Home > Occupy the Marxist Academy, Off Blog, political-economy > Reply to HettGutt_MRMarxist on my previous post, “Clueless”

Reply to HettGutt_MRMarxist on my previous post, “Clueless”

The redittor, HettGutt_MRMarxist, took exception with my argument in my last post on Bernanke’s monetarist theory of deflation. Since the writer raised several important points critiquing my argument, I thought it important  to reproduce comments here in their full form, along with my responses.

HettGutt_MRMarxist: You’re attempting to measure the economy in terms of gold, in order to claim GDP in “real” terms is slipping, correct? So you report GDP / P(gold) and claim inflation is terrible because of “fixed incomes” and monetary policy sucks and gold is awesome and go on a tangent about Ponzi something-or-other.

JEHU: To your first point: if you cannot restate my argument properly, it should occur to you that you do not understand it. A decent rebuttal begins with a proper summary of your opponents thesis.

HettGutt_MRMarxist: But you never stop to consider if you’re wrong about money printing causing inflation. Take 1 over your measure to get P(gold) / GDP. This is a measure of the nominal price of gold in units of “the entire physical output of the US economy”. In other words, if the nominal price of gold increases faster than inflation, gold is overvalued, and this price must come down once the bubble pops and subjective values (prices) return to the actual value. (This result is true regardless of whether you believe LTV or STV. In LTV, the actual value is SNLT. In STV, the actual value is the use value, or the WTP without advertising, fad effects, and mob mentality.) This circumstance of rising nominal price is caused by an increase in demand, i.e., a bubble.

JEHU: To your second point: My argument is not that money printing is causing inflation. Inflation is a change in quantity of currency in circulation in relation to the underlying value this currency represents. If, we begin with the assumption that 100 dollars represents the value contained in one ounce of gold, but later, due to money printing this 100 dollars now represents one half ounce of gold, the purchasing power of the dollar has depreciated by half. This is not an assertion on my part; it is an empirically established relation that has been identified in political-economy for several centuries. You cannot get by this empirical evidence by simply inverting the relation between gold and GDP, and stating gold is in a bubble. Since gold is money, in labor theory gold has no price — nominal or otherwise. It is the material form price takes in a money economy. So you are quite wrong to state that gold “price” increases in labor theory of value suggests gold is in a bubble. While the prices of commodities may indeed fluctuate, and this fluctuation implies at one point gold is being exchanged above its value and at another point below its value, labor theory assumes these deviations cancel each other out over time. It  is, of course, possible for gold to exchange above or below its value for rather long periods of time, but this does not change the basic assumption of labor theory regarding a commodity money.

HettGutt_MRMarxist: So is there a bubble? Watch Glenn Beck, Peter Schiff, survivalist libertarians, & co. echoing the praises of gold on Fox Business, CNBC, in the WSJ, and online. Notice the explosion of commercial gold-buyers. Also note that gold’s subjective value – as store of value or as a speculation – increases as its prospects (future expected returns) increase. So, an increasing price of gold begets an even higher price of gold.

JEHU: To your third point: the fact that gold bugs have naively grasped that gold “prices” appears to be rising at this point, and that this realization has caused them to jump on the bandwagon for whatever get rich quick schemes they have, cannot be taken as a refutation of the fact that gold “prices” are rising. Nor does it invalidate my argument for why these “prices” appear to be rising. This is true even when this argument is dressed up as a “theory” of gold as a “giffen good”, where demand increases as the price of the good increases. MY argument — not Beck’s, Schiff’s or the WSJ’s — as you probably know is that gold “price” appears to be rising only because, in a depression, the quantity of commodities in circulation, and thus the quantity of value represented by the currency in circulation, is falling. This argument is also founded not on Austrian theory, but labor theory.

HettGutt_MRMarxist: Of course the true value (embodied labor or utility) of gold is fixed, but price is not equal to true value in general, for any price theory, including Marx’s! (For Marx, only total value = total price, this does not hold for individual commodities.) A lower GDP measured in gold does not mean there is less total value created, any more than does a lower GDP measured in snow shovels or hula hoops or cotton gins.

JEHU: To your fourth point: First we need to separate out gold from snow shovels, hula hoops or cotton gins. These latter are ordinary commodities and do not behave like gold. Your equating gold to snow shovels is only an attempt to confuse the issue by mixing things that cannot be mixed in Marx’s theory — the relative and equivalent forms of value. Marx put great emphasis on differentiating between these two forms, and for you to ignore this suggests you are not being honest, or do not understand his theory. Second, in Marx’s theory the value of gold is not fixed. In fact, Marx assumes gold can serve as money only because its value is not fixed. This means the change in the price of commodity can result from a change in the value contained in gold, the value contained in the commodity, or an unequal change in value contained in both. It follows from this that a lower GDP measured in gold can result either from a change in the value contained in gold or a change in the total value of GDP, or both but unequally. In any case, a change in GDP measured in gold is only one indicator of the quantity of value expressed in nominal GDP.

HettGutt_MRMarxist: Now, we get to the issue of why deflation is bad. Start from the basic accounting principle that Steve Keen emphasizes: annual income + annual change in public & private debt = annual spending + annual net asset turnover. (This is true regardless of the rate of inflation; it is a nominal accounting identity.) The basic idea is that the money supply needs to keep up with GDP. In the financial crisis, we saw a massive contraction in the money supply because asset values crashed, everyone rushed to pay off debts, and liquidity (lending) froze. (For a brief time, M0 was GREATER than M1. If you know your money supply measures, this should shock you.) In response, the gov’t needs to make up for the contraction in order to prevent prices from increasing, i.e., deflation.

JEHU: To your fifth point: Economics is not accounting. So your accounting identities have no place in a discussion of the economic processes expressed in the capitalist mode of production. It is all well and true at present that an increase in output must result in an increase in the currency of money. However what has to be explained is why, since the Great Depression, this relationship holds, since it is not the relationship that existed prior to the Great Depression. You think you can sidestep this problem by employing only accounting identities, but overlook the fact that these accounting identities mask an underlying relation between output (material wealth) and money (the value-form). The question raised by your argument is that if indeed this accounting identity must hold, why, as a practical matter, does it not hold? If the supply of money must constantly increase, yet we find the supply of money contracts. Well, let me ask you: For whom must the supply of money constantly increase? Capital or labor? All you have really told us is that, at present, profits require the constant escalation of prices. What appears to you as a mere accounting identity is revealed to be a covert war on the working classes of all countries waged by capital.

HettGutt_MRMarxist: Deflation causes prices to fall, but interest rates rise due to the liquidity problem I discussed earlier, which hurts those who I’ll call “serial borrowers,” i.e., consumers (workers) who took out loans to try to make up for their wages being too low. (This is the familiar underconsumption/overproduction problem.)

JEHU: To your sixth point:Deflation does not cause prices to fall. Deflation is itself defined as a generalized fall in prices. So to understand deflation it is necessary to put aside tautologies and ask what causes prices to fall generally. In labor theory, all other things being equal, a fall in price can only be explained by a fall in the socially necessary labor time required for the production of a commodity. Now, the question is why this reduction in socially necessary labor time will be expressed in the rise in nominal interest rates? Again you will only offer an accounting identity as an answer: the real interest rate = the nominal interest rate minus inflation. But let’s restate this another way: the nominal interest rate equals the real interest rate plus inflation. Since deflation means the rate of inflation is negative, this argues not for an increase in nominal rates, but a fall in nominal interest rates. What is this telling us? As the values of the commodities in circulation falls, the quantity of money required for circulation falls with this. Less money is required, and, therefore, less demand for credit. Why this should injure the working class, since it implies this class is less dependent on debt, is quite beyond me — since deflation means the wages of the working class are appreciating rather than depreciating, they will find they have less need to mortgage their future labor to live in the present. Perhaps, you can explain why this is a bad thing.

HettGutt_MRMarxist: I’ll admit that QE is the second-worst way of dealing with the problem (after giving printed money directly to the wealthy), but increasing the money supply will certainly make us better off. Overall, though, we need to deal with the structural issue, that is, banks’ ability to lend non-existant money. FRB would actually work fine if that were how banks actually worked. It’s not. Banks lend non-existant “digital dollars” and chase deposits later to satisfy their reserve requirement. But those deposits are easier to get because their lending has a multiplier effect on the economy as a whole. (Actually, even if the multiplier is 1, the bank is still fine if the person paid by the borrower deposits the payment into the bank where the loan was taken out!)

JEHU: To your seventh and final point: QE is nothing more than the Fed paying for value-less fictitious claims to future profits above what they would command in the market — so it is essentially giving printed money to the wealthy. I am not sure what you mean by “second-worst way of dealing with the problem”. If you do not accept my word on this, you can refer to any of Bernanke’s explanation of this so-called monetary tool. For instance, in his speech at Jackson Hole this past August, Bernanke explained the process this way:

“Imperfect substitutability of assets implies that changes in the supplies of various assets available to private investors may affect the prices and yields of those assets. Thus, Federal Reserve purchases of mortgage-backed securities (MBS), for example, should raise the prices and lower the yields of those securities; moreover, as investors rebalance their portfolios by replacing the MBS sold to the Federal Reserve with other assets, the prices of the assets they buy should rise and their yields decline as well.”

The problem here is not the banks overall ability to lend — the money lent is created out of nothing at a computer terminal — but the capacity of non-state borrowers to absorb any more debt. Since the money is created out of nothing as an asset on the books of the bank, there is no need for the banks to chase deposits to satisfy their reserve requirement. So it is no surprise that the Federal Reserve wants to eliminate all reserve requirements to free up the debt accumulation cycle. See, for instance: “Forget Dodd-Frank; Revisited Chicago Plan would Eliminate Bank Money Creation, the FOMC and FDIC”

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