Inflation as a Political Power Play Gone Wrong
Dale Coberly found this excellent analysis on economic happenings by Yanis Varoufakis.
How did all of this Inflation come about? Certainly, wages have not been outstripping everything else. Labor is going to take a hit eventually. We do have supply chain issues. Much caused by countries shutting down. Companies not maintaining orders to the manufacturers is also a part. Automotive again shoots itself in this manner and blames everything else.
This time it is not so much an issue of CDS and naked CDS or Goldman Sachs making the call on AIG triggering anxiety on the market and preliminary steps to rescue WallStreet. With pennies on the dollar in reserves, AIG would have collapsed and set off a larger chain reaction than what was seen with banks collapsing as tracked by Calculated Risk. The Fed and the Gov rescued WallStreet and MainStreet took it on the chin. Unemployment benefits were extended into 2010 when Congress finally shut it off. What is so different today?
People also appear to forget the time table from when greater allowances were made for banks to dabble in the market place. If you have forgotten here is a refresher; 4um: “Glass-Steagall Act creates new banking landscape” (freedom4um.com) and here: “What Barack Obama Needs to Know About Tim Geithner, the AIG Fiasco and Citigroup” – The Big Picture (ritholtz.com)
The Gov rescued workers this time around. Biden and Democrats put money in the hands of individuals and more for families with children. People had more money than what Unemployment Insurance would payout and they spent it. Healthcare insurance was made less costly by increasing income cutoffs and also by subsidies for Silver ACO plans up to 250% FPL. With the latest Manchin-Schumer program, those healthcare subsidies will continue. It is not single payer but it is better than “nothing” and more people became insured as a result. Some “septuagenarian” did this.
Much of this is the loss of control of the Supply Chain. It sounds simple enough. Manufacturing tells Purchasing what it wants based on Sales demand and future demand. Purchasing places its releases and blanket orders with the supplier using arrival times matching manufacturing needs. Without understanding ocean times, manufacturing times you are planning blind. For chips, US companies are controlling design (which is near impossible to design by someone else), and they are farming out fab, growing the wafer and layering. Yes, this is simple speak. However, Biden is making the right moves to keep US design and targeting trusted countries for fab.
What is lost in Supply Chain is the knowledge of what it takes to make and obtain those components. Every year I would be gone for a month or so going from plant to plant. Rebuilding my fundamental knowledge of the supply chain and component manufacture. No banks were hurt in this event. A lot of companies suffered when they shut down.
Companies increased pricing because they can do so for no reason. This has little to do with out-of-control costs. Much to do because they can get away with it. And there is the good old politics. (edited after I read where all of this is going . . . I got it right).
Yanis has a good not-so technical read.
“Inflation as a Political Power Play Gone Wrong” – Project Syndicate op-e – Yanis Varoufakis
The blame game over surging prices is on. Was it too much central-bank money being pumped out for too long that caused inflation to take off? Was it China, where most physical production had moved before the pandemic locked down the country and disrupted global supply chains? Was it Russia, whose invasion of Ukraine took a large chunk out of the global supply of gas, oil, grains, and fertilizers? Was it some surreptitious shift from pre-pandemic austerity to unrestricted fiscal largesse?
The answer is one that test-takers never encounter: All of the above and none of the above.
Pivotal economic crises frequently evoke multiple explanations that are all correct while missing the point. When Wall Street collapsed in 2008, triggering the global Great Recession, various explanations were offered: regulatory capture by financiers who had replaced industrialists in the capitalist pecking order; a cultural proclivity toward risky finance; failure by politicians and economists to distinguish between a new paradigm and a massive bubble; and other theories, too. All were valid, but none went to the heart of the matter.
The same thing is true today. The “we told you so” monetarists, who have been predicting high inflation ever since central banks massively expanded their balance sheets in 2008, remind me of the joy felt that year by leftists (like me) who consistently “predict” capitalism’s near-death – akin to a stopped clock that is right twice a day. Sure enough, by creating huge overdrafts for the bankers in the false hope that the money would trickle down to the real economy, central banks caused epic asset-price inflation (booming equity and housing markets, the crypto craze, and more).
But the monetarist story cannot explain why the major central banks failed from 2009 to 2020 even to boost the quantity of money circulating in the real economy, let alone push consumer price inflation up to their 2% target. Something else must have triggered inflation.
The interruption of China-centered supply chains clearly played a significant role, as did Russia’s invasion of Ukraine. But neither factor explains Western capitalism’s abrupt “regime change” from prevailing deflation to its opposite: all prices taking off simultaneously. This would require wage inflation to overtake price inflation, thus causing a self-perpetuating spiral, with wage rises feeding back into further price hikes which, in turn, cause wages to rise again, ad infinitum. Only then would it be reasonable for central bankers to demand that workers “take one for the team” and refrain from seeking higher wage settlements.
But, today, demanding that workers forgo wage gains are absurd. All the evidence suggests that, unlike in the 1970s, wages are rising much more slowly than prices, and yet the increase in prices is not just continuing but accelerating.
So, what is really going on? My answer:
A half-century long power play, led by corporations, Wall Street, governments, and central banks, has gone badly wrong. As a result, the West’s authorities now face an impossible choice: Push conglomerates and even states into cascading bankruptcies or allow inflation to go unchecked.
For 50 years, the US economy has sustained the net exports of Europe, Japan, South Korea, then China and other emerging economies, while the lion’s share of those foreigners’ profits rushed to Wall Street in search of higher returns. On the back of this tsunami of capital heading for America, the financiers were building pyramids of private money (such as options and derivatives) to fund the corporations building up a global labyrinth of ports, ships, warehouses, storage yards, and road and rail transport. When the crash of 2008 burned down these pyramids, the whole financialized labyrinth of global just-in-time supply chains was imperiled.
To save not just the bankers but also the labyrinth itself, central bankers stepped in to replace the financiers’ pyramids with public money. Meanwhile, governments were cutting public expenditure, jobs, and services. It was nothing short of lavish socialism for capital and harsh austerity for labor. Wages shrunk, and prices and profits were stagnant, but the price of assets purchased by the rich (and thus their wealth) skyrocketed. Thus, investment (relative to available cash) dropped to an all-time low, capacity shrunk, market power boomed, and capitalists became both richer and more reliant on central-bank money than ever.
It was a new power game. The traditional struggle between capital and labor to increase their respective shares of total income through mark-ups and wage increases continued but was no longer the source of most new wealth. After 2008, universal austerity yielded low investment (money demand), which, combined with plentiful central-bank liquidity (money supply), kept the price of money (interest rates) close to zero. With productive capacity (even new housing) on the wane, good jobs scarce, and wages stagnant, wealth triumphed in equity and real-estate markets, which had decoupled from the real economy.
Then came the pandemic, which changed one big thing: Western governments were forced to channel some of the new rivers of central-bank money to the locked-down masses within economies that, over the decades, had depleted their capacity to produce stuff and were now facing busted supply chains to boot. As the locked-down multitudes spent some of their furlough money on scarce imports, prices began to rise. Corporations with great paper wealth responded by exploiting their immense market power (yielded by their shrunken productive capacity) to push prices through the roof.
After two decades of a central-bank-supported bonanza of soaring asset prices and rising corporate debt, a little price inflation was all it took to end the power game that shaped the post-2008 world in the image of a revived ruling class. So, what happens now?
Probably nothing good. To stabilize the economy, the authorities first need to end the exorbitant power bestowed upon the very few by a political process of paper wealth and cheap debt creation. But the few will not surrender power without a struggle, even if it means going down in flames with society in tow.
As taken from: “Inflation as a Political Power Play Gone Wrong” – Project Syndicate op-e – Yanis Varoufakis
What Barack Obama Needs to Know About Tim Geithner, the AIG Fiasco and Citigroup – The Big Picture (ritholtz.com)
“Glass-Steagall Act creates new banking landscape” (freedom4um.com)
Varoufakis wrote “Adults in the Room” about his experiences as economics misister of Greece, which is worth reading.
I wish he would include more detail in his analysis, but then I’d have to wish I could understand it.
Still, what he says seems more likely to me to be true than what the usual politicians and pundits, not to say economists, have to say.
where does that leave us? not in a good place, i am afraid. given that every other problem that we face is dealt with exactly the same way by the usual politicians and pundits and non partisan experts… a mixture of theories (lies) that hve worked for centuries to keep the powerful powerful, the rich rich, and the poor in their place.
not that i expect much from the poor. during my lifetime I have seen the poor get considerably richer..at which point they start to act more like the rich. meanwhile the problems we face are not problems of relative wealth but problems of survival in the real world, which is unforgiving: i.e. put more CO2 in the air than the green things can take out of it and the world gets hotter and the biological systems that used to sustain us, and far more of what makes life worth living that we realize, start to break down.
we can’t keep living this way…where money is the only measure of value, and the only people who have the power to change the way we do things are the people with money, and the only thing they can think about is money.
oh, i forgot about Putin… so money AND power.. for no other reason than money and power. we probably ought to thank him for reminding us that we live in a room where any madman can destroy everything in a moment of pique.
I have been reading a lot of “why inflation” articles this year and generally surprised at how many of them miss the ongoing pandemic as a pervasive worldwide driver of inflation. This article briefly mentions it, but only as an exogenous factor, focusing more on the pricing power of large organizations which I basically agree with and accept.
But with the pandemic headed into a 3rd year I suspect the uncertainty is driving higher costs everywhere. Uncertain supply chain drives higher inventory costs and possible risk of liquidating excess inventory at a discount. Uncertain workforce availability drives hiring to guarantee reserve workers to meet demand. And of course all the inputs to most businesses are seeing their own versions – energy/electricity costs, rents, insurance are all going higher to accommodate their own pandemic uncertainties. So now organizations of all types and sizes are baking in hedges to manage the new reality. All of which carry additional costs and ultimately inflate prices.
Which also explains why inflation is a worldwide phenomenon this year, at least in the western industrialized countries which managed the pandemic via mass vaccination. Of course the major corporations have global scope too so that is the other universal factor.
If the pandemic isn’t ultimately controlled by improved vaccines and treatments (per the stated plans) these costs are only going up. Long covid cases alone are a potential mountain of disability claims.
I certainly think what you are saying here is important, and needs to b thought about alongside of Varoufakis theory. I suspect they are both true. Your case is more “objective” than his. But I guess I have gradually come to accept a slightly paranoid view of how the world really works…leaving your thoughts in the realm of the mechanical details of how decisions of the powerful work out in the everyday world of making things and paying rent.
I wish I had more time to think about all this, but I am so far believing that it matters what I think, that I will pobably leave that to others. You might know enough about the mechanical details to see how they fit into a grand theory of economic everything.