this post was submitted on 30 Nov 2025
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It’s not wrong that deflation is a much more dangerous situation than inflation. China and Japan have been going through a deflationary spiral, and it’s been dragging their economies down. Hence why the governments in China and Japan have been desperately trying to boost consumption to get into the inflation zone.
The problem with the US and Western neoliberal economies is that the wages are not rising faster than the inflation, as the wealth has been disproportionately concentrated at the top 1%, and this places a lot of financial burden on the working class.
This leads to another fundamental problem: if wages are being raised, how do you stop the wage-price spiral, where the rising wages also lead to an inflationary spiral?
The failure of the Fordist-Keynesian economists to stop the wage-price spiral in the 1970s directly led to the rise of neoliberalism under Thatcherism in the UK, and Reaganism in the US: if rising wages lead to uncontrolled inflation, then the only way (according to the neoliberals) to stop inflation is to crush the trade union movements and stop their wages from being raised.
Stalin’s USSR (1929-1955) had the only economic model in practice that I know of that succeeded in solving the wage-price spiral problem (wage increase without inflation), which gave support to the revolutionary contribution of Modern Monetary Theory (proposed 70 years later) in stopping inflation: the price anchor mechanism through jobs guarantee. Any other form of trying to control inflation, such as price controls, almost always end in failure.
So, it’s not wrong to say that deflation is worse than inflation. In fact, you really do not want to live in a deflationary economy. The question is what sort of economic policies you have to enact in order to solve these problems, and that requires an understanding of how fiscal policy and the monetary system interact within an economy, for which the neoclassical economists (whose theory justifies neoliberalism) have no answer for, so the way out is to crush the worker’s wages from rising and create an unemployment buffer to stop inflation.
The so-called "wage-price spiral" is bad economics not materialist analysis. It has been used by capitalists to justify not raising wages since Marx's time. Marx literally wrote Wages, Prices, and Profits to refute it and he further elaborates on these ideas in Capital Vol 2. Modern economists carry water for the capitalists in every argument they make. They literally invented neo-classical economics to refute Marx for being CORRECT. If the tea-leaf readers and bone throwers of the capitalist class are telling you its bad, it means its bad for capitalists NOT workers. Surprised to see anyone on here regurgitate capitalist propaganda let alone someone who has so much knowledge of theory.
Marx made important contributions to inflation theory but remember that he wrote Wages, Prices and Profits in the 1860s, when the world was still in the gold standard era i.e. a fixed exchange rate regime that exerted a natural deflationary force to the economy.
Marxist theory of inflation has developed much further in the hundred years since. Robert Rowthorn’s conflict theory in the 1980s is a much better representation of inflation in a modern economy, which took into account of endogenous money supply, the conflicting force between firm’s mark-up profit and leverage strength of the union in pushing for real wage increase, the central bank setting interest rates, and most importantly, the collapse of the Bretton Woods causing the natural deflationary force of the fixed exchange rate regime to be lifted and made the Keynesians lost control of the inflationary spiral.
That’s when neoliberals came in and brutally crush the unions.
I respect you've spent a lot of time in the shadow realm of modern economics and I understand that finance capital has more ways to punish workers. This, however, is not a refute on Marx's arguments against the so called wage-price spiral. Any wage increase won by the working class is a direct benefit to the working class. Saying otherwise only serves the capitalists and leads to to why the US no longer makes economy cars and affordable housing. Deflation, wage-price spirals, and every other argument as to why wages can't increase and prices can't fall is NOT for the benefit of the working class.
Two different things here.
First, wage-price spiral is not a problem until you have full employment and all resource utilization is fully occupied. In that case, GDP can only be driven by inflation. Strong unions can push through real wage increase and cut into the capitalist profit, which was why the UK went into an inflationary spiral as it did in the 1970s because the capitalists did not want to give up their profit. The Keynesians did not have an answer for that, hence the neoliberals came in and crushed the workers unions.
Second, I agree with you that under current neoliberal system, where full employment is not reached, there won’t be wage-price spiral. Hence, you won’t find it in the IMF study that Roberts quoted.
However, for any socialist who is serious about bringing full employment for the economy to ensure the prosperity of the working class, you cannot avoid this problem. As I already presented, you either go with Stalin’s mechanism or the MMT price anchor mechanism.
If you ignore this problem, you WILL get inflationary spiral as the Keynesians did, and the next thing you know, your government is overthrown. Again, ignore this at your own peril. So many left wing governments continue to regurgitate neoliberal model and see how they end up.
Any serious socialist would not be using capitalist economics and markets to determine prices.
Tell that to the Soviet and Chinese economists and all the Marxist economists.
Would if I could, but we've got the benefit of hindsight and modern computing. Not sure which Marxist economists you are referring to, but if they are reinforcing capitalist economic propositions they should be discarded. The UK could have gone another way during the inflation of the 1970s, but the same old tired nonsense was wheeled out and we got the old Thatcher classic "There is no alternative."
Sorry to interrupt, just want to say I love your username.
Not a real thing. Never happened irl, its a propaganda bit to scare workers. Prove it and you'll get that fake ass nobel prize in economics. We demand raises because prices have already gone up, not the other way around. Rising wages are a response to raising prices. But they will of course lie and say that you asking for more will mean that they'll HAVE to raise prices.
https://thenextrecession.wordpress.com/2022/11/20/the-wage-price-spiral-refuted/
Doesn't Wray talk about a few instances of a spiral during his mmt talks? His take was that they do happen but only at absolute full employment.
Yes, that was a problem that the Keynesians in the UK could not solve. The US inflation was more complex, because it was also driven in part by the spike in energy price during the oil crisis.
FYI I already commented to the poster that the IMF study that Roberts quoted used data from the 1970s-2010s, when the NAIRU framework was already firmly in place, so wage increase has already been heavily curbed. No surprises there at all.
Irrelevant. The IMF study used data from the 1970s onward to the 2010s, at which point NAIRU (non-accelerating inflation rate of unemployment) has already been pushed heavily by the IMF and OECD after the collapse of the Bretton Woods to many developed and developing economies. Neoliberalism was already in full force, of course wage is catching up to the inflation because wage growth has already been pre-emptively crushed under the NAIRU framework!
Also funny that IMF is being quoted here because that’s literally IMF justifying how their neoliberal framework was the correct one.
lmao, guess what happened in the 1970s?
The problem is that the capitalists would much rather run the rate of profits into the ground with AI than by paying workers. And we aren't doing nearly enough to force their hands.
By which metric? GDP growth, maybe. Well-being of the workers, I'm not so sure.
True, but again, reversing the omelette, at what cost? I'm a Spaniard, Spain is one of the few countries in the EU with a "healthy" GDP growth. Since 2020, with Germany sunken into recession, Spain has a stable 2%-ish GDP growth yearly, yet purchase power keeps going down because of inflation and lack of correspondingly rising wages. Checking the Instituto Nacional de Estadística (INE, national institute of statistics)'s consumption surveys, purchase power is worse in 2025 for the vast majority of house units than it was 20 years ago. Compare that to China consistently achieving increases of purchase power year after year, 2024's report pointing to a 5% purchase power increase over one year.
I fundamentally agree that, in principle, "price-wage spiral" is a thing that an advanced socialist market economy needs to take into account. However, I also believe that there's no fundamental reason for a socialist economy to use markets in 2025 (except as a possible transitional phase), the whole "information of markets and prices" neoliberal stuff has been dispelled by Marxian economists such as Paul Cockshott and the revival of Labour Theory of Value using computational techniques and empirical studies.
Let’s start with a very simplified and exaggerated scenario and work this out step by step:
If your income is $1000, and the price of a Treat is $100, you can afford 10 Treats per month. If next month, your income has doubled to $2000, and the price of Treats has also doubled to $200, you can still afford the same amount of 10 Treats next month.
Question: is your situation after the inflation the same as you did before?
Similarly, let’s consider the opposite scenario:
If your income is $1000, and the price of a Treat is $100, you can afford 10 Treats per month. But next month, your income has halved to $500. But, the price of Treats also halved to $50 - in this case, you can still afford the same amount of 10 Treats the following month.
Question: is your situation after the deflation the same as you did before?
Hint: neoclassical theory says there is no difference between them.
Don’t worry about getting the answer wrong, because most people won’t get it right, but make sure you give a moment of thought before answering. I will provide the answers afterwards, because getting this part right is very important to understand what follows.
Assuming that the person has no debts or savings denominated in that currency, nothing changes, that would be my answer.
Regardless, my point about inflation wasn't theoretical, I've given you concrete examples of countries with inflation vs deflation and the effects on macroeconomics vs workers themselves.
Your example of Spain with the stagnating wages (stagflation) is why, as I wrote in the original comment, that workers are feeling financial strained.
However, believe it or not, deflation itself is even worse!
You may think if products are getting cheaper, the purchasing power of the consumers will increase. Yes, but only up to a point.
Neoclassical economists think there is no difference between the scenarios because they treat money as a medium of exchange. But this cannot be the case because money is debt…
Consider the inflation scenario:
You have $1000 income, Treat is $100 a piece. If you take out a $2000 loan, you can get 20 Treats this month.
Next month, your income has doubled, so you have $1000 + $2000 = $3000, you use $2000 to pay off your debt, you still have $1000 left in your bank account that allows you to afford another 5 Treats if you wish!
Now, consider the deflation scenario:
Same as above, you take out a $2000 loan to consume 20 Treats. But next month, your income is only $500, you have a total of $1000 + $500 = $1500 but with a $2000 debt to service. You are $500 short with no liquid cash to afford more treats this month.
Of course it’s an exaggerated scenario, but it very much reflects how money works in an economy. First, consider the business sector:
For many private firms, they take out commercial loans for investment, for expansion of production, hiring workers etc. Under an inflationary scenario, the loans become cheaper to service, wages can be raised etc as long as profit is expanding. This also means you can hire more workers, expand productive capacity which will lessen the inflation over time.
But under a deflationary scenario, your profit margin gets squeezed (prices become cheaper = profits falling) but you still have the same amount of debt to service. There is no good way out of it - you can’t pay your workers more, and as they receive less wages, they will consume less, which means the deflation gets worse over time, and more workers become unemployed as a result!
Now let’s consider the household sector, which is very much the relevant situation for the Chinese middle class today.
Let’s say you purchased a house at $100k. Now you may say the price of the house is irrelevant because you’re not interested in speculative investment, you just want to stay in it.
But does it really not matter? Can you make sure that you can stay employed over the next 30 years of your mortgage?
You bought a house at $100k, the inflation has made your house worth $150k. We’ll dispense with how much downpayment and how much you already paid for the mortgage because it’s too complicated.
But let’s say you lose your job and can’t find one in months. Your savings is running thin. At this point, you can sell your house and take the cut (say $30k after all the expenses) and downgrade your living condition to a cheaper rental place. You now have a $30k buffer to get through the unemployment.
But if the deflation has made your house worth only $70k, you’re pretty much screwed!
First, it’s unlikely you can see your house, because who would want to buy it at $70k when it could be $50k next year? Not only are you already making a loss in real time, but you’re not even allowed to cut your losses!
If you choose not to default on your mortgage, you still have to pay that $100k + mortgage over the full 30 year period, while having lost your entire income!
This means austerity, cut all spending and use whatever you have to keep servicing your loans, and this automatically translates to less consumption, contributing to the deflationary spiral of the economy.
As the middle class spending stops, the economy begins to stagnate. These two situations are very real in China right now, and it is made worse by the fact that there is little to no social safety nets in China, unlike European countries.
If you define "inflation" as "inflation + increased wages" and you discard stagflation as a special case of inflation, your comment holds up, it's just not the case anywhere in developed countries for the past 40 years. The reality for most workers is that, as of the past 20 years, inflation doesn't correlate with increased wages, so discarding the whole "inflation = suffering" that most workers actually feel in their bank accounts feels sophistic to me.
Not true to many workers. In Spain, when the inflationary episode of 2022 hit, it turned out that most mortgages had a variable interest rate, so if a mortgage used to be 500€/month, it went to 750€/month, so people not only had to afford more expensive goods with meager salary increases, their debts also increased because banking institutions have shielded themselves from inflation when giving out debt by applying variable interest rates.
How much have productive capacity and number of workers increased by in Europe and the USA over the past 3 years? Also, is debt in practice cheaper to take on during inflation when central banks in capitalist countries consistently decide to rise interest rates under inflation?
In a country like China, where there is a home ownership rate of 90+%, this might seem obvious. Go to Germany with a <50% home ownership (disproportionately affecting low income workers) and let's see who's actually hurt or benefitted by a lowering of housing prices and profitability of housing as an investment.
At the core of the issue, I think this is just a matter about our definitions of inflation vs stagflation. If your point is "there hasn't been inflation exclusively in most of the developed world for the past 20 years, there has been stagflation", then I guess sure, I agree.
That’s literally what I said at the top comment. The wealth is being concentrated at the top 1% due to neoliberal policies and monopolists charging what they want (this is known as the sellers inflation, which Marx talked about). This happens due to a lack of strong labor union movement that can push wage growth through the price increase set by the capitalists.
What I am saying is that deflation is much more dangerous than inflation, because inflation, as you described, can be easily fixed through policy change - you simply expand the productive capacity, more workers can be employed, and the increased supply of goods will lessen the inflation. The fact that your neoliberal governments refuse to help poor people is beside the point.
Deflation is much harder to get out because once baked in, can spiral very easily. This is because money is debt… it has a time component, and if the system does not have a debt cancellation mechanism, it can drag the entire economy down. This is a problem you don’t have to face under inflation.
If the wage-price spiral is fundamental then surely China could instantly solve the deflation problem by simply raising wages?
Wage-price spiral occurs only under full employment. When the productive capacity is fully occupied, GDP can only grow through inflation.
That is irrelevant to China’s problem because China doesn’t have full employment.
To understand the solution to this problem, we need to go back in time to the 1970s first before we can explain this.
After the collapse of the Bretton Woods, the IMF and OECD began to push the NAIRU (non-inflationary rate of unemployment) theory, which in simple terms, means that full employment no longer mean fully employed workforce, but a minimum level of unemployment where you do not cause more inflation. In other words, if you have too few unemployed people (too many people getting paid), you’re going to get into an inflationary spiral and it’s bad for the economy.
As a result, many countries were afraid of using an expansionary fiscal policy (government deficit spend more money) to ensure full employment. To spend more money in a “balanced budget”, you need to increase the assets you hold first. As a result, many developing countries - under the pressure from IMF, World Bank and GATT (later WTO) - converted their economy in export-oriented economy to run a trade surplus, export-led growth model. By selling cheap goods and services to wealthy Western economies, the earned foreign currencies then become part of their assets, which allowed the governments to spend more money domestically to raise the living standards of their own people.
This is all neoliberal crap, of course. The solution to preventing wage growth under full employment from causing an inflationary spiral is also where the genius of MMT comes in. The introduction of a price anchor through jobs guarantee pretty much solves the problem. When the government sets the wages through guaranteed employment, and since goods are priced relative to wages, it eliminates the potential wage-price spiral with too many people getting employed. The wage level is set as determined by the productive capacity and availability of goods and services in real terms.
Amazingly, Stalin figured this out nearly 70 years ago with the first Five-Year Plan, which involved the 1930-32 Credit Reform. Using a Dual Circuit monetary system, Stalin correctly understood that money is simply debt, and split the ruble into two largely insulated but partially overlapping circuit - the non-cash ruble circuit are investment money used for driving large investment projects, while the cash rubles circuit are the wages that flow into the working people for consumption. Since the non-cash rubles were mostly insulated from the consumption economy, the Soviet government was able to spend huge amount of money into investment projects without having to worry about inflation. Instead, the wages (cash ruble circuit) were determined based on productive capacity and availability of goods and services. This was how the Soviet economy was able to expand exponentially with very little inflation. Of course, a large portion of this mechanism was reversed under Khrushchev, and the Soviet economy began to stagnate in the coming decades.
Going back to China, as you can see, all China has to do is to give up the neoliberal framework and begin to enact jobs guarantee program. This will immediately allow the consumption level to rise, and hence solving its deflation problem. Not only that, the Chinese government can also set social safety net, such as free healthcare, such that people would be less averse to spending. Finally, wealth redistribution is also key to ensuring that the rural population (nearly 40% of China’s population whose monthly income is still around 1000 yuan (~$150) will also have the purchasing power to raise their living standards.
The increased consumption level will automatically cause wages to increase, and inflation to increase at a healthy level.
No neoliberal country actually has full employment because none of them have a jobs guarantee, so this seems to contradict your earlier assertion that the wage-price spiral is fundamental. Clearly it isn't, you're saying it's contingent on full employment. Shouldn't that mean there's no problems with raising wages?
It was a problem in post-war European social democratic countries under the Keynesian model, including the UK.
Strong labor unions had the leverage to push for real wage increase, and if the firms do not want to cut their profit, they have to mark up the prices in return, leading to a wage-price spiral.
The bourgeois establishment was afraid of the strong unions eating into their profits, and their refusal to reduce their mark up profit led to uncontrolled inflation. By the mid-1970s, inflation in the UK soared to ~20%, and combined with the falling sterling exchange rate, the neoliberals were brought in to crush the labor unions and bring the inflation to an end.
It becomes a problem once economies gave up the neoliberal framework and start guaranteeing everyone job. In this case, a job guarantee program from the government will become the price anchor that anchors labor to wage, hence effectively setting the minimum wage to the economy. If firms do not want to raise wages, the workers will simply go find jobs from the government. If firms mark up the prices excessively, demand will fall and they will have to cut production and layoff workers. However, because of a jobs guarantee mechanism in place, the system ensures that there will not be a loss in consumption demand (since the laid off workers continue to be employed in another job and getting paid), preventing both a recession and for the firms to unreasonably drive up inflation. The situation fixes itself.
Okay, but that begs the question: why can't China fix their deflation problem by also pushing for wage increases?
It seems like a non-problem that is being created by their own inflexibility and adherence to, as you say, neoliberalism.
Because China wants to have its cake and eat it too. It wants the competitiveness of its export industries (since money creation is tied to accumulation of foreign currencies/assets, and requires suppression of wages and domestic demand) and boost domestic consumption at the same time (which requires wages to increase, and giving up its net exporter status).
In fact, the IMF themselves even gave this phenomenon a name - middle income trap. The idea that a exporter country’s economy is stuck at transitioning into a high income country because the moment they give their workers high income, their export competitiveness will fall, lose their economic advantage and brings them back down to middle income.
The only way out is to not play the IMF/neoliberal game.
Okay, so Chinese deflation comes from the contradictions created by keeping exports cheap. If wages rise then domestic consumption will compete for exports, raising the cost of exports unacceptably and hurting China's overall income. That still sounds like a non-problem created by their own unwillingness to actually make that choice, they're adhering to a model that isn't necessary anymore. It's not like all of their built-up infrastructure will just go away if they can't export slop to Western consumers.
Also, isn't the middle income trap just a neoliberal revision of World-systems Theory? So-called middle income countries are stuck at transitioning to high income countries because they aren't imperialist, they are unable to use predatory financial instruments and assassinate neighboring political leaders and otherwise underdevelop their periphery. Is the transition to high-income even possible without being welcomed into the imperial core or being one of the core's favored semi-peripheral compradores?
The question is where is the money going to come from?
To raise wages, either the firms (private sector/capitalists) run into deficit, the foreign sector does, or the central/local governments do so.
Let’s go through them one by one:
Since the capitalists are unlikely to want to make a loss, and they aren’t exactly in the shape to do so right now because profit margin has been squeezed to razor thin due to intensive competition (involution), the wage growth isn’t going to come from there. You can see the government has started intervening with the anti-involution campaign to raise the firm’s profits so they have the money to even pay their workers. Worse, the deflation (lack of domestic consumption) is making their corporate debt even more expensive to service. The only way to offset the loss is by exporting even harder (which is why you see Chinese exporting firms are dumping cheap goods into other countries under Trump’s tariffs).
The local governments are also in a debt bubble right now. Years of over-reliance on land revenue has caused a reckless over-investment in real estate. The property prices are now plunging (land revenue going down), and with slowing consumption/export (value added tax revenue going down), and with an outsized hidden and visible debt that need to be serviced, the local governments have little capacity to spend do so.
Which brings us to the central government, the only governmental body that has the power of money creation. However, since China wants to adhere to the IMF rule of balancing the budget to keep its deficit spending low, it has to either accumulate foreign currencies (through export, or through attracting foreign investments), or borrow through bond issuance (banks collateralizing their assets to the government).
As you can see, the only realistic way to raise wages is for the central government to run deficit, but they will not be able to meet the 3-4% of GDP spending as recommended by IMF, and they will be scolded by the IMF.
Yes, because the developing countries have listened to the IMF to convert their economies into export-oriented ones.
After the collapse of the Bretton Woods, the US empire found the “cheat code” by running permanent trade deficit (super-imperialism) to absorb the surplus goods from the rest of the world. This causes many governments, wanting to earn the US dollars, to become over-invested in export manufacturing capacities. As a result, the oversupply of productive capacity allowed wealthy Western countries with strong currencies to enjoy cheap goods from the Global South.
Since they have over-invested in this trade surplus strategy, the export economy became the primary driver of domestic growth. Whenever they try to raise income, their export goods become uncompetitive. This keeps the developing countries in an artificial “trap” as long as they want to rely on the export industries.
But here’s the problem: how do you transition out of the export economy? For every investment, there is always an opportunity cost. If you spend 10 years to get good at something, and suddenly the skill you’re good at is no longer needed, you find yourself difficult to compete with others because you have not invested in the other skills. This may not be a problem if you’re alone and don’t need much to survive, but what if you have to pay for the medical treatment of your aging parents? Suddenly, the decision is a much harder one to choose.
Every country has to decide how to strategically invest in their economy, and the cost of transition, even if it is overall beneficial to their own economy, will always be a policy choice with some hard decisions to make. If you give up something you’re good at, you might get overtaken by your competitors and suddenly you find yourself losing that market, and you’re screwed if that transition fails.
This is why only countries like China with very strong economy can make the transition easier than most, and they will and should have an outsized responsibility for the rest of the Global South countries.
That still sounds like a non-issue, can the IMF even do anything to China?
The issue I see isn't the IMF, it's the MIC. Without the West relying on China for slop the economic disincentives for war drastically decrease, bullshit like """defending Taiwan""" makes a lot more sense when China stops being the West's toy factory.
That was my question! Is the transition to becoming a high-income country even possible without being welcomed into the imperial core or being one of the core’s favored semi-peripheral compradores? It seems like the middle income "trap" is actually predetermined by the limits of non-imperialist growth, that it might not be possible to reach high-income without superprofits under the current world system. Which would actually imply, to me, that the only way out is to change the world system itself.
So, I guess I agree with you from a different angle. China can't just print money to eliminate deflation because, if it did, its exports would become less competitive and then the imperialist death machine would turn its sights on China to punish them for daring to not churn out the endless slop the West needs to sustain its high standards of living. It's a hostage situation.
They can if they abandon the neoliberal ideology, as I have been saying.
It is a belief system. If everyone in your neighborhood believes that you can only use tap water for no more than 5 liters per day, or else the pipe is going to burst and flood your entire house and damage your property, it’s going to dramatically alter how you live your life, and everyone else in the neighborhood. You will learn how to drink less, wash less, save water whenever necessary, and you will curb certain activities that might make you too thirsty, or need more washing.
And this will create a trading system where people who are good at saving water will sell or lend the surplus water to their neighbors who need more water for the day, in exchange for other treats. It will create an economy of its own even though nobody knows for sure whether the pipes will burst or not.
The point is that until somebody actually tried running the tap water beyond the maximum limit, it will continue to be a belief that dictates everyone’s life. And nobody dares to test it, because they are afraid that the pipes will burst, their homes will flood, and their neighbors will kill them for irreparably damage the life support system of the community.
Sure, and I'm saying it's a non-issue because beliefs aren't real.
That said, there is some material basis to these beliefs. If somebody ran the tap water beyond the maximum limit the empire's water police would come and kill their whole family. If China abandoned neoliberal ideology the US would start WW3.
Trump literally wanted to decouple from China. It has been China that, through using various of its powerful cards like rare earth export restrictions, that brought the US back into the “marriage”.
China should just take up on Trump’s offer and start importing from the US lol. Let the Americans be the world factory’s workers for once.
Sure, but that demonstrates my point. Trump showed that the US can't decouple from China because it's too reliant on Chinese exports, as long as China is the world's factory it has tremendous leverage that protects it from direct US aggression.
Turning the US into an exporter could turn the contradiction on its head and protect them from US aggression, because then the US would be reliant on Chinese consumers, but I don't see how the US becomes the world's factory without central planning. Currently the US is throwing all of its resources into the AI furnace and it doesn't look like productive economic activity will resume for a while.
My point is that Trump is the one who wants to decouple, not China.
Trump is the one saying “the Great American Nation has run up 100 gallons of tap water for y’all so you get to save your water. Now I’m asking you to open up your tap water and give us back some of the water we gave you”.
I agree that Trump won’t be able to materialize his MAGA plan to re-industrialize America. However, the fact that that’s what Trump wants means that he won’t start a war with China for literally giving him what he demanded, will he?
I'm very aware that Trump is the only one that wants to decouple and not China. Trump thinks paying for stuff is the same as being ripped off, so trade deficits are actually somehow stealing from the US economy. His decoupling strategy wasn't even total, he granted so many exceptions that China continues to be a strong trading partner with the US. Deeply unserious.
That's also why there won't be war, because China is still too important of a trading partner despite exports to the US declining. China also is important for the rest of the imperial core and semi-periphery, even as Trump tries to pressure US-allies and vassals to cut off trade (to very limited success) and this further protects China from US aggression.
So with all that in mind, I can kind of see the logic of maintaining the export-based economy. As long as the imperial core is dependent on China's exports they can't attack without causing their own economies to collapse. It's the only material explanation that makes sense to me, "China is just too ideologically committed to neoliberalism to consider raising wages" isn't a satisfying explanation.
There is no need to wonder, I already posted it before here:
Wang Jian (王建) from China Society of Macroeconomic Research, who proposed the Great External Circulation strategy back in 1987 that was officially adopted by the central government, talked about this in an interview in the early 2000s:
In September 2020, months after China proposed the Dual Circulation Strategy (export balanced by domestic consumption), Wang Jian reasserted the importance of dollar hegemony in an interview:
Once you understand this, you will understand that China cannot and will not give up the dollar system, especially its hegemonic status. The status quo greatly benefited the Chinese economy and there is no reason to give up even when the US itself is threatening to end the arrangement, because China still has plenty of cards to play (e.g. rare earth export). The US will find itself unable to decouple from China.
This is also why when the US confiscation of Russia’s $300 billion foreign reserve at the start of the Russia-Ukraine war, and the Fed rate hike that caused dollar liquidity crisis in many Global South countries and spurred strong interest in many to leave the dollar regime, China has been the one that was and still is the most reluctant to abandon the US dollar. If China doesn’t want to, then nobody else can do anything about it. The Biden administration correctly gambled that China would not threaten the dollar hegemony during the rate hike in 2022.
It's hard to reconcile this with the BRICS trying to set up their own currency alternative to dollars. That doesn't look like China "cannnot and will not give up on the dollar system" it looks like they're trying to build an off-ramp before it inevitably collapses.
And where is the plan of BRICS setting up their own currency?
They have been trying for the last three years, and learned the hard way that a confederated currency cannot possibly work among the different countries. If anything, it will only lead to an internal fracturing and the result is the dollar becoming even more hegemonic. This was the key lesson from Russia’s Kazan proposal on dedollarization at the BRICS summit in 2024.
The only way out is to use a federated currency backed by a strong economy. Euro and yen were two good, internationalized currencies that have the potential to challenge the dollar, but the US already pre-empted the dominance of the euro by destroying the European economy through the Ukraine war. The Japanese economy isn’t growing fast enough and isn’t up to the task anymore.
This brings us to yuan, which is backed by China’s strong economy, but since China refuses to give up its net exporter status, it cannot become a reserve currency that others can use for saving. China seems content with reaping the benefits of the dollar hegemony, so it’s a no go on that front either.
I’ve been reading through the thread and the discussion is fascinating. However, I’m realizing my MMT knowledge is a bit too underdeveloped to really grasp some parts. Would you mind explaining? Particularly the “Stalin understood money is debt” bit.
For a long time, especially during the gold standard era and the Bretton Woods era, economists had bought into the barter myth perpetuated by Adam Smith that money was invented as a medium of exchange because people used to trade through barter.
I highly recommend reading David Graeber’s Debt: the First 5,000 Years which was based on Michael Hudson’s research, or at the very least, read this excellent Hudson article: Palatial Credit: Origins of Money and Interest, which very much refuted the barter theory:
As Hudson pointed out in the article, money had always existed as a form of debt since the early civilizations, and debt is simply a form of promise.
As human civilization transitioned from primitive hunter-gatherer society into agricultural society, planning for the future was crucial. You need time for the crops to grow, so how do you even “pay” for goods before the harvests?
The widespread use of gold had to do with the Crusades, when medieval kingdoms did not have the means to assert their legal authorities as the currency issuer, and since they hired mercenaries who operate outside the boundaries of their legal authority, gold was instead used as a substitute form of payment.
By the 19th and early 20th century, the monetary system of most countries operated under the gold standard (and later Bretton Woods from 1944-1971).
Even though governments had at times abandoned the gold standard and turned to fiat currency, especially during war and crisis, for example the greenbacks during the American Civil War, all of these were deployed as temporary measures.
Stalin was the first to decouple the “internal” or “domestic” ruble from gold (there is also a “clearing” or “external” ruble that the USSR used for external trade that was still somewhat tied to gold, but it’s irrelevant for the discussion here):
As I wrote in the previous comment, the Soviet “internal/domestic” rubles existed in two forms: non-cash (for investment/business transaction) and cash (the “money” that people use to pay for goods and services). The non-cash ruble isn’t exactly the “money” that people think of today (a commodity/medium of exchange for barter), but rather a form of debt (think credit or score, i.e. numbers) that the government (the legal authority) issues to allow for settlement between state agencies and business entities. This circuit is detached from the “money” that flows into the hands of the working people, and because they were insulated from the consumption loop, its impact on causing inflation is minimal.
On the other hand, the cash ruble was issued based on productive capacity and availability of goods and products, and because the volume was controlled by the state, it could easily ensure that people have access to the available goods without driving up the inflation.
Now, on to MMT, the genius of MMT is the introduction of a price anchor, using government-backed jobs guarantee to prevent wage-price spiral, a mechanism that solved the problem the Keynesians ran into in the 1970s causing the inflation to spiral.
With the government setting the minimum wages through jobs guarantee (because nobody would work for a private firm that pays less than the government guaranteed job), it also controls the prices of goods and services (which are priced relative to wages). Of course, there is also supply side inflation which can be caused by shortage of imported goods, international sanctions, logistics interruptions but we’re focusing on the goods and services that are produced and consumed domestically here.
Moreover, through jobs guarantee, the mechanism also ensured that when workers are laid off by private firms, it automatically offsets the loss of income that could dampen consumption, because the workers can be immediately re-hired through the government jobs guarantee program, ensuring that their income is not lost.
Most important of all, jobs guarantee anchors wages to prices, and give leverage to the workers over the capitalists. If private firms refuse to pay better wages or provide better benefits, the workers will not have to worry about losing their jobs because they can always be hired through the jobs guarantee program, and this gives them plenty of bargaining chips. And because the wage floor is set by the government, it will also not lead to a wage-price spiral.
Pay attention and compare to the Stalin’s dual circuit monetary system here - even though the forms of implementation are different, both rely on the government setting the wages (as opposed to government setting the prices), and this required an understanding the money really is just a form of debt, not a commodity/medium of exchange as perpetuated by Smith’s barter theory.
Hope this helps.
Thank you for the thorough answer. I still have more learning to do but this was a great introduction.