Today I am not going to lay out any data or anything like that. I jut want to put down some thoughts on inflation. I will do so in the form of a Q&A as it will allow for a Devil’s Advocate sort of assessment. This is important because I think there are reasonable disagreements over whether inflation is here to stay or not.Inflation is here to stay unless or until there is a recession. e.g. from much higher prices or artificially imposed demand destruction by the central bank. The factors involved that he mentions don't appear to be relenting.
Phil doesn't mention it but there are also other significant factors operative or that may become operative that involve a lot of uncertainty considering the level of instability in the world, again arising from many factors, most salient of which are the course of wars, pandemics, effects of climate change, and political instability, including geopolitical.
For example, part of the recent inflation is the result of the need to green economies owing to impending effects of climate change. This issue will last throughout the transition period, which promises to be drawn out, e.g., political expediency since it will be difficult to convince people to accept the economic consequences. Similarly, addressing a pandemic involves a tradeoff between lockdowns and economic contraction. The expanding confliction in Europe and Asia is also exerting an inflationary influence, both as a result of sanctions and also diversion for real resources.
It would be difficult to put numbers on this in terms of the big picture, and a fortiori a time frame, so Phil doesn't attempt that here. The post is a short easy read.
Macrocosm
Why inflation is likely to stick around
https://macrocosm.substack.com/p/why-inflation-is-likely-to-stick
Macrocosm
Why inflation is likely to stick around
https://macrocosm.substack.com/p/why-inflation-is-likely-to-stick
Philip Pilkington
18 comments:
Will the weather support Biden or Putin?
https://mobile.twitter.com/anasalhajji/status/1544221545022857217?cxt=HHwWgoC92YjUlu4qAAAA
The summer weather and Hurricane season could play a HUGE role in what happens next.
Why you see the recent reports of countries moving back to coal and the EU now claiming nuclear power and gas as "green" energy.
They are all worried what is coming down the track and changing narratives accordingly. It has been over 30 in the shade the whole time I have been abroad and the chamber maids are now stealing the room key I leave in the hotel room for the air conditioning. I have to go down to reception most days to get a new one.
Never mind the heat in the oil producing countries who are using more and more On the air conditioning in their countries and will export less because their own needs come first.
They were worried about the Winter. However, if this heat wave continues and Hurricane season is a bad one. Watch this space.
Things must be getting bad in the EU?
You canne control the weather. They'll be praying for rain then like Australia get 8 months worth in 4 days and floods and then it is winter.
The climate change deniers will shrug their shoulders and call it normal.
All I hope is they all leave the EU go back to being sovereign nation states. Then MMT stands a chance. So keep the sun shining baby the hotter the better.
Some people are worried, but a majority are in denial.
John Michael Greer gets it:
https://www.ecosophia.net/the-end-of-the-industrial-age/
I consider his writing to be about 'best case' scenarios.
The end of the industrial age and Amazon and the rest are built upon cheap labour.
The productivity illusion created by the big tech companies, which rather than make things more efficient have actually “un-scaled” the economy by making it more dependent on cheap labour not less. This is the case from Amazon to the gig economy. The “new app-based economy” is more zero sum than many appreciate. And if the inflation crisis actually forces true efficiency on the system, could actually stimulate some real innovation. I very much doubt that is going to happen when price gouging is rampant.
Reuters is reporting that the French government is planning to take full control of EDF, France’s largest power provider. Germany’s Uniper energy in bailout talks to plug $9.4bn hole. Is this trend going to continue and energy companies in the West going to be nationalised.
First the government bailouts came for the banks they were insolvent; then they came for the airlines Lufthansa was never going to make a profit; then they came for the gas utilities and everybody wondered if there would be anything left for the government to come for before the war ends.
Nationalising these important parts of the infrastructure is the only way to control prices and stop the price gouging and the investment strikes. They only ever realise it when a crises hits and privatise them again afterwards. As the free market tooth fairy has a bigger following than god and they believe their prayers will be answered next time. When the truth is they have set the monetary system up to serve themselves.
Most of the sheep stand in line and give their savings to a fund manager. Look what happens.
https://mobile.twitter.com/cullenroche/status/1537880956027097089
Civilization was built on cheap energy and cheap labour. There is the holy grail of automation, but the technology for it is lacking; it has to compete with cheap labour; or it cannot be scaled.
The free market tooth fairy is known as mother nature. When she is healthy and abundant, she is generous. Primary resource industries extract what we need from her, for free. (She also provides the energy required for extraction at scale.)
When she grows ill, her abundance depleted, she is less and less generous. Isolating the Russian free market tooth fairy from Europe did not help the situation either.
Nationalization and rationing are logical alternatives to free market dogma. When the crisis eases, the ideologues and their sheep return to the dogma.
But when mother nature is too tapped out to recover, the magic of the free market tooth fairy isn't what it used to be. Without cheap energy to extract free resources, our pretentiousness will take a beating.
But no worries. We're very good at making up stories to rationalize away our discomfort.
People love their "investments". Instead of investing their time and effort, they invest your money, so that they can make more money, without any effort on their part.
Earned income is for losers, capital gains are reserved for winners.
All hail Wall Street !
The productivity illusion created by the big tech companies,...
The productivity is there, but is being masked by declines in productivity elsewhere. First, the Solow Paradox:
"You can see the computer age everywhere but in the productivity statistics." —Robert Solow
Noah Smith has solved that paradox.
And it also means that if we see a wave of inventions but slow TFP growth, it doesn’t necessarily mean that those inventions didn’t boost TFP! It could just mean that other things were happening at the same time that held TFP back. In other words, if college attendance stays flat or declines, cities keep excluding newcomers by banning construction, and consumers keep shifting to services, it could be enough to obscure most of the impact of a 2020s tech boom. But that doesn’t mean the increase wasn’t there! Technological innovation might be the only thing preventing TFP from slowing down even more, or even falling outright.
they invest your money, so that they can make more money, without any effort on their part.
A capitalist economy produces capital goods and consumption goods. In a capitalist economy, someone has to hold the capital stock. These are the people who forgo consumption. That's a lot harder than it sounds. It means constantly fighting to get people out of your life who want to rat race with you. You know the type, the greedy consumptionists who love telling you they bought this and that. Or took expensive vacations. And so on.
My wife wants granite countertops because some of her friends have granite countertops. I say no and buy stocks instead. Because for me, financial security is more important.
As an aside, there are people who do not have the savings to buy investment assets, but I'm referring to the majority who spend all their discretionary income on consumption and then some even going into debt to be able to consume even more.
You're not doing the economy any favours by investing. Buying granite countertops may get the money to where it could do more for the real economy.
Too much 'wealth' is ending up in unproductive, zero-sum shell games.
If you believe that paper wealth represents security in a declining civilization, I'd suggest you diversify your portfolio into tangible investments. Bill Gates is buying farmland, maybe you should too. Learn how to grow vegetables. Learn actual skills.
Buying granite countertops may get the money to where it could do more for the real economy.
More granite countertops means less resources available for things like health care. Both are parts of the real economy, but I'd rather Canadians import MRIs instead of granite.
“I don't have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim checks on society. It's like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GDP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don't do that though. I don't use very many of those claim checks. There's nothing material I want very much. And I'm going to give virtually all of those claim checks to charity when my wife and I die.” —Warren Buffett
People like Buffett, who lives a frugal lifestyle, are the heroes in a capitalist economy. The rich who buy yachts, for example, which creates jobs, take away resources from an economy that could be better used elsewhere, creating jobs in those areas instead.
Guns versus butter model
Entrepreneurs who invest in their businesses are the heroes in a capitalist economy. Investors are just lazy 3rd party opportunists.
Investors allow entrepreneurs to scale up their operations quickly. The investors make the capital allocation decisions of which entrepreneurs are supplied with capital, so they can grow quickly.
McDonald's went public in 1965. It's a good thing we didn't have to wait for McDonald's to grow organically with retained earnings only. Otherwise, all those women who entered the workforce in large numbers wouldn't be able to pick up fast food on the way home from work.
Bankers and loan sharks do the same thing - I don't hear them being referred to as heroes.
There are also government programs that offer business development funds. Some are loans, some are grants.
Confiscating Warren Buffet's wealth and converting it into bursaries for entrepreneurs and students would do a lot more for the economy.
Stop putting these vultures on pedestals. They already believe they're god's gift to humanity.
Investments are transactional. So is prostitution.
There are also government programs that offer business development funds. Some are loans, some are grants.
Which businesses? Do you want government deciding which businesses receive funding and which don't?
The private sector does a better job of allocating capital and when private investors screw up, they lose money. When government workers screw up, they get to keep their jobs, so they can keep making stupid decisions.
Confiscating Warren Buffet's wealth and converting it into bursaries for entrepreneurs and students would do a lot more for the economy.
Warren Buffett's wealth is ownership claims on things like factories. How do you turn factories into bursaries?
Bankers and loan sharks do the same thing - I don't hear them being referred to as heroes.
Bankers and loan sharks don't allocate capital. Bankers, for example, will lend to anyone with collateral and the ability to make loan payments. They're in the business of assessing risk.
Capital is scarce. The purpose of capital markets is to allocate capital to its highest and best use (HBU).
Highest and best use
Highest and Best Use, or highest or best use (HBU), is a concept that originated with early economists such as Irving Fisher (1867-1947), who conceptualized the idea of maximum productivity. One of the earliest citations of the term is found in the Minutes of the Maine Legislature as early as 1831 in speaking about the assessment and valuation of real estate: "...the land was classified preceding such change of use, had such real estate been assessed at its highest and best use..." It is the concept in real estate appraisal that shows how the highest value for a property is arrived at. In any case where the market value of real property is sought, that value must be based on its highest and best use. Highest and best use is always that use that would produce the highest value for a property, regardless of its actual current use.
Which businesses? Do you want government deciding which businesses receive funding and which don't?
Government could fund every business that met certain criteria. To a certain extent, this already happens, in the form of loans, tax deductions, subsidies, guaranteed markets, and last but not least, public tenders. Behind the scenes, lobbyists and state actors are actively picking winners and losers. Libertarians complain about this all the time.
The private sector does a better job of allocating capital and when private investors screw up, they lose money. When government workers screw up, they get to keep their jobs, so they can keep making stupid decisions.
The private sector consists of opportunistic individuals and groups looking for a return on investment. They couldn't care less whether their investments are beneficial or harmful to the economy. They aren't 'allocating capital', they're looking to make money without actually working.
The original narrative about free markets is to allow everyone to pursue their self-interest, and that if we do, we'll end up with the best possible outcome. Well, everyone is free to invest in whatever they want. Everyone is free to be a philanthropist, yet relatively few people claim to be philanthropists, or that they're trying to make the world a better place. In terms of motivation, self-interest wins out. This is the society we live in.
Warren Buffett's wealth is ownership claims on things like factories. How do you turn factories into bursaries?
He couldn't have a claim on tangible assets unless he had money to begin with. Granted, some of these sophisticated investors borrow money, or leverage most of it. They keep their personal wealth separate and beyond the reach of creditors or the tax office.
Bankers and loan sharks don't allocate capital. Bankers, for example, will lend to anyone with collateral and the ability to make loan payments. They're in the business of assessing risk.
All investments are differentiated by risk. If people were not risk averse, they would invest willy-nilly. Otherwise known as 'spending with unknown benefits'. A lottery is a limited example of that sort of activity.
Capital is scarce. The purpose of capital markets is to allocate capital to its highest and best use (HBU).
When everyone is legally able to make ownership claims, of course it is. We had to get rid of debtor's prisons though, and invent loopholes such as bankruptcy. Otherwise the free market system would grind to a halt.
We have a free market system, not a 'capital allocation' system. If government were allocating capital according to a set of criteria, there would be howls that this is inefficient, that this is central planning. So this purposeful public policy approach has been rejected in favor of individual self-interest. (Except that government is still spending and making investments in the economy, as libertarians point out.)
So thanks to the free market system, most new businesses go bust, and about 15% of the labour force are able to make a living as entrepreneurs. Best of all possible worlds, right?
The sole purpose of private capital markets is to make money from money. There would be no private capital market if money had an expiry date, or if usury were illegal. In that case, the concept of investment/ownership would be exclusively in the form of stocks or shares. Perhaps that system would be better. Perhaps we should consider systems that restrict ownership claims whenever those claims are barriers to business creation.
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