The game of finding the culprit for the sudden rise in prices is underway. Was inflation caused by central banks that pumped too much money into the system for too long? Or is China to blame, where most of the physical production moved, and then the pandemic led to the closure of the country and the rupture of global supply chains? Or is the real culprit Russia, whose invasion of Ukraine prevented access to a significant part of the world's supply of gas, oil, grains and fertilizers? Is the problem in the sudden transition from the regime of savings from the period before the pandemic to the regime of fiscal relaxation?
No one has offered the correct answer yet. The culprit seems to be all of the above and nothing from that.
Many explanations are offered for major economic crises, all of which may be correct, but miss the heart of the problem. When the collapse of Wall Street in 2008 caused a global recession, several interpretations were in circulation: the strong influence of the financial sector on legislation, after its representatives pushed the industrialists from the top of the capitalist pyramid; propensity for financial risks as a characteristic of Western culture; the failure of politicians and economists to distinguish between what is really a new paradigm and what is a financial bubble, etc. All the explanations were valid, but none hit the heart of the problem.
It is similar today. Monetarists who have been announcing high inflation since central banks have been increasing the money supply (since 2008) have had their five minutes. They remind me of leftists (like me) who persistently predict the imminent demise of capitalism - like broken clocks that tell the correct time twice a day. Of course, by giving bankers huge amounts of money in the hope that this money will somehow find its way into the real economy, central banks have produced epic inflation in the prices of all kinds of assets (stocks, real estate, cryptocurrencies, and more).
But monetarists cannot explain why in the period from 2009 to 2020 central banks failed to increase the amount of money in circulation in the real economy, much less why they failed to raise consumer price inflation to the target value of 2%. It will be that the inflation this time was caused by something else.
There is no doubt that the disruption of supply chains, which mostly originate from China, played an important role, as did Russia's invasion of Ukraine. But these factors cannot explain the sudden change in the regime of business in Western capitalism - the fall from ubiquitous deflation to its opposite: simultaneous growth of all prices. This, of course, leads to wage inflation, thus starting a vicious cycle that leads to new price spikes and new wage increases ad infinitum. Only in that case can bankers ask workers to make sacrifices for the common good and refrain from further demands for salary correction.
But in the current situation it is absurd to ask the workers to give up their demands. All data show that today, in contrast to the 70s, wages are growing much slower than prices. Despite this, price growth not only continues but also accelerates.
What is actually happening? My answer is this: after half a century of abuse of the financial system by big corporations, Wall Street, governments and central banks, things got out of control and the authorities in the West found themselves faced with an impossible choice: push big corporations, maybe entire countries, into bankruptcy , with a domino effect, or allow inflation to rise.
In the last 50 years, Europe, Japan, South Korea and finally China recorded net positive trade balances, primarily thanks to the economy of the United States. As a rule, the lion's share of the realized profits flowed to Wall Street in search of better returns. On the wave of capital that flooded America, the financial sector built towers in the air (such as options and derivatives) and financed corporations with private money that built a global labyrinth of ports, ships, warehouses, road and rail infrastructure. When the crash of 2008 destroyed the financial pyramids, the financialized labyrinth of global supply chains, a system of production without inventory, found itself on the edge of the abyss.
In order to save not only the bankers but also the labyrinth itself, the central banks offered to replace the threatened pyramids of private money with public money. Meanwhile, governments have been cutting public spending, cutting jobs and cutting services. It was socialism for the capitalists and a strict austerity regime for the workers. Real wages were falling, prices and profits were stagnating, but the value of property that the rich were buying was skyrocketing. Investments as a share of the total amount of available money fell to a historic minimum, production capacities were disappearing, and market power was growing irresistibly. Capitalists have never been more dependent on central bank money and never been richer.
It's a new game. The traditional battle between capital and labor for a greater share of income is still going on, but it is no longer the source of most of the new wealth. After 2008, globally introduced austerity measures resulted in a decline in the level of investment (demand for money), which, combined with the abundance of new money that central banks handed out handily, brought down its price (interest rates) practically to zero. In a period of falling production capacity (even in construction), shortage of good jobs and stagnant wages, the rich triumphed in the stock and real estate markets, which were disconnected from the real economy.
Then the pandemic came and brought about a big change: suddenly Western governments were forced to direct some of the new money from central banks to the masses who found themselves quarantined inside economies that had lost productive capacity in the last few decades, and then faced the collapse of global economies. supply chains. When the population began to spend part of the received aid on fewer and fewer imported products, prices began to rise. Corporations with large paper wealth used their enormous market power (acquired from declining production capacity) to further drive up prices.
After two decades of asset price inflation and corporate borrowing thanks to the support of central banks, the first hints of inflation have fundamentally shaken the system that has shaped our world in the post-2008 period and which has virtually restored the institution of the ruling class. What else can we expect?
Probably nothing good. In order to stabilize economies, the authorities would first have to take away enormous power from a small group of people who had acquired it through paper wealth and cheap money. But they will not surrender without a fight, even under the threat of total ruin.
(Project Syndicate; Peščanik.net; translation: Đ. Tomić)
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