Inflation as a powerful political drama gone wrong

After two decades of rising central bank-backed asset prices and rising corporate debt, a little price inflation was all that was needed to end the power drama that shaped the post-2008 world in the image of a revived ruling class. So what happens now?

The blame game for rising prices continues. Did excessive central bank money pouring over a long period of time cause inflation to rise? Was it China, where most physical production had moved before the pandemic shut down the country and disrupted global supply chains? Was it Russia, whose invasion of Ukraine took most of the global supply of gas, oil, grain and fertilizer? Was it the stealth shift from pre-pandemic austerity to unlimited fiscal goods?

The answer is one that testers never encounter: All of the above and none of the above.

Major economic crises often give rise to multiple explanations that are all correct while missing the point. When Wall Street collapsed in 2008, triggering the global Great Recession, various explanations were offered: regulatory capture by financiers who had replaced industrialists in the capitalist trickle-down order; cultural inclination towards risky finance; the failure of politicians and economists to distinguish between the new paradigm and the massive bubble; and other theories as well. All were valid, but none went to the heart of the matter.

The same is true today. Monetarists, who have been predicting high inflation since central banks massively expanded their balance sheets in 2008, remind me of the glee that year from leftists (like me) who are constantly “predicting” the death of capitalism – akin to the stopwatch that is right twice a day. Of course, by creating huge overdrafts for bankers in the false hope that money would flow into the real economy, central banks caused epic asset price inflation (stock and housing market boom, crypto craze, and more).

But monetarist history cannot explain why the major central banks failed from 2009 to 2020 to even raise the amount of money circulating in the real economy, let alone push consumer price inflation up to their target of 2 %. Something else must have caused the inflation.

Disruption of China-centric supply chains played a major role, as did Russia's invasion of Ukraine. But no single factor explains the sudden "regime switch" of Western capitalism from prevailing deflation to its opposite: all prices rise simultaneously. This would require wage inflation to outpace price inflation, thus causing a self-perpetuating spiral, with wage increases feeding back into further price increases, which, in turn, cause wages to rise again. ad infinitum. Only then would it be reasonable for central bankers to demand that workers "take one for the team" and refrain from demanding higher wages.

But today the demand that workers give up their wages is absurd. All the evidence suggests that, unlike in the 1970s, wages are rising much more slowly than prices, and yet price rises are not only continuing, but accelerating.

So what's really going on? My answer: A half-century-long power drama led by corporations, Wall Street, governments and central banks has gone awry. As a result, Western authorities now face impossible choices: push conglomerates and even states into multiple bankruptcies, or let inflation run unchecked.

For 50 years, the U.S. economy has maintained the net exports of Europe, Japan, South Korea, then China and other emerging economies, while the lion's share of those foreigners' profits have been rushed to Wall Street in search of higher profits. high. On the back of this tsunami of capital flowing to America, financiers were building pyramids of private money (like options and derivatives) to finance corporations building the global labyrinth of ports, ships, warehouses, shipyards, roads and railroads. When the crash of 2008 burned down these pyramids, the entire financial maze of global just-in-time supply chains was jeopardized.

To save not only the bankers, but the labyrinth itself, the central bankers stepped in to replace the pyramids of financiers with public money. Meanwhile, governments were cutting public spending, jobs and services. It was nothing less than generous socialism for capital and severe austerity for labor. Wages shrank and prices and profits were stagnant, but the price of assets purchased by the rich (and thus their wealth) skyrocketed. Thus, investment (relative to available money) fell to an all-time low, capacity shrank, market power flourished, and capitalists became richer and more dependent than ever on central bank money.

It was a new power game. The traditional struggle between capital and labor to increase their respective shares of total income through growth and rising wages continued, but was no longer the source of most of the new wealth. After 2008, universal austerity measures produced low investment (money demand), which, combined with ample central bank liquidity (money supply), kept the price of money (interest rates) close to zero. With productive capacity (even new housing) in decline, good jobs and wages scarce, wealth triumphed in the capital and real estate markets, which were disconnected from the real economy.

Then came the pandemic, which changed one big thing: Western governments were forced to channel some of the new rivers of central bank money to masses locked inside economies that, over decades, had depleted their capacity to produce things. As isolated crowds spent some of their allowed money on scarce imports, prices began to rise. Paper-rich corporations responded by using their enormous market power (given by their shrinking production capacity) to push prices through the roof.

After two decades of rising central bank-backed asset prices and rising corporate debt, a little price inflation was all that was needed to end the power drama that shaped the post-2008 world in the image of a revived ruling class. So what happens now?

Probably nothing good. To stabilize the economy, the authorities must first end the excessive power given to the very few by the political process of paper wealth and the creation of cheap debt. But the few will not surrender power without a fight, even if it means going down in flames with society in tow.

(Yanis Varoufakis, former finance minister of Greece, is the leader of the MeRA25 party and a professor of economics at the University of Athens. The review was written for the global journalism network, "Project Syndicate", of which "Koha Ditore" is also a part) )