Contents "The internationalist proletarian" n.12
MONETARY CAPERING OF INFLATION, DEAD WEIGHT OF OVERPRODUCTION
Evolution of inflation in general
"The Internationalist Proletarian" No. 11 in "Gradual deflation of the supply chain", the inflation indicators of the great capitalist powers have continued to fall, with inflation in general slowing down and China entering a situation of technical deflation.
The Fed and the ECB
The Fed has taken interest rates to 5.5%, one point below the last relative high of 6.5% reached in 2000 in the run-up to the dot-com crash and the 2001 attacks that opened the cycle with which the US tried to resist what is now its decline.
The ECB has raised interest rates to 4.5%. The chart below shows that the two moments when the interest rate peaked were the preludes to its abrupt decline:
The following announcement is interesting: "The ECB also announced that as of September 20 it will cease to remunerate the minimum reserves that it requires banks to have on deposit in Frankfurt. This money, which until now was paid the interest of the deposit rate (3.75%) will no longer offer a return to the entities. (...) almost 165,000 million will be affected by this decision." (Expansión, 28-07-2023).
In other words, the ECB has reduced the interest rate for this capital to 0%. It is true that these capitals cannot be moved as they are compulsory reserves and this circumstance limits the impact of the decision. But this does not detract from the substance of the decision: lowering the interest rate.
As for the slimming of the balance sheets, on the one hand: “As of August 9, the Fed’s portfolio had shrunk by $0.98tn since the portfolio’s peak of $8.55tn in May last year (…) aims to cut another $1.5tn from its balance sheet by mid-2025” (Financial Times, 11-08-2023).
And, on the other hand: "the ECB's balance sheet has gone from 8.8 trillion to 7.1 trillion (...) to finish with the debt portfolio in the hands of the institution organically would take between 12 and 15 years". (Expansión, 02-08-2023).
The paradox is that these amounts are small and large at the same time. They are small when compared to the volume gobbled up and to the time (12 or 15 years of smooth capitalism... NOT EVEN IN THEIR BEST DREAMS!) needed to get rid of it. They are large and even enormous if compared to the oscillations and swings that they can produce in the debt market and in the liquidity of companies and institutions.
In a capitalist economy INDEBTED UP TO ITS EYESBALLS, the rise in rates produces a notable increase in the cost of debt: "The debt analysts of the entity [Bank of America] point out that the cost of the new price of money for public and corporate issuers in the G20 countries could amount to 8 trillion dollars a year (7.3 trillion euros)". (Expansión, 11-07-2023).
Central bank losses
If in the previous issue we looked at the losses of the Swiss, European and US central banks, now it may be the turn of the German one: "The Bundesbank, Germany's central bank, may need a recapitalization with public funds to cover losses derived from the European Central Bank's (ECB) bond purchase program, a report by the Bundesrechnungshof suggests (...) losses in the coming years would "probably" exceed the remaining 19.2 billion euros in provisions and 2.5 billion euros in capital." (Expansión, 27-06-2023).
Central banks against the working class
The blatant statements of the central bankers make clear their objective of torpedoing the purchasing power of the working class to force them to accept WORKING MORE FOR LESS WAGES: "The labor market is very strong, that puts upward pressure on wages, which in turn serves to keep spending high and leads to more inflation," summarized Jerome Powell, chairman of the Fed. In the United States, unemployment is at near historic lows, below 4%, a situation that the head of the Washington-based institution believes must change in order to recover price stability (...) "the number of job offers for each unemployed person, which was once seven, is already falling." (Expansión, 29-06-2023).
The 'rating' of the US banks and that of the US
The big US banks announced that they would raise their dividends after obtaining as a result of the stress test – admittedly in the most pessimistic scenario – that they would lose "only" 541 billion dollars (Financial Times, 01-07-2023). The situation is that: 1) a large part of the banks are replacing the escape of money from their deposits with loans from the Fed or the Federal Home Loan System, with a notable increase in the cost of funding 2) there have been widespread losses on bonds: “Bank of America loses 100 billion in bonds (…) The losses at BofA accounted for a fifth of the $515bn in total unrealised losses in the securities portfolios among the nation’s nearly 4,600 banks at the end of the first quarter, FDIC data showed” (Financial Times, 29-06-2023), 3) non-performing loans have
doubled compared to the previous year and 4) “Federal Deposit Insurance Corporation in an open letter (...) said it had “observed that some depository institutions” had “incorrectly” lowered the value of their uninsured deposits. (Financial Times, 24-07-2023).
Result: two of the three main US agencies have downgraded the credit rating of several banks: "Two weeks after Moody's Investors Service caused turmoil in financial markets by cutting the ratings of a number of U.S. banks, S&P Global Ratings has also downgraded the ratings and outlooks of several more." (Expansión, 23-08-2023).
Immediate background: “Fitch Ratings has cut the US debt rating from triple A to double A plus” (Financial Times, 02-08-2023) joining a decision already taken in 2011, and maintained since then, by S&P.
Neither the US banks nor the State itself deserve the full confidence, even for the gallery, of their own rating agencies!
Debt issuance by companies
The difficulty of refinancing - and, therefore, the greater probability of bankruptcy - of companies whose debt is in the "junk debt" category (or "high return", depending on the emphasis) is manifested in the reduction of maturities, in a reduction of the total market volume of this debt and in the reduction of the lowest segment: capitalists are not as willing to lend to companies with the lowest rating and when they do lend, they do so more on a short-term basis.
“By January, companies will have about $260 billion of debt coming due within a year, about double the current level, according to data compiled by Morgan Stanley. (Bloomberg, 17-06-2023).
“The $1.35tn [1.2 billion euros] US junk bond market has shrunk by almost $200bn since its all-time peak in late 2021.” (Financial Times, 13-07-2023). In Europe, “So far this year, 67% of high yield bond issuance has been concentrated in companies with the highest rating in this category (BB)." (Expansión, 15-08-2023).
Debt issuance by banks
The APPETITE FOR DEBT by idle capital worldwide is still going on and the banks obtain the necessary liquidity by this means without having to raise the remuneration of deposits: "Banks and other financial firms around the world have placed two trillion dollars in bonds (1.84 trillion euros) in record time this year". (Expansión, 23-08-2023).
Deposits, bills of exchange and the petty bourgeoisie
The following graphs illustrate the situation derived from the above, in the Spanish State. Despite the evolution of the interest rate set by the ECB and which can be seen on the previous page, the interest paid on deposits is not at the same level.
The following graph shows how the total volume of "savings" in the stock market is increasing, but with a significant decrease in deposits and an increase in "investment funds" and government bonds ("treasury bills").
The consequence for current "savers", among which are the future "RUINED", is the following: "New cold water for savers who invest in Treasury Bills (...). As usual in the last auctions, the demand was very high and more than doubled the final allotment to 5,350 million euros (...) the high volume of requests allowed the Government to relax once again the yields offered (...)". (Expansión, 17-08-2023).
Stock market: anomalies in the temple of capital
The number of companies on the Western stock exchanges is decreasing. In the City they have been falling since 1966, reaching a reduction of 60%: from 2,700 companies to 1,100.
In the US, the process began in the mid-1990s with a reduction of around 50%, and in Germany "the number of listed companies began to fall in 2007 and since that year has fallen by 40%" (Expansión, 28-07-2023).
Apart from this global phenomenon of stock market escape, the month of August has seen a general stock market slump: "Wall Street’s S&P 500 index, Europe’s Stoxx 600 and China’s CSI 300 have shed a cumulative $2.8tn — about 5 per cent of their aggregate value and more than the entire market capitalisation of London’s FTSE 100 — in the three weeks to August 21." (Financial Times, 22-08-2023).
China slides into the swamp of deflation
The "Western" capitalist economies have been living the spasms-soufflé generated by the electroshock administered with the lock-downs and the epileptic resumption of circulation, in an attempt to parapet themselves before the avalanche of goods from the Asian VOLCANO OF PRODUCTION.
As we have been following in this review, while this was happening, in the Chinese capitalist economy (epicenter of the volcano) the variables presented themselves differently and the actions of the Chinese central bank - albeit timidly - were moving in the opposite direction to those of the central banks of European, American, Australian, etc. imperialism.
The situation in China is one of a substantial decline in industrial prices, along with a decline in CPI and virtually neutral core inflation.
The value of Chinese exports has been slowing to a net decline of 12.4% in June:
The slowdown has not occurred mainly because Chinese goods were too expensive in relative terms, but mostly because of the overcrowding of US warehouses as a result of previous compulsive buying (see "Gradual deflation of the supply chain", p. 16 and the beginning of "Chinese push in trade war overwhelms US tariff defense attempt", p. 17, in The Internationalist Proletarian No. 11). This compulsive buying tightened circulation, triggered transport prices and increased import prices of Chinese products by around 5% during 2021 and until the beginning of 2022, which is when the prices of imports from China to the US began to fall. Throughout 2022 and 2023, import prices from China to the US have been falling and, with some rebound, the total value of Chinese exports has slowed down, reaching contraction.
The People’s Bank of China lowered rates on one-year medium-term lending facility loans by 15 basis points to 2.50 per cent. The cut, the biggest since 2020 (…)” (Bloomberg, 15-08-2023). However, as has happened previously, these rate cuts have only been partially passed on to bank lending rates:
“The five-year loan prime rate was left at 4.2% on Monday, according to data from the People’s Bank of China. Most economists had predicted the rate to be cut by 15 basis points following a similar reduction last week to an key central bank policy loan rate. That was seen as precursor for a cut to the 5-year LPR.
The one-year LPR was lowered by 10 basis points to 3.45% from 3.55%, a smaller cut than most economists predicted.” (Bloomberg, 21-08-2023).
A part of the production has been shifting from China to Vietnam or Cambodia since "Seamstresses, for example, earn about 800 dollars a month in China, compared to 400 and 600 dollars in Cambodia and Vietnam, respectively" (Expansión, 02-08-2023). But it is not only Chinese industrial production that is suffering, but also Japan, South Korea, Taiwan and Vietnam.
The graph above shows that in China, foreign, state-owned and private companies have all seen their cumulative profit fall.
In these terms two Chinese capitalists, a footwear manufacturer and an electronic components maker, lament: “Orders dropped by a third from the second half of 2022 and production nearly halved from 5mn pairs of shoes pre-pandemicy (…) Ho, also of the industry group Hong Kong Apparel Society, said some of his peers reported orders falling 20 per cent or more in the first half of this year as retailers cleared excess inventory. With rising interest rates, some buyers have demanded payment extensions.” (Financial Times, 01-08-2023).
The laws of the capitalist mercantile economy, with its DECREASING TREND OF THE RATE OF PROFIT are reflected in a decreasing trend of economic growth that has been imposed in China since 2005.
Housing prices are also falling. It should be noted that an estimated 65 million homes are vacant, around 20% of the housing stock:
This situation affects Chinese developers, which has once again been brought into the spotlight by Evergrande's filing for bankruptcy protection in the US, followed by a 79% drop in its stock market value: “Evergrande, the world’s most indebted developer with liabilities of $340bn, last month unveiled losses of $81bn over 2021 and 2022..(…) Fellow developer Country Garden, the largest privately owned homebuilder in China which was until recently seen as safer than many of its highly-levered peers, also missed payments on its international debts this month, and investment group Zhongrong similarly failed to repay savings products.” (Financial Times, 18-08-2023).
Only in China?
Industrial prices are also falling in Europe:
“The EU’s statistics office, Eurostat, said factory gate prices in the region fell 1.5 per cent in the year to May, the first outright decline since December 2020.” (Financial Times, 05-07-2023).“At first, optimism caused orders to soar well above supply, putting pressure on prices; and now, once inventories have been saturated, orders are contracting again (...) All this has caused retail prices to contract at the fastest pace in almost fourteen years.” (Expansión, 02-08-2023).
And industrial prices are also slowing down in the US.
Our fixed points of reference
Capitalism can mitigate, slow down and even postpone its inherent contradiction, but, in historical terms, this is a steamroller that will ineluctably impose itself.
“The real barrier of capitalist production is capital itself. It is that capital and its self-expansion appear as the starting and the closing point, the motive and the purpose of production; that production is only production for capital and not vice versa, the means of production are not mere means for a constant expansion of the living process of the society of producers. (…) Development of the productive forces of social labour is the historical task and justification of capital. This is just the way in which it unconsciously creates the material requirements of a higher mode of production (…) It comes to the surface here in a purely economic way — i.e., from the bourgeois point of view, within the limitations of capitalist understanding, from the standpoint of capitalist production itself — that it has its barrier, that it is relative, that it is not an absolute, but only a historical mode of production corresponding to a definite limited epoch in the development of the material requirements of production.” (Capital, Book III, Part 3, Chapter XV, K. Marx).
No matter how many electro-shocks capitalism administers to itself, how much capital it injects into its drugged economy, how many military and tariff blockades are imposed and how many wars are unleashed to destroy the productive forces already created and unload the losses on competitors, how many droughts and hurricanes distort circulation. It is not only possible, but inevitable that capitalism will develop through spasms, conflicts and crises; as we shall see below:
“The rate of profit would not fall under the effect of competition due to over-production of capital. It would rather be the reverse; it would be the COMPETITIVE STRUGGLE which would begin because the fallen rate of profit and over-production of capital originate from the same conditions.” (Capital, Book III, Part 3, Chapter XV, K. Marx).