Posts Tagged ‘TRADE DEFICIT’

Inflation, the negative rate of profit, and the Fascist State (Part six)

April 26, 2011 Leave a comment

I need to digress for a moment to set everything I have discussed so far regarding inflation in the context of the world market. As will become clear, it is difficult, if not impossible to discuss inflation without taking into account the relation between the two. Inflation, as I have argued, can be understood as the chronic secular rise of prices for commodities, yet, it can also be understood as the chronic fall in the general level of consumption in an economy over a period of time. These two expressions of inflation do not simply exist as poles of a definition of inflation, but first and foremost as poles of the actually existing relation of production within the world market — a chronic, secular rise in prices of commodities on the one hand, and a chronic fall in the general level of consumption — of wages — on the other.

Inflation and the faux political battle over Austerity

One way to begin this is to look at the current faux political struggle unfolding in Washington over deficit spending by the Fascist State, since this faux struggle touches on one of the most glaring expressions of the imbalances within the world market. So, let’s examine the argument of the advocates of Austerity from the standpoint of Marx’s labor theory of value:

According to these sober persons, the United States must pay its debts. Since it must pay its debts — for instance, the US owes China $3 trillion — it must contain spending to a level consistent with this goal. Of course, the statement that the United States owes China $3 trillion is a non-sequitur in relation to domestic spending and taxes, since the US doesn’t pay China with revenues raised through taxes. It creates the money out of nothing. If China is concerned about getting its money, a faceless bureaucrat at the Treasury simply goes to a computer terminal and enters a 3 followed by 12 zeroes into an account designated by China. Now the PRC has its $3 trillion and we need not talk about Austerity. They get what we promised them: $3 trillion, and nothing more.

As the economist advocates of Modern Monetary Theory argue, this process is no different than what occurs when you withdraw cash from your savings account at the bank or transfer cash from your savings account to your checking account. US treasuries are simply China’s own savings account.

Now, what does China do with the $3 trillion? They have absolutely no domestic use for it, since the yuan serves as the domestic currency, not dollars. The PRC could use the money to import wage commodities to raise the material standard. But if they had any intention of doing this, the $3 trillion would not have been loaned to the United States in the first place. The PRC could also use the money to import capital commodities to increase the rate of domestic economic growth. However, even if they used the money this way. it would only result in more exports and even greater trade surpluses denominated in dollars. We have to assume that China has absolutely no use for the dollars — that the dollars are excess capital, which, since the PRC has no use for it, ends up being lent to the United States. And, since the United States can create as many dollars as they want, they have no use for it either.

The $3 trillion is valueless. And, if it is valueless, this implies all the crap they sold us is valueless as well. China sold us all this crap knowing we were giving them valueless dollars in return. We must assume they exchanged these commodities for American ex nihilo dollars because it couldn’t be sold otherwise. Since the crap was valueless unless they sold it to us for equally valueless dollars, the terms of the trade were met. Crap for crap; superfluous commodities, which, therefore, are not commodities at all, since they have no value, exchanged for a quantity of ex nihilo money that also has no value.

But, by the same token, the savings from austerity sought by the Austerians to repay China must also be valueless, since it consists entirely of these same ex nihilo dollars. Which implies that current expenditures by the Fascist State are also valueless, since the money spent domestically is the same as that to be paid to China. The money isn’t valueless because we owe it to China, it was valueless already — just as China’s crap is valueless unless it is sold. Whether it is used to repay China or spent on National Health Care, the money is completely valueless. Which means, not only is all that crap in China valueless, national health care is valueless as well. You cannot buy something with nothing unless that something is also nothing, i.e., has the same value as your means of purchasing it.

On the other hand, health care is definitely something, but so are socks made in China and sold at WalMart. By saying a thing exchanged for nothing must be nothing as well clearly has nothing to do with whether it is useful or necessary. The socks are useful, and so is an annual checkup. But, when exchanged for valueless dollars, they must also be valueless. It is not a question of whether these valueless dollars will go to pay China or to pay for health care.

The real question is why all of these useful goods continue to circulate in the form of commodities despite the valuelessness of the money? If we removed the valueless money from the equation entirely and allowed the goods to move as society demanded, nothing will have changed. Which is to say, if the goods were free, from the standpoint of value, nothing has changed. The fact that money serves as an intermediary in exchange here has no impact on the value of the things. Rather money is announcing, “These things for which I am exchanged have no value themselves. They, like me, are valueless in an economic sense, and, therefore, are no longer actually commodities.”

The absurdity of ex nihilo money

The absurdity is apparent: Money in this case only expresses that, from the standpoint of the law of value, there is no need for money. But this monetary expression takes the form of a valueless money. The sheer stupidity that money expresses its own superfluousness is already given in ex nihilo money. At the same time, this absurdity can only arise because, as a practical matter, the superfluousness of money appears absurd itself. Or, what is the same thing, a society founded on exchange of commodities has nevertheless come to be dominated by directly social production. This directly social production, for which exchange of commodities is entirely absurd, must nonetheless appear in the form of exchange – fictitious exchange. To accomplish this fictitious exchange requires a money form that is itself fictitious — ex nihilo money.

Although the exchanges taking place are fictitious, and use a currency that is entirely fictitious, the need for these fictions are real. The premise of all these fictions is that completely social conditions of production are nevertheless split up among the members of society. On the one hand, this division presupposes exchange of commodities, yet, on the other hand, this commodity exchange is entirely superfluous to the production of these commodities. The conflict between the conditions governing exchange and those governing production must be resolved; and they are, by fictions. But this “resolution” of the conflict between the conditions of exchange and the conditions of production can only intensify the antagonism between the two, and develop it to its most extreme limit.

Every nation attempts to resolve the conflict between the conditions of production and the conditions of exchange by issuing its own ex nihilo money. However, the limit of any nation to issue ex nihilo money rests on its ability to export more than it imports. According to Paul Krugman (2010) a nation can issue ex nihilo money only if it can run an export surplus and accepts a depreciation of its money. Moreover, in a flexible exchange rate system the export surplus becomes possible because issuing the ex nihilo money itself creates a tendency toward this depreciation of its currency. Thus, in a flexible exchange rate system, creating money ex nihilo produces a tendency toward export surpluses by depreciating the purchasing power of the ex nihilo money. The creation of fictitious money depresses the ability of the community to consume what it produces; it reduces the ratio of domestic consumption to domestic production — increased export is realized through the relative impoverishment of the community.

Since, in Krugman’s 2010 model every nation seeks a trade surplus by impoverishing itself — i.e., by reducing the portion of domestic production that is consumed domestically — who is consuming all of this now excess crap? Krugman’s 2010 model implies either the existence of a designated importer nation, or, the planet ends up with massive quantities of unsold excess commodities. What role does this designated importer play? If every other nation is running a trade surplus, the designated importer must run a trade deficit equal to the total surplus commodities produced by all the other nations. i.e., equal to the sum of excess capital in the form of excess commodities.

If the designated importer nation is running a chronic and growing export deficit, how does it pay for these imports? This designated importer has a fictitious currency every other nation must accumulate as payment for its exports. By law, only the State can create ex nihilo money. The responsibility of creating sufficient quantities of fictional money falls to it. The creation of ex nihilo money, however, is nothing more than the creation of fictitious profits — to the penny. If this creation is accomplished by issuing public debt, this public debt amounts to the fictional profits of private capitals. By increasing the public debt the owner of the world reserve currency can print money and buy all the crap. On the other hand, there is a tendency for the excess capital of the world market to be denominated in the world reserve currency.

However, since we are dealing with an actual material conflict between the conditions of production and the conditions of exchange under condition of absolute over-accumulation of capital, this conflict doesn’t disappear. It now appears as poles of international trade in the form of many net exporters on one side, who are accumulating fictitious dollar assets, and a net importer on the other side, who is accumulating a growing public debt; thus, the excess capital of the world market is increasingly denominated in the world reserve currency. This division of the world market into many net exporters and a single net importer has consequences for ex nihilo money creation itself: The capacity to grow export surpluses by creating ex nihilo money does indeed increase, but this increased capacity is only true for the designated importer nation. The export surplus nations actually end up with less capacity to create ex nihilo money, even as the designated importer nation gains in this capacity. Eventually, the export surplus nations must absolutely constrict their respective money supplies to contain inflation — producing, as a consequence, a growing surplus population of starving laborers. Although this conclusion is obvious, Krugman has not a hint of it in his 2010 paper.

Ex nihilo money, labor time, and the World Market

The problem is that directly social production abolishes the law of value, while exchange takes place only on the basis of this law. Under the capitalist mode of production, production is only undertaken with the eye to profit, i.e., to realization of surplus value. Yet, under conditions of absolute over-accumulation of capital, no additional surplus value can be realized, i.e., the profit rate is zero, if not negative. If the fiction of profits could not be maintained, production would cease entirely. To maintain this fiction, you need fictitious money.

To put this another way, under conditions of over-accumulation, directly social production limits the total labor time of the community to socially necessary labor time. And, what is the measure of this socially necessary labor time? Here is the somewhat surprising answer:

Socially Necessary Labor Time = Value = Wages.

Under conditions of over-accumulation of capital, the absolute limit of total socially necessary labor time is the value of the wages of the working class. Any value created in addition to this necessary limit — i.e., surplus value — cannot be realized as profit — it is wasted (or, superfluous) labor time. Profits realized under this regime must, by definition, be fictitious; hence the fiction of ex nihilo money.

If the production of surplus value no longer takes place, profit can be “realized” through exchange only on condition there is a continuous and pervasive unequal exchange of values within the world market. If labor power cannot be exploited to create surplus value, it must be constantly and artificially devalued — that is, purchased at a price below its actual value. This artificial (purely monetary) devaluation of labor power is a natural consequence of Fascist State ex nihilo money expenditures. This purely monetary devaluation of labor power goes hand in hand with a purely monetary devaluation of the fixed and circulating constant capital.

However, although labor power and the fixed and circulating constant capital are artificially devalued, this does not, by any means, imply a fall in the prices of these commodities — rather the situation is precisely the reverse. Under the conditions I am describing, the purely monetary devaluation is expressed inversely as rising ex nihilo prices for these commodities. They become dearer in ex nihilo money terms as their prices are held well over their actual values; in turn, society is compelled by generally rising prices denominated in the world reserve currency to consume fewer of these commodities.

However, it should not be understood by this that generally rising prices cause declining consumption of commodities; nor, does this imply that either or both result from the huge quantities of ex nihilo money created by the state. Rather, each of these is called forth by the growing conflict between the conditions of production and the conditions of exchange under circumstance of chronic or absolute over-accumulation of capital. Over-accumulation of capital means precisely over-accumulation of commodities — of fixed and circulating constant capital, and, of variable capital, i.e., labor power. Moreover, we have to assume that this over-accumulation of capital exists not simply in one or a few nations, but universally throughout the world market. Hence, export of capital no longer serves to resolve the contradictions inherent to capital.

Those who are following my reasoning so far immediately recognize the logical contradiction in the above paragraphs: I have made the absurd assumption that commodities sell at prices below their values and, simultaneously, above their values. On the surface, it would appear that these two paradoxical assumptions could not exist, or, if they did exist, would bring social production to a halt entirely. As a practical matter, however, these two assumptions, although occurring side by side during the circulation of commodities, nevertheless only occur serially in any given example and in two different directions: the capitalist purchases labor power where the average wage is priced below its value, and sells wage commodities where prices of these commodities are above their values. Which is to say, the world reserve currency, despite massive ex nihilo creation that should force its exchange rate against other currencies down precipitously, actually exchanges against these other currencies at a higher rate than would otherwise be expected — it enjoys what economists refer to as an “exorbitant privilege”.

As a result, there is a tendency for production to move toward the least developed regions of the world market, where labor power can be purchased for a fraction of its value, while the resultant output is sold in the most developed consumer markets. Capital denominated in the world reserve currency, since this currency can be exchanged for any local currency, can simultaneously purchase labor power in those places where wages are below their values, and sell the produced commodities in those places where prices are above their values. Productive employment of capital in the home market of the world reserve currency holder grows increasingly unprofitable and commodities produced there suffer from uncompetitive world market prices. Capital, therefore, takes flight to the less developed regions of the world market. This event is accompanied by loud public pronouncements by politicians and the business community on the liberating effects of free trade; and by angry denunciations on the part of those capitals who, because of their size or circumstances, cannot shift their capital to take advantage of this process and are driven to ruin or speculation.

This has implications for the development of the world market, which, rather than slowing because of the general over-accumulation of capital within the world market, now increases at an astonishing rate and geometrically: Capital denominated in the world reserve currency can not only take advantage of the price disequilibrium between labor power and wage goods, it can further exploit the “exorbitant privilege” of the world reserve currency. This must accelerate the export of capital to less developed regions of the world market to take advantage of extremely favorable terms on which labor power can be exploited in the local currency, and, simultaneously, lead to the expansion of the portion of the total social capital denominated in dollars at the expense of the portion denominated in other currencies.

The problem I spoke of in an earlier post in this series — that wages are too high, and yet too low — resolves itself naturally into accelerated export of productively employed capital to those places where labor power can be had for a fraction of its value, to produce goods destined for markets where commodities are priced many times their actual value. This arbitrage, which can only continue so long as new sources of ever cheaper labor power can be found, must be expressed in a growing volume of Fascist State ex nihilo money creation, which, moreover, must not simply increase, but increase geometrically.

Marshall’s magical money machine (The Conceit)

April 8, 2010 Leave a comment

FBN's Liz Claman: Ready for soft landing (probably not a real photo ... sigh!)

Continued from here

“Every magic trick,” Caine’s character tells us, ‘has three steps’: 1) the “Pledge” which is sometimes called “the Magician’s Choice” offers audiences an option, but really tips the process, favoring one option over others. In the same way, life seems to offer everyone the same set of choices, when (in reality) the best choices are more ‘real’ in some lives than in others; 2) The next phase in the magic trick is the “Turn,” transforming one possibility into another unexpected possibility; and finally, 3) the “Prestige,” or return of the original promise in a surprising fulfillment or realization, such as the reappearance of the person who has first vanished.

Critical Vision – “The Prestige”: A Movie Review.

The facts laid out in the preceding section of this post raise the question of whether Washington’s deficits are, in reality, nothing more than the excessive accumulation of social resources in the hands of the very wealthiest members of society. But, in a brilliant example of misdirection, Marshall draws our attention to mere accounting identities: Washington must run deficits, if the rest of society is to save, i.e. if society is to produce more than it consumes. He conceals the nature of these “savings” – the massive concentration of wealth in a few hands, side by side with the relative and absolute collapse in the living standards of the great majority. Hence, the idea that Washington’s deficits only serve to maintain this massive inequality within society need never be seriously addressed by Marshall or his cronies Bill Mitchell, James Galbraith, Randall Wray, Warren Mosler and Rob Parenteau.

The accounting identity of national income to the sum of its parts is the hook intended to grab the attention of millions of desperate working families, who are drowning in debt and looking for any means to keep their heads above water. It serves the purpose of offering a seemingly costless way to increase their income sufficiently to restart the cycle of indebtedness: If Washington runs a deficit, Marshall explains, the massive accumulation of superfluous wealth in the “private sector” can be placed back into currency in the form of public consumption – generating jobs and wages for millions of unemployed.

The rubes are now set up for this performance of economic magic.

Read more…