13 March, 2015

Inflation in Capitalism

In capitalist societies, the phenomenon of Inflation is unavoidable; indeed, it turns out to be actually essential for the maintenance of the economic system. This is due to the invaluable roles it plays within such a system, based entirely upon borrowed capital to finance the establishment and development of the companies that carry out literally all its transactions.

So, when a loan (or investment) is required, it will usually involve two commitments. Taking a loan will involve the addition of interest to also be paid on as yet outstanding parts of that loan. And secondly the paying back of the borrowed Capital will also be required, usually within a given time period.

NOTE: Investments are somewhat different as the money invested is not paid back, but can be retrieved by selling the investment on the Stock Exchange (maybe at a profit), or if the firm collapses, most, if not all of it, could be lost.

Naturally, with such a risk, the annual dividends paid would therefore be higher.

Now, such pressures upon the system, where the whole development is based upon borrowed money, with additional charges unavoidable, necessarily causes Inflation – the value of the currency is always being devalued to some extent. But, let us consider the effect of such inflation upon the value of the sum borrowed. If every year the value of the currency is decreased by inflation, it means that what is paid back off the borrowed sum will be of less value than it was when borrowed. So, over extended periods paying off the capital becomes less and less in current values, and hence costs the borrower less in real current values to redeem it.

Now, no lender will be happy with such a decline in the money they have lent, so they reduce those effects by limiting the period of time that the loan, or any part of it can be outstanding. They also change the yearly interest charged to offset the decline in value of their loan.

Clearly, the lender must ensure that the terms of the loan, including the rate of interest, balances the books, and guarantees an acceptable profit upon the transaction. So clearly, that rate of interest will not only exceed the rate of inflation, but also will also actually contribute to that rate of inflation itself.

Also, it is always possible that the borrower will default, and the lender will lose some if not all of his loan. So, if there is any doubt about the borrower, the appended yearly interest rate will be upped considerably to protect the lender.

We should also see how bad it is for a borrower in difficulties, for the more problems he encounters, the more interest he will be charged upon subsequent loans, so such a business can be pushed into bankruptcy, while a dominant and flourishing business will be able to borrow money ever more cheaply.

You can certainly see why slumps occur!

Let us now look at all this from the other end – that of a worker in a company. Let us see how inflation affects the wages of such an employee.

Given a fixed wage, inflation will reduce its buying power. It will have the same effect as a cut in wages – hitting the earner, while helping his boss! So, employers borrowing money to finance their business get a “double help” from inflation. It decreases their loans, while also decreasing the real wages of their employees.

Clearly, a worker wanting to maintain the value of his or her wages will require regular wage rises, at least in line with inflation, and often above inflation to increase their cut in the process that they are involved in. The current slump 2008-2015 (so far) has seen no real increase in wages while inflation has been regularly present over almost seven years. The wages of the worker has therefore been regularly cut, while his employer has seen his own owings decline throughout. It is crystal clear who is being made to pay for the crisis, even though it was certainly nothing to do with those workers.

In addition, during that same period, literally millions of reasonably paid full-time jobs have been terminated – mostly in the public sector, and replaced by private sector jobs at lower wages, often involving either part-time working or even zero hours contracts

The whole of the slump is being reversed by getting the necessary wherewithall out of the workers.

But, this has only been possible in the more powerful capitalist states. The weaker ones (as explained above on loans) have been pushed more and more to the wall, by debts and ever-higher interest rates.

The points made here about loans, inflation and interest rates means that those in the deepest holes are forced to pay the highest rates for their necessary loans, and the local bourgeoisie implement the cuts in jobs and wages to try to foot the ever expanding bills. The interest rates being charged to working class families in financial difficulties have now reach phenomenal proportions upon the so call “pay day loans”, and along with fines for late payment, and even bigger hikes in interest rates, they are being impoverished.

Inflation is a necessary cog in the mechanism that is Capitalism, and it is also a cause of such things as slumps, and the means to extract the owners from their slumps, on the backs of the workers.

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