Inflation: Secrets and Lies 4
Winner, losers and abusers, and what does the future hold?
Brown University professor Mark Blyth recently gave a talk on the new book he’s got coming out about inflation. I’ve embedded it above. Please note, I am simply transcribing the points of the talk here; if you have an issue with what he is saying, do not take it up with me, please take it up with Mr. Blyth.
For the impossibly hurried or those with short attention spans, here are the main points of his talk:
Inflation was caused by Covid supply shocks, higher fuel costs, and firms taking advantage to raise prices because they could.
Jacking up prices was more pronounced in highly consolidated industries which is more and more of the global economy.
Eventually inflation cools because you can't raise prices forever1. There is no evidence that raising interest rates did anything to lower inflation.
The stimulus checks primarily went to pay down credit card debt, rent, and groceries, none of which are inflationary.
There are a lot more things you can do to fight inflation besides raising interest rates. Price controls are used all the time, we're just not told about it.
Inflation is measured in different ways across different countries.
Inflation doesn't measure house prices even though that's what most people spend most of their income on and that's what's been rising the fastest all over the world.
"Money printing" is a symptom—not a cause—of hyperinflation. Hyperinflation usually results from problems with foreign exchange rates in small, vulnerable, open economies dependent on export commodities. Inflation does not necessarily lead to hyperinflation—they have totally different causes.
Banks make a killing in times of high inflation thanks to deregulation.
There are reasons to think inflation will persist into the future.
That's the 10,000-foot summary, but if you want more details, read on. Or you can just skip to the conclusions.
Inflation: You are what you measure
Is inflation fighting really just monetary austerity?
Inflation affects people differently—how you consume, where you are in the income distribution, and what your assets are.
Friedman: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than an output.” A causal statement: increase 'M' and you're going to get inflation if output is constant.
“Shootings are always and everywhere a ballistic phenomena.” Not a causal statement. It's true that bullets kill people, but that doesn't give you much information.
Thatcher: “Inflation is a sustained rise in the general level of all prices.” It's not the prices of specific things going up. It’s not houses getting more expensive. It’s not Bitcoin going on a tear. It is all prices, all rising together.
Inflation is measured in different ways. Different countries include different things in their indexes. Therefore, inflation rates between countries may be measuring totally different things.
House prices are not included in inflation numbers because they are not “consumed,” that is, you don't eat your house. Nevertheless, for most people, shelter is their biggest expense.
“Core” inflation strips out "volatile" items like food, fuel and housing, but these are most people's biggest expenditures.
Your consumption and mine and everyone else's is very, very different. What you actually experience is different from what the core number is. Two people in similar circumstances can experience inflation very differently depending on what they purchase.
Because not everyone is affected equally, there are distributional effects. That is, there are winners and losers from inflation.
Why do we do what we do when we have inflation?
In the 1970s, Paul Volcker jacked up interest rates to bring down inflation to 16 percent real, 20 percent nominal. Businesses went bankrupt and unemployment went up.
In the same time frame, banking was deregulated.
“What happened in that period was the entire banking sector was deregulated. And what that meant was, credit that was very hard to come by under the old system, suddenly became very available at a price. So imagine you've got 20 percent nominal inflation, you've got a real rate of 16, of interest rates, and your inflation rate's about 15-14 percent.”
“Once you crush the economy you'll absolutely bring down inflation—there's simply less economic activity. But imagine it settles at about 6 percent. But you've deregulated your banks and they're now able to charge 12 percent interest. I just made 6 percent real just for showing up! Would anyone like a credit card?”
“So this is the beginnings of that whole tsunami of credit that basically financializes Western economies. So it's not just a question of, 'This guy was a hero who stood up to the politicians and did this terrible thing for the greater good.' Loads of people benefited from it! Mortgages were more available. Credit was more available. Banking became fantastically profitable.”
Nixon price controls were seen to have failed in the 1960s.
It turns out here's a whole panoply of things that we do all the time to control price increases that are very effective, but we're told the only thing you can do is raise interest rates.
Four stories of inflation. Each story focuses blame on a different entity: “If it's your fault, you have to pay for it.”
The stimulus checks (Larry Summers):
According to the survey of consumer finances from the New York Fed, the biggest ever credit card receivables in history was three months after the stimulus checks went out.
Over 25 percent of stimulus checks went to paying down credit card debt which is non-stimulatory.
The next set of checks was back rent.
What people spent the checks on was, 1.) groceries, 2.) rent, 3.) paying down their credit card, none of which are stimulatory.
“Schrödinger's checks”: Stimulus checks were said to be both the cause of high inflation during the pandemic and high savings afterword. But checks cannot be both saved and spent.
“The whole notion of too much money? Well, it depends on where you are in the income distribution. You're going to spend that stimulus check if you need it; if you don't, you're going to save it. So much so, that we end up with this phenomenon that I call ‘Schrödinger's checks.’ These things were meant to be spent in 2021 and 2022 to cause inflation, but in 2023 and 2024 you were getting stories in the financial press about how all these excess savings were keeping the economy going. Well, you can't have it spent in one period and saved in the next. That's literally quantum physics. This doesn't make any sense.”
Unemployment is too low (Olivier Blanchard)
Higher unemployment means lower inflation (the Phillips Curve). This idea fell apart in the 1970s.
Phillips Curve logic is embedded into the policy regime, even if most modern macro wouldn't go anywhere near a Phillips Curve.
Fears of a "wage/price" spiral.
“Wages actually didn't grow as much as inflation. The whole notion that people were able to recoup the lost value that they got from the inflationary loss simply didn't happen. Pretty much everybody is down outside of the top 10 percent, and that's not because of higher wages, its because they have more wealth to start with.”
There's very little empirical evidence that inflationary expectations really exist among the public.
Supply Shocks (Paul Krugman):
Pandemic and war cause higher prices.
Also an expectations argument. The reason it won't spiral is because the public know that price increases are temporary, so they'll see through it and it won't effect long-term expectations.
People don't think this way about prices2.
Seller's inflation (Isabella Weber):
Firms taking advantage. Shrinkflation.
There's a difference between profits and markup.
“Imagine a firm where all its input costs double and it used to make 20 percent. If it then doubles its sales price, its still making 20 percent. Notional profit has doubled, but its actually the same from where they started proportionally. So what really has to move is the margins.”
To determine this you need to have good data on input costs. It's really hard to get intermediate firm input cost data, however, to the extent that we can get this, it shows that margins did, in fact, increase.
The ECB, at the end of 2023, said that 40 percent of inflation the EU experienced over the past twelve months has been caused by this.
It really was gas prices, and firms protecting their margins, and in highly concentrated markets, actually pressing on and making excess profits.
There are limits to how much you can do this.
Hyperinflation
Cagan: Fifty percent a month or more increase in prices.
Kalecki: An aggreviated tendency for any population to substitute their currency for anybody else's currency. You don't want to hold the government's money because you don't trust it.
The famous photo of the guy with the wheelbarrow full of Reichsmarks worked for the central bank and was moving money between banks. He wasn't paying for stuff with wheelbarrows full of cash—this is a myth.
Usually in hyperinflations what you've got is a problem with exchange rates.
Pretty much all cases of hyperinflation are small, vulnerable, open economies that have a soft currency that is not regarded as a savings asset.
“So that means that a current account constraint has to operate. If you're going to import stuff—and usually these are commodity-dependent or a similar sort of export-oriented economies—then they're going to have to balance their imports with their exports over time. And if they don't do that, then the people selling them the imports are highly likely to either demand more of the domestic currency, or alternatively, payment in a hard currency they can't print. That is where all the trouble starts. It's really through the exchange rate.”
When you can't manage that, the central bank starts printing money as an emergency measure. Money printing is a symptom of failure rather than a cause.
1. Venezuela
The economy is dependent on a single resource: oil. Oil is 60 percent of exports and 20 percent of GDP.
Jobs are handed out based on cronyism. The skills to run the oil industry dissipate.
The oil price crashes amid low investment in the industry.
They try to deal with it by sweating the oil asset but run into the exchange rate problem.
Economic collapse and migration ensues.
It's not about the central bank printing money. It's about the fact that Venezuela is ludicrously dependent on one commodity and its price just collapsed at the same time you're engaging in mass redistribution for the first time in the history of the country.
2. Zimbabwe
It’s a post-colonial settler regime with incredibly concentrated land holdings.
After settlement in 1980 you redistribute the land but you break it up into microparcels.
It's no longer big enough to be collateral so the banks won't lend against it.
The folks who are inheriting the land don't have the skills to run it at a bigger scale.
Exports collapse because they are an agricultural exporter.
The government steps in to do export credits which is subsidies paid by the central bank.
Veterans from the liberation want their pensions. You can't pay them off so you start a diversionary war with your neighbor.
Massive political cronyism.
Is this fiscal incontinence or a broken state? It's a broken state.
3. Argentina
The Peronist labor coalition meant that you couldn't squeeze labor.
When you got to the 1970s there were a series of supply shocks, particularly oil.
At the same time they’ve borrowed tons of dollars. The exchange rate collapses.
They start to get inflation through the import channel. The central bank moves to accommodate. Inflation becomes endemic and it's really hard to get rid of once you do that.
4. Weimar Germany
They crashed the economy so they wouldn't have to pay back reparations to the French.
In order pay back debt in gold marks you needed to have a strong exchange rate.
Government runs the printing presses to pay wages, the exchange rate collapses, and the ability to pay reparations goes to zero.
Americans who invested in Germany wanted their money back so they initiated a bailout: The Dawes Plan.
American money pouring in leads to a boom time from 1924-1929.
In 1929 Wall Street crashes. The Federal Reserve puts interest rates up to seven percent. Foreign investment dries up.
Chancellor Brüning comes into office and slashes the budget.
The public votes for Hitler and the Nazis.
Hyperinflation did not bring the Nazis to power. There was a 10 year difference between hyperinflation and Hitler.
There's no necessary path from mild inflation to hyperinflation.
Hyperinflation is not coming to a country like yours anytime soon.
Are Inflation wars class wars? Winners, losers & abusers of inflation.
Percentage change in average profit markup, major corporations 2021-2022.
Concentrated markets where you've got pricing power.
Auto manufacturers and dealers shifted from a high volume-low margin business model before the pandemic to a low volume-high margin model after the pandemic. Manufacturers emphasized higher-margin luxury vehicles, while dealers increased their markups over manufacturer list prices.
Workers versus firms—who's going to take the hit for it?
The 1970s truly was a conflict between labor and capital.
We don't have unions or national economies anymore. Investors can flee. You can't strike because production can move overseas. When you have inflation, rather than a bargaining situation between labor and capital, labor gets residualized and profit margins go up.
Was there catchup in wages? No. Wage price laggards.
Are firms inflation's clear winners? Saudi Premier League has massive amounts of cash from the oil price shock.
High markups in highly concentrated industries. More industries than you think. Supermarkets. Internet providers. Banks. Economies have become more concentrated over time. You can push up your margins, not just defend your profits.
“Banks don't need deposits to make loans. They need deposits to get a banking license and insurance. They actually just borrow money overnight and lend it out for various periods and then run you the credit through the repo markets. The fractional reserve model doesn't exist outside of terribly small countries with very poor capital markets. That means the banks can do loads of things to enrich themselves short-term with inflation.”
Conclusions.
Are inflation wars class wars? They are, but they don't need to be.
There's loads of things you can do other than raise interest rates to tame inflation.
Will there be more inflation or less inflation in the future?
For things like cars, the tendency is deflation—more competition, different cars, expanded markets, etc.
Food webs are vulnerable to climate change leading to higher prices.
Demography: old people don't work, there are not enough young people, and there is no appetite for immigration, so domestic workers should have higher wages. Unless you are productive enough to pay for those wages, it will show up in higher prices, particularly if you are import-dependent.
Which forces push in which direction going forward?
Stephanie Kelton
Finally, I’d like to highlight this interview with Stephanie Kelton in the Financial Times. As James Galbraith pointed out, heterodox economists have consistently been more realistic and more accurate about the causes and solutions for inflation than mainstream economists and the media.
Kelton believes that supply shocks and disruptions associated with the pandemic and war were more significant than deficits or "money printing":
Everyone remembers the supply chains breaking and we all saw images of ships backed up at ports, and we know that shipping costs increased. We also couldn’t spend money the way we were accustomed to. In the US, 80 per cent or so of economic activity is wrapped up around the service sector, and all of a sudden we were told you can’t go to restaurants and bars and nail salons. So what did we do? We ploughed a lot of money into goods that had to be manufactured somewhere and transported to us.
So we got early inflation in durable goods, and then a series of supply shocks. The pandemic came in waves, and different parts of the world were shutting factories down at different times. Then of course Russia and Ukraine, and another round of energy and food price shocks and we just found ourselves dealing with supply shock after supply shock.
She doesn't believe that the recent interest rate hikes of the Federal Reserve have done anything to bring inflation down. As she points out, the Fed failed to raise inflation for years, yet somehow, they magically have the power to lower it:
I think inflation has come down in spite of what the Fed has done, not because of what the Fed has done. Think back to what happened after the 2008 financial crisis, when central banks the world over were trying to get inflation up to their 2 percent targets. We watched the European Central Bank and the Bank of England and everybody just struggling, year after year after year, running quantitative easing, zero interest rates and all the rest, trying to push inflation higher.
It didn’t work, but somehow we’re all supposed to believe that monetary policy is really effective if you turn the dials in the other direction. Why should we believe that?
The forces that drove inflation up in the first place reversed themselves. Basically we’re getting back to normal. I think it was always destined to happen. I was a vocal member of “team transitory”, and I never used the word transitory to mean short-lived. I meant that inflationary pressures would abate when enough time had passed to allow the snarls in the supply chain and the things that had disrupted the economy to work themselves out. I didn’t expect prices to return to what had been “normal”, but I thought inflationary pressures would largely abate on their own.
When it comes to raising interest rates, it’s possible that it does more harm than good, especially if the problem isn’t overspending and there’s a cost of living crisis:
The cost of financing a home has increased a lot. It costs a lot more money if you want to buy a car and you’ve got to finance it. Your credit card bills are higher. That’s the brake pedal. It’s meant to slow spending. That’s the goal of the Federal Reserve, to slow everything down and get some disinflationary pressures under way.
Ironically, you’re trying to fight the cost of living crisis by raising the cost of living for millions of people.
But economists like me who look at this through the lens of modern monetary theory understand that there is also an accelerator effect from the Fed raising interest rates and this is too often under-appreciated.
When the Fed raises interest rates, it forces the Treasury to pay out more in interest income to bondholders as bonds mature and new securities are issued. All of a sudden the government is paying out hundreds of billions of dollars in additional income to holders of US Treasuries. That income can be saved, used to pay down debt, or spent back into the economy.
It’s like a basic income payment that goes to relatively wealthy people. You have to have enough comfort in your income level to be a saver, to have dollars that you can park in Treasuries in order to capture that subsidy. So it is a regressive form of fiscal stimulus. Effectively, the central bank has put a part of fiscal policy on autopilot. The Treasury is paying out all this additional interest income because of the actions of the Fed...
And she wants more government spending to boost supply, rather than trying to make people poorer by raising interest rates to bring supply and demand into balance:
If the problem is a mismatch between supply and demand, you could make the argument for less spending, but a better way to resolve the imbalance is through boosting supply. I sometimes imagine I’m watching a couple of runners. One of them is way out in the lead and he’s wearing a jersey that says “demand”. Then there’s somebody wearing the “supply” jersey, who is huffing and puffing, just trying to catch up. Why shorten the distance by kneecapping the guy who is in the lead? Maybe the other runner just needs an energy drink.
Think about the US in 2023. Deficits jumped way up, growth soared and inflation continued to cool. Clearly, you don’t need austerity to keep demand in balance with what the economy can provide. We’re building a lot of additional capacity, which helps supply catch up to demand. That’s a lot smarter than kneecapping the recovery...
I don’t see the benefit of keeping interest rates high. I think Congress should use the fiscal space that’s available to them to deliver meaningful improvements in people’s lives. We’re short millions of units of housing. We absolutely should be dealing with that, which would help with the inflation problem over time, because chronic shortages are a big part of the reason why the price of shelter is going up so rapidly.
https://archive.ph/xJD41#selection-2483.1-2483.424
Conclusion
Okay, it’s time for the big picture conclusion from this last series of four posts. In those, we saw causes for inflation that are not talked about:
Climate change is devastating crops worldwide. Climateflation is real.
Globalized supply chains are fragile and still not back to normal3.
The war in Ukraine is still ongoing and other wars loom or have already started.
High energy costs are driving inflation worldwide.
Worker shortages are causing supply chain disruptions and rising prices. This is a result of lower birthrates. Citizens don't support more immigration in large part due to rising housing costs. Rising housing costs and other expenses are suppressing birthrates in a feedback loop.
In addition:
Nearly every modern capitalist economy is highly consolidated.
In heavily consolidated industries, firms used the pandemic as an excuse to increase their margins. Greedflation, skimpflation, shrinkflation and cartels are all real and documented.
Software packages allow price-fixing across a wide variety of sectors.
Companies add junk fees which are pure profit and consumers have no choice but to pay.
There are no unions or national economies anymore. Workers and consumers no longer have any power. Multinational corporations and wealthy investors have all the power.
As for interest rates:
There is no evidence whatsoever that inflation was caused by "money printing", government spending, deficits, or anything like that.
The stimulus checks appear to have been spent largely on non-stimulatory things like debts and rent.
Inflation indexes ignore lots of things people have to spend money on. This is for valid reasons, but it undermines faith in statistics and feeds conspiracy theories.
There is no hard evidence that interest rates do anything at all for inflation, either to raise it or to bring it down.
There is no definitive connection between interest rates and the money supply.
Hyperinflation scaremongering is bullshit. Hyperinflation is caused by unique circumstances that usually happen to small, peripheral economies.
No, the Federal Reserve is not responsible for global inflation.
Inflation (or the lack thereof) is due to a variety of causes, but economists don't care to develop a suitable theory of inflation because economics is a pseudoscience designed to reinforce hierarchy and class power. It is not interested in the real world.
Based on this, the future looks unimaginably bleak. I think what we're seeing is the beginning of a long process of grinding down people's living standards which will last for hundreds of years. And it’s just getting started. This is fundamentally the result of climate change, overshoot, diminishing returns to technology, and peak energy per capita, just as The Limits to Growth predicted. Basically, modern capitalist civilization has reached its limit.
We’ve already seen people reacting to rising food and housing costs with far-right extremism, domestic political violence, social conflict, conspiracy theories, scapegoating, xenophobia, and so forth. We’ve seen military conflicts and autocracy increasing around the world. As climate change worsens, it will make parts of the globe uninhabitable, spurring refugee crises and devastating harvests. Social media will exacerbate these problems. All of this will cause inflation to increase.
Basically, the Enlightenment is slowly coming unraveled as we devolve into barbarism. The ratchet effect, creeping normality, and shifting baselines will mean what was once unimaginable will simply become normalized (as has already happened). Dictatorship, repression, violence, fear, war, poverty, genocide, infectious disease, chaos, and starvation will be the lot of most of humanity going forward.
Unless we opt for a socialist alternative (and we won’t), this cycle will continue and things will get worse and worse, forever. Maybe hundreds of years from now, with a fraction of people alive today, some sort of humane, enlightened civilization can emerge from the ashes. But until then, we are entering a nightmare scenario, and inflation is just the canary in the coal mine.
Anyway, sorry to end on such a down note. I hope I’m wrong.
See this, for example:
After years of squeezing Americans’ wallets — the average price of McDonald’s menu items increased roughly 40% from 2019 to 2024 — flagging sales made the company realize its customers had reached a breaking point. Other companies are recognizing this, as well. Both Walmart and Target announced they would drop prices on thousands of items, from eggs to diapers. Even Starbucks — which rarely offers promotional deals — began promoting discounts designed to drive traffic via email and its app.
Americans are mad about inflation. McDonald’s just admitted they were right. (MSNBC). Are we expected to believe that these companies are now lowering their prices because of interest rates?
See this article, for example:
Some experts believe that inflation fell so painlessly in 2023 because the Fed never let expectations get out of control in the first place…This is the kind of economic theory that sounds very plausible until you try to apply it to actual human behavior.
How, exactly, is the latest federal-funds-rate number supposed to penetrate the consciousness of the American consumer? Normal people don’t pay much attention to the minutes of Federal Reserve meetings. You might suppose that the Fed’s general vibe trickles down through the media to the man on the street via a drawn-out game of economic telephone, but the evidence suggests otherwise. The average American has depressingly little idea of what’s going on with the national economy. (In one recent poll, 56 percent of respondents said that we’re in a recession. We are not.) And even if people are aware of rate hikes, that doesn’t mean they will respond in the way the textbooks predict. A survey recently conducted by a trio of economists found that 57 percent of Americans believe that raising interest rates actually causes inflation to rise. This isn’t totally irrational—more on that later—but it’s the exact opposite of how Econ 101 says people react to higher rates.
Even those who endorse the expectations theory acknowledge that they can’t explain how it works. “Do we really think an individual person in some town somewhere is really saying, ‘Oh, the Fed went to a 5.5 federal funds rate, so I won’t ask for more wages’?” Adam Posen, a former central banker who literally co-wrote the book on the role expectations play in lowering inflation, told me. “Economic theory says yes: Through some magical awareness, people do behave that way. I’ve always been a little skeptical of that.”
The Federal Reserve’s Little Secret. No one really knows how interest rates work, or even whether they work at all (The Atlantic)
See this, for example: ‘It’s All Happening Again.’ The Supply Chain Is Under Strain.
The intensifying upheaval in shipping is prompting carriers to lift rates while raising the specter of waterborne gridlock that could again threaten retailers with product shortages during the make-or-break holiday shopping season. The disruption could also exacerbate inflation, a source of economic anxiety animating the American presidential election. If the supply chain disturbances of the pandemic proved anything, it was this: Trouble in any one place tends to ripple out widely.
A container full of chemicals that arrives late to its destination spells delayed production for factories waiting for those ingredients. Ships jammed at ports wreak havoc on the flow of goods, clogging warehouses and putting pressure on the trucking and rail industries. “I’m lovingly calling the market now ‘Covid junior,’ because in a lot of ways we’re right back to where we were during the pandemic,” said Ms. Loomis. “It’s all happening again.”
No need to apologise, not your fault. So enjoy today!
socialism or barbarism.