A stagflationary future!

Image: Ravi Kant


Capitalism creates barbarism, but it is not entirely compatible with it. Transforms from prosperous capitalism to disastrous, miserable capitalism

Nouriel Roubini is a unique economist of the system. If he has international fame, he is often looked at with ironic distrust. Behold, his peers consider him a "prophet of doom". However, everything he says has enormous plausibility. He has now supported a cloudy prediction about the economic situation in the coming decades of the XNUMXst century: capitalism on a global level will suffer from persistent stagflation and this will be its normal condition from now on.

Here is how Nouriel Roubini, in his own terms, presents this foresight: “Advanced economies and emerging markets are increasingly involved in necessary “wars”. The future will be stagflationary and the only question is how bad it will be. Inflation rose sharply throughout 2022 in advanced economies and emerging markets. Structural trends suggest the problem will be secular – not transitory.”

There will therefore be necessary wars against new pandemics, the effects of global warming, massive immigration, scandalous poverty, etc.; there will even be real war conflicts like the current one between the United States (behind the stage), Ukraine and Russia (on the very stage where the battles actually take place). As these two types of “wars” will act either to raise aggregate demand or to contract aggregate supply, they will create the objective conditions for the normalization of stagflation. His two writings in which these “predictions” are made can be accessed here e here.

How can theoretically justify this thesis that Nouriel Roubini advances by exposing arguments that refer mainly to future phenomena? Well, first of all, persistent inflation, as it is known today, is a characteristic post-war phenomenon.

As the following figure shows, continuous growth in prices, at least at a crawling level, followed the conjuncture throughout the period beginning in 1945. The abandonment of the gold standard, the institution through which fiduciary money is anchored in commodity money, allowed inflation to become a normal condition of economic growth. As is well known, the objective of central banks now is to keep inflation low – not to eliminate continued price growth.

The following figure presents US and UK wholesale price indices between 1780 and 2010 in the form of a series where 1930 = 100. This needs to be looked at carefully. Note, first, that secular time is measured on the horizontal axis with the decades mark. It should also be noted that the vertical axis presents the price level (measured by the index) on a logarithmic scale, which, as is well known, flattens the rise in prices from 1940 onwards. price levels fluctuate between 1780 and 1940, oscillate up and down around the 100 axis, but do not trend upward. Note also that there are several periods of deflation: those between 1870 and 1895 and in the early 1930s are notable because they indicate the occurrence of long depressions.

If the gold standard had not been abandoned in the 1930s, which became famous because of the severity of the economic crisis, the post-1929 deflationary period would have lasted much longer. Thus, it can be seen that creeping inflation was a “good solution” both to avoid the worst (deflation) and to help boost capitalism for three decades (after 1945). That is, it worked without problems, but only before capitalism entered its sunset. Stagflation, then, became the indicator that this “solution” started to fail, becoming an eventual difficulty, a “problem”.

After this historical consideration, the inflation theory that best supports Nouriel Roubini's gloomy forecast can be presented; behold, it was formulated by Anwar Shaikh and is exposed in his book Capitalism (Oxford University Press). To expose it, it is necessary to state peremptorily that inflation is produced immediately by the decisions of capitalist companies, in particular, of corporations that have great control over their markets. They are and only they are free to raise prices when they see fit. In this sense, there is an evident asymmetry in relation to workers.

Thus, the inflationary inertia supposedly produced, in certain circumstances, by a price/wage spiral of circular causation, is only an appearance that gives rise to a false theory, which is usually supported by economists of the system. The rise in wages that follows the rise in prices comes as an a posteriori response and it follows only through much struggle on the part of the workers. What produces inflation a priori are the decisions of the capitalists, which aim to increase prices whenever possible to increase the profit margins actually obtained.

According to Shaikh's theory – which operates with macroeconomic variables, which are constituted only as statistical syntheses of complex elementary phenomena – the inflation rate depends positively on aggregate demand impulses, negatively on the net profit rate and positively on the degree of use of the growth potential (which can be approximated in the short term by the degree of occupancy of the installed capacity).

The following chart helps to understand this theory of inflation. But it should not be taken as positive information, but only as a rhetorical device that nevertheless has knowledge value.

The horizontal axis represents the growth potential and the vertical axis the expected inflation rate; the curves drawn therefore depend on the three variables mentioned above: explicitly on the “τ” variable and implicitly on the “demand impulse” variable (shape of the central curves). The inflation rate should grow with the use of the growth potential, tending to infinity as it tends to run out. For this to happen, there needs to be enough momentum from aggregate demand. If this is sufficiently strong and continuous, hyperinflation occurs. Two curves are plotted in the figure to make explicit the dependence of the inflation rate on the net profit rate: one for higher profitability than the other. As the comparison of the curves suggests, lower profitability increases the inflationary tendency of the economic system.

Now, it is also known that the investment impulse depends negatively on profitability, that is, the lower the expected rate of profit, the lower the rate of capital accumulation. Thus, in contemporary conditions in which fiduciary money is not explicitly linked to commodity money (that is, to gold), a stagflationary conjuncture is always formed and the rate of profit remains tendentially and historically low. Because, in this condition, a large part of the demand impulses (which come from the companies themselves, from the families, from the government and even, eventually, from foreign trade) leads companies to raise prices instead of opting for investment, whether in raising production capacity is even in raising current production.

And, as the sequence graph produced by Basu et alii indicates,[I] this seems to be the condition of the main capitalist economies after the turn of the 2008th to the XNUMXst century and, especially, after the XNUMX crisis. System economists refer to this phenomenon using the term “secular stagnation” and critics of political economy advance the opinion that it is a “long depression”. Nouriel Roubini mentions nothing in this regard, but it is under this structural condition that his macroeconomic arguments make the most sense. What trends does this author point out – one must ask – for the future behavior of aggregate demand and supply?

Based on the theoretical and historical exposition developed above, it was concluded that the situation of the world economy is marked now and from now on by a stagflationary tendency. Why, then, will what is in potency become an act over the coming years and decades? Why will stagflation necessarily occur? And here it is necessary to return to the texts of Nouriel Roubini, who speak of adverse demand and supply shocks as circumstantial or constant causes of inflation, unwanted price increases that will be accompanied by economic stagnation.

This author, a lone voice – somewhat strange – among economists of the system, believes that governments and peoples will face in the coming decades what he calls “wars”, which will be necessary to face what he calls “mega-threats”. . And they in general – as well as possible war conflicts and those that are actually happening now – will require increasing spending that will result in “even bigger fiscal deficits, more monetization of debts and, thus, higher inflation in the future”. Here, therefore, he is referring to demand shocks that must necessarily – and not just possibly – occur. Which ones are they? Where can they come from?

Real wars require increasing spending on infrastructure and on defense and attack weapons. There is already an open conflict between the United States and NATO (through Ukraine) and Russia, but there are others on the horizon: the dispute over whether or not to keep the island of Taiwan (Formosa) separate from mainland China and the conflict between Iran and Israel are the most notorious examples. Furthermore, it is known that an arms race is underway and it also involves, in addition to the United States, Russia and China, Europe, Japan, etc.

The governments of countries in general will not be able to avoid waging a war against climate change and its consequences: in this struggle “a significant part of the existing social capital will have to be replaced either because it will become obsolete or because it will be destroyed”. In addition to global warming, it is necessary to clearly see that the ecological crisis is much broader – deforestation, pollution, water contamination, etc. – in such a way that its effects will imperatively demand, in the present and in the future, a great effort to combat the forms of degradation of the environment that do not stop prospering.

Furthermore, governments will also have to fight uphill battles against future pandemics; in addition, they will have to struggle to minimize the deleterious effects of the ongoing technological transformation on labor markets. The social degradation that comes from the effort to recover the rate of profit by deregulating labor markets and thus by increasing the rate of exploitation, and which appears to liberal economists as a natural necessity, after all, it also undermines the process of accumulation. Capitalism creates barbarism, but it is not entirely compatible with it. It transforms from prosperous capitalism to disastrous, miserable capitalism.

In summary, at the same historical moment when the accumulation rate is low because the future profit rate also appears low, when, as a result, economic growth is reduced and the tax capacity is compressed, there is a strong tendency to increased need to increase public spending for several reasons mentioned above. Apart from taxes, governments are financed through indebtedness or through monetary issuance. As the levels of public debt of governments, as well as companies and families, is already at a very high level and growing, they will have to resort at a certain point to monetary issuance to support their spending.

According to Nouriel Roubini, commodity production itself, and thus aggregate supply, is threatened by shocks that may arise from the same causes that produce demand shocks. Actual wars and hardships in general can create barriers to the flow of goods, they can destroy crops, they can disrupt global supply chains. Now, the result of all this is always a rise in certain specific prices, which become a wave that affects all prices. Nouriel Roubini mentions, by the way, that “the world is going through a 'geopolitical depression' crowned by growing rivalries”. And this is what one has to expect from the process of relative deglobalization now under way.

In conclusion, it must be remembered that the future can be foreshadowed, but it cannot be predicted especially with certainty. The decline of capitalism, which began in the 80s, certainly holds many unpleasant surprises, although it is not known exactly which ones will actually come. And they will be blunt mainly for those who "choose" now to maintain some form of denialism, still expecting some individual or social progress from the maintenance of capitalism. And here it is impossible not to think about the current situation of the capitalist economy in Brazil. Is it not also affected by a stagflationary bias?

*Eleutério FS Prado is a full and senior professor at the Department of Economics at USP. Author, among other books, of From the logic of the critique of political economy (Ed. anti-capital fights).


[I] The data dashboard showing the historical profitability of the US economy can be found here https://dbasu.shinyapps.io/Profitability/; the data panel showing the worldwide rate (average of 25 countries) can be found here. https://dbasu.shinyapps.io/World-Profitability/


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