Deconstructing the underlying causes of inflation is not particularly simple. Like a nasty game of whack-a-mole, addressing one inflation accelerant – such as interest rates – as the Federal Reserve has elected to do by increasing their bank rate by the largest single rise (0.75%) in almost three decades, often triggers the desired cooling down of the economy… at the expense of jobs and growth. Stagflation is the uncomfortable combination of inflation with recession. And stagflation appears to be what we face.
Almost two decades of “cheap money,” mostly available only to the biggest borrowers in the U.S., exacerbated by the 2017 massive corporate tax cut, had many stunning results. Corporations were incented to buy back their shares and merge and acquire other businesses. Oh, there were side benefits to ordinary people – like cheaper mortgage rates – but that has pushed home prices through the roof which has squeezed first-time home buyers to all but the highest earners. As those with variable rate mortgages are about to discover, new higher interest rates will also apply to earlier buyers. Additionally, home sales of late have both diminished even as prices have begun to moderate. Effectively, since April, mortgage rates have doubled.
Job growth projected by a dwindling number of “I still believe” trickle-down economists – a rising tide (rich people getting or retaining more money) will float all boats (benefit all) – did not materialize from that 2017 cut. That trickle-down theories have never worked to create good jobs somehow continues to escape most voters. The only boost to job growth was the perceived ending of the pandemic, and the sudden release of pent-up consumer spending.
Another reality is that low interest rates literally determine where investors are likely to deploy their available capital. If interest rates do not pay well – with recent treasuries hovering near 1% or even less, bonds and mortgage aggregators – that money instead finds its way into hard equities, from real estate to stocks. Which pushed those values much higher, effectively to economically artificial highs. But Fed rates are now rising fast. As famous economist Paul Krugman puts it in the June 21st New York Times – his chart on adjusted (for inflation) rates is pictured above: “For the past 10 or maybe even 20 years, the Fed has kept interest rates artificially low. These low rates inflated bubbles everywhere, as investors desperately looked for something that would yield a decent rate of return. And now the era of cheap money is over, and nothing will be the same…
“So is the claim that the Fed was consistently setting interest below this natural rate? If so, where was the runaway inflation? In fact, until 2021, inflation consistently came in more or less at the Fed’s target of 2 percent a year… But why was the natural rate so low? The immediate answer is the Fed learned from experience that it had to keep rates low to keep the economy from slipping into recession.”
Some say the Fed was late in the game and should have started the rise in the Fed rate earlier and phased it in more slowly. Simply, some say, they reacted too late, and this delay just might push the recession component over the edge. Krugman is still optimistic: “Once inflation is back down to 2 to 3 percent, which will probably happen by the end of next year, the Fed will begin cutting again. In fact, real long-term interest rates, which reflect expectations of future Fed policy, are up from their pandemic lows, but still only about what they were in 2018-19. That is, the market is, in effect, betting that the era of cheap money will be coming back… Does this mean that there will be more bubbles in our future? Yes — but there would be more bubbles even if interest rates stayed high. Hype springs eternal.”
All global leaders know that the major driving force in the current economic malaise is the huge increase in the cost of oil and gas, which most economists attribute to Putin’s war in Ukraine and the resulting sanctions. After all, Russia produces as much petroleum as does Saudi Arabia and vastly more natural gas. Likewise, Ukraine was one of the largest producers of grain exports in the world, but farming and exporting there have come to a grinding halt. Even as fossil fuels also produce fertilizer, the fact that most goods are shipped (read: dependent on oil) does not help the situation. And no, Joe Biden does not control global oil pricing, and Texas billionaires are not exactly willing to produce their oil and sell it to patriotic Americans at less than the going rate.
This anomaly of profiteering seems to have slipped under most people’s radar. Voters seem more likely to blame the incumbent administration and skyrocketing wages for the across-the-board inflationary increase in the cost of just about everything. On closer examination, however, the richest in the land have clearly taken advantage of the situation, especially Big Oil. As LA Times OpEd columnist Michael Hiltzik suggests (his June 29th contribution): “Wages have crept higher over the last year, but the increases have trailed inflation, which is why so many workers and their families are feeling the sting of higher prices. Corporate profit margins, however, have rocketed into the stratosphere, outpacing the inflation rate and pulling it higher.
“‘Markups and profits skyrocketed in 2021 to their highest recorded level since the 1950s,’ Mike Konczal and Niko Lusiani of the Roosevelt Institute reported in a new paper. ‘Further, firms in the US increased their markups and profits in 2021 at the fastest annual pace since 1955.’” When profits are set as a percentage of goods sold (more than just oil), the problem becomes more apparent. Hiltizik continues: “The bigger story is that the expansion of corporate profit margins has far outpaced wage gains over the last two years, including the period of surging inflation. From the first quarter of 2020 through the end of 2021, corporate labor costs increased by about 7%, but corporate after-tax profits by nearly 14%, according to the Bureau of Economic Analysis.
“Konczal and Lusiani found that whereas average corporate markups, a fair proxy for profits, averaged about 26% above marginal costs from 1960 through 1980 and about 56% during the 2010s, they shot up to 72% in 2021… ‘In other words,’ they wrote, ‘in 2021, we see a sharp increase in ... firms in the aggregate decoupling their prices from their underlying costs.’”
The Biden administration is looking at a federal gas tax moratorium, a short-term mollifier that seems unsustainable if Putin’s war continues for a longer term as expected. A tax on profiteers, limiting mark-ups to a reasonable (pre-economic crisis) level would help more, but this requires an act of Congress. And how many Republicans, needed to pass such a tax, would punish corporate America and take pressure off the incumbent Democratic administration, which is facing an uphill battle in the upcoming mid-terms? Exactly!
I’m Peter Dekom, and making excess profits from the plight of many seems to be justified by an inane rendering of a “free market,” which is anything but the United States today (mired in loopholes as well as corporate regulatory and tax advantages not provided to “the rest of us”).
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