Thread by All Possums Go to Heaven

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Back in 1963, Milton Friedman asserted that “inflation is always and everywhere a monetary phenomenon” and here on twitter dot com and in general discourse you will often find that idea repeated uncritically as an article of faith.

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In this telling, a growth in the money supply without a commensurate growth in production means people have more dollars to pay for the same amount of goods and services, bidding against each other and driving up prices.

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As prices go up, the purchasing power of each dollar goes down. Money is, in this telling, a commodity priced in goods and services. As supply goes up, its price goes down.

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So firms raise prices both because a) the value of every dollar they take in as revenue is worth less but also b) their suppliers are raising prices too.

In particular, we need to be on the look-out for “wage push” inflation.

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This happens, we’re told, when workers demand higher wages. To maintain profits rate despite paying higher wages, employers must raise their prices. This in turn leads workers to demand yet higher wages to maintain their purchasing power, which leads to yet higher prices…

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That’s the culprit right now. Biden (and Trump, who is often skipped over in this tale) massively increased the money supply with all those pandemic-related handouts. With all that free money, workers bid up prices.

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Worse, those handouts removed the disciplining effects of poverty and turned workers uppity, convincing them that they could withhold their labor and organize with each other to demand higher wages.

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Federal Reserve Chair Jerome Powell had embraced this theory, declaring it his goal to “get wages down” to control inflation. To do this, the Fed will raise interest rates, raising the cost of credit for firms (and ironically increasing short term inflation).

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Faced with rising costs, many firms will reduce wages or fire workers, ruining many lives and driving up the suicide rate, but also leaving many people with less money to bid up the price of goods and services.

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But there’s a funny thing going on: despite all this alleged pressure from higher wages and higher input prices, firms are reporting *incredible profits.* These firms are not raising their own prices to keep pace with rising expenditures on labor and other inputs.

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Rather, they must be raising prices *faster* than any rising wages or input prices. Otherwise, we’d expect to see their profits stagnate or even decline.

What gives? That doesn’t track with the monetarist explanation of inflation at all!

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www.bloomberg.com/news/articles/2022-08-25/us-corporate-profits-soar-taking-margins-to-widest-since-1...
Helpfully, @BichlerNitzan, the authors of Capital As Power, propose a different explanation: inflation is, they argue, is not a monetarist phenomenon but rather one of structural power: inflation, they argue, is a restructuring of the price system.

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capitalaspower.com/casp-forum/topic/inflation-is-always-and-everywhere-a-redistributional-phenomenon/...
They note an incredibly tight relationship, as you can see from the chart below, between the rate of inflation and the profitability of the 500 largest US companies.

This is hardly what you’d expect to find if inflation were merely a problem of money supply growth.

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It *is* what you’d expect to find if those largest firms were able to use their market power to raise prices faster than their competitors, transferring income from both their competitors and consumers.

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If that sounds far-fetched, the CEO of Iron Mountain Inc, a data storage firm, helpfully said exactly, explicitly that. Citing his firms “very strong pricing power,” Barry Hytinen told investors he can “price ahead of inflation.”

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theintercept.com/2022/09/28/inflation-prices-investors-iron-mountain
@blair_fix helpfully provides these charts. On the left is what you’d expect if inflation were the product of monetary expansion: a uniform rise in all prices tightly correlated to the rise in money supply. On the right is what we actually have: prices all over the place.

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Fix reminds us that inflation is *differential.* The consumer price index (CPI) is an average. Sometimes prices move more or less in the same direction, but sometimes they diverge, with some increasing and others stationary or even decreasing.

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Fix has found that the more prices diverge—the faster some sectors are able to change prices—the greater the change in CPI.

Which is exactly what you’d expect to find if certain sectors, dominated by powerful firms, were dragging the CPI upwards with them.

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This also checks out: wages have grown slower than inflation. Prices for goods and services sold to workers are rising faster than the wages paid to the workers who make those goods and services.

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www.cnn.com/cnn/2022/07/29/economy/worker-wages-inflation/index.html
That is, firms might be matching higher costs—but the most powerful of them are tacking on bonus price increases, because they can. The disruptive price changes we experience as “inflation” in our daily lives are tribute we pay to already-rich firms.

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economicsfromthetopdown.com/2021/11/24/the-truth-about-inflation/
But the Fed isn’t seriously considering taking action to reduce profits by the largest firms who are dragging prices upwards. That would be silly! The Fed is considering action that will instead crush worker living standards and bargaining power.

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While the interests of those largest firms might lay with inflation, most of the capital class is concerned about inflation because it a) redistributes from them to the largest among them, and b) erodes the value of their holdings while creating unpredictable returns.

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As you can see from the chart below, the US inflation rate has historically swung wildly, including some major peaks in the 15-30% range and some dips into deflation.

Since the Depression, our elites have focused on maintaining a low, *steady* rate of inflation.

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Inflation is, of course, a global rather than US problem right now. Inflation is a *global* problem in the wake of the pandemic, further undermining the argument that inflation is a product of your own individual government issuing too much currency.

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Worried about inflation? We should probably consider that we just lived through the worst sequence of global climactic events in my life—droughts, heatwaves, and flooding everywhere.

Higher interest rates won’t bring back ruined crops.

www.axios.com/2022/10/12/global-wealth-2022-decrease-allianz-report

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PS: In case you weren’t convinced, the largest banks have helpfully been raising prices faster than the fed has been raising interest rates, not only passing on their higher costs to customers but also grabbing more revenue for themselves.

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