Economists explain inflation on The Agenda with Steve Paikin
None deal with the real culprit - a global shortage of fossil fuels
Steve Paikin had a terrific panel of three economists speak to the issue “Is Record Inflation Here To Stay””. Craig Alexander, Mike Moffat and Armine Yalnizian all offered their take on the roots of the currently rampant inflation and a view on the outlook. Inflation is a simple concept. Think of the economy as an incorporated business with all commercial activities as its assets and its money supply as its share capital. If a corporation issued large numbers of new shares for no consideration the value of the shares would be diluted. If a government creates large increases in money supply that is not directed towards increasing commercial activities, the value of that money is diluted. An oversimplification to be sure, but illustrative nonetheless.
The panelists were universally well-qualified and eloquent in their comments, pointing to the usual culprits for inflation like “demand pull” and “supply shortage” and “wage and cost pressure driven”. Those comments ignore the simple reality that more money chasing fewer goods will drive up the price of those goods by reducing the trading value of that money.
Craig Alexander correctly saw that (unlike in the 2008-2009 Global Financial Crisis “GFC”) central bank purchases of government bonds (called Quantitative Easing or QE) was not particularly inflationary when the money created sat idle on bank balance sheets but became inflationary when QE money was distributed by government to consumers as part of the COVID-19 relief program. It is almost tautalogical that an increase in the money supply is inflationary if not offset by a reduction in the velocity of money (achieved in the GFC by keeping the money out of the hands of consumers). During the pandemic, the Trudeau government ran massive deficits funded by QE and the money was distributed widely, with a large portion going into savings accounts (and not chasing goods and services) so the inflationary effect was delayed until the pandemic ended and as Armine Yalnizian commented, consumers wanted to travel, spend and party.
All three economists and Paikin thought the government had no choice but to enact the COVID relief. Nonsense. Of course governments had a choice. They could have spent less money, targeted the most vulnerable, and let the rest of society take their chances.
The massive intervention did little to stem the progress of the virus. As of April 2022, the Center for Disease Control estimated that 58% of Americans had been infected with the virus and that number has been growing by about 100,000 cases a day ever since adding another 6 million persons infected in two months. It is pretty clear that sooner or later everyone susceptible to the disease will have become infected in the United States and there is no reason to believe Canada is any different.
There was no relief program of any consequence in the Spanish flu pandemic in 1919 yet it passed into history. The mortality rate from COVID in persons under forty years of age is virtually nil, suggesting the government could have targeted only those at risk to mitigate the damage of the pandemic and avoided squandering billions, but political leaders can never let a crisis go to waste if they can claim they “have our backs” at the next election.
Armine saw “corporate greed” as a major contributor to inflation and suggested a stronger Combines Branch of the federal government was needed to stop consolidation of power in the hands of fewer corporations. She seemed to subscribe to the left wing rhetoric that companies like TC Energy, Couche-Tard and and major real estate companies were ripping off Canadians. I follow financial news but didn’t see TC Energy merge with anyone no were there any amalgamations of major real estate companies, and Couche-Tard’s long list of acquisitions was devoid of Canadian entities but for some small convenience store chains in Atlantic Canada.
Canadian corporate profits during the pandemic were at a rate of about $75 billion before taxes quarterly, little changed since the second quarter of 2021. On Canada’s $1.7 trillion Gross Domestic Product, the changes in corporate profits are a rounding error insignificant to inflation which at 7.7% comprises ~$30 billion of quarterly price increases. Corporate profits in the past year have been relatively flat and are not a major source of inflation, with respect to Ms. Yalnizian.
While corporate profits have risen marginally a deeper dive into the mix tells the story. Finance, insurance and real estate margins have risen sharply as have margins in service and retail industries but the goods producing sector has barely budged.
The higher margins for real estate companies is a derivative of stupid government policies that husbanded serviceable land and artificially drove down interest rates (until recently in response to inflation) which has seen housing prices rocket higher by as much as 40% in the past two years, a point Craig Alexander did not miss. Service and retail margins have doubled but those businesses have suffered higher costs from wages (up 3.8% year over year in aggregate and more in service industries) and energy costs exacerbated by a thoughtless carbon tax. To call profit margins of 5% to 15% of sales “gouging” just tells me Ms. Yalnizian has never run a business or had to meet a payroll.
Mike Moffat was relatively quiet during the session but spot on whenever he spoke. Moffat was the only economist to comment on inflation expectations as a contributor to more inflation. Nothing could be more obvious or more important. If you think your money is going to be worth less, you spend it and often pay a premium price to avoid a higher price later.
None of the economists dealt directly with the elephant in the room - energy prices. The price of oil is set by a global auction and driven by supply and demand. Our government and the Biden administration in the United States have kept their thumb on the scale of energy development putting up every conceivable barrier to energy producers expanding output in the name of a specious and nonsensical “climate change” alarm ignoring the reality that CO2 is harmless and cannot possibly cause any material amount of “warming”. I wouldn’t expect these economists to have a foundation in the laws of physics but the application of nothing more than grade 12 physics and arithmetic shows how foolish the climate change theory really is, regardless of its popularity among politicans and the propaganda they feed us daily. Here is the mathematics and physics laid out so a high school student should understand them in an article I wrote “How much warmer can CO2 make Earth”.
Inflation will persist until central banks raise interest rates high enough to cause a recession and that means rate where borrowers are not being paid to borrow with rates that are less than the rate of inflation. Tinkering with a few basis points change in overnight rates is fiddling while Rome burns. House prices will likely collapse and that is a good thing (as Craig Alexander rightly said) and many livelihoods will be lost but it is essential to curb inflation which is essentially a tax on the poor. A recession will also take the steam out of energy prices and give governments the time they need to increase the supply of fossil fuels. If they don’t, energy prices will rise even faster as the recession ends since demand will return to current levels and keep growing and supply will not keep up.
It is time both politicans and economists dropped the climate change charade and faced the facts that fossil fuels are here to stay and it will be many decades before alternative can power Earth’s energy needs with nuclear the only option with a ghost of chance of being a viable alternative. The “climate change” chickens are coming home to roost and unless we elect leaders who embrace the need to expand fossil fuel production, the economic damage to Canada and the United States will be severe and unfortunately even worse for developing economies.
In summary, institutional stupidity is no substitute for effective policy.
I agree that this is an excellent article, especially as it reveals the ideological differences among economists who comment on inflation. I would only add a few points. The first is that most economists would agree that the discipline does not have and never had a well-developed understanding of the causes of inflation. It certainly cannot be accurately modelled or predicted. This may have something to do with the role of expectations; we just cannot read human minds. The second is that the role of energy prices in causing inflation is changing. Fifty years ago, energy generally and oil in particular had mush larger shares to the costs of living in North America and Europe. Energy is still important but not central and it affects the price of goods far more than services. Finally, much as I agree that governments have made an immense policy error in prioritizing GHG emissions reduction, we need to recognize that the main present and long-term economic effects of these policies is to accelerate the transfer of industrial activity from the OECD countries to the non-OECD ones, and especially to Asia.
Housing prices continue to be low vs demand. How do you reconcile housing prices to collapse or do you mean it will soften. Can you define in % what collapse or soften mean. Thanks very insightful article