make more profit from their “toxic treasure” until the end of the fossil age – in this transformation phase.
No country has a greater interest in this than Putin’s Russia. Its technological backlog can only be reduced and its world power ambitions continued in this way. Negotiations with Saudi Arabia about production cuts broke down at the end of 2019. The Saudis “punished” Putin by increasing their demand and letting the oil price fall.
Together with the economic collapse from the Corona-pandemic, all “fossil speculators” were stricken by the disastrous development. In April 2010, the oil price fell to $18. This shock made one thing clear to them. Supply-fears had to be fomented by continuously higher prices of fossil energy whether through hard facts (Russia supplied less natural gas, Saudi Arabia throttled oil production etc), through fake news (oil companies reduce investments) or through production of insecurity (Nord Stream II, Iran-conflict etc).
This strategy was very successful. The prices for crude oil and natural gas rose fourfold by November 2021. Thus, the escalation of the Ukraine conflict is not only part of Putin’s neo-imperial ambitions but also his economic strategy. This agrees with the interests of other “fossil speculators” and energy companies. Saudi Arabia could cut the price of oil in half but decided against that. Reducing quantities and driving up prices is a better profit strategy.
The producers and intermediaries of other raw materials also understand this. Their prices rose before the Ukraine invasion, even if “only” around 50%. Energy prices skyrocketed again (natural gas prices “exploded”). The other raw materials were expensive, especially food.
“Homemade” components of inflation join these political-economic framing conditions. The uncertainty on account of the economic consequences of the Corona-pandemic, the turbulence on the stock markets and the Ukraine war led entrepreneurs to raise their prices sharply corresponding to rising costs for energy and raw materials to draw an extra profit. This was the case with indispensable goods like natural gas, fuels, electricity and foods. The more inflation
spread, the more a chain reaction occurred – as can be seen now. More and more businesses move and raise their prices whether because their input costs were higher or because they saw other businesses raise their prices. The expectations of further price increases trigger hamster purchases that strengthen the process of raising prices…
Measures against the global price upswing
(1) First of all, interventions like a transactions tax could counter speculation on the raw material derivative markets, particularly for crude oil and natural gas. Weakening the power of the “de facto cartel” of OPEC and non-OPEC could be just as important – through long-term bilateral agreements with smaller producer countries and/or through abandonment of sanctions against Iran and Venezuela (both countries have enormous oil- and gas reserves).
(2) Combating inflation on the EU plane is not less important. Here the short-term goal of containing inflation should be combined with the medium-term goal of avoiding a grave shortage of energy and the long-term goal of a climate-neutral economy.
These first two goals require a break with the past practice of establishing electricity- and natural gas-prices on the exchanges. Services for households and businesses must be available at affordable prices. These are drawn up in network economies where market logic is only restrictedly valid because the networks represent natural monopolies. Agreement of production and consumption is essential in electricity production (otherwise blackouts threaten) and cannot be guaranteed as stable or inexpensive by the stock market.
This is especially true in crises like our present crisis. Austria illustrates the consequences. Although nearly 80% of its electricity production comes from water-, wind- and solar-power plants, the energy suppliers expect a much higher exchange price. Therefore, the provision of the population occurs (again) through public electricity- and gas-businesses at average costs. The agreement of production and consumption happens through technical solutions (clearing houses on the natural and EU planes).
The third goal of the overall strategy, a constant reduction of CO2 emissions, requires the insight of all actors that fossil energy will have a moderate but steady higher price from year to year. If this is guaranteed, every household and every business can calculate what costs can be saved in the next 10, 20 or 30 years if the respective household or business switches to renewable energy. The most important sources of profit of such investments are the costs of fossil energy available in the future.
This expectation of a constantly higher price of fossil energy and of CO2 emissions cannot be anchored either through CO2-taxes or through emission trading because the prices of crude oil, coal, natural gas and also CO2-prices fluctuate much too strongly. So the diesel-price in Germany has fallen three times in the last 15 years around 30%… There would be planning
security over all investments in CO2 avoidance if the EU would agree on a long-term price path where crude oil, coal and natural gas increase 5% to 7% per year…
In the present situation, a concerted action is needed of all stakeholders in which everyone agrees on the following guidelines:
– To keep the distribution of gross incomes stable, the cost of living must be oriented in the BIP (gross domestic product)-deflator.
– Since businesses already raised their profit rates, they should accept wage increases corresponding to the gross domestic product, inflation and the higher work productivity.
– This is similarly true for renters. A limited moratorium on rent increases would be sensible to calm or stabilize the inflationary climate.
-Securing existence is central in the lower income third endangered by poverty. Their social benefits and wages should be valorized with the VPI (Consumer Price Index)…