In the letter, King explains that inflation has got completely out of control. Global fuel and food prices have rocketed. World agricultural prices have risen 60% in the last year; oil prices are up 80% and wholesale gas prices are up 160%! That has meant significant increases in living costs for average working family in the UK. For example, the average gas bill is up 7%, electricity bill up 10%, the water bill up 6%; rail season tickets up 5% and, above all, the cost of an average tank of petrol or diesel to fill the car or lorry is up 20-35% in a year. Overall, the weekly shopping basket is up 8%. Inflation is recorded at only over 3% because the cost of other items like clothing or electrical goods has fallen.
And it is going to get worse. Mervyn King forecasts that the inflation rate will climb to over 4% a year and stay up there through most of 2009, at best. And the acceleration in inflation is happening at the same time as the UK economy is heading into slump as a result of the global credit crunch and the collapse of the housing market.
Most economic forecasters are now admitting that British capitalism is grinding to a halt. The bosses’ ‘union’, the CBI, reckons that economic growth this year will be just 1.3% and next year not much better. That would be the lowest rate of growth since 1992, the last great economic recession.
Even this forecast is probably optimistic. That’s because a key factor driving British capitalism over the last decade or so has not been investment in manufacturing and other productive sectors of the economy, but in real estate (housing) and unproductive speculation in stock and shares, bonds and money in the City of London.
Now the credit crunch is causing huge losses in the financial sector and the UK housing market is collapsing like a pack of cards. House prices on most measures are falling by around 5-7% a year now and most forecasts suggest that this rate of decline could accelerate up to 20-30% by end of 2009.
Young people and others who joined the ‘housing ladder’ at its peak in summer 2007 will find that their property is worth only 70% of what they paid for it by then. And many will have taken out large mortgages to pay for their flat, many up to 100%. So their home will be worth less than the debt they owe. That’s what is called ‘negative equity’.
And with mortgage rates rising all the time, hundreds of thousands of British families are going to be unable to meet their payments over the next couple of years and will be forced to sell or have to walk away from their homes.
So the great consumer spending binge is over. Everybody will be tightening their belts as wage rises fail to keep up with inflation and unemployment rises. That’s a recipe for outright slump, not just an economic slowdown.
Unemployment is already starting to rise. The number of claimants for unemployment benefit in May rose for the fourth consecutive month and the official unemployment rate rose for the first time in years to 5.3%.
With unemployment heading above 6% and inflation towards 5%, the misery index (the addition of the two rates) will be in double figures soon. And the last time that happened, British capitalism was reduced to its knees.
What can the Bank of England and the government do about this to avoid a slump? The short answer is nothing. Mervyn King is in a deep quandary. If he raises interest rates in order to drive down inflation, he will just make it worse for British businesses and households to fund their investment and spending. That will deepen the oncoming recession. On the other hand, if he lowers interest rates, he could inspire more borrowing and more inflation. So he will do nothing.
The truth is that the spectre of ‘stagflation’ is now hanging over the UK economy. That is where the economy stagnates and does not grow, but the economic slowdown does not get inflation down either. Such a situation has not existed since the 1970s and early 1980s and the strategists of capital are now really worried that it could reappear, proving yet again that capitalism cannot avoid the continual cycle of boom and slump, which is inherent in the capitalist mode of production for profit, not need.
The supposed solution of the politicians (including New Labour ministers), the bankers and the bosses to this dilemma should be no surprise to Marxists. It is not that the bankers and financiers that got the economy into this mess should be penalised. Oh no. The answer is that workers and their families should take the hit.
The cry of the politicians and economists is that workers must accept lower or no wage rises to stem inflation. Public sector workers are being forced to accept less than a 2% pay rise when inflation is now well above that and accelerating, and employers in the private sector are trying to do the same. And yet we know that the reason for inflation is nothing to do with wage rises and that is admitted by the economists and the Bank of England! So the capitalist solution is blatant – working-class families must be forced to reduce their already low standards of living.
The economic crisis is not the result of workers like the oil tanker drivers asking for too much (they had not had a pay rise since 1992!). It is a product of the failure of capitalism globally. The housing slump is not confined to Britain, but started earlier in the US and has spread to Spain, Ireland, Australia and elsewhere. The financial crisis is not confined to Britain, but started in America and has spread to the UK, Europe and Asia. Nothing is clearer: capitalism is destroying people’s hard-won living built up over the last decade or so and the leaders of capitalism want the working-class to pay for their losses.
There is a theory doing the rounds of capitalist economists at the moment. It is called the Black Swan theory, developed by an American financial analyst, Nicholas Taleb. Before people discovered Australia, it was thought that all swans were white. But the discovery in the 18th century that there were black swans in Australia dispelled that notion.
Taleb argues that many events are like that. It is assumed that something just cannot happen: it is ruled out. But Taleb says, even though the chance is small, the unlikely can happen and when it does it will have a big impact. Taleb cited the 9/11 Twin Towers attack as a modern example. The global credit crunch and the ensuing economic crisis have been suggested as another example of the Black Swan theory.
From a Marxist dialectical point of view, the Black Swan theory has some attraction. After all, revolution is a rare event in history. So rare that many (mainly apologists of the existing order) would rule it out as impossible. But it can and does happen, as we know. And its impact, when it does, is profound. In that sense, revolution can be described as a Black Swan event, as a unique historical event.
But where Marxists would disagree with Taleb is that he argues that chance is what rules history. Randomness without cause is how to view the world. This is far too one-sided and undialectical. Sure, chance plays a role in history, but only in the context of necessity.
The credit crunch and the current economic slump could have been triggered by some unpredictable event like the collapse of some financial institution last August or the loss of bets on bond markets by a ‘rogue trader’ in a French bank last December. For that matter, the recent food price explosion may have started with a tsunami or an unexpected drought in Australia. And the oil price explosion may have been the product of the ‘arbitary’ decision of President Bush to attack Iraq.
But those things happened because the laws of motion of capitalism were being played out towards a crisis. As we have argued in this column many times before, capitalism only grows if profitability is rising. And corporate profitability peaked in 1997, fell back to 2002, recovered somewhat up to 2006, but began falling again after that. With profitability declining, the huge expansion of credit (or what Marx called fictitious capital) could not be sustained because it was not bringing enough profit from the real economy. Eventually, the housing and financial sectors (the most unproductive parts of capitalist investment) stopped booming and reversed.
Similarly, the food price explosion was man-made, not an act of God. Global warming, droughts and floods are man-made. The food and energy deficits are due to weak capitalist production combined strong demand from China and other fast-growing economies and the failure of capitalism to diversify into clean alternative energy production.
So the current economic crisis was no chance event that nobody could have predicted. Marxists and even some capitalist theorists forecast it. The economic slump that British capitalism is now entering (along with many other capitalist economies around the world) is no Black Swan. It is an inevitable consequence of the capitalist system of production.