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1. Many mainstream economists, including the illustrious Larry Summers, have been warning of inflation, not just as the global economy ‘heats up’ due to post-covid re-opening, but also because all that government stimulus has inflated the pocketbooks of workers.[1] Others, like Mark Blyth, argue that we will see “bottlenecks,” like those in shipping containers, chips, lumber, copper, etc. but that those are “just basically short-term factors that will dissipate after 18 months” In Blyth’s view, labor power is not nearly strong enough to raise its own wages to the point at which high general inflation would occur.[2]
My first question to the forum is with regard to “bottlenecks.” Is this what is really happening? It’s clear that, while lots of businesses suffered from falling demand during the pandemic, others thrived, or at least, were relatively unaffected: online retail and housing construction being two of the most prominent. Does this explain the ‘shortages’ that have supposedly led to surging prices?
Take the case of West Fraser Timber Co. In February of this year, West Fraser, one of the world’s leading wood product manufacturers, completed the acquisition of Norbord, another of the world’s leading manufacturers of wood products.[3] Here is West Fraser’s Q1 2021 earnings report, which compares earnings to previous periods:[4]
While sales increased by 260%, between Q1-20 and Q1-21, earnings increased 7400%. The company’s markup (earnings/sales) went from 1% to 28% (please check my math on these numbers!).
This company is also a manufacturer of lumber, meaning that for it, higher lumber prices mean increased costs. It seems to me that while “surging” demand might plausibly explain some of that increase, the concentration of power in certain areas of production is also a central factor in price increases. However, there is high concentration is many industries, so concentration in general does seem a satisfactory explanation either. Any thoughts on why these particular industries are seeing extreme price increases besides ‘surging demand’? Is it simply a combination of demand, concentration and opportunism, and are there other factors to consider?
2. In addition, it seems there are some signs that more general price increases are occurring:[5]
With regard to the more general situation of rising prices, Thorstein Veblen has an interesting point about gold rushes, which he later relates to the expansion of credit more generally:
“Any inflation of money-values due to an increased supply of specie will enhance the corporation’s assets, while it leaves the outstanding obligations at the old figure. Inflation, therefore, signifies net gain to the corporation in all its book-values; and its assets will serve as collateral to float that much more debt, with a fixed charge.
In the last analysis, of course…the traffic must be made to bear such charges in perpetuity as will yield that rate of net gains which is called for by this expanded recapitalization. And the staple procedure dictated by sound business principles in such a case is to increase the schedule of charges and curtail the output.”[6]
It seems to me that, contrary to the mainstream opinion that ‘bubbles always deflate’, the inflation of credit during the pandemic, perhaps particularly through stock prices (as well as other assets) has ‘created’ (not sure of that’s the right word) the need to raise prices and curtail output in order to achieve the inflated expectations of future profit. In other words, in the short term, all things being equal, inflation of asset prices might lead to a commensurate, if differential, increase in inflation. What is interesting however, is that by far the biggest stock market winners are not really directly implicated in the industries currently undergoing price surges (as far I know). So there are some missing pieces to my application of Veblen’s analysis. Any thoughts on a potential relation between asset inflation and prices?
My final question is regarding the current general state of affairs. Nitzan and Bichler have argued persuasively that stagflationary periods during the twentieth century appear to occur most intensely when certain ‘envelopes’, or structural obstacles to the differential accumulation of power by dominant capital groups, occur.[7] It does not seem to me that the pandemic itself presented much of an obstacle (rather, it seems like it has been an opportunity). On the other hand, as Nitzan and Bichler have recently argued, prior to the pandemic (at least in the US), dominant capital was encountering increasing difficulties increasing its share of society’s wealth.[8]
So: Do you think the pandemic accelerated the end of a long global breadth regime? Are larger structural factors at work? No need for Blythian predictions! I’m just curious if there are facets of what is going on that I haven’t considered.
Sources:
[2] https://theanalysis.news/interviews/mark-blyth-the-inflated-fear-of-inflation/
[3] https://marioncoherald.com/2021/02/18/west-fraser-completes-acquisition-of-norbord/
[4] https://www.westfraser.com/sites/default/files/First%20Quarter%20Results%20-%20May%206%2C%202021.pdf
[6] Veblen, Thorstein. Absentee Ownership: Business Enterprise in Recent Times: The Case of America. Transaction Publishers, 2009: pp 183-184.
[7] Nitzan, Jonathan and Bichler, Shimshon. Capital as Power: A Study of Order and Creorder. RIPE Series in Global Political Economy. New York and London: Routledge, 2009.
[8] http://bnarchives.yorku.ca/336/2/20120600_bn_the_asymptotes_of_power_rwer.pdf
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Chris,
Of the additional $1B in revenue Q-o-Q, most of that is due to 2 months of revenue from the acquired Norbord business. “Only” $300M is from increasing lumber prices, and it looks like all of the increase was due to mark up (unit lumber sales must have been about identical Q-o-Q because the costs associated with producing and selling them was almost identical). See pages 15-16 of the Q1 report you linked.
So,I am with Mark Blyth in the belief this is a short term shock until supply catches up with demand, and there’s a lot of M&A happening right now, so I see the continuation of the breadth regime (of which West Fraser/Norbord is an example).
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Hi Chris:
1. From power to inflation, or from inflation to power?
In my view, the interesting question is not the effect of power on inflation, but rather what inflation can tell us about power.
From our CasP perspective, modern power is observed as a quantitative relationship between entities. In capitalism, the ultimate manifestation of this relationship is differential capitalization. You can also examine the components of this power, one of which is differential prices (and their rate of change — namely, differential inflation).
From this viewpoint, it makes little sense to say that ‘a lack of workers’ power prevents a rise in future inflation’, simply because nobody knows the future pricing power of workers. Instead, I think it makes more sense to say that the fact that there is currently only limited inflation suggests that workers have limited power and therefore are unable to help fuel it here and now.
2. Absolute versus differential inflation
From our CasP viepoint, inflation is always and everywhere a redistributional process. This means that what matters is not the absolute but relative rates at which prices change. Furthermore, the redistributional patterns of inflation may or may not correlate with its absolute levels. This is something that can be deciphered only through empirical research. (For more, see Inflation as Restructuring.)
3. Do asset prices fuel inflation?
Over the longer haul, higher asset prices need to be ‘validated’ by higher profit (and/or lower risk and normal rates of return), and profit can indeed be increased by inflation. But for that to happen, capitalists must be able to raise their differential prices, and I doubt that this ability is connected to asset prices as such.
4. Does low inflation means more M&A?
In our opinion, the answer is no. In our work, we argued that differential accumulation depends mainly on M&A and stagflation, and that the conditions underlying these two processes are contradictory, so they tend to move counter-cyclically to each other. However, these tentative observations do not mean that there must be either M&A or stagflation. Instead, we simply suggest that at least one of these processes is required for differential accumulation, and that if dominant capital is unable to achieve either, it will end up with no differential accumulation or might suffer differential decumulation.
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Hi Chris: 1. From power to inflation, or from inflation to power? In my view, the interesting question is not the effect of power on inflation, but rather what inflation can tell us about power. From our CasP perspective, modern power is observed as a quantitative relationship between entities. In capitalism, the ultimate manifestation of this relationship is differential capitalization. You can also examine the components of this power, one of which is differential prices (and their rate of change — namely, differential inflation). From this viewpoint, it makes little sense to say that ‘a lack of workers’ power prevents a rise in future inflation’, simply because nobody knows the future pricing power of workers. Instead, I think it makes more sense to say that the fact that there is currently only limited inflation suggests that workers have limited power and therefore are unable to help fuel it here and now. 2. Absolute versus differential inflation From our CasP viepoint, inflation is always and everywhere a redistributional process. This means that what matters is not the absolute but relative rates at which prices change. Furthermore, the redistributional patterns of inflation may or may not correlate with its absolute levels. This is something that can be deciphered only through empirical research. (For more, see Inflation as Restructuring.) 3. Do asset prices fuel inflation? Over the longer haul, higher asset prices need to be ‘validated’ by higher profit (and/or lower risk and normal rates of return), and profit can indeed be increased by inflation. But for that to happen, capitalists must be able to raise their differential prices, and I doubt that this ability is connected to asset prices as such. 4. Does low inflation means more M&A? In our opinion, the answer is no. In our work, we argued that differential accumulation depends mainly on M&A and stagflation, and that the conditions underlying these two processes are contradictory, so they tend to move counter-cyclically to each other. However, these tentative observations do not mean that there must be either M&A or stagflation. Instead, we simply suggest that at least one of these processes is required for differential accumulation, and that if dominant capital is unable to achieve either, it will end up with no differential accumulation or might suffer differential decumulation.
Jonathan,
In your study of inflation, has it ever been proven that inflation is caused by increased money supply (e.g., the Friedman monetarist argument)? Generally, it would seem that if you put more money in the hands of people who save it, they would simply save more of it, and if you put more money in the hands of people who spend it, they would buy more things, not pay more for what they already buy.
That being said, here in Silicon Valley it is pretty clear that real estate prices (and, therefore, rents) are driven up by easy money from successful IPOs, but usually it seems like inflation is due to price-push or simple mark-up. (I don’t deny supply/demand shocks cause temporary increases in prices, but don’t know if that counts as inflation if the increases aren’t sticky.)
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The standard monetarist argument, put in its most simplistic form, is that inflation is driven by rising liquidity (liquidity=money stock/production). But for that argument to hold, the rise in liquidity must come before the increase in inflation.
This graph, taken from our 2002 book The Global Political Economy of Israel, shows it is the other way around: Israeli inflation has led the rise of liquidity!
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