Let’s wrap things up. As a rule, your best bet for understanding the real world is to forget what you read in economics textbooks. Instead, pay attention to what the powerful say when they talk amongst themselves.
On that front, CEOs have been explicit that inflation isn’t some exogenous force, driven by the money supply. It’s a game that they actively play.
As a case in point, take William Meaney’s recent comments to investors. Meaney, the CEO of an information management company, claimed that he’s been ‘praying for inflation’ because it’s a good excuse to raise prices:
Where we’ve had inflation running at fairly rapid rates, we’re able to price ahead of inflation.
In other words, forget the money supply. Inflation is a business strategy.
Longish post with a lot of data and analysis.
Economics from the Top Down
Inflation: Everywhere and Always Differential
Blair Fix
Inflation: Everywhere and Always Differential
Blair Fix
Price rises are always, everywhere a lack of effective market competition.
ReplyDeleteAnybody can put their prices up. The challenge is getting somebody else to pay them.
Steve Randy Waldman (interfluidity) responds to this question:
ReplyDelete...it is not clear to me that it is well understood why inflation sometimes can be seen in consumer goods and sometimes is manifested in "asset price inflation". Do you have any ideas on this mechanism? I know some people deny there is such a thing as "asset price inflation". Do you have a theoretical basis for your ideas in this area?
Steve answers as follows:
Follow the money. Whether an economy generates asset price inflation or consumer price inflation depends on the details of to whom cash flows. In particular, cash flows to the relatively wealthy lead to asset price inflation, while cash-flows to the relatively poor lead to consumer price inflation.
I think this is the point Blair Fix misses when he asks why sometimes government spending is inflationary and other times it's not. Also, this from Blair's article:
That’s the beauty of creating money and giving it to the poor. It makes them less poor.
No it doesn't because their spending adds to aggregate demand which raises prices, and then the central bank steps in and clobbers the poor with higher interest rates which is a stealth tax on the poor. That extra money the poor pay ends up in the hands of the rich, which increases wealth inequality. That extra money in the hands of the rich leads to asset price inflation.
There's no free lunch here, or anywhere for that matter.
The rule in economics is that for someone to consume more, someone else has to consume less.
ReplyDeleteWhat happens when Biden gives $100 billion to Ukraine? Now that Ukrainians are consuming more from US output, who consumes less? It can't be the rich because their marginal propensity to consume is around and about zero.
No, most of that burden will fall on the poor, and somewhat less on the middles class. Again, the extra consumption adds to aggregate demand, which means higher interest rates paid by the poor which reduces their consumption.
Poor Americans are skipping meals, so Ukraine can have artillery shells.
Guns and butter.
re: Ukraine Sovereignty Bond
ReplyDeleteTo offer Canadians an opportunity to directly support Ukraine, the Government of Canada announced that it would issue a Ukraine Sovereignty Bond. The five-year, $500 million bond, denominated in Canadian dollars, was then issued on November 29, 2022.
Subject to negotiations with Ukraine, an amount equal to the proceeds from the bond will be transferred to Ukraine through the International Monetary Fund's (IMF) Administered Account for Ukraine, which Canada played a leading role in creating.
The funds will support the Government of Ukraine to continue to operate in the face of Russia's illegal invasion, including by providing essential services to Ukrainians, such as pensions, the purchasing of fuel before winter, and restoring energy infrastructure. The Government of Canada partnered with participating financial institutions to offer Canadians the opportunity to purchase a Ukraine Sovereignty Bond in denominations of $100.
The Ukraine Sovereignty Bond builds on the Government of Canada's $2 billion in direct financial assistance to Ukraine so far in 2022, all of which has already been disbursed. Canada has also committed more than $2.5 billion in military, humanitarian, and development assistance to Ukraine this year. This brings Canada's assistance in 2022 to more than $5 billion.
We Canadians are on the hook when Ukraine loses the war, which it will (bold mine):
How the Ukraine Sovereignty Bond will work
Canadians who participate in the Ukraine Sovereignty Bond are, in effect, purchasing a regular five-year Government of Canada bond at a 3.245 per cent rate of return. To provide investors with confidence about the safety of their funds, the Ukraine Sovereignty Bond is likewise backed by Canada’s AAA credit rating.
No doubt Deputy Prime Minister of Canada Chrystia Freeland had something to do with that:
Freeland's maternal grandfather, Michael Chomiak (Ukrainian: Михайло Хомяк, Mykhailo Khomiak), had been a journalist before World War II. During the war in Nazi-occupied Poland and later in Nazi-occupied Austria he was chief editor of the Ukrainian daily newspaper Krakivs'ki Visti (News of Krakow) for the Nazi regime. —Wikipedia
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