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Who determines prices?

Who determines prices?

One of the consequences of the response to the pandemic and the disruption from Brexit is that labour shortages are appearing across the low-paid sectors of the economy.  So much so that even the metropolitan liberal Guardian has begun to wonder whether the benefits of higher wages for the low-paid might outweigh the cost of having to pay more for a plumber or an au pair.  As John Harris puts it:

“For decades, large swathes of the labour market have been run on the assumption that there will always be sufficient people prepared to work for precious little. But here and across the world, as parts of the economy have been shut down and furlough schemes have given people pause for thought, the idea that they need not stay in jobs that are exploitative and morale-sapping has evidently caught on.

“In the UK, meanwhile, Brexit remains a disastrous and chaotic project – but, among its endless and unpredictable consequences, leaving the EU has cut off employers’ access to a pool of people who were too often exploitable. Time has thereby been called on one of the ways that our dysfunctional labour market was prevented from imploding.”

Harris points to sectors of the economy – mostly low-paid – where employers have been obliged to increase wages in order to fill vacancies.  And there is certainly some room for wage increases across the economy.  But the emerging narrative is that this is a bad thing because it will create price increases.  Much of the thinking around this issue though, is based on experiences and on economic models that last saw the light of day half a century ago.  And with this in mind, we should take mainstream narratives with a pinch of salt.

…click on the above link to read the rest of the article…

Supply and Demand Deconstructed

Supply and Demand Deconstructed

Prices are caused by supply and demand, right? So say neoclassical economists. If you’ve bought their fairy tale, I recommend you watch the video below. In it, Jonathan Nitzan demolishes the neoclassical theory of prices. It’s a master lesson in how to deconstruct a theory.

Here’s the 100-word summary. Nitzan shows that the neoclassical theory of prices fails in six ways:

  1. Neoclassical theory hinges on utility that cannot be measured
  2. It relies on demand and supply curves that cannot be observed
  3. It depends on equilibrium whose existence it cannot confirm
  4. It requires but cannot show that demand and supply are mutually independent
  5. It requires but cannot demonstrate that the market demand curve slopes downward
  6. And it must but cannot measure capital and therefore cannot draw the supply curve, even on paper

So what explains prices?

If neoclassical theory is bunk, then what explains prices? Jonathan Nitzan, together with Shimshon Bichler, argues that prices are inseparable from power.

Here’s a window into Nitzan and Bichler’s thinking. Start with what economists call ‘demand’. If you’re going to buy something you must need or want it. But your want isn’t some fixed property of human nature. It’s a product of your social environment. Want can be massaged, even manufactured. That’s why we have advertising. Everyday, corporations shape our wants so that we buy what they’re selling. This means that demand isn’t some function of autonomous ‘preferences’ (as neoclassical economists would have us believe). Demand is actively shaped by corporate power.

Now let’s look at ‘supply’. It makes sense that if people want something that is scarce, they’ll bid up the price. The problem, though, is that scarcity isn’t just a fact of nature. It’s also an outcome of property rights.

…click on the above link to read the rest of the article…

A Word About the Current Chaos in Prices and Inflation

A Word About the Current Chaos in Prices and Inflation

Some prices collapsed, others skyrocketed, and the Consumer Price Index went haywire. Here’s what I’m seeing beyond the near term — and it’s not “deflation.”

Amid soaring prices of meat, beverages, fruit, veggies, and other food at home, and surging costs of personal goods, medical care services, and household furnishings, and amid a collapse in prices of gasoline, car rentals, public transportation, car insurance, lodging away from home, and other things – amid these diametrically opposed price movements, the Consumer Price Index went, as expected, haywire today. And we’re going to look at some of those gyrations beyond it.

First, here’s what got buffeted around:

The overall Consumer Price Index fell 0.8% in April from March, the steepest one-month drop since December 2008, when the economy was going through peak-Financial-Crisis 1. This brought the increase over the past 12 months down to 0.3%, the lowest since October 2015 during the oil bust at the time.

The “core” CPI – CPI without the volatile food components and the extremely volatile energy components – dropped 0.5% from March to April but was still up 1.4% from a year ago.

But wait…

What if we take out the most chaotic and largely temporary price movements at both ends to get to what the undying loss of the purchasing power of the dollar might be? Because that’s what consumer price inflation is.

There is a consumer price index that is not buffeted around by the month-to-month collapse of some prices and surge in other prices; The Cleveland Fed’s “Median CPI,” which is based on the data from the CPI, removes the extremes at both ends since these extremes are often temporary and distort long-term inflation trends.

…click on the above link to read the rest of the article…

Costs Are Spiraling Out of Control

Costs Are Spiraling Out of Control

And how do we pay for these spiraling out of control costs? By borrowing more, of course. 

If we had to choose one “big picture” reason why the vast majority of households are losing ground, it would be: the costs of essentials are spiraling out of control. I’ve often covered the dynamics of stagnating income for the bottom 90%, and real-world inflation, i.e. a decline in purchasing power. 

But neither of these dynamics fully describes the relentless upward spiral of the cost basis of our economy, that is, the cost of big-ticket essentials: housing, education and healthcare.

The costs of education are spiraling out of control, stripping households of income as an entire generation is transformed into debt-serfs by student loan debt. The soaring costs of healthcare are a core driver of higher costs in the education complex (and government in general), and to cover these higher costs, counties raise property taxes, which add additional cost burdens to households and enterprises as rents rise. 

Rising rents push the cost structure of almost every enterprise and agency higher.

Then there’s the asset inflation created by central bank ZIRP (zero interest rate policy) which has inflated a second echo-bubble in housing that has pushed home ownership out of reach of many, adding demand for rental housing that has pushed rents into the stratosphere in Left and Right Coast cities.

The increasing dominance of monopolies and cartels has eliminated competition in sector after sector. Monopolies and cartels skim immense profits even as the value, quality and quantity of their products and services decline: The U.S. Only Pretends to Have Free Markets From plane tickets to cellphone bills, monopoly power costs American consumers billions of dollars a year.

Thanks to their political influence, monopolies and cartels have legalized looting, raising prices and evading anti-trust regulations because they can pay whatever it takes in our pay-to-play political system.

…click on the above link to read the rest of the article…

UNLOCKED: The Curious Case of Rising Fuel Prices and Shrinking Inflation

UNLOCKED: The Curious Case of Rising Fuel Prices and Shrinking Inflation

On Friday, April 26, 2019, the market was stunned with a much stronger than expected 3.2% rate of first-quarter economic growth. Wall Street expectations were clearly off the mark, ranging from 1.3-2.3%. The media took this as a sign the economy is roaring. To wit, a headline from the Washington Post started “US Economy Feels Like the 1990s.”

Upon first seeing the GDP report, we immediately looked with suspicion at the surprisingly low GDP price deflator.  The GDP price deflator is an inflation measure used to normalize GDP so that prior periods are comparable to each other without the effects of inflation. 

The Bureau of Economic Analysis (BEA) reports nominal and real GDP. Real GDP is the closely followed number that is reported by the media and quoted by the Fed and politicians. Since the GDP price deflator is subtracted from the nominal GDP number, the larger the deflator, the smaller the difference between real and nominal GDP.  

The BEA reported that the first quarter GDP price deflator was 0.9%, well below expectations of 1.7%. Had the deflator met expectations, the real GDP number would have been about 2.4%, still high but closer to the upper range of economists’ expectations. 

Fueling the Deflator

Like Wall Street, we were expecting a deflator that was in line or possibly higher than its recent average. The average deflator over the last two years is 2.05%, and it is running slightly higher at 2.125% over the last four quarters. Our expectation for an average or above average deflator in Q1 2019 were in large part driven by oil prices which rose by 32% over the entire first quarter. Due to the price move and the contribution of crude oil effects on inflation, oil prices should have had an unusually high impact on inflation measures in the first quarter of 2019. 

 …click on the above link to read the rest of the article…

Americans Brace For Shock Surge In Everyday Food Prices

Americans Brace For Shock Surge In Everyday Food Prices

The ‘patient’ Fed has been lamenting the “lack of inflation” for far too long. It is about to get its wish.

American food merchants are struggling to import fruits and vegetables from Mexico as wait times at port of entries along the Mexico–US border have surged because of a shift in Customs and Border Protection (CBP) personnel away from the port of entries to remote regions of the border to fight illegal crossings. As a result, shipments of food have dramatically declined in recent weeks, and the result is an imminent spike in imported food prices in the coming months that could put a sizeable dent in consumer wallets.

Fruit and vegetable importers that wholesale to grocery stores throughout the US, could inflate prices by at least 20% to 40% if the wait times continue, with avocado prices already soaring (see “Mexican Avocado Prices Explode By Most In A Decade After Trump Border Threat“).

After the avocado price surge, cucumbers, eggplants, bell peppers, squash, cherry tomatoes, watermelons, and most other fruit and vegetables imported from the tropics would be affected.

“(The) Mexican border, it’s one of the most important crossings to the United States,” said Joshua Duran, Amore Produce sales representative.

About 43% of all US fruit and vegetables originate from Mexico. In the last several decades, Mexico has become the top trading partner with the US. Much of the US-Mexico commerce involves mega-corporations that send products back and forth across the border as part of a critical segment of their supply chain that has increased since the North American Free Trade Agreement (NAFTA) took effect in 1994.

This month [April], distributor Amore Produce truck drivers hauling product from Mexico have experienced a 300% wait time at the various port of entries along the Mexico–US border, stuck in line for up to 15 hours.

 …click on the above link to read the rest of the article…

The Source of Killer Inflation: Services

The Source of Killer Inflation: Services

The soaring cost of services is driven by a number of factors.

What will the future bring: fire (inflation) or ice (deflation)? The short answer: both, but in very different doses. Goods that are tradeable and exposed to technologically driven commodification will decline in price (deflation) while untradeableservices that are difficult to commoditize will increase in price (inflation), generating a self-reinforcing feedback loop of wage-price inflation.

Gordon Long and I discuss these trends in our latest program The Supply-Demand Services Problem (YouTube).

The big difference between goods that drop in price (TVs, etc.) and services that are exploding higher (healthcare, childcare, elderly care, higher education, local taxes and fees, etc.) is the relative size each occupies in the household budget: a new TV is a couple hundred bucks and a once-every-few-years purchase, while all the services cost thousands of dollars annually– or even tens of thousands of dollars.

A new TV or electronic gew-gaw is signal noise in the household budget while services consume the most of what’s left after paying for housing and transport.

A 10% decline in the cost of a new TV is $25, while a 10% increase in annual tuition and college fees is $2,500. Add in thousands more for childcare, elderly care, local taxes and fees and healthcare, and the deflationary impact of tradeable goods is trivial compared to the increases in untradeable services.

Not all goods are declining in sticker price. vehicles are rising sharply in price, a fact that’s erased by hedonic adjustments in official inflation (the new car is supposedly so much better than the previous model that the “price” actually declines-heh).

Then there’s the inexorable shrinkage of quantity and quality. The package that once held 16 ounces now contains 13.4 ounces, and the appliance that once lasted for years now lasts a few months as the quality of components is reduced. 

 …click on the above link to read the rest of the article…

According to the Wall Street Journal, Inflation Is About to Increase the Prices of EVERYTHING

According to the Wall Street Journal, Inflation Is About to Increase the Prices of EVERYTHING

We’ve been pretty lucky over the last ten years in terms of inflation, which has remained at about 2%. However, if the Wall Street Journal is correct, our luck is about to run out.

The price of just about everything is set to increase in the coming months. Part of this is because manufacturers and suppliers are facing rising costs, just like the rest of us.

Airlines are paying about 40% more for jet fuel than they were a year ago. Trucking costs were up 7% annually in September, as trucking companies passed along their own higher labor costs. Private-sector wages and salaries in the September-ended quarter rose 3.1% from a year earlier, the strongest gain since 2008, the Labor Department said Wednesday.

Meanwhile, U.S. manufacturers are paying roughly 8% more for aluminum and 38% more for steel than a year ago as the industry adjusts to tariffs the Trump administration levied on imports of those metals. Also, a 10% tariff the administration imposed in September on $200 billion worth of various goods from China is weighing on businesses that buy those imports. (source)

With that being the case, it isn’t surprising that those costs will be passed on to consumers.

What is inflation?

Here are some basic facts about inflation from Investopedia.

  • Inflation is a sustained increase in the general level of prices for goods and services.
  • When inflation goes up, there is a decline in the value, or purchasing power of money.
  • Variations on inflation include disinflationdeflationhyperinflation and stagflation.
  • Theories as to the cause of inflation are up for debate. Some common theories include demand-pull inflationcost-push inflation, and monetary inflation.
  • When there is unanticipated inflation, creditors lose, people on a fixed-income lose, menu costs go up, uncertainty reduces spending and exporters aren’t as competitive.

…click on the above link to read the rest of the article…

The Fed’s Mandate To Pick Your Pocket – The Real Price Of Inflation

The Fed’s Mandate To Pick Your Pocket – The Real Price Of Inflation

Inflation is everywhere and always a monetary phenomenon.” – Milton Friedman

This oft-cited quote from the renowned American economist Milton Friedman suggests something important about inflation. What he implies is that inflation is a function of money, but what exactly does that mean?

To better appreciate this thought, let’s use a simple example of three people stranded on a deserted island. One person has two bottles of water, and she is willing to sell one of the bottles to the highest bidder. Of the two desperate bidders, one finds a lonely one-dollar bill in his pocket and is the highest bidder. But just before the transaction is completed, the other person finds a twenty-dollar bill buried in his backpack. Suddenly, the bottle of water that was about to sell for one-dollar now sells for twenty dollars. Nothing about the bottle of water changed. What changed was the money available among the people on the island.

As we discussed in What Turkey Can Teach Us About Gold, most people think inflation is caused by rising prices, but rising prices are only a symptom of inflation. As the deserted island example illustrates, inflation is caused by too much money sloshing around the economy in relation to goods and services. What we experience is goods and services going up in price, but inflation is actually the value of our money going down.

Historical Price Levels

The chart below is a graph of price levels in the United States since 1774. In anticipation of a reader questioning the comparison of the prices and types of goods and services available in 1774 with 2018, the data behind this chart compares the basics of life. People ate food, needed housing, and required transportation in 1774 just as they do today. While not perfect, this chart offers a reasonable comparison of the relative cost of living from one period to the next.

…click on the above link to read the rest of the article…

Housing Bubble and Everything Bubble in One Simple Picture

To understand the magnitude of the housing bubbles simply compare the index of wages to the index of prices.

How Did We Get Here?

That’s easy.

Average Wages vs CPI

Note the correct CPU comparison for this chart is CPI-W not CPI-U, not that it matters much.

No matter what official CPI one uses, the chart is a joke. Why? The CPI only reflects rent, not actual housing prices.

The Fed made this mistake during the housing bubble and they made it again from 2011 to present.

More bubbles will burts and that is very deflationary. By chasing its tail, the Fed creates the very conditions it seeks to prevent.

Price Deflation Not a Problem

For years, the Fed desperately sought more inflation. However, a BIS Study on the Historical Costs of Deflation shows routine price deflation is not a problem.

According to the BIS, “Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive.”

Meanwhile, people keep faith in the Phillips’ Curve. It’s pathetic.

Related Articles

The Problem with a State-Cartel Economy: Prices Rise, Wages Don’t

The Problem with a State-Cartel Economy: Prices Rise, Wages Don’t

The vise will tighten until something breaks. It could be the currency, it could be the political status quo, it could be the credit/debt system–or all three.

The problem with an economy dominated by state-enforced cartels and quasi-monopolies is that prices rise (since cartels can push higher costs onto the consumer) but wages don’t (since cartels can either dominate local labor markets or engage in global wage arbitrage: offshore jobs, move to lower-wage states, etc.)

Think about the major expenses of the typical household: Internet, telephony, cable and other digital services: cartels. Airlines: cartel. Healthcare insurance, providers and Big Pharma: cartels. Defense weaponry: cartel. Higher education and student loans: cartels. Mortgages: cartel. And so on.

The economy is now dominated by two consequences of state-enforced cartels:

1. High profits / high incomes for the owners and managers at the top who reap most of the gains of the cartel: high-income individuals pay most of the income taxes and fund most of the political class’s campaign contributions. No wonder the political class insures that the state protects cartels from competition: it’s called self-interest.

2. Debt. i.e. credit for consumers, so they can continue to borrow more to pay the ever-higher costs of living.

But debt has a cost, too, and even at low rates of interest, eventually the interest on ever-larger mountains of debt crimps households’ spending and their ability to borrow more.

When consumers aren’t earning more and can no longer borrow more to support additional consumption, consumption and the rate of new debt expansion both decline, guaranteeing recession.

Cartels don’t really have competition, and so there is no pressure to lower costs; cartels have no incentives to innovate in ways that radically reduce costs and improve their services. Consumers see this most dramatically in healthcare and higher education, where costs just keep rising year after year.

If consumers can’t borrow more to pay higher costs, then cartels lobby for the government to pay their rising costs via deficit spending, i.e. the government borrows more to fund the cartels.

…click on the above link to read the rest of the article…

What If All the Cheap Stuff Goes Away?

What If All the Cheap Stuff Goes Away?

Nothing stays the same in dynamic systems, and it’s inevitable that the current glut of low costs / cheap stuff will give way to scarcities that cannot be filled at current low prices.

One of the books I just finished reading is The Fate of Rome: Climate, Disease, and the End of an Empire. The thesis of the book is fascinating to those of us interested in the rise and fall of empires: Rome expanded for many reasons, but one that is overlooked was the good fortune of an era of moderate weather from around 200 BC to 150 AD: rain was relatively plentiful/ regular and temperatures were relatively warm.

Then one of Earth’s numerous periods of cooling–a mini ice age–replaced the moderate weather, pressuring agricultural production.

Roman technology and security greatly expanded trade, opening routes to China, India and Africa that supplied much of Roman Europe with luxury goods. The Mediterranean acted as a cost-effective inland sea for transporting enormous quantities of grain, wine, etc. around the empire.

These trade routes acted as vectors for diseases from afar that swept through the Roman world, decimating the empire’s hundreds of densely populated cities whose residents had little resistance to the unfamiliar microbes.

Rome collapsed not just from civil strife and mismanagement, but from environmental and infectious disease pressures that did not exist in its heyday.

Colder, drier weather stresses the populace by reducing their food intake, which leaves them more vulnerable to infectious diseases. This dynamic was also present in the 15th century during another mini ice age, when the bubonic plague (Black Death) killed approximately 40% of Europe’s population.

Which brings us to the present: global weather has been conducive to record harvests of grains and other foodstuffs, and I wonder what will happen when this run of good fortune ends, something history tells us is inevitable. Despite the slow erosion of inflation, food is remarkably cheap in the developed world.

What happens should immoderate weather strike major grain-growing regions of the world?

Then there’s infectious diseases.  Global air travel and trade has expanded the spectrum of disease vectors to levels that give experts pause.  The potential for an infectious disease that can’t be mitigated to spread globally is another seriously under-appreciated threat to trade, tourism and cheap stuff in general.

…click on the above link to read the rest of the article…

What is Wrong With the Popular Definition of Inflation?

According to Mises,

Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation’ to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation.[1]

What is today called inflation is the general rise in prices, which is in fact only the outcome of inflation. Consequently, anything that contributes to price rises is now called inflationary and therefore must be guarded against. Thus, a fall in unemployment or a rise in economic activity are all seen as potential inflationary triggers and therefore must be restrained by central bank policies.

Some other triggers such as rises in commodity prices or workers’ wages also regarded as potential threats and therefore must be always under the watchful eye of the central bank policy makers.

If inflation is indeed just a general rise in prices, then why is it regarded as bad news? What kind of damage does it do?

Mainstream economists maintain that general price increases cause speculative buying, which generates waste. Inflation, it is maintained, also erodes the real incomes of pensioners and low-income earners and causes a misallocation of resources.

Despite all these assertions regarding the side effects of what they define as inflation, mainstream economics does not tell us how all these bad side effects are caused.

 

…click on the above link to read the rest of the article…

Should we Restore the Gold Standard?

Would it make sense to rebuild an international gold standard like the one we had in the late 1800s? Larry White says the idea has merit, David Glasner believes it isn’t worth the risk. Over the years I’ve followed the back-and-forth between these two blogging economists, each of whom has done an admirable job defending their respective side for and against the gold standard. Let’s look at one or two of the most important themes running through the White v Glasner debate.

Like a ruler measures distances, a nation’s monetary standard serves as a measuring stick for the value of goods and services. People need to be able to set sticker prices with the unit, calculate profit and loss, negotiate labour contracts, and establish the terms of long-term debts using it. If the measuring stick is faulty, then all these important tasks becomes unnecessarily difficult.

Gold as Unit of Account

Since 1971 we have been on a fiat money standard in which all currencies float against each other. Central banks try to ensure that, within the confines of their nation, the general level of domestic consumer prices stays constant, or at least rises at a constant rate of around 2-3%. And while the first decade of the fiat standard was a disaster characterized by high and rising inflation, central bankers in developed nations have generally managed to keep inflation on track for the last thirty or so years.

To re-establish a modern gold standard, each nation’s unit of account—say the $ or ¥ or £—would have to be redefined as a certain fixed number of ounces of gold.

…click on the above link to read the rest of the article…

WARNING: Markets Reaching Extreme Leverage

WARNING: Markets Reaching Extreme Leverage

As investors’ bullish sentiment moves up to euphoric levels, the markets are reaching extreme leverage.  This is terrible news because a lot of people are going to lose one heck of a lot of money.  According to CNN Money’s Fear & Greed Index, the market is now at the “extreme greed” level and if we go by Yardeni Research on “Investor Intelligence Bull-Bear Ratio,” it’s also is the highest ratio in 30 years.

But, of course… this time is different.  I continue to receive emails and comments on my blog that the Fed will continue to prop up the markets.  Unfortunately, there is only so much the Fed can do to rig the markets.  Furthermore, the Fed can’t do much to mitigate investor insanity in record NYSE margin debt or the massive $2 trillion in the global short volatility trade.

The record NYSE margin debt suggests traders have racked up a record amount of margin debt (33% more since 2007) and the largest short volatility trade in history.  By shorting volatility, investors are betting that it will continue to move lower.  A falling volatility index suggests more calm and complacency in the markets.

So, the market will likely continue higher and higher, until it finally POPS.  And when it does, watch out.

I’ve put together some charts showing the extreme amount of leverage in the markets.  While this leverage may increase for a while, at some point the insanity will end in one hell of a market correction-crash.

The Commercial Banks Are Betting On Much Lower Oil Prices

As I mentioned in previous articles and my Youtube video, Coming Big Oil Price Drop & Market Crash, the Commercial banks have the highest net short positions in the oil market in over 20 years.  In the video, I explained how the Commercial net short position in oil increased from 648,000 to 678,000 contracts in just one week.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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