The US copes with inflation Ruthless Criticism

Translated from GegenStandpunkt 4-22

More interest, more debt

The US copes with inflation and the risk of recession,
setting benchmarks for the rest of the world

Inflation of the national currency

In the USA, prices have been rising across the board for some time now. The decline in the value of the national currency is damaging its reliable services to the economy and society: it corrodes the purchasing power of the wages and salaries on which average Americans finance their living costs, and thus threatens to call into question the standard of living which hard-working Americans have a recognized right to; and it undermines the reliability with which money performs its service of functioning as a means of capital accumulation for corporations and financial institutions. The American state power does not want to simply accept either of these things; in the meantime, the dwindling purchasing power of the dollar has reached the point that it is now the decisive economic policy challenge for national politics. The President declares the fight against inflation to be the top priority of his economic policy; with the same justification, the Federal Reserve decides to radically correct its monetary policy.

As far as the source of the dollar’s decline in value is concerned, there is a broad consensus among the politicians and the general public: inflation is an unfortunate side effect of the Biden administration’s measures, which in themselves were extremely successful, to cope with the damaging effects of the Corona epidemic. The “American Rescue Plan” provided the economy and the people with billions of dollars from the national budget as a substitute for money that could no longer be obtained from the usual sources due to the epidemic.[1] The government payments proved their worth – almost textbook perfectly – in their function as purchasing power and thus at the same time served free enterprise as a means of enrichment; so well that the companies – speculating on a general expansion of business – resumed or expanded production and also took on additional workers for this purpose. This state-managed restoration of cooperation between capital and labor in America was promoted by a massive expansion of credit on the part of the banks. The banks made a lot from the upswing which they fueled with their loans: They provided the companies – not for free of course – with the money needed to expand investments as well as the masses with the necessary purchasing power to realize the growing profit claims of the borrowing companies. According to statistics, Americans in all income brackets are now more indebted than they were at the beginning of the financial crisis in 2008. The rising growth rates fueled a stock market boom, i.e. the ability of finance capital to create all by itself ever new opportunities for speculative money accumulation.

Biden is happy to be celebrated as the initiator and promoter of this fabulous economic recovery [2] – the good news, that is. What the media and the electorate blame him for is the downside of this success story, namely the decline in the value of money that has accompanied this growth. Included in entrepreneurial activity, whose achievements for national growth can’t be praised enough, is the freedom to tap into the solvency created by the state and the credit system by raising prices, i.e. to use it to sell additional goods and services even without making the effort to enrich oneself. This is exactly what companies have done in recent months; they have “passed on” the prices they paid to their business partners to their own customers, i.e. they have demanded higher prices wherever their market power allowed them to do it. The result has been a general inflation ultimately fueled by the rise in energy prices. Finance capital’s speculation on real estate, which went hand in hand with the general growth, drove up land prices and, along with them, interest rates on mortgages and rents, which already account for a not insignificant part of the usual cost of living. As a result, the general rise in prices represents a decline in the purchasing power of the nation’s money. Or, to put it differently: The growth of the dollar-denominated monetary earnings from all production and speculation and the quantum of access power available with earnings to the – productive as well as consumptive – elements of available social wealth are diverging further and further. The expansion of money, the purpose of all economic activity, represents less and less a real increase of earned capitalist wealth and more and more an unproductive inflation of credit.

This is the critical situation that America’s political leadership is addressing under the headline of the fight against inflation. Biden and co. see the beautiful growth successes which were set in motion by the Rescue Plan being endangered by the dollar’s loss of value domestically; and the stock market boom, which was initially celebrated as a success in terms of growth, is giving them less and less proof of the reliable character of the all-around increase in dollars and more its precarious condition. They intervene against this.

The Federal Reserve Bank looks after the value of money: Crisis on demand

This is the easiest exercise, since the question of who has to do what to get inflation off the back of the American economy has long been taken care of institutionally: This is a matter of monetary policy, and the Federal Reserve Bank is the authority responsible for it. In accordance with the objectives of “balanced growth” and “stable monetary value,” it is supposed to influence the conditions under which the banks lend their own customers credit. Its leverage is the extent to which, and the price at which, it refinances the credit granted by the banks, thereby enabling them to grant new loans. Of course, it does not take action only when the damage has already been done. Rather, monetary policy support for the national economy is a permanent task. Accordingly, the Fed has accompanied the upswing driven by the Rescue Plan with its monetary policy from the very beginning: first supporting it with a “low interest rate policy” that refinanced the banks and the business world’s giving and taking of more and more credit, thus facilitated the expansion of society’s ability to pay; then, increasingly critical on the question of whether in the course of growth and inflation there wasn’t already too much ability to pay in the society. It wants to get this under control by making money lending more expensive and thus making credit scarcer. With this in mind, it has decided on a fundamental change of direction, which is understood as such by all concerned: It initiates a series of interest rate hikes intended to curb the speculative excess of credit and thereby give the dollar a stable value.

First of all, raising the cost of refinancing the banks’ borrowing costs and passing them on to their customers only makes borrowing more expensive – for everyone who is already in debt. [3] Concerns that ordinary consumers will now have to cope with both the increase in prices and the borrowing costs they will have to pay for their cars, houses, etc., are not accepted by the Fed, nor is it stopped by the warning that the across-the-board increase in borrowing costs could destroy too much business, possibly even trigger a recession. Rather the Fed sees the fact that the increase in the key interest rate is generally raising the cost of borrowing in the country as the first success of its measure, i.e. as proof that it is on the right track: The general rise in interest rates confirms that previously there was probably too much cheap credit. Conversely, this means that prices will only come down if business goes bust. If it is good for monetary stability, the Fed wants to devalue some of the capital invested in America; so if its interest rate policy causes prices to crash to a considerable extent and makes yesterday’s profitable business unprofitable, then so be it. [4]

Nor is the Fed tormented by concerns that its sharp interest rate hikes could also make borrowing by the American government more expensive. The danger that every “tightening of monetary policy” and every accompanying increase in interest rates on government bonds could raise the question among finance capitalist investors as to whether the government issuer can bear such a higher burden on its credit is apparently not something it can recognize. At the Fed, there is no sign of a dichotomy between “monetary and fiscal policy” which European central bankers, for example, currently grapple with. Its interest rate policy is based not only on the assumption that the American government currently has good reasons to expand its borrowing, but also that it can continue to do so without any problems, even at higher costs.

The government is fighting the threat of recession conjured up the Fed – with an “Inflation Reduction Act”

In the midst of inflation and credit tightening, the Biden administration launches an extensive program to stimulate the economy, [5] which includes some of its “Build Back Better” program, which even the Democrats themselves had believed to be dead. [6] Lest anyone misunderstand this as being in opposition to the Federal Reserve’s concurrent restricting of credit, the big government spending program is christened the “Inflation Reduction Act.” The good will to fight inflation is underlined by the fact that it also includes a large revenue program that is guaranteed to “counter-finance” the new spending by, for example, raising taxes on the rich and collecting taxes more consistently from everyone else; in addition, the largest expenditures are estimated for several years and the promise is documented to radically reduce the mountain of debt that has accumulated over the years: There can be no talk of an inflation-increasing bloating of the national debt, since the budget has been calculated so neatly according to all the rules of the arts of budgeting.... In addition, the government is taking direct aim at price increases, especially where they make it particularly difficult for the masses to get by: The escalating cost of medicine is to be reduced by authorizing the state to negotiate price discounts for prescription drugs with manufacturers; in this way, the government claims to have finally resisted the claims of ‘Big Pharma,’ something previous governments allegedly did not dare or succeed in doing. An ambitious energy program to promote the green energy economy in America and ensure global American energy dominance is expected to significantly reduce energy costs for the average American. [7] To lower gasoline prices in particular, the Strategic Petroleum Reserve will be tapped, supplemented by a polite but firm appeal to oil companies to produce and refine more oil. Also on the program is a “Housing Supply Action Plan,” which Biden says will build more than a million new homes over the next five years.

The big package mainly testifies to the Biden administration’s determination to fight inflation not merely by purging the American economy of bad credit, but by promoting clearly profitable business. Not only should this shakeout not turn into a recession or a general decline in national business activity, but exactly the opposite: a new upswing. In this sense, the government announces that it will fight inflation and recession at the same time with the only truly effective means: a new government-sponsored surge in investment that will make the American economy more productive and more profitable overall. It’s no coincidence that the energy industry stands at the center of this program: the president sees the intensification of competition between states for access to affordable energy, triggered by the economic war, as an opportunity to bring about an American locational advantage by lowering energy prices, which is intended to attract capital to America. Such growth-promoting effects justify not only the use of government budget funds to finance the large-scale project, but also the promise to reduce the national debt mountain now. Properly fueled growth in America at the expense of the competition – that makes every budget calculation respectable.

So the American government is thus no means refusing to accept the requirement that the state, when expanding government spending, must take care of the reliability of the nation’s credit; Biden demonstratively harps on how committed he is to the basic principle according to which America doesn’t do anything that isn’t profitable, i.e., that even when going into debt he makes sure that the nation’s money-making is advanced and not burdened. There is nothing defensive about the way the President takes on this commitment: He demonstrates that the US right now, in the midst of war and crisis, can afford a far-reaching competitive offensive which also gives back to national money its rightful quality as a reliable means of growth. For this nation, fighting inflation coincides seamlessly with what the government has long been doing anyway: restoring America’s unequivocal supremacy in the economic competition between nations. That this is what it’s all about is clear anyway; Biden doesn’t even have to mention that. He prefers to talk about the bright future that awaits every American when his rule focuses entirely on promoting the well-being of his people, relieving the burden on citizens, fighting special interests, and so on. One may think of ‘Big Pharma’ as well as of the ‘super rich’ who are asked to pay for the law, or of the real estate speculators who are put in their place with a new housing policy project. These are the opponents that the American government must and wants to bring down so that America can continue to prosper; in this question, too, the USA is only measuring itself.

The anti-inflation program – a declaration of war on the rest of the world

When the Fed fulfills its function as monetary policy supervisor of capital growth in America and raises the price of debt in dollars, the entire rest of the world of states is directly affected. In doing so, the Fed sets a decisive datum for the debt capacity of all other political sovereigns; accordingly nervous, there are negotiations there about what dangers threaten one’s own credit and one’s own competitive position on the world market and how one’s own economic and monetary policy should react to them. This is so because American credit money, which functions as a national means of purchase and payment within the US and is devalued in this function, is at the same time the globally authoritative capitalist wealth. As such, the dollar is not only the ultimate end of all economic activity, but the universally used means for it: for the reliable execution of all the money and credit transactions involved in capital accumulation. The Fed’s sovereignty over the costs of debt in dollars contrasts with the reliance of the great majority of other states on having access to American credit money as world money; thus, to the extent that it drives up the dollar interest rate, the US central bank makes this means of participation in the world market, which is indispensable for all state and private actors, more expensive.

The Fed simply assumes, as a reliable business basis for its monetary policy, that the other states are affected by and dependent on its decisions – as things stand, and rightly so. It is precisely the ubiquitous need for and use of American money for whatever purpose that puts the American state power in the comfortable position of being able to so profligately expand its indebtedness; with its credit expansion, it has more globally valid wealth at its disposal almost automatically. Moreover, the same special status of the dollar allows the American central bank, indifferent to any undesirable effect on the exchange ratio of the dollar to other national credit moneys, to concentrate entirely on getting the inflationary effect of the domestic credit expansion under control. It simply takes advantage of the fact that the increase in the price of dollar-denominated loans that it decrees does not raise any doubts about America’s creditworthiness; on the contrary, it strengthens it. Investments in such unquestionably valid, money-equivalent dollar debts are now even more profitable than before – this induces the globally active speculator mafia to “restructure” their investments and consequently increases the demand for dollars. As a result, each Fed interest rate hike makes it more expensive for the rest of the world to borrow in dollars; this in turn is reflected in finance capital’s speculation on and against the world’s currencies in such a way that the ability of other nations to obtain dollar-denominated loans becomes more distrusted with each increase in the value of the dollar. And so on.

As the Fed raises interest rates, the exchange rate of the dollar rises against the currencies of all other nations; this is further fueled by the hardships that the economic war against Russia is causing other powers. As the dollar rises in value, the rest of the world becomes poorer; attempts by governments to counteract exchange rate losses with their own interest rate hikes mainly shows that no other nation can afford the interest rate hikes that the Fed is prescribing. The Fed, on the other hand, is free to do what it thinks is best for capital growth in America. The world’s most powerful central bank is, of course, just as familiar with the global effects of its interest rate policy as it is with the crises that other countries have to deal with.[8]

But their worries are none of the Fed’s business, at least not in the sense that it caused them; the problems of other nations certainly have no influence on its measures. It is the other way around: powers of lesser means have to accommodate themselves to what the monetary policy managers of the world’s largest capital location consider necessary for its growth and therefore also impose on the rest of the world as an inescapable condition for their economic progress. [9] In the same spirit, Biden’s anti-inflationary legislation declares that America’s advantage in the economic field is only possible in opposition to the rest of the world. This is what the US is fighting for: against its most loyal war allies – and against other rivals and adversaries anyway.

[1] “In the aftermath, federal policymakers were left to wonder whether the rush of federal aid carried other unintended consequences, including a rapid rise in prices nationally. The data would later show the rescue packages were a double-edged sword — spurring the fastest recovery of any Group of 7 nation, even as it sparked the biggest jump in consumer prices in 40 years....It was the largest burst of emergency spending in U.S. history …. The money spared the U.S. economy from ruin ... but it also invited unprecedented levels of fraud, abuse and opportunism.” (Sept. 8, 2022, Washington Post)

[2] “Since we took office, we have created nearly 10 million jobs; a record for any president...unemployment is at its lowest level in 50 years...and we’ve cut gas prices...” (Biden, Inflation Reduction Act Passing Speech, September 13, 2022)

[3] When asked, central bankers readily admit that the change in interest rates that the Fed charges banks for their money supply is a rather “crude means” to separate unsound from sound business. But what’s the point...

[4] The expected victims of the interest rate policy have a name that underscores its necessity: they are called zombie companies. Which is exactly what they are: They have long since become unprofitable, are kept alive and running only by inexpediently cheap credit, so they must go. This is very constructive thinking; however, as is well known, the crisis does not stop at separating the wheat from the chaff.

[5] The bill is, according to its author, the greatest thing in economic, social and investment location policies the American people have ever seen – “the single most important legislation passed this Congress to combat inflation and one of the most significant laws in our nation’s history” (Remarks by President Biden on the Passage of H.R. 5376, the Inflation Reduction Act of 2022, September 13, 2022).

[6] More about this program of Joe Biden is explained in the article “’Build Back Better’: The Battle for America's Soul Continues: The Superpower Wrestles with Itself over Its Global Supremacy” from GegenStandpunkt 4-21.

[7][7] “After all, this bill cut costs for families, helped reduce inflation at the kitchen table, because that’s what they look at ... Folks, it offers working families thousands of dollars in energy savings with tax credits and rebates to buy new and efficient appliances … American automobile companies and American labor are committing billions of dollars and a great deal of hard work and ingenuity to make electric vehicles and batteries. Because of the Infrastructure Law, we’re going have 500,000 electric charging stations on our highways across America installed by the IBEW. And they’re all going to be made in America.” (Biden, ibid.)

[8] “Inflation is very high in the United States and abroad, and the risk of additional inflationary shocks cannot be ruled out.... Central banks facing high inflation are tightening monetary policy rapidly to damp demand and bring it into alignment with supply, which is constrained in a variety of sectors. The process of resolving imbalances will be easier the more supply improves in markets for commodities, labor, and key intermediate inputs, as is generally expected, but there is a risk that supply disruptions could be prolonged or aggravated by Russia's war against Ukraine, COVID‑19 lockdowns in China, or weather disruptions. Russia's war against Ukraine has generated spikes in prices for energy, food, and agricultural inputs. Most recently, inflation in Europe was pushed higher by Russia's cessation of natural gas deliveries through the Nord Stream 1 pipeline, creating hardships for households and risking disruptions for some industries in the affected countries. China's COVID lockdown policy could also lead to supply disruptions if cases again increase. Separately, weather conditions in several areas, including China, Europe, and the United States, are exacerbating price pressures through disruptions to agriculture, shipping, and utilities.” (Speech by Fed Vice Chair Lael Brainard, September 30, 2022)

[9] So once again the old saying proves true:

“The dollar is our currency, but your problem.” (John Connally, US Treasury Secretary, 1971)