We have entered a world characterised by extreme instability. Even if the people managing the major capitalist economies are mainly boringly familiar, circumstances are forcing them into extreme policy reversals. The latest example is provided by the panic over inflation.
The rapid upsurge in the rate of inflation since last summer is itself a symptom of the deepening instability. For more than a decade, price increases in the big economies struggled to rise much above zero. Now they’re pushing into double figures, the highest in 40 years.
Higher inflation reflects the recovery in the global economy from the biggest slump since the Second World War, caused by the initial peak of the Covid-19 pandemic in 2020-1. Demand for goods and services rose amid disrupted supply chains, workers changing jobs or dropping out of the labour market, and increasing international competition for natural gas. The Ukraine War has pushed up food and energy prices more.
China is the exception. In May the consumer price index actually fell by 0.2 percent compared to the previous month. China’s economy has been depressed by the lockdowns imposed on cities such as Shanghai and Beijing. The government is trying to boost growth by encouraging firms to invest and produce more, especially for the booming export market.
The central banks that became the main economic managers in the neoliberal era are panicking. Since the Global Financial Crisis of 2007-9 they have kept interest rates very low and pumped money into the financial system. Now these policies are going into reverse.
The central bankers are terrified of a “wage-price spiral”. Even though there is plenty of evidence that the inflationary upsurge is driven by higher profits, they fear that workers may seek to defend their real wages by striking for higher pay. So they are clobbering workers— and indeed the entire economy.
The main instrument is higher interest rates. This started with the Bank of England (BoE) in February, but now the US Federal Reserve Board is in the lead. Last week it increased interest rates by 0.75 percent. Usually changes in interest rates come in much smaller doses of 0.25 percent but the Fed wanted to make a point.
The Financial Times newspaper Unhedged column explains that this policy “makes credit more expensive, so companies invest less and consumers spend less. It makes asset prices fall and asset markets less liquid, so companies and households become poorer and less inclined to spend. It makes people not get hired and it makes people get fired. It does this quite indiscriminately. It is not a scalpel, it is a sledgehammer. It smashes things.”
The BoE and Swiss central bank also raised interest rates, and the Europe Central Bank says it will start doing this in July. And Fed chair Jay Powell made it clear there will be more increases—maybe as high as 1 percent in a go.
The Fed is also planning to end its policy of quantitative easing—that is buying government and corporate bonds as a way of ensuring financial markets have the money they need to function effectively. The danger with this “quantitative tightening” is that it may cause the money markets to freeze as they did in 2019-20, even before the pandemic hit.
Powell says that he hopes these policies will force down inflation quickly without precipitating a recession. But no one seems to believe anymore in this “softish landing”, as he calls it. This is why stock markets have been falling worldwide.
The central banks’ “sledgehammer” will push up unemployment as a way of compelling workers to accept huge cuts in their real wages.
The last time something like this happened was in October 1979 when the new Fed chair Paul Volcker imposed a brutal monetary tightening. This was the turning point in the advent of neoliberalism globally. The resulting recession in the US was exported globally via a strengthening dollar that precipitated the Third World debt crisis.
I don’t myself expect something like the “Volcker shock” this time. My guess is that the central banks will eventually retreat to more expansionary policies. And workers striking for higher wages can help force this retreat.
Crises are on the horizon