The Causes of Inflation

Traditionally, crises of overproduction are accompanied by deflation, i.e. a fall in prices. This is quite understandable, since overproduction means a surplus of goods, which pile up on the shelves of sellers who can no longer sell them, unless they lower their prices.

Capitalism is constantly in a situation of disequilibrium: on the one hand, the accumulation of capital pushes production to increase more and more, but on the other hand, it is necessary to sell the goods produced to realize their value and to allow the accumulation of capital. But in a society where appropriation is private, where each producer and consumer is independent of the other, the balance between production and consumption is constantly made through chaotic readjustments. When the firm sees that it can no longer sell its production, it reduces its production by putting its workers to “rest”, which leads to financial difficulties for the workers and the firms, and even to bankruptcy.

During the “thirty glorious years”, these bankruptcies remained localized and were compensated by growth in other localities and in other branches. On the other hand, before the alarm bells went off, goods had already accumulated on the merchant’s and wholesaler’s shelves; stocks were swelling beyond measure.

The crisis is generally preceded by price pressure, i.e. by a rise in prices, particularly of raw materials as a result of strong demand from industry, and by a rise in interest rates. This is what we saw, for example, with oil, just before the great crisis of overproduction in 1974-1975. Oil prices will rise again at the end of the next cycle.

Silently, business bankruptcies are increasing and with them the number of unpaid bills. Bills of exchange, whose interest payments are over three months overdue, are increasing considerably, putting financial institutions at risk. These financial institutions, which in order to lend, borrow on a daily basis on the interbank market – the repo market. For example, Lehman Brothers, before its bankruptcy on September 15, 2008, for 1 dollar of equity lent up to 30 dollars. In other words, all this money lent was not its own. To meet its cash outflows, this large investment bank was totally dependent on daily borrowing on the repo market. But when the first cracks appeared, the other banks realized that the king was naked, and nobody wanted to lend him money anymore.

When the crisis arrives, it may first manifest itself as a commercial crisis, due to the accumulation of unsold goods, but it may just as easily begin as a financial crisis, as in 2008, or as a stock market crisis, as in 1929. In all cases, the crisis of overproduction leads to a collapse in the price of goods and even more so in the price of all securities – shares, bonds, real estate, commodities, etc. – which have seen their prices soar. – In all cases, the crisis of overproduction leads to a collapse in the price of commodities and even more so in the price of all securities – stocks, bonds, real estate, commodities, etc. – which have seen their prices soar as a result of the tremendous speculation which preceded the crisis of overproduction.

The crisis of capital is often referred to as a disease. Thus a healthy organism would be struck by a disease, which sometimes could be fatal unless a remedy is found. For the great mass of people – proletarians or petty bourgeois, but also for the big bourgeoisie and its economists – the capitalist relations of production – wage labor, capital, profit, interests, etc. – appear as something natural. And so if there is a crisis, it is either because somewhere there has been manipulation – the crisis is intended, because it benefits a few – or it is due to causes external to capitalism; accidental factors provoke a crisis. For bourgeois economists, every crisis is due to contingent factors: bad management, greed, an exaggerated rise in the price of raw materials, etc. But never for them is it inherent to the capitalist mode of production; they do not understand that the capitalist mode of production, like any mode of production, is a historically transitory social form. The crisis is not a disease, but it is due to the fact that capitalism, in its development, produces its own negation: the economic basis of communist society. The accumulation of capital leads to the ruin of the small producer and the socialization of the productive forces, replacing the mass of small producers with an army of proletarians who work collectively in a centralized way, and who do not possess the property of the product, nor that of the means of production, and whose collective work uses instruments, whose use and production require a whole social organization and require the latest technical and scientific knowledge.

It is the antagonism between this economic basis and the private appropriation resulting from the relations of production, which leads to the crises of overproduction. This is why the dilemma can only be solved definitively by moving to communism. This antagonism is reflected in the permanent imbalance between production and consumption and in the fall in the rate of profit: the more the productive forces are developed, the more the productivity of labor increases and consequently the rate of profit falls. The remedies applied by the bourgeoisies to solve the crisis: deregulation, subcontracting, relocation, unbridled speculation, the race for debt, etc., all end up aggravating the crisis of capital.

As for inflation, there is nothing new about it: it was born with the monetary system. What determines the price of money is the ratio between the money supply in circulation and the supply of goods whose value it is supposed to represent. The greater the money supply in circulation for the same quantity of goods, the lower the value of the money. On the contrary, if the money supply decreases to represent the same quantity of goods, each unit of money will represent a larger fraction of goods and therefore prices will decrease because less money is needed to buy the same quantity of goods. The value of money therefore increases, i.e. each unit of money reflects a greater value.

In times of crisis, such as wars, in the past have repeatedly resorted to printing money to pay for their expenses. That is to say, they started to issue more money to meet their expenses that they could not pay, because the treasury was empty. The result each time was a significant inflation, because the multiplication of coins or banknotes does not lead to an increase in production: there is more money in circulation for the same quantity of goods, hence the inflation, i.e. the rise in prices due to the devaluation of money that results from its greater mass in relation to the goods whose value it is supposed to reflect

This is what happened in Germany in 1923: since the Social Democracy did not want to force the big bourgeoisie to pay the debt, Germany did not have enough currency to pay for its imports, to pay the war debt and to reimburse the German petty bourgeoisie who had subsidized the war effort. Inflation cleared all accounts with the petty bourgeoisie, cancelling the debt that the Germany owed to them, which had become ridiculous as a result of the monstrous inflation. The petty bourgeois class came out of it ruined, which we Marxists appreciate, but the big bourgeoisie came out of it unscathed and even strengthened, because the German proletariat did not know how to take power in those terrible postwar years.

Closer to home, inflation in Venezuela, Lebanon or Turkey is the result of the fact that these countries are unable to repay their debts and pay for their imports, following, for some like Venezuela, a collapse of exports. The coffers are empty, the central bank has no more reserves or very few, imports can no longer be paid and capital flees the country, the currency collapses. Imports expressed in the national currency become more and more expensive; exports, seeing their price fall, compensate less and less for the imports. Everyone wants dollars, but they are becoming more and more expensive. The central bank is forced to print money. In Turkey, the central bank, in order to deal with capital flight, is raising interest rates, but since the government is blocking this increase, the result is a collapse in the value of the Turkish lira. During the crisis of 2015-2016, China, in order to stem the fall of its currency, following the flight of capital, had to disburse 1,000 billion good dollars!

Classically, liberal capitalism – that of Marx in the days of the British Empire – saw prices fall as a result of competition and the increased productivity of labor. But with monopolies the situation has changed. Competition is reduced and growth is accompanied by inflation and a race between wages and prices. This is what happened throughout the post-war period. Economic growth went hand in hand with inflation, obviously to the detriment of the proletariat.

So what about the return of inflation in the major imperialist countries? Before answering the question, let’s start by looking back.

The great international crisis of 1974-1975 definitively ended the almost crisis-free cycle of capital accumulation that followed the post-war period. There followed, every 7 to 10 years, as in Marx’s time, crises of overproduction. Until the crisis of 2001-2002, all these crises of overproduction, unlike the classical ones, were with inflation. This is because states and monopolies managed to organize the withdrawal, by distributing production quotas within a single branch, in order to avoid a collapse of prices. This was the case, for example, for steel in Europe; after bargaining, the European Commission succeeded in distributing production quotas among the different European Union members.

But the great crisis of 2008-2009 turned things around. After the bankruptcy of Lehman Brothers, then of AIG, saved in extremis by the American State, all the stock exchanges collapsed, the prices of real estate, especially in the United States and in Spain, fell sharply, the price of raw materials collapsed bringing with them the fall of all prices. In this post-war period, the recession of 2008-2009 was the first major crisis with deflation. Without the energetic intervention of central banks and governments, which did not hesitate to go into heavy debt to save their economic system, we would have had a deflation like in the 1930s. With difficulty, production has recovered, especially in 2017-2018. However, almost all the major imperialist countries, apart from China, have a lower level of production than before the crisis of 2008-2009. And above all, if the world bourgeoisie has avoided a collapse, as in the 1930s, it is at the price of a colossal debt, interest rates close to zero, even negative for some countries, and a monstrous inflating of the balance sheet of all the big central banks. Global capitalism is maintained in a state of survival thanks to the flood of trillions of dollars by the central banks! Such a flood of money in a “normal” situation would lead to high inflation; this has not been the case, as deflationary forces have proven to be more powerful.

Especially since all this virtual money did not end up in the pockets of the proletariat or the petty bourgeoisie for consumption, but in those of the big bourgeoisie, which used it largely for speculation; this drove up the price of securities on the stock market, which are once again reaching record highs, and the prices of bonds and real estate, which are skyrocketing in the world’s major cities. So it has been securities and real estate that have driven inflation. But as this valuation of securities is purely artificial, all it takes is the slightest piece of bad news for everything to fall back like a soufflet. This explains the chaotic trend in world stock market prices.

The “boom” of 2017-2018 has turned into a bust, because in 2019 there is once again a worldwide recession, including in China, with a fall in production and international trade. The containment due to the virus from March to May 2020, more or less extensive depending on the country – Japan has not imposed a containment – has aggravated a recession already underway.

This recession was followed by a strong recovery in March and April 2021, but since May the recovery has slowed everywhere: apart from the United States, where industrial production growth is still high – 5.1% in October 2021 – thanks to massive government stimulus packages. Everywhere else – apart from China, for which we have no reliable figures – growth is close to zero, or even negative, as in Germany and Italy. We report below the graph for the United States, where we can see the bell curve of the recovery.

The table below shows the current situation of the major industrialized countries other than the United States.

It can be seen in the fifth column that everywhere, except England, production is lower than in 2019, itself a year of recession. And that compared to the maximum reached in 2007, production ranges from -3% in Germany at almost -28% for Portugal, without forgetting the -18% for Japan and the almost -20% for Italy. For the latter, Mario Monti cannot do much about it. The current inflation is therefore not due to high demand, but to the fact that oil and gas production is kept below the level necessary to keep prices high, and is above all due to the anarchy inherent in this mode of production. For agricultural products, we must also add the poor harvest due to bad weather, which has caused an increase in the price of certain foods.

Since the crisis of 74-75, companies, for cost reasons, have maintained very little inventory. When production started up again at the beginning of the year, all the companies in the world began to order parts produced in Asia, the necessary raw materials and oil at the same time. The result is that the international merchant fleet, which is in the hands of a few monopolies, cannot keep up, and the congested ports cannot load and unload quickly enough to meet the brutal and colossal demand. In the United States, dockworkers have to work 24 hours a day to unload ships. The imbecility of this chaotic mode of production is on full display.

And for energy, the European multinationals, in order to save money, have waited until the last moment to fill their tanks, making the price of gas explode, which of course is aligned with the least profitable well – this is what they call the law of the market: it is in fact the law of monopolies allowing some to pocket a real rent. And the famous wind turbines, which should provide some electricity, have provided very little this year due to the lack of wind, making the situation even worse.

The whole thing is further aggravated by the system of plundering that the various bourgeoisies have put in place for thirty years now with liberalism. For example, French nuclear electricity, the cheapest in Europe, after Finland, a small country where hydroelectric production is sufficient for its needs, has been aligned with the price of gas so as not to compete with other producers! This is what they call free competition. And it’s not over yet: EDF is forced to sell half of its electricity production below its cost price to subsidized suppliers who produce nothing, but are just there to shear the wool of the sheep.

Thus it is the proletarians who pay for the enrichment of a whole band of parasites. The bourgeoisie has become, with its mode of production, a totally parasitic class incapable of the slightest long-term forecast. It functions at sight.