Profit-Price Spiral: Excess Profits Fuelling Inflation, Not Wages
futurework.org.au
futurework.org.au
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.
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.
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.
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.
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.
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.
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.
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.
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…
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.
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).
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.
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 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.
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.
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.
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.
(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 it was a cold war fairy tale.
State is needed to stop too much consolidation from occurring and prevent monopolies where alternatives are sensible.
[0] - https://en.wikipedia.org/wiki/List_of_mergers_and_acquisitio...
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.
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?
"Capital in the Twenty-First Century" talks about this, great book.
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.
You going to start an airline, a Telco, or meat processing plant because the others are colluding
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.
Land value taxation paired with a citizens' dividend would close that hole - alongside myriad other socioeconomic benefits.
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.
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.
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.
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?
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.
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.
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.
Think of Chicago School and MIT economists as Meta and Amazon leads.
In finance they say, 'no one ever got fired for buying IBM'
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.
In dollar terms its profits have gone up but as a percentage they haven't.
Citation required.
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.
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.
> (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.
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...
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...
https://www.npr.org/2023/05/11/1175487806/corporate-profit-p...
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.
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.
Corporations are greedy, but they have always been greedy. This is just government using MSM to deflect blame.
(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.
The fact people keep "discovering" this is quite confusing.
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-...
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.
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...