By Daniel Lacalle *
Senator Elizabeth Warren recently said the price hike was due to rising corporate profits. “It’s not about inflation, it’s about price hikes for these guys.” It is simply incorrect.
No, companies have not doubled their profits and the price hike is not due to corporate misdeeds. If evil companies are to blame for the price hike in 2021, as Elizabeth Warren says, I imagine they were magnanimous and generous companies when there was little or no inflation, right?
Inflation is the tax of the poor. It destroys the purchasing power of wages and swallows up the little savings that workers accumulate. The rich can protect themselves by investing in real estate, real estate and financial assets, the poor cannot.
Inflation is not a coincidence, it is a policy.
The middle class and working people not only fail to see the benefits of inflation, but they also lose in real wages and also in their future prospects. Robert J. Barro’s study of over 100 countries shows that an average 10% increase in inflation over the course of a year reduces growth by 0.2 to 0.3% and investment by 0. , 4% to 0.6% the following year. The problem is, the damage is well entrenched. Even though the impact on gross domestic product is apparently small, the negative effect on growth and investment persists for several years.
Despite the message from central banks, who repeat that inflation has temporary components and is fundamentally transient, we cannot forget:
Inflation will not fall in 2022, according to central banks. Inflation will increase less in 2022 than in 2021. It is not the same thing.
When some agents speak of “transient” inflation, they mean that it will increase less in 2022 than in 2021, not that prices will fall.
“Transitional inflation” is 6% in 2021, 3% in 2022 and 2.5% in 2023. That is to say an increase of more than 12% in three years. How many of you are going to see your wages and earnings increase by 12% in three years?
The government is the big beneficiary of inflation, and Ms. Warren knows it. This is why it defends inflationary monetary and fiscal policies. On the one hand, the revenue from monetary taxes of captive economic agents increases (value added tax, personal income tax, corporate taxes, indirect taxes), and on the other hand, the accumulated debt of the state is partially “devalued”. But public accounts are not improving because gross domestic product is slowing; the structural deficit remains high and therefore the absolute debt does not decrease.
How many of you are going to increase your salary by 12% in three years?
Governments in deficit see their real spending increase and the structural deficit does not decrease.
Wages and pensions do not increase with inflation. Hardly anyone will see their labor compensation increase by 12% in three years. Median real wages in the United States have fallen due to inflation, according to data from the St. Louis Fed.
Inflation is not the consumer price index (CPI). Inflation is the loss of purchasing power of money which leads to a persistent rise in most prices regardless of their sector, demand, supply or nature, and is a direct consequence of monetary policy, which is wrongly called expansionist. Inflation is a direct cause of currency depreciation.
The CPI is a basic basket calculated with estimated weights between goods and services. There are prices of non-reproducible basic products that go up much more than the average and that we consume every day (food, energy) and the basket is moderated with services and goods that we do not consume every day ( technology, leisure).
Prices do not increase in tandem by 2 to 5% due to a coordinated decision of all companies in all sectors. It is a monetary phenomenon.
The good thing for the most interventionist politician is that the government benefits the most from the price increase but it can blame others for it and, on top of that, present itself as a solution by making paper payments. -more and more useless money.
The story of monetary interventionism is always the same:
- To say that a non-existent “risk of deflation” must be fought. To print.
- Let’s say there is no inflation even though risky assets, real estate, and non-reproducible property prices rise more than the CPI. Print more.
- Let’s say the inflation is due to the base effect. Print more.
- Let’s say inflation is transitory. Print more.
- Blame businesses and businesses. Print more.
- Blame consumers for “hoarding”. Print more.
The monetary factor is essential to understand the continuous rise in almost all prices at the same time. A huge monetary stimulus intended in its entirety for massive current spending plans – infrastructure, construction and renovation, energy-hungry sectors and checks to families – financed by debt monetized by central banks.
To this must be added the effect of the shutdown of an economy just in time during the pandemic, which generates certain bottlenecks and is exacerbated by the massive growth of the money supply.
Much of what they sell us as “supply chain disruptions” or effects on input costs is nothing more than more money directed to relatively scarce assets, more currencies. directed to the same number of goods.
Professor John B. Hearn explains:
Stephanie Kelton, a prominent MMT advocate [modern monetary theory], said that “all of the inflation over the past 100 years is cost-driven inflation.” As much as we want to believe that oil prices, energy prices, wage hikes and falling money values can cause inflation, it just doesn’t make sense. By definition, all inflation is defined by more currency units used in the same number of transactions. All of the above can change the relative prices, but none of them can increase the number of currency units in the economy. There is therefore only one cause of inflation and it is the action of a Central Bank which, in a modern economy, manages the stock and the flow of money in this economy.
This is because a good or service may increase in price due to a temporary effect, but not the vast majority of prices in a generalized increase. When they try to convince us that inflation has no monetary cause, they make us look at a good or service that has increased, for example, by 50% temporarily, but they hide from us the fact that the median of essential goods and services services increases more than the CPI every year. This is why Keynesian economists always speak of annual CPI and not of cumulative CPI. Can you imagine if you read that inflation in the eurozone at a time when we were told there was no inflation was 45%?
Professor Dallas S. Batten in an article published by the Federal Reserve in St. Louis explains:
The cost push argument sees inflation as the result of continuously rising production costs, costs that rise unilaterally, independent of market forces. Such an assumption (1) confuses changes in relative prices with inflation, a constantly increasing global price level, and (2) neglects the role that the money supply plays in determining the overall price level. The idea that greedy companies and / or unions can drive prices up continuously cannot be supported by either conceptual development or the empirical evidence provided. Alternatively, the hypothesis that inflation is caused by excessive money growth is well supported.
Why was there no inflation a few years ago?
First, there has been massive inflation of risky assets, but also constant inflation in house prices and the costs of essential and non-repeatable goods and services. And a large number of countries in the world suffered from inflation due to the destruction of the purchasing power of their currencies during this period when we were told that there was “no inflation”. .
Second, the increase in money supply in the euro area or the United States has been less than the demand for credit and currencies in aggregate terms, since the euro and the dollar are global reserve currencies with global demand. . Although the money supply has grown a lot, this did not immediately translate into high prices nationally. An excess of money supply has remained in the financial system, thanks to the inflationary brake mechanism available to quantitative easing, which is the real demand for credit.
Inflation has kicked in now that the credit demand brake mechanism has been partially removed, shifting the new money supply towards direct government current spending and subsidies to economic agents amid a forced halt in lending. ‘economy. The supply of money far exceeds demand for the first time in years.
According to Morgan Stanley, the biggest impact on companies is the collapsing margins of those who cannot pass the increased costs on to their prices and this particularly affects small and medium-sized businesses while large companies can better manage the market. inflation, but profits do not double … In fact, margins tend to fall.
There is a paradox that many companies see their sales increase but their margins and profits fall. This is why bankruptcies and foreclosures have exploded.
The impact of inflation is particularly negative on the most disadvantaged citizens, who have a basket in which energy and food weigh much more.
The United Nations food price index is at a ten-year high and has increased 47% since June 2020, while natural gas has increased by 300% and oil by 60%. Industrial companies are also suffering from declining margins, with aluminum prices increasing by 36% and copper prices by 20% in 2021.
The problem is that this situation can generate a significant problem for the vast majority of the population. This is why it is so urgent that central banks stop monetary madness and normalize monetary policy. If the monetary excess is maintained under the pretext of “transitory inflation”, we will end up with a problem that it will have taken several decades to control: persistent inflation and the risk of stagflation (inflation with economic stagnation).
Those of us who work in the financial sector cannot fall into the perverse incentive of defending inflationism just to wipe out a further rise in risky assets. Our obligation is to defend monetary reason and economic progress, not to encourage bubbles. Let us attack inflationism before it attacks us all.
* About the author: Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Liberty or equality (2020), Escaping the central bank trap (2017), The energy world is flat (2015), and Life in the financial markets (2014). He is professor of global economics at IE Business School in Madrid.
Source: This article was published by the MISES Institute