Housing and securities prices are going down; food and fuel prices are rising. How will these opposite trends affect our economy looking ahead?
The real estate bubble (US capitalism’s latest toxic mix of profit-driven over-investment, over-lending, and financial fraud) is in full “bust” mode. Residential and now also commercial real estate prices are dropping quickly. Millions of families who used their rising home prices over the last decade to borrow money (the “refinancing” boom) can no longer do so. Their consumption thereupon falls as do the fortunes of all the producers who depend on that consumption. As other home “owners” default by the millions on unsustainable mortgages, foreclosures throw ever more houses onto a market with many fewer buyers. This drives home prices down further and likewise consumption. This process is now leading world capitalism into a “global slowdown in production.”
At the same time, the world of financial investing (banks, hedge funds, stock brokers, etc.) is reeling from widening real-estate losses. Investors globally bought billions of US securities based on US mortgages (and other kinds of loans) whose borrowers can not make the required repayments. First these big investors produced the real estate bubble monster and now they scramble to survive its bursting, to avoid fates like that of Bear Stearns. So they cut back credit to still other borrowers who now struggle to cope with lost borrowing capability. This too contributes to the “global slowdown.” Modern capitalism is caught up in yet another Frankenstein story.
Large investors are changing their portfolios. They are not returning massively into stocks, remembering their losses in 2000 when the dot com bubble burst in another Frankenstein horror. The “global slowdown” likewise undercuts stock buying. Nor will they soon return to the downward spiraling real estate market. So they are looking for new places to put their money.
The big investors are also worried about the risks of inflation. They know that the US government pumped historically unprecedented mountains of new money into the world economy in their “policies” to offset and cushion the social effects of first the stock market meltdown of 2000 and then the real estate bubble busting since 2006. They fear that all this extra money in circulation may well be used, sooner or later, to make purchases and thereby bid up prices. Fearing such inflation, they don’t hold money as an asset (a form of their wealth) because money’s value — its purchasing power — drops when commodity prices rise.
Instead, they buy commodities whose prices they think will rise fastest: not to consume or use them, but rather to hold and resell them later at the higher prices. These days, those commodities include energy, food, basic production materials (metals, minerals, etc.), and gold and silver. Many factors (difficulties in finding new sources of these things, climate changes, rising production in newly industrializing countries, etc.) combine to make their prices rise the fastest. So big investors buy them and contribute further to the inflation from which they seek to profit. Media and politicians’ eagerness to blame “speculators” — bad people are the problem — divert attention from how global capitalism repeatedly provokes investment bubbles and then spreads the damage when they burst, including the damage from inflation.
The system is the problem. US capitalism is dysfunctional on many levels for working people today. It is driving down the value of their most important asset, their homes; it is reducing the credit that their standard of living now depends on; it is slowing production which drives up unemployment; and it is driving up the prices of the food and fuel they cannot do without. This is what capitalism delivers these days.
Because profit-driven agricultural corporations displaced family farming, our food supply became much more energy-dependent (for tractors, fertilizer, insecticides, and for transporting food products). So rising energy prices provoke rising food prices. The drive of US business to profit from suburbanization vastly increased Americans’ dependence on energy (for cars, electricity, and heating single-family homes). So rising energy prices raise the cost of living especially in the suburbs where most Americans live.
Of course, a government responsible to its people and aware of US capitalism’s history could have anticipated and taken some steps at least to reduce the damage from the latest bouts of booms, busts, speculations, and inflations. However, the last 30 years of Republican and Democratic governments did none of that. They celebrated “private enterprise” and less government economic intervention. So, for example, local non-energy-guzzling farming was not encouraged, subsidized, studied, or even officially discussed as an agricultural policy. Nor was substituting energy-saving mass transit for the individual automobile, nor cheaper housing options than energy-guzzling single family homes. Instead, corporations profited from making us increasingly dependent on energy — despite available alternatives — and threatened by its rising price.
To answer the question we began with: there is no way now to tell how falling real estate and securities markets will interact with rising food and energy and materials prices in terms of their impacts on overall inflation, production, employment, and incomes. No one knows, including those private and government “experts” and “officials” who pretend, like the fortunetellers at the county fair, that they see into the future.
But American working people should face certain facts about the economic system they live with. So long as private corporations wield the power to use the profits they get from selling the products their workers produce, they will continue to do what they have always done. They will deploy those profits to competitively seek higher profits, produce booms and busts, speculations, speculators, and inflations. And they will use those profits to buy the politicians and the media to make sure they and the system that funds them receive no blame for any of it. The system is the problem.
Rick Wolff is Professor of Economics at University of Massachusetts at Amherst. He is the author of many books and articles, including (with Stephen Resnick) Class Theory and History: Capitalism and Communism in the U.S.S.R. (Routledge, 2002) and (with Stephen Resnick) New Departures in Marxian Theory (Routledge, 2006).