Yanis Varoufakis: Inflation as a political force has gone wrong

ive here. Yiannis Varoufakis’s theory of why the West suffers from hyperinflation is useful and generally beats easy and false claims like “a lot of money printing”. If “money printing” caused inflation, Japan, with its massive fiscal and monetary stimulus, would not have been mired in border deflation for two decades. So far, its year-to-year inflation, despite its depreciating currency (which means imported energy is more expensive) is only 2.4%.

However, I have a serious skirmish with Varoufakis’ argument. He is right to point to derivatives as big, and I argued the big cause of near-death for the global financial system in September and October 2008. This was the justification for the massive transfer of wealth to financiers and investors at the expense of taxpayers. Keep in mind, as we discussed at length at the time, that there are more equitable ways to save the financial system, such as writing down bad debts, especially underwater mortgages, and offsetting the deflationary effect with more fiscal spending. And of course Berb walks for many of the top bankers.

When Varoufakis is too far off the mark, commerce/supply chain finance is portrayed as playing a role in the financial crisis. As we documented in a long formula in ECONNED, the derivatives that blew up the financial system were written on BBB/BBB offshoots of really bad mortgage securitization which were then aggregated into CDOs. These CDOs then often appear on the balance sheet of highly leveraged systemic financial institutions.

By Yanis Varoufakis. Originally published in Project Syndicate; By posting from their website

The blame game for high prices continues. Did the central bank’s money that has been pumped for so long cause inflation to rise? Was it China, where most physical production moved before the pandemic shut down the country and disrupted global supply chains? Was it Russia whose invasion of Ukraine took out much of the world’s supply of gas, oil, grain, and fertilizer? Was it a subtle shift from pre-pandemic austerity to unfettered financial generosity?

The answer is not faced by test takers: all of the above and no one what mentioned before.

Pivotal economic crises often provoke multiple explanations, all of which are correct, omitting the point. When Wall Street collapsed in 2008, leading to the global Great Recession, different explanations were offered: regulatory takeovers by financiers who replaced industrialists in the capitalist system. a cultural predisposition towards risky finance; Politicians and economists failed to distinguish between the new paradigm and the mega bubble; And other theories, too. They were all correct, but none of them went to the heart of the matter.

The same is true today. My “We told you so” critics, who have projected high inflation since central banks massively expanded their balance sheets in 2008, remind me of the euphoria felt that year on leftists (like myself) who constantly “predict” capitalism approaching death. Closer to a stopped watch is appropriate twice a day. Sure enough, by creating massive overdrafts for bankers in the false hope that money will flow into the real economy, central banks have caused epic asset price inflation (stock and housing market booms, crypto-craze, and more).

But the monetary story cannot explain why in 2009-2020 the major central banks failed even to increase the amount of money circulating in the real economy, let alone drive consumer price inflation to the 2% target. There must be something else causing the inflation.

The disruption of supply chains centered in China clearly played an important role, as did Russia’s invasion of Ukraine. But none of the workers explains the sudden “regime change” of Western capitalism from prevailing deflation to its opposite: all prices are shooting up simultaneously. This would require wage inflation to outpace price inflation, causing a self-perpetuating vortex, with higher wages returning to higher prices which in turn causes wages to rise again, To infinity. Only then would it be reasonable for central bankers to demand workers “take one for the team” and refrain from seeking higher wage settlements.

But today, asking workers to forgo wage gains is absurd. All the evidence indicates that, unlike in the 1970s, wages rise much more slowly than prices, yet the increase in prices is not only continuous, but accelerating.

So what actually happens? My answer: The half-century-long power game led by corporate Wall Street, governments and central banks has gone wrong. As a result, Western authorities now face an impossible choice: drive conglomerates and even states into cascading bankruptcy, or let inflation go unchecked.

For 50 years, the US economy has kept net exports to Europe, Japan, South Korea and then China and other emerging economies, while the lion’s share of these foreigners’ profits have flocked to Wall Street in search of higher returns. Against the backdrop of this tsunami of capital heading to America, financiers were building pyramids of private money (such as options and derivatives) to fund companies to build a global labyrinth of ports, ships, warehouses, storage yards, roads, railroads, and transportation. When the crash of 2008 destroyed these pyramids, the entire financial maze of global supply chains in time was endangered.

To save not only the bankers but also the labyrinth itself, central bankers stepped in to replace the financiers’ pyramids with public money. Meanwhile, governments have been cutting public spending, jobs and services. It was nothing less than the lavish socialism of capital and the harsh austerity of labour. Wages shrunk, prices and profits stagnated, but the prices of assets that the rich (and thus their fortunes) bought rose dramatically. Thus, investment (relative to available cash) has fallen to an all-time low, capacity has diminished, market power has flourished, and capitalists have become richer and more dependent on central bank money than ever before.

It was a new power game. The traditional struggle between capital and labor continued to increase their respective shares of total income by increasing profits and wages, but it was no longer the source of most of the new wealth. After 2008, global austerity reduced investment (demand for money), which, along with abundant central bank liquidity (money supply), kept the price of money (interest rates) close to zero. With declining productive capacity (even new housing), a dearth of good jobs, and stagnant wages, wealth has triumphed in the stock and real estate markets, which are decoupled from the real economy.

Then came the pandemic, which changed one big thing: Western governments had to divert some new rivers of central bank money to the shutdown masses within economies that, for decades, had exhausted their ability to produce things and were now facing crippled supply chains to boot. When the closed masses spent some of the holiday money on scarce imports, prices began to rise. Companies with massive paper wealth responded by exploiting their massive market power (due to shrinking production capacity) to drive prices higher.

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

Maybe nothing good. To stabilize the economy, the authorities first need to end the exorbitant power given to the few through the political process of paper wealth and cheap debt creation. But the few will not relinquish power without a struggle, even if it means igniting the fires of society.

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