, 07.19.2022 01:45 PM

My latest: inflation, causation

Why is it so much more expensive to live?

And, yes, we all know inflation is the highest it’s been in four decades – and, yes, we know that the cost of borrowing has ballooned to levels unseen in nearly three decades. We know all that. The media and the talking heads tell us that stuff all the time.

But why?

What we aren’t being told, a lot of the time, is this: what’s the main reason for everything costing so much? What caused it? And who, if anyone, should pay a political price for prices going up?

Ten things about the cause, all related. But, before we relate them, know this: there isn’t a politician alive who isn’t a bit panicky about the cost of living. They know that a mob of voters – torches and pitchforks and nooses at the ready – may soon come looking for them.

But those metaphorical hangings – for Messrs. Trudeau or Biden, or even Messrs. Poilievre or Trump – wouldn’t actually be fair. (For other sins, maybe.)

Everything costing so much? The politicians didn’t do that. Covid did.

Ten points. Here goes.

1. Covid-19 is the culprit. Politicians – and I’ve worked for plenty – are a species familiar with downturns. But not a downturn like Covid’s: it was huger than huge. It was gargantuan. And they just weren’t ready.

2. The virus prompted lockdowns everywhere. That shuttered factories and manufacturing. Billions of people became virtual prisoners in their own homes – and they started shopping, virtually and energetically. That overwhelmed manufacturing, and is why you started to hear about “supply chains” for the first time.

3. China is a vicious dictatorship – but it is also the biggest manufacturer in the history of the world. We in the West stupidly let that happen, and we are accordingly at the mercy of China – which has the toughest lockdowns in the world, and is accordingly throttling manufacturing. Which is the China-related reason everything is more expensive.

4. When goods and services are hard to get, prices go up: that’s a truism of capitalism. Some firms started to take advantage of that, and jacked up prices higher than they needed to. That, too, is a capitalist reality: greed.

5. Politicians like to get re-elected. They know that bankruptcies and worried voters tend to impede re-election. So, they let fly trillions of dollars in stimulus spending. They had no choice. But experts now suggest they spent too much – see the stories about CERB fraud, for instance – and thereby kickstarted inflation, big time.

6. Central banks were Nervous Nellies. They needed to raise interest rates before they actually did so, because money had become basically free to borrow – thereby stoking the inflation that is always caused by too-big demand and too-little supply. They waited too long.

7. Central banks, like the Bank of Canada, are like all religious converts: they’re always trying to make up for lost time. But now the fear is they’re doing too much, too late. And they may well father a new disaster: a deep global recession. We may be in one already, in fact.

8. Pile on top of all that chaos and misery something else: Russia’s Satanic war on Ukraine. Ukraine isn’t just an ally: it is a key component of the global food supply. That’s hurting us all. The war is also relevant to what you pay at the pumps: the insane cost of oil and gas is partly due to government taxation, yes. But Vladimir Putin’s war has hammered global oil supply, and sent prices into the stratosphere.

9. Politicians, as noted, want to get re-elected. They know voters don’t like lockdowns, so they started to ignore their own medical experts. But politicians, as also noted, just weren’t prepared for the pandemic. And neither were central banks: the tools they usually have to stop inflation aren’t working now.

10. Tomorrow, Statistics Canada will release its report on prices in June. It is expected to report that inflation is higher than it has ever been, perhaps closer to an astonishing ten per cent. Meanwhile, no one is predicting, anymore, that the cost of everything is going to start going down.

Politicians deserve some of the blame for this mess. So do central banks. So do “experts.” So do greedy capitalists.

But the main culprit for how bad things are, how expensive things are?

It’s the goddamned virus. Still.

21 Comments


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    Sean says:

    This analysis… while 100% accurate… is far too sophisticated for the internet.


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    Ronald James O'Dowd says:

    8. Another cause of high energy prices is greatly reduced efforts to explore for oil and gas in the United States and high depletion rates for fracked wells. Add to that the decades old underinvestment in refining capacity in the United States and especially in Canada and you get another piece of the energy puzzle.

    I remember raising Cain during the Harper government about the lack of value-added processing of oil and gas in AB, SK, BC and NL. From where I’m sitting, nothing much has happened post 2015 to make a reasonable and significant difference.


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      Andy Kaut says:

      100%. We’re not using less oil yet. And the energy crunch that will hobble Europe will not hit in Canada because they’re unable to buy ours. Yet.

      Build a couple more terminals (TMX, CGL). Add some drilling rigs (literally every junior producer right now), build some more pipelines (Keyera, TC, Pembina) and we’ll see gas marketed to tidewater within a couple years on a scale we’ve never dreamed of.

      Stay out of Alberta’s (and therefore Canada’s) way – we’re going to be the global supply for liquid nat gas within 2 years. Even the Groper can see that coming.


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        WestGuy says:

        While that sounds good, it’s fantasy at this point. First of all “within a couple of years” you’d probably still need another decade before you complete the regulatory phase, long before the start of any construction. And that assumes any company is willing to invest it money. Given Trudeau’s habit of moving the goalposts on the hydrocarbon sector, I doubt many would be willing. I think we’ve seen the last major facility built, be it pipeline or processing. Trudeau tells Europe that Canada is prepared to help it’s energy needs. Problem is Trudeau has done everything possible to ensure that can’t happen.


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    westcoastjim says:

    Warren great, albeit incomplete, analysis. Other than increasing interest rates and slowing spending the government has few tools to attack inflation. However the worst possible response to inflation is an ill-conceived change in fundamental fiscal policy – such as converting the country to Bit-Coin. Anyone with such foolish and Fiscally catastrophic policy initiatives is not fit for public office. I find it appalling that this fiscal idiocy has not fatally wounded Pierre’s campaign. As always the Conservatives would rather use jingoism than rebate serious public policies.


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    Robert White says:

    “Inflation is everywhere and always a phenomenon of monetary policy.” Professor Emeritus Milton Freidman Chicago School of Economics.

    Central banks ruptured the REPO market back in 2019 and since that time they have printed in overdrive ensuring that inflation is embedded for years to come.

    Our esteemed host manages politicians and has done so for decades, but he does not process them via the courts so that they can be jailed for wrongdoing. In brief, incompetent politicians should not be accorded competent management like our host offers if they are truly mismanaging our economy and screwing up serially YoY via Finance.

    Financial incompetence is intolerable in my estimation. There can be no excuses for financial incompetence or mismanagement. Not even our esteemed host can make excuses for them or their unprofessionalism.

    RW


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      Ronald James O'Dowd says:

      Robert,

      We’re true Austrians.


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        Robert White says:

        I’m Marxian, but I get along with the Austrian School of Economics adherents because of their a priory thought experiments. Austrians are about rugged individualism and Marxisns are Historical Materialists based on conflict theory of Economics.

        Austrian School adherents are still contemptuous of Marxian Theory. ZH is mostly a cohort of Austrian School adherents. We always get along and fight through every facet of theory.

        Mises was smart I agree. Intolerance for any mistakes in Finance on my part comes from being raised by a CA. If a CA cannot manage money they’d lose their charter. One must be competent if one is a Chartered Accountant. I was raised by one so that’s where I’m at.

        RW


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    Andy Kaut says:

    All of that and no mention of the crash happening later than it should have because of Canadian QE policy that was printing (bank of Canada purchasing gov’t bonds) to the tune of 4.7bbn/week for 18 months.

    Budgets balance themselves, and this fellow kicked the can far enough down the road that it turned into a 400 Bbl tank. At least Mr. Trudeau was close to the truth – markets always equalize on their own. No matter how much money you print, it just dilutes the amount in circulation.

    We should have have had a recession during May 2021, when oil prices went negative. Some other brave countries did. Instead, we cashed up and now we’re paying the price.

    Oh yeah – and in the meantime we re-elected the Weasel-in-Chief to make sure he knew we believed in him.


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    Phil in London says:

    My only disagreement with this excellent article is how little I feel politicians care about inflation.

    Sitting at home in May of 2020 I would have conversations with people who could not fathom how the government could pay for the “largesse” of things like CERB. My answer than was “inflation”.

    I don’t believe anyone saw the magnitude of the pandemic. Much was focused on the huge percentages of the population that would die and thankfully I think we are on the low side of those expectations. Very little focus was on the economy . Those in positions of power know that economy is defined as the section of the plane or train or ship that the little people occupy.

    A glance at the Ontario fiscal update released a few days ago – spending less then expected and revenues higher. Result – lower deficit so far in 2022. This is all on short term results but…

    …I am pretty confident that revenue from HST will skyrocket along with the ever escalating costs. Lumber and building materials, higher prices for new cars and other items will all swell the coffers of the federal government. To say nothing of the reversal of money out from CERB to money in from collections AND higher income tax paid by anyone who has received a wage hike.

    Maybe I am missing something but if the emperor in Ottawa sticks to the script two – three more years of NDP support means most of the heat will be off by the time he returns to the polls bragging about the “prowess” of his finance minister getting the deficit down.

    Ford is the latest to receive a fresh mandate and Legault seems sure of securing one. Several other elections were decisive over the pandemic. While much of the point of Warren’s causes is accurate, I don’t buy that here in Canada Politicians concern themselves with the little people – throw them some trinkets while the gravy is flooded over the rim of the government plates. There will be lots of criticism of leaders but few have the courage to kick the bums to the curb no matter what the party, policy or catastrophe du jour – people are afraid to try a different approach at the best of times and rarely willing to reverse face in tough times.

    As for the war in Ukraine, no question it is a big factor on inflation as well, that is the other thing that was easily predicted coming out of Covid-19 pandemic, not that there would be war in Ukraine but that there would be serious military jockeying somewhere, possibly many places in the globe. This war could spread and spread big with China into Taiwan, possibly an Indian war (not the native populations of North America – the other much larger population of Indians from India). I am one hell of a lot more worried how the world’s leaders use diplomacy and force to achieve some of their convictions than I am about what a loaf of bread will cost.

    As much as I always want to blame The Liberal Party of Canada, this is a global “problem”. I also would suggest that problems have two sides, people getting hurt and people benefitting. Many who have no mortgage or other debt will be very well positioned if they keep a cool head.

    People who can’t afford both their kids desire to eat and their new mortgage payments will be far less able to adjust.

    I guess I am saying it is GOING to be ugly out there not that it could get that way. Even as inflation ebbs things won’t get cheaper unless we have some form of disinflation. Interest rates will rise higher than most think, than drop back to levels more historically connected to the value of money.


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      Ronald James O'Dowd says:

      Phil,

      The latest debate is whether we’re merely in inflation and a recession or stagflation and in a recession. My money is on the second one.

      People…with a 3 minute attention span…funny how I remember vividly 1970s and 1980s inflation.


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    Peter Williams says:

    Re inflation. The Trudeau government (supported by Mr Singh) doesn’t think inflation is a problem.

    Mr. Trudeau plays in the sand.
    https://mobile.twitter.com/alanfryermedia/status/1550197255839162368?cxt=HHwWgICh4ZuMtIMrAAAA

    Mr Singh, says print/borrow more money so the Government can give Canadians $1000.


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      Robert White says:

      PM Blackface Feminist-in-Chief Trudeau just sent me an inducement cheque for his Climate Change campaign promise that the inflation at the pumps & grocery store
      wouldn’t be so terrible.

      $186.50 CDN can still buy 18.5 cartons of contraband cigarettes on First Nations reservations. The gas to get there and back has doubled since FN lowered the cost per carton from $12.00 back to $10.00 in the same time frame as it took the gas companies to double their profits at the pumps.

      Mr. Singh has my vote. Another $1000.00 would be about right for the gas conundrum.

      RW


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        Ronald James O'Dowd says:

        Robert,

        Since Singh is so keen on giving everyone and his dog 1K, I say by all means, so long as it only comes out of Singh’s pocket.

        I will try to channel your Dad: fiscal largesse should always be targeted in nature and exceedingly rarely universal. (How did I do?)


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          Robert White says:

          My dad was penny wise and pound foolish when it came to house maintenance and car maintenance. He was miserly and totally fixated on money/Finance my entire life. My poet mother spent money like a drunken sailor on shore leave and my CA father saved like Scrooge.

          I played the role of Bob Cratchit always making sure the coal scuttle had a lump of coal to keep the house warm.

          :-)’

          RW


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    Terence says:

    Lots of misunderstanding in these comments. 1. The government issues the currency because it needs to provision itself as a matter of state security. 2. It assesses everyone a tax liability so we are forced to go earn the government’s currency because the tax can only be paid in that currency. We earn the money by either selling our labour or goods to the government who pays us, THEN we pay taxes once we have earned money. Alternatively we borrow money from the government’s agents, the banks, to start a business or we work for people who borrow from the government’s agents. In other words, the government does need or use “our” money…we need the government’s money ..to pay our tax liability. That’s it. Taxes to not ” fund” federal spending (they do fund provincial and municipal spending, however since junior governments are not currency issuers.) This is literally how it works with a fiat currency. The government can’t run out. It can’t go broke. And our grandchildren will never have to pay anything back. And what about the government’s tax “revenue” accounts? They are pure fiction for the purposes of international financial reporting standards that we’ve signed up for as members of the Bank for International Settlements. Canada is monetarily sovereign and a large exporter. The “debt” and “deficits” are essentially fictions. Literally. That is how our system actually works and is set up and has been since the end of the gold standard and fixed exchange rates over 50 years ago. The government has no need to borrow money from anyone but itself through the bank of Canada. Bond offerings to private investors are a worthless holdover from the era of the gold standard. The alternative would be to just have the government take whatever it wanted or force us to provide labour for it at gunpoint. But that way doesn’t work very well.


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      Ronald James O'Dowd says:

      Terence,

      Excellent and highly informative points.

      Where are you on our respective FedCoins that Powell, Lagarde and our friend Carney love so well?


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        Terence says:

        What is their point? Cryptocurrencies are worthless in the real world because ultimately you have to pay your taxes in real money. What is backing up Crypto? Pure sentiment. That is not what backs fiat currency. Fiat currency is backed by the State’s power to tax and use force to make you pay your taxes. Why is the value of Bitcoin reported in U.S. dollars? Because U.S. dollars are real currency backed by the power of the U.S. government. The Canadian dollar, Australian dollar, Japanese Yen, British Pound, Norwegian Kroner…all backed by the state. The Euro? It’s backed by the European Central Bank…Germany is not fiscally sovereign, nor is France, Italy, Spain, Greece, Portugal, or any other country in the Eurozone. Monetarily they are equivalent to Canadian provinces. They are USERS or currency, not issuers. This is the biggest misunderstanding about fiscal issues in this country. People don’t know the difference between provincial government taxes and Federal government taxes. Ottawa issues the currency, Ontario uses it. That is a fundamental difference. Ontario can go broke in Canadian dollars; Canada can’t. The government of Canada doesn’t need anyone else’s money; we need ‘it’s’ money…to pay our tax liability, as explained above. This is neither a left or right issue. MMT is not a policy; it is merely a lens through which to look at how our monetary system actually functions. It is empirical. It was poorly named, unfortunately. Normal people don’t know what ‘theory’ means from an academic standpoint, unfortunately. MMT should have been called Modern Monetary Operations, in my opinion because that is what it describes.


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    Ronald James O'Dowd says:

    Warren,

    I’m seething with rage. It took a while but every time I see one of those business talking heads on TV I go berserk. Those fuckers know perfectly well that inflation is out of control and they choose individually or by corporate coercion to spread the big lie. In addition, any guest who does not tow the official government line on inflation, unemployment or economic growth ends up on a banned list for future appearances.

    No talking morons, inflation is not at 9 percent in the United States — the rate was already manipulated in Reagan’s time but so much more today. In addition, the core inflation number is absolute bullshit as it excludes gas prices, housing costs, etc.

    Take a long, hard, look at the second chart, the one for the way things were calculated in the 1980s and concentrate the mind on the blue line…an eye-opener to say the very least:

    http://www.shadowstats.com/alternate_data/inflation-charts

    (Your kind indulgence is appreciated.)


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      Robert White says:

      Central Limit Theorem will eventually get rid of all the liars that understate CPI. Lies can only exist for the time it takes to figure them out.

      Everybody knows that G7 Governments are lying about inflation metrics.

      The GFC turned these governments into inveterate liars YoY. Financialization has run its course. Keynesian Macroeconomics is now completely defunct & extant false so-called ‘science’.

      The Farmer’s Almanac would be a better predictor IMHO.

      RW


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    Peter Williams says:

    How’s Justin’s 10 Minister task force doing?

    They must be improving things. We see photos of the Transport Minister touring airports with few or no line ups.

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