Discover more from Learning by Proxy with Vivek Srinivasan
Let me tell you what inflation is
Inflation has nothing to do with supply chain and everything to do with psychology
They will tell you a whole bunch of nonsense about demand, supply and price. Let me tell you what Inflation is…
Inflation is the measure of greed in a market.
Capitalism believes that the only way to motivate a person is through greed. In order to supply this motivation another thing called the interest rate exists. Interest rate assumes that money just grows by sitting around.
Harnessing greed is like riding a tiger that is intent on killing you. In the meantime, that tiger can kill anything else and you must sit and watch, hence the climate crisis.
If greed goes out of control in a system, then the system fails and if greed itself dies, the system fails.
This creates the need to maintain inflation in a tight band where people are just greedy enough. When that is true, interest rates work and those with the capital can keep everyone under their shoes.
Let me illustrate this.
According to the popular narrative, the oil supply has been hit due to the war in Ukraine. Consequentially the cost of oil has gone up and since oil powers the entire logistics system across the world, everything has become more expensive. It takes oil to transport coal to the power plant. The maintenance guy who takes care of the solar panels most likely travels in a car powered by oil. Your food that comes from many miles away was transported to you in a vehicle using oil. And the list goes on.
This oil is produced by what can only be termed as daylight robbery of the planet. The oil companies did no work to make the oil, it was just sitting there to be taken. They got the licence and bore a hole.
Just like if you created a borewell in your backyard and pumped out water it is not like you created water, you are just taking what was already there. Nature put it there.
If you told me that pumping out the water was getting more expensive (gyrating by 500%) I would wonder how?
If I told you pumping out water from my well is more expensive because someone else has stopped pumping out water, this would be clearly absurd.
But when it comes to oil, we assume this to be an inalienable truth.
And like that Exxon was left with the unbearable burden of booking $20 Billion in quarterly profits.
Exxon Mobil broke records again with its profits in the third quarter, raking in $19.66 billion in net income.
The Irving, Texas company said Friday that it booked $112.07 billion in revenue during the quarter, more than double revenue last year during the same period.
Americans have struggled with painfully high gasoline prices in recent months, paying more than $4.80 on average for a gallon of regular at the beginning of July. Prices eased somewhat towards the end of the quarter, but customers were still paying more than $3.79 a gallon of regular, on average, in late September.
Source: Economic Times
They did not want to, but the markets forced them!
Greed is only tempered by fear.
Businesses are afraid of competition. In the absence of competition, fear gives way to greed and we arrive at inflation.
Inflation is caused by the absence of competition.
Oil has not become more expensive, it is just that one competitor is off the table and in those circumstances, the other (non-Russian) oil companies feel comfortable pushing the price up for the commodity. By the way, these very companies were willing to pay people to take that oil just 30 months ago.
There is no mysterious demand-supply-price alchemy at play. They just can afford to be more greedy. Which then begins to explain the sky-high profits.
The companies try to explain this away by blaming it on market forces. The markets are just trying to predict what will happen in the absence of supply. They sell futures contracts and they anticipate greedy behaviour when a competitor disappears, that is all.
In the late 90s, before the Dotcom crash, the economy was healthy at the same time oil was trading at $20. If inflation is being caused by rising prices, the reverse should have been in action at that point. Oil prices had fallen by 50% in a very short period. Things should have been getting cheaper. They did not.
Source: Trading Economics
Also, food prices crashed in the 1980s thanks to the green revolution and the rise of fast food and high fructose corn syrup. Food costs came down significantly. That did not cause inflation to crater. It just made us discover obesity.
Inflation is caused by the scarcity of fear in the minds of the seller and is brought to an end when the buyer has had enough and no longer sees any further value. The buyer stops buying shit at criminal prices and we enter a recession.
They would like you to believe that inflation has everything to do with supply. Frankly, it has nothing to do with demand or supply.
For over two years now, the US government has purchased all of the covid vaccines administered in the country, in what has become the largest public vaccination campaign in American history.
Those purchases have included more than 500 million doses from Pfizer. The first 100 million cost around $20 a dose, thanks to an earlier agreement in which the US government invested $1.95 billion in vaccine production. The remaining doses were bought for around $30 each.
The company announced on Oct. 20 that it intends to sell the covid vaccine, marketed under the brand name Comirnaty, for $110 to $130 per dose.
This is about four times the current selling price—and 100 times the estimated cost of manufacturing the vaccine.
Pfizer was given enough orders to comfortably recover the cost of R&D. The company was provided expedited clearance. The company was provided legal immunity from rolling out an untested technology.
It is not like the demand for the COVID vaccine is ripping the roof. It is just that the FDA has not approved the AstraZeneca vaccine to this day in the US. Pfizer has very little competition and therefore very little fear and a lot of greed.
Nothing to do with demand or supply.
Last week I saw a piece of news that said that tonnes of food grains kept in storage had rotten away and had to be thrown in India. This, at a time when the world is seeing an incredible food shortage and when the Ukrainian economy is in no position to supply the grains.
Makes you wonder. You would rather let something rot and go to waste than give it away to those who need it. This is a feature of capitalism.
This is not unique to India. Nor is it just unique to food. The US performed this remarkable feat with vaccines last year. It happens across the world and is so common we should be aghast that this is even allowed to happen.
The Irony is that on the one hand, you claim that the value of a commodity is going up and on the other hand you let it rot with impunity!
Banks screwing with rates
Every country has a central bank which is tasked with handling the monetary policy and the lever that they use is a set of interest rates.
The interest rate set by the central bank determines the risk-free return that you can get on your capital. Assuming the banks do not collapse.
Ordinarily, if you had some capital lying around and you wanted to grow it, you would invest that capital in a venture. This would entail risks but if the venture pays off, you make a reward. A positive byproduct is job creation.
They will shit you into believing that they wanted to create jobs; nobody starts a venture wanting to create jobs, hence AI.
Interest rate assumes that you should be able to get this reward for doing nothing.
So now if the interest rate is high enough, you would reconsider. Investing in a venture is risky and fraught with its own perils. By comparison, if you could get half as much return by just handing the money over to the bank would you not just do that?
This would result in the contraction of the job market. The contraction results in firing. Creates a recession. Those allowed to hold on to their jobs can be made to feel grateful for having the job and kept tied to the same salary for a longer time.
Americans are still quitting at near-record levels, according to new data from the Bureau of Labor Statistics. The overall quits rate—the percentage of the employed population that quit within a month—was 2.7% in September, the same as it was two months earlier. The quits rate for the private sector alone slowed down a hair, though, from 3% to 2.9%.
These rates show both how many opportunities workers are seeing at other firms and how confident they feel about leaving their jobs. Those workers are then rewarded for switching jobs: Their wages increased by 7.1% on an annual basis, according to the Atlanta Wage Tracker. That’s higher than the 5.2% raise that people who stay in their jobs have gotten in the past year.
This will prompt the Fed to continue raising rates more aggressively, as it has been doing.
The problem is not that prices are rising.
The problem is that it is not leaving people scared shitless.
They are confident enough to quit their jobs! Why that vermin!! We will raise interest rates till you cannot find a job. Period. If inflation does not break your spirit we will keep increasing interest rates and ensure we break it one way or another.
Inflation and its control are just about keeping the poor scared.
What if they kept the interest rates low?
If the interest rates are not increased, it is not as if businesses will go on borrowing ad infinitum. Inflation will rise, but not like in Weimar Germany.
Say the inflation settled at 15%.
It would be clear to workers that prices double every 5 years. They would ask for a 20% raise every year and that would become the norm. It would not be possible to keep minimum wages at the same level for 40 years.
The cycle of the rich getting richer at the cost of the labour class would not persist and that is the problem.
Say you put a person in a large tub and the person does not know how to swim. You keep increasing the water level by 2.5%. To the “capitalist”, the person supplying the water, the immense volumes of water being added are clear but to the person in the tub, the increase would be imperceptible. This goes on cyclically over and over till suddenly it is no longer possible for the legs to reach the bottom of the pool or stand steadily.
Inflation kept in the right range works like this. The poor get poorer without even knowing that they are until one day they just don’t make enough to stand on their feet.
If the water level rose by 15%; very soon the person in the pool would realise that something was off. They would ask for support or ask out of the pool. An increase in pay or the death of capitalism.
“No COLA? No Beer!” read the signs of striking British Columbia General Employees’ Union (BCGEU) workers on the picket line this past summer. With inflation at highs we haven’t seen this century, employees in BC’s public sector — including clerks at the province’s liquor stores — reached an impasse at the bargaining table over the rise in cost of living. What they wanted was a cost-of-living adjustment (COLA) clause, a guarantee that their wages would keep pace with the tidal wave of inflation.
As inflation is seized upon by the capitalist class to make everyone’s lives miserable, unions should fight to ensure that workers aren’t thrown under the bus. A raise is meant to be a raise — if it can’t keep up with increases to costs of living, it’s not actually a raise.
The capitalist myth works only when inflation is a thing that only the rich have to deal with on their spreadsheet while maintaining it in such a way that the poor can be told that it does not even exist.