Profit-Price Spiral: Excess Profits Fuelling Inflation, Not Wages
futurework.org.auIncredible that there's not even a mention of monetary policy.
Are they proposing that corporations suddenly became greedy in 2020? During previous periods of low inflation, did they congratulate those corporations for their altruism in keeping prices low?
Money is subject to the same laws of supply and demand as everything else, and when there's more of it, it's less valuable.
Corporations didn't suddenly become greedy, they didn't realise that they could be this greedy and get away with it. Typically the market forces that would keep such price gouging in control is competition i.e. if you increase prices a competitor could cut you short and gain market. The pandemic allowed everyone to raise prices and now they played chicken to see who can keep the prices high for longer, only to realise they can not only keep prices high but keep jacking it further and everyone implicitly will do it in unison (or perhaps they had a secret cabal meeting agreeing to it).
We give these CEOs too much credit. The vast majority of them aren't that smart. They clearly realised this is possible, I doubt they have thought about the long term implications to their own bottom line. I suppose they really don't care either.
It'll be interesting to see how the market corrects itself. Everyone's selling good for insane profits, shouldn't that mean there's opportunity for an enterprising person to come in and disrupt that? Only time will tell.
In mye MBA studies the teacher for accounting had done research on return of equity (ROE) and it showed over time 10+ year for all Norwegian companies it stuck around 9.3% If something become very profitable then many companies should start to target that marked and the profit should be less over time. It is reasonable to think the same thing should happen now.
Unless market consolidation has reached a sufficiently high threshold.
Is there a significant change in market consolidation across all areas in the past 3 years?
Were M&A higher more recently?
It seems odd to me that market consolidation happened in all areas of the CPI and it’s happening at the same time as extremely high money supply is just a coincidence.
> Money is subject to the same laws of supply and demand as everything else, and when there's more of it, it's less valuable.
But somehow, none of the post-subprime-crisis QE had any impact on the price, how surprising…
The monetarist take on inflation as a product of money supply died in that period (so much that monetarist proponent invented a new concept of “asset price inflation”).
Inflation in general[1] is not and has never been a money supply topic: it's a supply and demand of goods and services issue. That's why inflation rose in 2021 in the US when the supply chain from China was disrupted, and not so much in the EU which is less dependent on China, despite similar monetary policies on both sides of the Atlantic. And why inflation ended up raising in the EU when Russia invaded Ukraine, because the gas supply was vulnerable.
Inflation isn't even related to the “value of money”, in 2021, the “value of 1$” grew on the FX market, at the same time inflation was raging in the US. In fact, during that year, if you were paid in dollar while living in the Eurozone (like I am) your purchasing power grew (because the price variation between EUR and USD was bigger than inflation in the Eurozone).
Another nail in the coffin of this urban legend is the Eurozone itself: the monetary policy is controlled at the EU level, yet inflation in 2022 has been very different between one country to another (from 5 to 15% YoY, that's a threefold difference!).
[1] hyperinflation is another topic, but even there, it's more of a “loss of confidence in the value of currency” than a supply and demand issue.
Astounding that you're claiming monetary policy can lead to hyperinflation, but not inflation. As if those are unrelated concepts.
You are very eager to put nails in coffins and claim that the common sense understanding of inflation (if you print too much money it loses value) is an urban legend.
> As if those are unrelated concepts.
They are. A slow/moderate increase in prices (even 20% a year) has nothing in common with “the salary you've received on the first of the month has lost most of its value by the end of the month”, the social and economic causes and consequences of these two events are completely different.
> that the common sense understanding of inflation
It's only “common sense” because Milton Friedman convinced a generation of people of it, but it goes pretty much against all empirical evidence (including in recent time). The sun and stars don't orbit around a fixed earth either, btw…
I'm listening to the audiobook "The Price of Time" right now and it gives chapter after chapter of empirical evidence.
Friedman was absolutely not the first economist to notice the connection between monetary supply and inflation. Locke wrote against artificial low interest rates in the 18th century.
Locke probably got it from Cantillon (who made a fortune out of John Law's system, how ironic), but this reference probably summarizes the biggest mistake neoclassical economists have been making, ignoring what happened between the 18th century and the 20th one: the Industrial Revolution.
In a pre-industrial economy, the total economic output is essentially fixed (crop production, which makes the vast majority of the economic output, mostly depends on the weather) and supply is always the decisive factor in an economy.
In industrial economies however the economic output mostly depends on the demand: if there's demand for something, then the industries will just ramp-up production to fit the demand (be it for smartphones or aircraft carriers like in WWII). In this regime, you don't really have monetary-induced inflation, until the industrial output can't follow for some reason (in most cases, the output in actually decreasing, meaning that stopping money emission won't solve the issue either, and you need to actively contract the economy to curtail inflation (like Volcker did after the oil shocks) or just slow it down a bit to wait until the problem sorts itself out, à la Jerome Powell).
Corps are always inherently greedy. 2020 is when corps started blaming the working class for receiving pandemic aid to stay afloat and started price gouging. Nevermind a decade of low interest rates propping up garbage corps and inflating markets.
Has there even been "low inflation" since dropping of the gold standard?
> Has there even been "low inflation" since dropping of the gold standard?
The inflation between 1968 and 1970 (during gold standard) was above 4%, which is higher than the inflation has ever been between 1992 and 2020.
Yes, and then during the 2007-2008 recession, there was even a brief deflationary period, so it's not the gold standard that's the issue.
In game theory, correlated equilibrium is possible without explicit communication, simply by having access to some signal that (everyone knows is) common knowledge. COVID and interest-rate opportunism by corporations could maybe fall into this bucket without explicit collusion.
Granted, the reality is probably less subtle than all that. When Mark Zuckerberg announces that he's doing stealth layoffs by "raising the bar on performance management", and this is reported in the news, the herd animals in C-suites see and follow. Subtle mechanisms of coordination don't need to be invoked; it's just straightforward mimetic fashion.
Returning to game theory, correlated equilibria can be good -- a way out of Prisoner's Dilemmas -- but in this case I'm afraid it's mostly just the actions of "capital" that are correlated. The Left's communication channels are jammed with pomo chaff, and its members' actions are more independent and uncoordinated.
They do mention monetary policy. Is there something specific about monetary policy that you believe contributed to rising inflation?
I don't know if they're suggesting that corporations became greedy but rather that they unilaterally increased prices during the pandemic which is the main cause of inflation.
>Is there something specific about monetary policy that you believe contributed to rising inflation?
Surely doubling the money supply in circulation during the 2020 money printing boom had an effect on inflation, wouldn't you say? It' snot like the corporations and street banks just made their money out of thin air.
The how is important though. The money supply grew due to PPP "loans" freely being given out to corporations with the help of street banks. I believe a more careful release of the same amount of money wouldn't have caused the same amount of inflation.
Yes corps are greedy all the sudden. This is why the Great Financial Crisis is referred to in academic circles as the "Great Generosity" because deflation occurred.
It does really feel like the cat is out of the bag that producers anywhere in the supply chain of housing and food realized they could do whatever they want and we can all suck wind. Every significant expense I have is up more than 40% in the past two years.
Competition is supposed to drive prices down to the equilibrium level. Why is it not happening? Are produces colluding to fix prices? Why new players are not entering the market to take advantage of higher prices?
Why would it happen? Competition is only supposed to drive prices down in free markets with relatively high elasticity. When producer/retailer sees that inflation is perfectly good excuse to raise prices now to account for future cost increases without sacrificing demand, they do exactly that. And why would you raise prices by lower magnitude or even lower them when elasticity is so low that lowering prices literally hurts profits?
Smart people can argue why elasticities are so low across the market, but IMO low elasticity is one of the major drivers behind equilibrium working a little bit differently than you would expect from high school level economics.
Housing has almost nothing to do with markets because Anglo countries run it by central planning. So they can't enter.
Construction is pretty high where it's been allowed.
As for food, it has fallen - eggs were high earlier this year and now aren't. This is mostly driven by gas prices and the occasional animal pandemic.
Housing is (almost) just as bad in rural areas, where there's plenty of land to build new houses. It's just supply and demand.
This is supply and demand:
https://twitter.com/stuartbdonovan/status/166414741287168409...
Your new land has to be insurable, not in a fire/flood zone, get roads and utilities built out to it, and has to not already have local land-use busybodies zoning it R-1 or inventing brand new weird design requirements.
>Your new land has to be insurable, not in a fire/flood zone, get roads and utilities built out to it, and has to not already have local land-use busybodies zoning it R-1 or inventing brand new weird design requirements.
At the same time, none of these things other than roads/utilities are a requirement in my country and housing is still rising in price much, much faster than anything else + wages.
They aren't requirements or you don't know they're requirements?
(Some countries like the UK don't have this because it's even _worse_. There are no written requirements of what's legal to build, because nothing at all is legal to build without convincing a planner to allow it.)
Because after several decades of deregulation and lack of anti-monopoly enforcement, there is effectively little competition in many sectors or stopping of collusion among firms.
Where I live, fuel, food, housing and other commodity prices are heavily controlled by a few central distributors. Those distributors are in turn controlled by, well, a few key corporations, including several levels of civil government.
New market entrants will conveniently be denied permits, or made to abide by the letter of the law, where other blessed groups are granted the grace of government officials looking the other way.
How is a new market entrant fuel distributor supposed to come in, when a single refinery exists to supply fuel? Same question, where a government monopoly sells electricity, how are we going to get competition?
Where I live, housing costs are triple or more in the city core as in the suburbs. But, gas prices are identical at every station, with zero apparent geographical variation! Same thing for grocery store prices, where food prices are identical in areas with 3x industrial and commercial leasing costs. For the gas, apparently, a tax on the commuters is what's balancing things out, but it doesn't add up.
What's more likely is that prices are being carefully centrally controlled, and have been for quite some time. And, this seems to be doing a great job of keeping inflation in check.
The above is not a criticism, just a statement of observation. The above scheme is working quite well for many people. It seems unfair to some.
Is there a formal economic theory that bases the generation of value off of the creation of economic inefficiencies? I definitely think we're there, and that the theory is correct. Efficient markets are not highly productive. What's highly productive is wasting a lot of energy and resources in various areas of activity. Where productivity means that you produce a lot. Wars, the Great Pyramids, "green" technologies come to mind.
Viewed this way, wage growth will happen if and when consumer spending is again considered to be a driver of economic growth. If we think that businesses are going to deploy cash more profligately than consumers, then cash will be (and should be) funnelled into businesses, so that they can drive economic activity.
For awhile now, Western consumers have been doing an awesome job of driving economic activity in other countries (exporting manufacturing economies). Western policy makers are super sick of this and it shows.
If you were given $100,000, what would you spend it on? And how would that drive further economic activity?
Supply and demand mechanism can take years, decades to materialize a such stabilization. Wealth hoarders have the power to suck huge amounts of wealth out and destabilize the entire economy, just like has happened now.
"Capital in the Twenty-First Century" talks about this, great book.
> Why is it not happening?
because it was a cold war fairy tale.
Capitalism leads to monopolies and related economic structures. It's best for every large player to carve out territory whether it's geography or specialization niche. The fallacy is that this will be a meritocracy. It's not. It's wealth concentration. The haves will buy innovation and deprive the market of competition to themselves. This happens again and again and again.
We see less of these kinds of problems the closer we are to a free market. A pure free market is not realistic, but sadly our current flavor of capitalism has headed far away in the opposite direction.
To me it is increasingly critical to separate capitalism from free market. They have gone together for some time, but in the end capitalism aims to crush free market when it benefits the capital.
State is needed to stop too much consolidation from occurring and prevent monopolies where alternatives are sensible.
I don't agree. It is state intervention that causes consolidation and monopolies. A free market keeps monopolies in check.
This claim is baffling to me. Are you saying without state intervention Amazon wouldn't just buy out every potential competitor or drive them out of business using currently regulated tactics?
Amazon has already been doing just that [0]. It wasn't born in a world where we have a free market.
[0] - https://en.wikipedia.org/wiki/List_of_mergers_and_acquisitio...
Because “the equilibrium price” has always been a fable.
Competition works when you have a free market. It doesn't work when you have government interventions, subsidies, price controls, and lobbying.
You're so close.
> The collapse of the Soviet Union, which Fisher believes represented the only real example of a working non-capitalist system
If it was working, why did it collapse?
There are lots of alternatives to capitalism but most of them are measured in mountains of skulls. No one has any difficulty imagining more, most people just noticed.
Maybe we don't live in a just world? Consider, for a second, that in the Cold War the bad guys won.
Capitalism has it's own skulls. Violent strike breaking, banana republics, for profit prisons, etc.
Yup mine too and on top of that everything has gotten smaller and shittier in quality too.
I really wish they would have met the banks collapse. That would have done wonders for fixing this inflation. Nope us wage slaves will continue to lose.
If the bank collapsed you'd lose because the bank has your paycheck in it.
Deposits are insured for regular people amounts of money.
No, I mean your employer's payroll account, and their payroll processor's.
Physical and human capital is all still there. Who cares.
The human capital certainly wouldn't be there since they'd all quit when they don't get paid for weeks.
Yeah id rather deal with a raging depression than this slow drip inflation reducing all of our standard of living. Pull the band-aid off.
Me thinks you need to look up what the FDIC does.
Your employer's payroll account is larger than $250k.
Fake news.
This is a measure of where inflation "goes", not what fuels inflation. The narrative that profits are "fueling" inflation is completely made up and the people pushing it are lying to everyone for political reasons.
Inflation is caused - in most countries - by excessively loose monetary policy (sometimes fiscal policy, sometimes both). If government policy creates inflation (average prices go up) that money can flow to a domestic labor or domestic investors or leave the country. This depends on supply-side factors that are basically orthogonal to the inflation question. It is true that in the most recent round of inflation it primarily led to increased corporate profits.
There is a theory from the 80s called the wage-price spiral [Blanchard] that talks about how inflation (which is initially caused by fiscal or monetary policy) can become self-sustaining if wages and prices are set in a staggered back-and-forth kind of way, as workers react to higher prices by demanding raises, and firms react to higher labor costs by raising prices. However, there is no serious theory that such a process would happen with profits. That makes no sense at all! The exact opposite would be true, if anything. High profits in some time period would likely regress to the mean as price competition sets in. In fact, this is exactly what is happening right now, as corporate profits after spiking over the past 12 months are shrinking.
The "profit-price spiral" narrative is being pushed by the same disingenous idiots pushing the "greedflation" narrative - it is not a serious attempt to explain inflation, it is an attempt to use reasonable-sounding economics words to blame inflation on companies instead of the actual culprit: governments that overstimulated their economies to such a degree that they caused both inflation and profits to spike.
> This is a measure of where inflation "goes", not what fuels inflation. The narrative that profits are "fueling" inflation is completely made up and the people pushing it are lying to everyone for political reasons.
Inflation is an increase in price level. When prices go up, one might consider that the price of inputs has gone up, or that profits has gone up, or both.
If the inputs go up, and the price stays the same, profits would go down, and there would be no change in price level. If companies are unable to be profitable in the face of rising inputs, they will collapse.
If inputs go up, and profits stay the same, prices would increase in line with the increase in inputs, ie. an increase in price level, ie. inflation.
If inputs go up, and profits increase, then prices will increase more than the cost of inputs would dictate, ie. inflation.
You can't say that the price increase in things like fuel and food were the result of profligate government spending, because that would suggest people are taking money they received from the government as covid stimulus and increasing their consumption of food and fuel.
You can't say that price levels have increased because of increased labour costs, because real wages have declined.
You can't say that companies have increased prices only sufficiently to offset the increase in inputs, because then profits would not have increased.
What you can say, though, is that the cost of inputs went up, there was a fiscal stimulus due to covid, people had increased spending power, and companies that sell "must haves" increased their prices to absorb that increased spending power, over and above what was required to satisfy increased input costs.
Then, because price levels went up (due to increased profits absorbing additional spending power) governments increased interest rates, making things more expensive for the very people whose increased spending power had just been absorbed by said companies.
If a company has for sake of argument a 10% profit margin on an item and seeks to maintain that 10% profit margin after an increase in its input costs then is that unreasonable?
In dollar terms its profits have gone up but as a percentage they haven't.
I think it's reasonable for companies to want to have infinite profits and $0 in costs to produce. That's what they're supposed to do.
My point is that when the OP says "inflation is the result of monetary/fiscal policy" (EDIT: paraphrased, not quoted, improved accuracy of paraphrase) it's inaccurate: people did not spontaneously choose to consume more food and fuel because they had increased spending power, but those prices went up and so did profits
So some companies are able to increase prices disproportionately because of their unique position as price setters and lack of competition. They absorb any increase in spending power and/or fiscal stimulus. Increase in interest rates absorbs whatever is left over.
As those price increases filter through the economy, price levels increase further and so on.
If there was more diversity in the food and energy sectors, then prices would not have increased as much as they did, and the increased fiscal stimulus would have dissipated throughout the economy, making its way into the pockets of more small businesses.
Now: should the government not stimulate the economy? Well, I doubt it, then people would have been really in the shit.
Should the govdernment better target their stimulus? Absolutely, I know in Australia it was very inequitably distributed.
Should the government implement policies to prevent those sectors with the least competition from hiking prices to absorb fiscal stimulus meant to avoid recession, thus keeping a cap on price level increases? I think so.
And I think the linked article does a good job of demonstrating the way in which "profit-price" interactions are a better way to think about inflation rather than "wage-price" interactions, and thus why it's unreasonable to expect labour to shoulder the burden of suppressing inflation, rather than capital.
I don't think op did say "inflation is the result of government spending" he said it was the result of excessive monetary stimulus. In other words the action of the federal reserve.
OP did say:
> (sometimes fiscal policy, sometimes both)
Although it's also clear that monetary policy alone cannot stimulate the economy, otherwise there would have been a correlation between ZIRP and economic growth, and there wasn't.
Fiscal policy does stimulate the economy, and if properly targeted this can be done without inflation risk.
OPs main claim here is that the article is "fake news" because government monetary and/or fiscal policy is the main driver of inflation. While it may be the case that governments did stimulate the economy, the bulk of price level increases are not increased caused by demand (ie. people deciding to buy more stuff) but a combination of increase in inputs (supply problems) and monpolistic price setting by poorly regulated companies.
I concede that one might say that, in the absence of any government stimulus, there would also have been no price level increase, but I would also contend that in the absence of such a stimulus there would have been a depression and that a price level increase could have been avoided through better targeted stimulus and better regulation of companies.
> In dollar terms its profits have gone up but as a percentage they haven't.
Citation required.
I can't say whether that's actually happening or not, all I can say is it's a reasonable explanation as to why profits would be going up for many companies.
The article we are discussing cites:
On Thursday Qantas posted $1.4b half-year profits, tripling revenues
On Wednesday Woolworths posted a 25% rise in profits. Supermarket profits have soared on the strength of rapid food price inflation.
On Tuesday Coles net profit grew 11% in the latest half-year result announced Monday, beating forecasts.
On Wednesday Santos posted a 221% annual profit
Ampol, Australia’s largest oil refiner, reported a 30% increase in first-half net profit, buoyed by soaring petrol prices.
Commonwealth Bank posted a record $5.1b billion profit, up 9%, buoyed by extra interest income from rising interest rates
In every case the increase in profits exceeds inflation, so the increase in profits is definitely not simply a case of percentages remaining the same.
Who had increased spending power exactly? I was under the impression the stimulus was mainly directed towards people who had suffered wage loss due to covid.
Some of the money went to folks who lost jobs. A lot of money also went to business owners who were supposed to use it "to not lay people off". Many probably didn't even need the money but took it because "free money". The number of business owners who bought new "toys" (i.e. cars, boats, etc.) or second and vacation homes during a time of supposedly difficult financial times is daunting...
Think about this: the cost to write off outstanding college loans is ~$350 billion. This amount was accumulated over a few decades. ~$700 billion was given to business owners in under a year...
One of the powerful things about the stimulus is that it was undirected—that money (I no longer recall the precise amount per household—$1200? $2000? somewhere in there) was just given to every household in the US.
Well ... if you think about it the additional spending power was sitting somewhere right? People lost their jobs because other people weren't spending. The people who didn't spend, kept their money. Then the people who laid off workers, kept their money. The government added money to close the spending gap. It's a perfectly reasonable policy, HOWEVER I know that in Australia definitely (and probably in the US) it was very poorly allocated, so people and firms who really shouldn't have had any extra income were granted it and some others who really needed it, didn't get it.
On balance, increased government spending adds net financial assets to the private sector and increased taxation removes it.
So did the government need to just "tax back" the money it spent into the economy? Maybe in some ways, but certainly not from the people it gave it to and maybe not at all. BECAUSE during the time when there was a recession avoided by stimulus, the population also grew so there should have been some economic growth during that time anyway.
As such, probably, what should have happened is that the government should have done things to ensure that the (very few) parts of the economy that benefit wildly from lack of competition and dysfunctional markets (like food, energy and housing) didn't accumulate all of the growth that should have been more evenly spread around.
In Australia, we need the government to build roughly 100,000 public houses per year, and we need to dramatically increase net migration to achieve that; but since we're an economy dominated by religion, mining, finance, real estate and insurance that's unlikely to happen. We actually have a horrible housing crisis in this country because of the dramatic increase in single person households as a result of relationship breakdowns over covid and the tendency away from share housing in young people (who can afford it!), as well as an explosion in dwellings used only as short term rentals.
In the US you probably have many of the same problems. The inflation reduction act did some of the work to improve things but it took a while to get it through because Manchin and Sinema fucked the recovery for everyone (as Bernie said: "give us more democrats").
This is the best discussion on inflation I've seen:
https://www.levyinstitute.org/publications/is-it-time-for-ra...
> price competition sets in
You going to start an airline, a Telco, or meat processing plant because the others are colluding
So, literally everyone is colluding then?
Wouldn't they be? These days, most people and institutions who own shares of a company tend to own a similar fraction of the shares of the competitors, too.
That's the basic premise of index funds.
Presumably when they vote, their interest will be in seeing the entire index go up, not one company stealing the market share of another.
It doesn't require active collusion. This is one of the things that many people fail to understand about this, and many other aspects of our current systems.
When supply chain disruptions during COVID caused significant supply shortages, companies raised prices as one would expect due to the classical law of supply and demand.
By the time those shortages ended, there was so much media buzz about inflation that those companies realized, independently, that they could probably keep prices high and no one would notice.
They did this. It worked. The media still kept talking about inflation. Wages started to recover a little bit from the beating they took during the pandemic, and the Fed started talking about forcing wages down to fight inflation.
Those companies, independently, saw this and broke out in the biggest shit-eating grins ever. They raised prices again, purely to juice their profits, and still the media and Fed were only talking about inflation as if it was caused by wages.
Only now, months/years later (depending on where you start counting), is the media starting to catch up to what's actually been happening.
(And I'm sure that it's also something of an oversimplification—that the inflation hasn't been caused solely by this corporate greed. But I'm pretty damn sure that in this instance, it has been caused primarily by corporate greed.)
TL;DR: Active collusion is not necessary in a situation where multiple actors within the system can independently recognize actions that will benefit them at others' expense, and engage in them simultaneously. It is a zeitgeist, or possibly a bellwether and then flock movement, not conspiracy.
> It doesn't require active collusion. This is one of the things that many people fail to understand
Exactly. Interested people should look up Keen & Standish critique of the theory of the firm (e.g. http://www.paecon.net/PAEReview/issue53/KeenStandish53.pdf), they have a really nice and simple computer simulation where competing firms collude only on the basis of knowing the current price, without even being aware of each other's existence.
Landlords as well https://www.propublica.org/article/yieldstar-rent-increase-r...
Landlords especially. Land value (whether you're measuring by sale price or rental value) is largely a function of economic activity or the potential thereof; landlords - even when they ain't colluding with one another - are well-positioned to respond to any growth in wages or profits by jacking up rents accordingly.
Land value taxation paired with a citizens' dividend would close that hole - alongside myriad other socioeconomic benefits.
I am not an expert in this field by any means but, Planet Money did a piece recently that suggested some people are putting forward a serious theory for how a profit-price spiral would work. Again, not an expert, but the reasoning ng seemed sound. Link here:
https://www.npr.org/2023/05/11/1175487806/corporate-profit-p...
> This is a measure of where inflation "goes", not what fuels inflation. The narrative that profits are "fueling" inflation is completely made up and the people pushing it are lying to everyone for political reasons.
Inflation is caused by rising prices. In the b2c markets, the prices at set by the companies. It is believed that in presence of sufficient competition, the companies aren't really free to set the price, and are only following the “market price” (they are said to be “price-takers”).
Here we see profit rising, which means that the competition isn't high enough, companies have become “price setters”, and they are setting the rising price. Hence they and their profits are responsible for inflation. QED.
> governments that overstimulated their economies
I don't understand the nuances of global economics, but makes you think how and why so many governments made the same monetary policy mistakes in lockstep.
In software the phenomenon is called best practices.
Think of Chicago School and MIT economists as Meta and Amazon leads.
In finance they say, 'no one ever got fired for buying IBM'
Interesting point. I could agree with this analogy if different countries had "bought IBM" at different times and thus made the same mistake. But what has happened here is that many countries have bought IBM together at the same time.
Any book about history of inflation shows the same pattern repeated over and over again, for the last 10,000 years: the government debases the money, e.g. the one ounce pure gold coin now is half gold half copper. They start to pay with those coins, at first at the same prices, but with the new demand rising prices go up. The government always try to put the blame on the greedy merchants, and always try to put price caps, to pass laws forbidding price rises, etc.
The dynamic of inflation makes this narrative plausible: when the government spends their new debased money, the first to get them are their providers, and their volume rises. As with every demand spike, prices go up, but the closer you are to the money printing, the best deal you get being able to spend new debased money as it was the old money. Wages are usually the last to get the rise, so the worker see how the bussiness raise their prices "greedily" while they don't get wage raises.
Precious metal coins is a concept that the ancient Greeks introduced and the Romans spread across their empire.
Ancient Egyptians didn't use precious metals. They used something far more mundane. You are a farmer? You bring your harvest of corn to a storage house and receive a receipt of your deposit on a clay tablet.
But here is the thing. Storing grains is expensive and they don't last forever, so the depositors are charged the cost of storage if they keep their receipts for longer than a year.
Now imagine you do the same thing except your receipt is gold. The concept of an eternally lasting receipt should raise an eyebrow. Who is going to pay for the storage costs? If nobody, then congratulations you just invented a Ponzi scheme! Early depositors get bailed out by future depositors!
Alternatively, the value of the coins must shrink to accommodate the loss of grains, but here is the thing. You are in a deflationary boom, you don't care about reality. But at some point you will try to spend your deflated money, right? Well, you will come crashing down to reality. The sudden price adjustment towards reality will cause a lot of inflation all at once.
Ok, so now that we know the dynamics of precious metal money even in the absence of government intervention, aka cycles of booms and busts.
We can now think about the motivation of the Roman Empire which is the most famous historic example of "debasement" because they were the first ones to do it on a large scale. Well, you see, the Roman empire was constantly expanding its borders to acquire new precious metal mines. This works until you run out of mines. In other words, it was a pyramid scheme that needs a constantly expanding territory.
So instead of thinking as precious metal money to be something aspirational, it would be smarter to realize that it doesn't work. I mean the easiest way to prove the idiocy of a gold standard is to point at all the fiat currencies that originated from a failed gold standard, which is basically all of them. In other words, fiat currencies aren't some kind of perversion of money, they are the late stage of a failed precious metal currency! It is easy to see why. Precious metal currencies don't circulate fast enough to clear the market because of their deflationary tendencies aka hoarding. So banks create a money substitute that is as good as the real thing but the problem is that the substitute can be hoarded as well so the problem can never be solved other than by substituting existing money with even more of the same hoardable money. In other words, the money supply has to rise all the time to accommodate uncoordinated/speculative saving decisions that have not been properly communicated to the market.
What I think is either sad or amusing, is that people think that these dynamics can somehow be avoided just by the government being tough enough on the economy to make all forms of money substitutes illegal, as if that wasn't some kind of massively disruptive government intervention.
Now let's go back to Ancient Egypt. If people hoarded the grain money, then the same dynamic would apply to that money right? The grain banks would have to create fake deposits for grains that don't exist and there would be constant runs on the banks, right? Except there is no historical evidence that this ever happened because people didn't want to pay the storage fee. Isn't it strange that this ancient civilization never recovered, even after thousands of years of Roman currency? Maybe the whole idea was a scam from the start. Permanence in our world is a meaningless concept. Your gold money will remain on earth billions of years after humanity has gone extinct, how exactly is it supposed to maintain its value?
I love how one can make an example (gold coin) to illustrate an issue (debasement) to receive a long lesson about the example being incorrect instead of discussing the issue. I never said "gold is the solution", and in fact my example is about how governments historically debased gold coins.
An egyptian government can also "debase" grain. Just issue fake receipts for unexistent grain, and buy things with them at current prices. Suddenly, there are a lot of grain receipts circulating, so you expect prices to rise. The government can now blame the price rise to the merchants! They are the ones that are rising the prices, and that's all you can see.
On the example of the grain deflation, you don't have a "receipt in gold". You buy or sell grain, and that's it. Lets suppose a simple market that stores grain at a cost of 10% in a year. You sell grain on January for 100 ounces of gold, but if you try to re-buy the same amount of grain in December, it costs 110 ounces, or receive a 10% less grain for 100 ounces. As simple as that. Your 100 ounces of January didn't guarantee you the same amount of grain in December, because they are not a "receipt in gold for X amount of grain". Prices are a dynamic way of economic coordination to reflect whatever reality it may come. E.g. if half the silos burn through the year, grain prices will double to reflect that, and that's not inflation. But good luck reclaiming your clay receipt amount of grain.
The problem here is not the gold. The problem is issuing more money than people are demanding. There is nothing wrong with issuing money (e.g. in form of new credit) if people demands credit that they are paying sooner or later. The problem is the government creating new money with zero intention of paying it back, because that fuels inflation.
Deflation is not bad _per se_. We have deflation in computer or mobiles prices since forever: we know we can buy a cheaper computer in the future with the same specs than today, yet we don't hoard money instead of buying computers. We buy them when we really need them. Inflation creates an artificial urge to spend sooner than you want/need, because we know our today money won't buy the same in the future but less. That looks like a good thing on the surface ("the economy moves" they say), but it has a lot of bad consequences: erodes savings, consumption rises above our real needs, investment is more difficult because economic calculations are uncertain.
Historic inflations are well explained here: https://www.amazon.com/Forty-Centuries-Wage-Price-Controls/d..., where the authors collect a large number of inflation events in the last 4,000 years and show how every single government followed the same route: 1) debase the money, 2) expend their newly created money, 3) prices raise, 4) people complain, 5) government blames the merchants and creates laws to control prices and punish price raises 6) inflation persists.
> The problem here is not the gold. The problem is issuing more money than people are demanding. There is nothing wrong with issuing money (e.g. in form of new credit) if people demands credit that they are paying sooner or later. The problem is the government creating new money with zero intention of paying it back, because that fuels inflation.
I don’t see the problem here. Does the government have any intention of paying it back? What would happen if all created money was payed back?
Seems more like created money/governmental debt needs to stay so people have something in their pockets to actually pay for something.
Note that despite the title, this isn't an impartial report on an unrelated academic institute's peer reviewed analysis.
It's a press release by the (political) institute that compiled its opinion on the subject.
That latter is not a problem (and the political bias could have been the other way), but bear in mind if you take the time to read it on the assumption the headline here has some weight.
A related question which I'm curious about: Suppose you own a well-diversified investment portfolio, work a job, and consume a relatively typical mix of goods and services -- what's the point (e.g. a ratio of how much you have in equities to how much you spend per month) where the "typical" margin-increasing price hike benefits you overall? In other terms, if this pattern of behavior results in a transfer from consumers to owners, what kinds of people are at the equilibrium point, where your lost purchasing power from price increases is exactly matched by increased value of one's investments caused by fatter margins?
Note that higher interest rates necessitates higher corporate profits. If corporate profits didn’t rise with interest rates, then the risk adjusted return on equity would drop relative to the risk free rate. Imagine you’re considering stocks versus bonds at 5% versus 0% on bonds- given the risks stocks hold, bonds look relatively more attractive. The other side of higher equity costs is less funding for business investment - fewer loss leaders, fewer vc funded firms running quarterly losses, and so forth.
This is the same narrative I am seeing in Canada too. Suddenly all the news feeds are about corporations making record profits and fleecing customers. Surely that is what's causing inflation and not the trillions of dollars the government has been printing for the last 5-10 years!
Corporations are greedy, but they have always been greedy. This is just government using MSM to deflect blame.
I'd expect analysis explaining why firms are able to achieve "excess profit" now for such a strong claim to be believed.
(1) profit is up. No analysis is required to explain a fact.
(2) profit is up because current winners have built enduring technological, organization, and market advantages that cannot be replicated by competitors in any reasonable time frame for market competition to discipline prices
(3) Because the current winners are stable, no one (in finance, business or government) gains by backing competitors, which amplifies the effect.
It's really simple: Whenever we run low on labour, we slow the economy with interest rate hikes. So Labour can never get a raise because it never has leverage. But when the other factors of production run low (and their price goes up, specifically land, capital and entrepreneurship) we take no action. The result is that land and capital owners get all the benefits of growth, and labour get's none. This is how we choose for the system to work.
The fact people keep "discovering" this is quite confusing.
So my model of the fuelling of inflation is that after a priceshock, individuals and organizations alike attempt to figure in present and future price rises into their own pricing. If you can do that perfectly, than inflation stays constant, and its effects are minimised (because your real earnings are going up at the same level, interest rates will include the flat rate, etc). If you estimate too highly, then you end up with spiralling inflation -- but it's certainly safer for your own pocketbook. That's the major risk with high inflation levels.
I can completely believe that producers are able to adjust prices more quickly than the labour market, and can easily overshoot, but it doesn't seem to be a /moral/ failing, as this is being portrayed in some quarters. You can -- and may well, and probably should -- get the same effect from the consequences of wage negotiations during rising inflation. Neither of these are the /source/ of the inflation though; they're both elements of prices rising in the first place. I've seen this conveyed in economics memes with a chart of inflation labelled "greed of corporations over time".
I guess looking into it more, this belief that both wage- and corporate-driven inflation is a misconception is also shared by monetarists like Milton Friedman[1], though I can totally believe conservatives might want to push the wage-driven argument, and progressives the corporate-driven model.
[1] https://www.aier.org/article/there-is-no-such-thing-as-wage-...
Karl Marx was right all along.
I believe Marx's thing was "the tendency of the rate of profit to fall", not "the tendency of the rate of profit to rise because of greed".
Isn't "the tendency of the rate of profit to fall" what ultimately prevents new companies to enter the market, causing "the tendency of the rate of profit to rise because of greed" due to price collusion of existing companies?
There's no correlation between price increases and industry concentration in the last few years.
Inflation is happening because of the continued printing of currency and an absolute refusal by all parts of the power structure to do anything that would decrease the amount of USD in circulation because it is politically unpopular.
And their not going to, the best thing you can do is park your wealth in assets which will continue to appreciate. Not even big things necessarily, instead of renting things like Rototillers or carpet scrubbers just buy the dang things.
> Inflation is happening because of the continued printing of currency
Money supply is currently falling [1]. Inflation is more complicated than more money higher prices.
[1] https://www.reuters.com/markets/funds/us-money-supply-fallin...