Deflation kills off industrial profit and the ensuing capital expenditure (investment in fixed capital) and wage growth for the average people. Furthermore, it makes their debt more expensive to service.
This is even worse because China’s central government is highly allergic to deficit spending, so they either have to earn foreign currencies through export first, or from borrowing. The huge infrastructure investment since the 2010s were heavily borrowed from the financial institutions, and because value-added tax is the main source of tax revenues for both the central and local governments, deflation is now causing their tax revenues to plummet (and combined with the plunging property market and land price, a main non-tax revenue for the local governments) and is screwing with local government expenditures. Somebody’s got to run the city infrastructures, subways, rails, public utilities, you know.
There is a reason why you see so much amazing development in China and yet people are working longer hours and the increase in productivity has not been translated into wage growth and increase in purchasing power. That’s because the wealth is being funneled into slowing down the plunging property market and the over-investment in industries from the local governments.
Think solar panels: China has dominated the world market with 90% of global share, yet every single major solar panels company is making a huge loss last year. Their workers have not experienced any wage growth from China leading in solar panels industries. In fact, the local governments that had spent billions into subsidizing these industries (again, coming from people’s wealth) are now facing with sunk costs that they cannot afford to lose out from. If they let solar panel industry to implode, then all the billions and billions of investment would be lost, and the local governments would find themselves in even more precarious financial position as they lose out on value-added tax revenues. As such, more and more wealth have to be funneled into saving these failing companies, and driving wealth gap even further.
As I have said again and again, China has to give up on its neoliberal ideology and start injecting money directly into the economy through deficit spending. Deflation is only a symptom - the root cause is wealth inequality.
I was looking for you in the comment section. The article sounded like the kind of stuff you warn about with regards to China, except for the conclusion they came to that China is incentived to go to war to solve their problems.
I hope they don’t obviously. I would way rather they just purge any neoliberals in charge.
The article is actually kind of run-of-the-mill analysis you get in mainstream financial press in China. Standard neoclassical thinking but one that is now becoming quite ubiquitous if you follow economic or financial news in China. A lot of “now that our economy is becoming more developed, we cannot expect to have high growth all the time… look at advanced Western countries and Japan… we have to get used to the new reality…” etc.
Unfortunately, when you take it to the conclusion under such framework, it means militarization because the ideological indoctrination from the IMF prevents them (most Global South countries, actually) from seeing running permanent government deficit as an economic solution. China has increased investment in militarization in response to Western threats, and military recruitment is being used as a way to alleviate the youth unemployment problem. Applicants for public services, especially military and police academy, has shot through the roof this year, because it’s guaranteed employment with good salary compared to private sector. The vibes for your average new graduates have certainly changed from “I’m going to work hard in the private sector and make good money to settle down with a family and a house” ten years ago to “I’d rather take a stable pay in the public sector with limited career progression and make sure I don’t lose my job over the next ten years”.
And this is not just China. Arguably, the EU and US militarization is even more intense within the last few years.
I sound like a broken record here, but the Global Majority needs a new economic framework that is radically different from neoliberalism if it is serious about decoupling itself from the West. As Michael Hudson often says, Capital Vol. 2 and 3 aren’t taught in China. Most of their knowledge in finance and the monetary system came from emulating the Western system.
Bouncing off this, the only thing worse than inflation is deflation because it means your stuff is worth less than what you paid for it. Money itself is a commodity used to transfer debt. The use-value of a commodity is where its real value is located. Money is just a way of tracking who is currently liable for what in the production chain.
When money deflates, its use-value as a debt tracker hasn’t changed. Only its exchange-value. This debt is held by anyone currently in possession of the money and whoever is at the end of the production chain. This is usually the worker, who traded their labor for wages and are now consumers buying commodities to transfer the debt (money) back to manufacturers. Any possessions held by workers and any means of production have gone down in exchange-value, while their use-value remains the same (or has declined due to normal wear and tear).
During inflation, the opposite effect happens where the debt held by workers is worth less than the use-value of commodities. This means workers benefit from releasing their debt (AKA spending money) and acquiring commodities they want or need. In capitalist nations, runaway inflation occurs faster than workers’ wages deliberately as the bourgeois holds the majority of the nation’s wealth both in terms of the means of production and money in possession. This allows them to have riskier behavior as they are incentivized to liquidate their money in search of commodities they can use to generate more passive income.
Deflation kills off industrial profit and the ensuing capital expenditure (investment in fixed capital) and wage growth for the average people. Furthermore, it makes their debt more expensive to service.
This is even worse because China’s central government is highly allergic to deficit spending, so they either have to earn foreign currencies through export first, or from borrowing. The huge infrastructure investment since the 2010s were heavily borrowed from the financial institutions, and because value-added tax is the main source of tax revenues for both the central and local governments, deflation is now causing their tax revenues to plummet (and combined with the plunging property market and land price, a main non-tax revenue for the local governments) and is screwing with local government expenditures. Somebody’s got to run the city infrastructures, subways, rails, public utilities, you know.
There is a reason why you see so much amazing development in China and yet people are working longer hours and the increase in productivity has not been translated into wage growth and increase in purchasing power. That’s because the wealth is being funneled into slowing down the plunging property market and the over-investment in industries from the local governments.
Think solar panels: China has dominated the world market with 90% of global share, yet every single major solar panels company is making a huge loss last year. Their workers have not experienced any wage growth from China leading in solar panels industries. In fact, the local governments that had spent billions into subsidizing these industries (again, coming from people’s wealth) are now facing with sunk costs that they cannot afford to lose out from. If they let solar panel industry to implode, then all the billions and billions of investment would be lost, and the local governments would find themselves in even more precarious financial position as they lose out on value-added tax revenues. As such, more and more wealth have to be funneled into saving these failing companies, and driving wealth gap even further.
As I have said again and again, China has to give up on its neoliberal ideology and start injecting money directly into the economy through deficit spending. Deflation is only a symptom - the root cause is wealth inequality.
I was looking for you in the comment section. The article sounded like the kind of stuff you warn about with regards to China, except for the conclusion they came to that China is incentived to go to war to solve their problems.
I hope they don’t obviously. I would way rather they just purge any neoliberals in charge.
The article is actually kind of run-of-the-mill analysis you get in mainstream financial press in China. Standard neoclassical thinking but one that is now becoming quite ubiquitous if you follow economic or financial news in China. A lot of “now that our economy is becoming more developed, we cannot expect to have high growth all the time… look at advanced Western countries and Japan… we have to get used to the new reality…” etc.
Unfortunately, when you take it to the conclusion under such framework, it means militarization because the ideological indoctrination from the IMF prevents them (most Global South countries, actually) from seeing running permanent government deficit as an economic solution. China has increased investment in militarization in response to Western threats, and military recruitment is being used as a way to alleviate the youth unemployment problem. Applicants for public services, especially military and police academy, has shot through the roof this year, because it’s guaranteed employment with good salary compared to private sector. The vibes for your average new graduates have certainly changed from “I’m going to work hard in the private sector and make good money to settle down with a family and a house” ten years ago to “I’d rather take a stable pay in the public sector with limited career progression and make sure I don’t lose my job over the next ten years”.
And this is not just China. Arguably, the EU and US militarization is even more intense within the last few years.
I sound like a broken record here, but the Global Majority needs a new economic framework that is radically different from neoliberalism if it is serious about decoupling itself from the West. As Michael Hudson often says, Capital Vol. 2 and 3 aren’t taught in China. Most of their knowledge in finance and the monetary system came from emulating the Western system.
Bouncing off this, the only thing worse than inflation is deflation because it means your stuff is worth less than what you paid for it. Money itself is a commodity used to transfer debt. The use-value of a commodity is where its real value is located. Money is just a way of tracking who is currently liable for what in the production chain.
When money deflates, its use-value as a debt tracker hasn’t changed. Only its exchange-value. This debt is held by anyone currently in possession of the money and whoever is at the end of the production chain. This is usually the worker, who traded their labor for wages and are now consumers buying commodities to transfer the debt (money) back to manufacturers. Any possessions held by workers and any means of production have gone down in exchange-value, while their use-value remains the same (or has declined due to normal wear and tear).
During inflation, the opposite effect happens where the debt held by workers is worth less than the use-value of commodities. This means workers benefit from releasing their debt (AKA spending money) and acquiring commodities they want or need. In capitalist nations, runaway inflation occurs faster than workers’ wages deliberately as the bourgeois holds the majority of the nation’s wealth both in terms of the means of production and money in possession. This allows them to have riskier behavior as they are incentivized to liquidate their money in search of commodities they can use to generate more passive income.