Why are prices falling? Why does this scare the bourgeoisie?
Posted by John Steele on January 11, 2009
by Eddy Laing
“Credit Suisse chief economist Joseph Tan told The Straits Times that the dramatic fall in prices was due to ‘massive unwinding’ by speculators which saw the collapse of prices from the US $150 range down to US $50. These speculators – whose bets on future prices drove prices to record highs – are fleeing to safer havens such as government bonds.” (1)
As the economic crisis continues to deepen, the ruling classes voice increasing concerns about ‘monetary deflation.’ Ordinary people, thinking of themselves as ‘consumers’, may not share that worry, especially after decades of rising prices, but we are now feeling it in obligations established at per-deflationary levels, such as in long-term leases and mortgages. For capitalists, however, the fear of deflation is based on the systematic debt and speculation that drives the capitalist economy.
In the lexicon of bourgeois economic theory, ‘deflation’ is inflation in reverse; an overall decline in prices of goods and services. What is unspoken in this formulation is the relationship that the exchange-value of money has to surplus-value.
The true cost of a thing for sale (a ‘commodity’ to Marxian economists) is determined by the amount of labor that goes into producing it, through all of the stages of its production. In bourgeois economics, some of this labor is considered as ‘direct costs’ and some is considered ‘indirect costs’ but all of it is represented in the final cost of the final commodity. This cost is computed in relationship to currencies — dollars, pounds, yen, rubles, yuan — and the value of currencies are in turn determined by the exchange of equal values between economies. But because exchange usually takes place through money (rather than in-kind exchanges of other commodities), money itself becomes a commodity and is exchanged for other currencies.
A distinct feature of capitalist economies is that commodities are also objects of speculative trading. This is done as a hedge against marketplace risks, such as finding buyers or sellers at the time the commodity is required or to hedge against fluctuations in the cost of money itself. In fact, there is apparently no limit to the number of times a commodity can change hands on paper in the course of this speculation. All along the way, each transaction promises some amount of the surplus-value as profit embedded in the commodity. Consequently, many capitalists engage in speculative trading as a profit-taking activity in itself and never actually take possession of the things they are trading for future delivery. Like a child’s game of ‘hot potato’ or ‘musical chairs’, each buyer expects to sell high before that final delivery date (when the music stops). In addition, within this ‘great game’ the participants often operate with borrowed money, which they presume to repay out of their profit-taking.
This convoluted method of production and exchange represents a large part of what Marx termed the anarchy of capitalism. Instead of focusing social production on the actual needs of the society, production and exchange are focused on the private appropriation of surplus-value (in the form of profits) by those who own and/or control all of the parts of the process of capital (i.e. capitalists).
Within this anarchic system, speculation introduces risk as capitalists bid prices up and down. When prices are bid above the real value of a commodity, the new bid price has an inflationary effect on that commodity, and possibly other commodities, while having a devaluing effect on the currency used to trade the commodity. If future buyers cannot be found, obviously, the commodity remains unsold and no profit-taking occurs. Beyond that immediate loss, however, the existence of debt obligations assures that the first loss will be accompanied by cascading losses elsewhere (e.g. by lenders and other ‘asset’ owners).
The capitalists, through their government, propose to correct this part of the economic crisis by encouraging monetary inflation, which will further reduce the exchange-value represented in currency. To that end, the US Treasury is issuing hundreds of billions of dollars worth of bonds – as ever more debt collateralized against the ‘full faith and credit’ of the US Treasury and its ability to tax the people – and by ‘quantitative easing’ through the printing of more money. Both of these actions actually introduce more risk and comprise a Ponzi scheme that far outstrips anything Bernard Madoff was able to put together.
In the US residential housing market, prices were successively bid up by speculation over the past thirty years. In part, this speculation was encouraged by inflation/devaluation of the dollar (about 330% over the period 1978-2008). In many or most instances, the rising price of a house largely reflected the declining value of a dollar. Thus, real estate appeared to ‘appreciate in value’. But importantly, the capacity to pay those inflated prices was supported by tremendously expanding levels of debt. These debts were undertaken in part with the expectation that the house could be sold at a price higher than what it was bought at.
Mortgages are just a fraction of the entire mountain of debt incurred by speculative exchange. Over the past thirty years, the US economy has ever increasingly depended upon borrowed surplus-value to support itself. This fact has been widely noted. What has not been noted is the fact that this surplus has been and was expected to continue to come from the international proletariat, who as part of this same process, have been mercilessly impoverished and physically crushed wherever workers could be ‘employed’ by US and other capitals.
The debt incurred by US capital has grown exponentially over the past 30 years, from about $4 trillion in 1978 to $50 trillion today (against a gross domestic product that was $13.3 trillion last year and is headed downwards as factories and stores are closed or go bankrupt).
And this is precisely why capital is so alarmed at the prospect of deflation. Just as many residential homeowners are finding that their mortgage debt far exceeds the market value of their house, money capitalists are finding that the costs of their various speculative debt obligations are rising because the market value of the ‘assets’ on which the debts were collateralized are dropping at increasing rates.
Part of this phenomenon is apparent in the current price of petroleum. The rapid decline in gasoline prices from August through December largely reflects the decline in ‘futures’ trading (aka ‘derivatives’) and contract obligations that can no longer be fulfilled because the money-capital — especially in the form of further debt — is not available to feed the transaction. (Secondarily, add to this equation a decline in consumption because two million more people have lost their jobs and stopped commuting and because commercial clients have gone out of business, etc.)
This inability to pay threatens money-capital directly. The US Federal Reserve Bank estimates that the current collapse has wiped out $7.1 trillion in US asset worth so far — more than one half of 2008 GDP with much more to come — compared to the $4.2 trillion ‘dot com’ speculative wipe-out in 2000. (2) Globally, asset losses so far total about $30 trillion.
As one investment manager recently told Bloomberg News, “it’s a real chink in the armor of capitalism.” (3) No doubt it is, and one we need to take advantage of with revolutionary work.
notes:
1. ‘Oil drops under US $34; Further falls expected as crisis continues.’ The Straits Times (Singapore). 20 December 2008
2. ‘A deflation maelstrom in the making.’ Business Week. 29 December 2008.
3. ‘Journal of a Plague Year: Faith in Markets Cracks Under Losses.’ Bloomberg.com. 31 December 2008.
Gary Leupp said
Might this from the French once-communist now-bourgeois newspaper l’Humanite deserve some discussion?
Karl Marx and the Lessons of “Capital” Are Back
http://www.humaniteinenglish.com/spip.php?article1121