Effect of High Net Profit Rate on Inflation & Interest Rates

I have been twittering a chart this morning which puts inflation alongside the net profit rate.

Net profit rate = Corporate profits/GDP – effective Fed rate

This measure is based on Keynes Marginal Efficiency of Capital. MEC.

net prof fed2

As net profit rates went down in the 1970’s, firms felt pressure to raise prices to protect their profit rates. There was also increasing purchasing power of labor.

Then as net profit rates increased since the 1980’s, pressure to raise prices has decreased. Inflation has kept falling even to below Fed targets. Right now firms have negligible pressure to raise prices, especially since purchasing power has been eroded with low labor share.

Interest rates have gone low because inflation has gone low. So if we push the Fed rate into negative territory, we will try to increase net profit rates in order to increase investment. But the effect will only be to lessen the pressures to raise prices. Inflation will stay lower and lower.

So I do not buy the argument of secular stagnation. We have a situation where corporations have very high net profit rates and labor share is low.  The economic system is a supply-side, tricke-down, neo-feudalistic bad dream…

We really need to be raising the Fed rate to push net profit rates back down a bit… Make firms feel pressure to raise prices. Then labor will have to fight for more bargaining power… and things will get back to “normal”.