Discover more from Peter St Onge, Ph.D.
Blaming Capitalists and Workers for Inflation
Get the people to fight and the puppet-masters are off the hook.
The Central bankers of the world, apparently losing confidence that they can fix the inflation they created, are turning to Plan B: blame the people so we fight each other.
A few months ago the European Central Bank laid it out, asking “What really drives inflation? Profits or wages?” Get it, voter? Is it the greedy right-wing capitalists or greedy left-wing socialists?
Central bankers actually have a name for this scapegoating: “greedflation.” As in, double-digit inflation had nothing to do with central bankers printing up $7 trillion and handing it to governments, bankers, and to the rich in asset purchases. Rather, it all happened because people suddenly got greedy.
In fact, something sudden did happen: By early 2022 one in three US dollars in existence had been printed in just 2 years. With similar quantities in Europe, Canada, Australia, and all the other countries suffering high inflation. All to bribe voters into lockdowns since it’s more pleasant getting paid to stay at home then to go to work, but it does take a lot of cash.
Since the beginning of our current inflation, corporate profits have taken the brunt of this scapegoating. By mid-2022 annual pre-tax corporate profits were up roughly 50% -- $1.1 trillion -- compared to pre-pandemic. Politicians like Elizabeth Warren seized on this to accuse companies of causing inflation, singling out grocery stores that are famously one of the lowest margin businesses in the world.
Workers got a pass since real wages had fallen dramatically since Biden took office, summing to a cumulative 10% drop. But now that workers are finally getting pay raises as the money printing trickles down to them, they are joining the naughty list as “wageflation” becomes the scapegoat this week.
We can understand why central bankers want to blame companies or workers – if the two sides fight then they’re off the hook. But let’s play along and ask: do profits and wages cause inflation?
Did corporate profits causing inflation? In short, no: the inflation caused the profits. For 3 reasons: too much money chasing too few goods; how accounting rules handle inflation; and uncertainty cutting investment.
Starting with the too much money part, during Covid the Fed printed roughly $7 trillion in new money to finance deficits to buy lockdowns. This even as those same lockdowns were reducing the amount of stuff for sale -- supply chains were choked, and services were literally closed. Too much money chasing too few goods means more dollars per remaining good. In the kingdom of too much money and not enough production, the one-eyed factory is king.
Next up is accounting. Inventory is by definition bought in the past. Meaning it cost the old pre-inflation price. Say your haberdashery buys hats for $9 and sells them for $10 -- you make a buck. If all prices go up 10%, last year’s $9 hats go for $11 – your profits doubled. But you’re no healthier as a business: every hat sold has to be restocked at $10 now – you still only make a buck. But you get a one-time profit on old, cheap inventory. It's an accounting quirk, not some nefarious shift of the economy towards Big Sneaker.
The final part is uncertainty. If a recession is on the horizon -- or, say, a lockdown of half the economy -- businesses pause investing because they're trying to survive. They don't replace machines or invest in advertising.
This cuts their costs in the moment -- which raises paper profits. But, of course, it sacrifices future growth.
In fact, early in Covid investment plunged by 22%. While investment did rise in 2021 as the economy first stepped out of lockdowns, recently it’s been crawling along at just over 1%, boosting paper profits even as the one-time accounting and supply chain effects fade.
So put it together and rising corporate profits these past three years have been a result, not a cause, of money printing paired with economic uncertainty. Both made in Washington, and both ongoing. While wages are only now beginning to catch up to prices.
So that’s profits. What about workers? Now that all that fresh money is finally trickling down to workers, they’re in the naughty chair.
In raw numbers, after falling throughout Biden’s term, labor costs are now up 6% on the year, barely beating out inflation at 5.3%.
While it’s nice that wages are finally rising, workers are simply finally getting the drip-down, second hand inflation. This is the Cantillon Effect, where inflation is pure profit to the first recipients, then progressively trickles down in weaker and weaker form until the last recipients, who gets their money long after prices have risen. Think of a counterfeiting operation who makes pure profit when they first pass the money -- prices haven't risen yet. While some elderly pensioner years later finally a cost of living adjustment long after the prices rose.
So the evolution from "greedflation" to "wageflation" is simply the Cantillon process: Trillions starting at the federal government, then the banks, then corporations, finally to workers. And someday, perhaps, to pensioners on fixed incomes.
So far that Cantillon parade has robbed the median American worker of almost 8% of his wages since Biden took office. Meaning the "wageflation" rise the Journal's currently worried about is barely making a dent. In fact, 8% matches the hit from the double-dip recession from 1979 to 1981, where workers lost a permanent 8% compared to trend.
So what's next? Any prospect of workers ever making up that lost 8% will run head into the coming recession, when both wages and workers are slashed. In fact, the latest jobs numbers say even workers' drip-down has ground to a halt as full-time jobs evaporate and gig work picks up the slack.
At this point, unless government radically scales back its economic manipulations -- which it will not -- the lost real wages of these past few years, like those of the 70's, will probably never be made up.
Governments love to scapegoat the people for their screw-ups, with capitalist profits and greedy workers conveniently dividing the electorate. They do this because getting half the country to blame the other half lets the puppet-master off so they can get back to fleecing and impoverishing us while we fight.
It's enough to make you wonder if maybe the people aren't actually at each others’ throats. That perhaps both sides actually agree the system is broken, but our elite does everything they can to set us against one another.
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