The inflationary crisis is deep. Hitting 8.3% in August, consumer prices in the U.S. are barrelling upwards at an alarming rate. It’s not just consumer goods that are failing to be properly circulated and distributed: in May, the Producer Price Index showed intermediate processed goods at a 21.6% rise over last year’s prices, along with a 39.7% annual increase for intermediate unprocessed goods. Supply issues related to the availability of skilled labor, the transport of goods, and warehousing—exacerbated by COVID shutdowns following March 2020—are compounding a reticence to invest in productive capital in some sectors, evident in the eagerness with which newly acquired capital is put into stock buybacks, which were up 7% from the year before in the second quarter of 2022. These productive and circulative tribulations are perhaps best highlighted by the spectacular failure of U.S baby formula producers in May 2022, when 43% of supplies were out of stock due to a recall by Abbott Nutrition.
The current inflationary moment may be explicated by the following interrelated factors: lockdowns in Chinese manufacturing centers, eternal queues of shipping containers vying for port access, the Russian invasion of Ukraine and subsequent sanctions, harvesting complications engendered by intensifying climate change, and corporate price-gouging. In addition, many businesses that received P.P.P loans—intended to maintain the labor force during the pandemic—were not closely monitored in how they utilized said loans, many of which were converted to grants, and thus were still able to perpetrate mass layoffs. The result was an understaffed labor force as the economy reopened, hence the labor shortage and resultant price hikes in commodities.
Deteriorating industry, rising inflation, and disrupted supply chains—among other things—color the current American economy. However, “we have to see that the economy is not in crisis, the economy is . . . the crisis” The tangled mess before us is only an expression of its own law: a law that lives by its constant subversion, but a law nonetheless. Thus, the blotches that color the economic coloring book do not arrive by the free choices of bad actors, but bleed out from the lines of the pages they mark. By trying to tease out some of the underlying tendencies that undergird the current economic conjuncture, perhaps we can start to form a clearer picture of why the present moment has taken shape the way it has.
Two tendencies to consider: firstly, jumping to 15.5% from the first quarter to the second, post-taxed non-financial corporate profits as a percentage of gross value added are now at a level not seen since 1950. Secondly, and ostensibly in contradiction, this moment composes a larger trend of generally falling profitability in the U.S., which is depicted in the graph below. This graph provides a crucial blueprint for sketching the economic history of the late 20th century. As economist Michael Roberts explains,
there has been a . . . decline in the world rate of profit over the last 80 years of -25%, starting with the huge profitability crisis from 1966, leading to the major global slump of 1980-82. That was followed by the . . . ‘neoliberal’ revival in profitability up to 1996 (+11%). After that, the world economy entered . . . ‘a long depression,’ when profitability slipped back, turning up briefly in the credit boom of the 2000s until 2004, before slipping again into the Great Recession of 2008-9. Since then, the world rate of profit has stagnated and was near its all-time low in 2019, before the global pandemic slump of 2020.
The bifurcation between the profit rates of all firms and those of non-financial corporations starting in 1982 reveals that the period of neoliberalism that combated many problems of profitability was reliant on the shifting of capital from the industrial to the financial sector. Roberts’ attempt at empirically demonstrating profitability over time is only one of many. William Jefferies’ calculation has similar but not identical findings, shown to the right. According to Jefferies’, growing profit rates as markets globalized and after China joined the W.T.O in 2001 discredit the thesis that the domestically imposed austerity measures in the U.S. were ever principal drivers of the recovery of the rate of profit. By reframing this drastic increase in the context of an international hierarchy wherein the U.S. relieved a strain on the rate of profit by drawing from super-exploitable labor in the Chinese market, Jefferies allows us to dissolve the dichotomy between domestic and foreign issues, between the economy and geopolitics. The “impact of the restoration of capitalism in the Former Soviet Union, Central and Eastern Europe after 1991,” Jefferies adds, was also a key factor in the recovery in the rate of profit. However, with rising wages in China, the rate of profit began to fall again in the mid-2010s.
The increase in the profit margin, which reflects that the rise in the prices of commodities is outpacing the rise in production and labor costs, yielding an increase in the rate of profit. So, we must understand “greedflation” as a counter-offensive to the overarching fall in the rate of profit: another strategy—less enduring and impactful than previous release valves for profitability issues, but similarly driven by a thirst for instant relief. Thus, in general, firms have succeeded in offsetting rising input costs by shifting the costs onto consumers. This however, is not a permanent solution to the crisis of profitability. For starters, the theoretical underpinnings of falling rates of profit depend not on a relation of prices, but one of values. Suppose we have a constant rate of surplus-value extraction, so that the instant in an eight-hour working day where the workers produce the value in commodities equal to the value of their wages comes at the same point in time each day. Barring alterations to the working day, then, employers are forced to shrink the ratio of labor costs to machinery costs over time. If this change is repeated over time, we have a situation in which—despite more goods being produced at each stage—less labor is mobilized to meet what previously stood as the quota. As a result, the mass of goods produced, although greater in quantity, are relatively less valuable, given that value arises from labor power. Thus, the surplus-value contained in each product falls as this reorganization in the composition of capital occurs. So, when we speak about this tendency in the rate of profit to fall, “the profit to which we are here referring is but another name for surplus-value itself.” All this is to say that prices and value are not identical measures. Thus, I argue, what we are seeing in “greedflation” is an attempt to extend the price of commodities past their real values by taking advantage of inflation expectations. That is not to say that inflation expectations are the cause of inflation, as Jerome Powell has erroneously expressed. Rather, non-financial corporations have operated under the fog of inflation to make matters worse. However, it is clear that opportunism that does not address the fundamental causes of declining profitability and worsens inflation cannot be a long term solution. Enter the Federal Reserve.
The Fed’s recent interest rate hikes—which brought interest rates to 3.00-3.25%—seem on the surface a desperate attempt to keep inflation down by strangling the money supply. With the public position that current inflation is at more than three times the Fed's 2% target and continues to climb in spite of the Fed’s rate increases, it is not surprising that the preeminent ideological stance is able to be encapsulated by the likes of Barclays’ Blerina Uruc, who states, “in this environment, monetary policy has to do that much more to cool down demand and have an effect on prices”. However real the unabated growth of inflation might be, a framing that centers on increased rate hikes and the promise of a “soft landing” as common sense are nothing but ideological drivel. This is because, as discussed above, the inflation problem is largely supply driven. What then—if not the direct reduction of inflation—are the effects of severe interest rate hikes by the Federal Reserve? As Ua Khan writes
raising interest rates cannot end the war in Europe[,] prevent lockdowns in China[,] or expand the number of shipping terminals. What it can do, however, is cause a recession; high interest rates mean firms will find it difficult to finance expansion and employment. Some will go under; the economy slows down, workers lose their jobs, and wages fall as the bargaining power of workers weakens. The remaining firms make do by paying workers less to do more . . .
So, the Fed’s crusade will lead to increased unemployment and falling wages in the U.S. This reveals that, although—given that real wages are falling while inflation skyrockets—the wage levels of American workers are not the cause of inflation, their reduction is certainly, in the eyes of the capitalist class, a solution to the inflation problem. On top of this dynamic, as Michael Hudson identifies, the astronomical increase in interest rates will make homeownership plummet, by increasing mortgage payments. Thus, the economic brinkmanship of the Fed’s rate hike gamble can only be described as class war. It may be seen as a redirection from the price-gouging method of overcoming issues of profitability to a longer-term solution: the reduction of the cost of labor and more burdensome debts, which allow for an expansion of the rate of profit in financial and non-financial corporations. However, we would be mistaken in limiting our analysis to the imperial hegemon. The rest of this essay will focus on the effects of interest rate hikes on the countries constituting the periphery of the world system.
U.S. monetary warfare need not be as overt as the freezing of the central bank reserves of Venezuela and Afghanistan to bring about privation in the Global South. In fact, deliberate action outside of international law is not always a necessary path for the U.S’s imperialist ends. Neither is control filtered through international institutions such as the IMF. The status of the U.S.D as the reserve currency of the world uniquely positions the U.S. Fed to dictate international monetary policy disguised as domestic policy. Per the U.N., escalating U.S. prices and interest rates are positively correlated with bond yield prices. Consequently, borrowing costs for debt-selling countries—whose buyers would now demand higher returns—would rise. As IMF Managing Director Kristalina Georgieva, like a flame warning of excessive oxygen levels, asserts, 60% of developing countries have debt payments greater than or equal to half of their national economies. Such a situation heightens the risk of international debt crises and IMF shock restructurings. Higher U.S. bond yields, enticing global investors, trigger waves of capital flight and currency devaluations in the global periphery. Also, high dollar-denominated debts incurred during the pandemic force peripheral economies to choose “between raising their own interest rates to prevent capital flight and defend the value of their currency, possibly triggering a recession, or allowing the currency to depreciate and face soaring costs for repaying dollar-denominated debt, and inflation”. In countries whose central banks are forced to follow the Fed’s hikes, the same dynamic of induced unemployment, devalued labor power, and falling home ownership would ensue. With falling currencies, crucial imports—already subject to supply-chain bottlenecks—become even harder to acquire, putting millions at the risk of malnutrition.
Such an attack on the working class and peripheral societies constitutes an attempt to increase the rate of exploitation by decreasing wage expenditures as well as an expropriation of the Global South’s capital in an attempt to breathe life into an economy that is down to its last legs in terms of profitability. The imperial proletariat’s benefiting from the domination of the Third World is no small topic, and, in my view, should be accepted as a thesis and expounded, but there is no question that—although to varying degrees—proletarians from every corner of the World System are victims of the Fed’s global class war.
The Invisible Committee. The Coming Insurrection. 1. Vol. 1. Semiotext(e)/Intervention Series. MIT Press, 2009.
This calculation is based on this equation for each year over 78 years.
This calculation is based on this equation for each year over 53 years.
As the Financial Times Editorial Board writes, “[Sri Lanka] may have as little as $500mn left in foreign reserves though a $1bn bond repayment is due in a few months. With the IMF ready to intervene, there is hope that the situation may stabilise.”
By Samuel Araura
