Living in China is getting cheaper. Because rents in my neighborhood in central Beijing are dropping, my wife and I pressed our landlord to reduce ours by $140 a month in a new lease that we signed last month. He wasn’t too happy about it, but he’s lucky that we didn’t move out. Given the desperation of local landlords, we probably could’ve saved another $500 a month had we switched to a comparable apartment nearby.
BUT AT WHAT COST?
I think is validity to the argument that capitalism as a system built on private debts should avoid deflation. True, from the worker’s perspective it appears as if the prices are getting cheaper under deflation, but is that the case in the aggregate in the long term? Are capitalists laying off workers because debt servicing is more difficult? Does it discourage future investments? Will the state take over to create employment that’s been lost?
In that sense, true price flexibility downwards can only happen in a centrally planned or heavily state interventionist economy as the state isn’t financially constrained in the way private entities are. Under capitalism, it’s best to have money wages rise than have the prices fall. But neither is happening in the West.
In the US’s case, post-revolution with a DOTP, we would probably want more price deflation than wage increase. Wage increases would necessitate a bigger gap between American workers and the rest of the world. Instead, eliminate capitalist profit margins to drop costs and allow some wage increase outside the US by newly state-seized firms. Price reduction is also necessary when you want to transition out of commodity production. The revolutionary state’s goal should be to drop a threshold of necessary goods out of commodity pricing entirely, being entirely by virtue of membership in society. In parallel, it would need to facilitate to collectivization and communization of property and production (ala the Venezuelan communal projection) using state capital and technical support to allow individual communities to remove as much of their subsistence and eventually abundance ™ from commodity and wage production as possible. Then the state assists in networking communes together, directly accelerating its own dissolution as the communal state grows and replaces the centralized state’s functions.
This is uniquely possible under a US revolution due to both its extremely high level of accumulated capital and its lack of external imperialist threats. A US DOTP, properly managed, could slingshot the entire planet towards post-state, post-class communism in a matter of less than a century, I believe.
the objective of many failed U.S. Victoria 3 playthroughs
Couldn’t debt servicing get cheaper?
The savings rate was already high in China and deflation is encouraging even more saving, so the supply of lendable money is up so the price to lend (interest) would go down to reflect that. That would be counteracted by the loss in ability to pay the loan as revenues go down. So the true cost of servicing debt could land on either side of that equilibrium depending on what force is stronger.
That’s the loanable funds model, and it’s not the reality. In reality banks lend according on profitability, yes even in China where priority lending is a thing because otherwise it’ll need capital injections from the Government. Capitalists take loans on if they think they get expected profits.
Also there are stocks of debts vs flows of debts, deflation mechanically makes servicing of existing debt difficult, your argument is whether it will lead to lower rates on future debt which may spur investment.
Interest rate is set by the Central Bank, not the market. Reserves then adjust according to demand. Given the nonsense ‘inflation targeting’ (which isn’t real, CBs can’t target inflation reliably), in a deflation scenario, it may lower rates to zero and try QE, but QE failed and will fail to create inflation or raise demand because the only effect it has on the real economy is via lower long term rates (since CB buys up a significant amount of long term gov securities). Regardless, fiscal policy will be needed, and it must be one which replaces the income lost by workers (via employment or transfers). Which goes to my point “Will the state take over to create employment that’s been lost?”.
Savings does not fund investment. It is investment that creates savings.
You can rearrange the Kalecki profit equation as :
Worker Saving = Investment + Gov Deficit + Foreign Surplus - Profits
So investment via bank loans comes first, and that creates profits for capitalists and savings for workers.
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