Yanis Varoufakis: Inflation as a Political Power Play Gone Wrong

Yves here. Yanis Varoufakis’ theory on why the West is suffering from widespread inflation is informative and generally superior to facile and false claims like “too much money printing”. If “money printing” caused inflation, Japan with its massive fiscal and monetary stimulus would no have remained mired in borderline deflation for two decades. Even now, its year to year inflation rate, despite its currency having fallen (which means imported energy is even more costly) is a mere 2.4%.

However, I do have a serious quibble with Varoufakis’ argument. He is correct to point to derivatives as a big, and I have argued the big, reason for the near death of the global financial system in September-October 2008. And that was the justification for the massive transfer of wealth to financiers and investors at the expense of taxpayers. Mind you, as we discussed at length at the time, there were more equitable ways to have rescued the financial system, like writing down bad debt, particularly underwater mortgages, and offseting the deflationary impact with more fiscal spending. And of course perp walks for a lot of senior bankers.

Where Varoufakis is well wide of the mark is depicting trade/supply chain finance as playing a role in the financial crisis. As we documented long form in ECONNED, the derivatives that blew up the financial system were ones written on the BBB/BBB- tranches of really crappy mortgage securitizations that were then packaged into collateralized debt obligations. These CDOs then too often would up on the balance sheet of systemically important, highly leveraged financial institutions.

By Yanis Varoufakis. Originally published at Project Syndicate; cross posted from his website

The blame game over surging prices is on. Was it too much central-bank money being pumped out for too long that caused inflation to take off? Was it China, where most physical production had moved before the pandemic locked down the country and disrupted global supply chains? Was it Russia, whose invasion of Ukraine took a large chunk out of the global supply of gas, oil, grains, and fertilizers? Was it some surreptitious shift from pre-pandemic austerity to unrestricted fiscal largesse?

The answer is one that test-takers never encounter: All of the above and none of the above.

Pivotal economic crises frequently evoke multiple explanations that are all correct while missing the point. When Wall Street collapsed in 2008, triggering the global Great Recession, various explanations were offered: regulatory capture by financiers who had replaced industrialists in the capitalist pecking order; a cultural proclivity toward risky finance; failure by politicians and economists to distinguish between a new paradigm and a massive bubble; and other theories, too. All were valid, but none went to the heart of the matter.

The same thing is true today. The “we told you so” monetarists, who have been predicting high inflation ever since central banks massively expanded their balance sheets in 2008, remind me of the joy felt that year by leftists (like me) who consistently “predict” capitalism’s near-death – akin to a stopped clock that is right twice a day. Sure enough, by creating huge overdrafts for the bankers in the false hope that the money would trickle down to the real economy, central banks caused epic asset-price inflation (booming equity and housing markets, the crypto craze, and more).

But the monetarist story cannot explain why the major central banks failed from 2009 to 2020 even to boost the quantity of money circulating in the real economy, let alone push consumer price inflation up to their 2% target. Something else must have triggered inflation.

The interruption of China-centered supply chains clearly played a significant role, as did Russia’s invasion of Ukraine. But neither factor explains Western capitalism’s abrupt “regime change” from prevailing deflation to its opposite: all prices taking off simultaneously. This would require wage inflation to overtake price inflation, thus causing a self-perpetuating spiral, with wage rises feeding back into further price hikes which, in turn, cause wages to rise again, ad infinitum. Only then would it be reasonable for central bankers to demand that workers “take one for the team” and refrain from seeking higher wage settlements.

But, today, demanding that workers forgo wage gains are absurd. All the evidence suggests that, unlike in the 1970s, wages are rising much more slowly than prices, and yet the increase in prices is not just continuing but accelerating.

So, what is really going on? My answer: A half-century long power play, led by corporations, Wall Street, governments, and central banks, has gone badly wrong. As a result, the West’s authorities now face an impossible choice: Push conglomerates and even states into cascading bankruptcies, or allow inflation to go unchecked.

For 50 years, the US economy has sustained the net exports of Europe, Japan, South Korea, then China and other emerging economies, while the lion’s share of those foreigners’ profits rushed to Wall Street in search of higher returns. On the back of this tsunami of capital heading for America, the financiers were building pyramids of private money (such as options and derivatives) to fund the corporations building up a global labyrinth of ports, ships, warehouses, storage yards, and road and rail transport. When the crash of 2008 burned down these pyramids, the whole financialized labyrinth of global just-in-time supply chains was imperiled.

To save not just the bankers but also the labyrinth itself, central bankers stepped in to replace the financiers’ pyramids with public money. Meanwhile, governments were cutting public expenditure, jobs, and services. It was nothing short of lavish socialism for capital and harsh austerity for labor. Wages shrunk, and prices and profits were stagnant, but the price of assets purchased by the rich (and thus their wealth) skyrocketed. Thus, investment (relative to available cash) dropped to an all-time low, capacity shrunk, market power boomed, and capitalists became both richer and more reliant on central-bank money than ever.

It was a new power game. The traditional struggle between capital and labor to increase their respective shares of total income through mark-ups and wage increases continued but was no longer the source of most new wealth. After 2008, universal austerity yielded low investment (money demand), which, combined with plentiful central-bank liquidity (money supply), kept the price of money (interest rates) close to zero. With productive capacity (even new housing) on the wane, good jobs scarce, and wages stagnant, wealth triumphed in equity and real-estate markets, which had decoupled from the real economy.

Then came the pandemic, which changed one big thing: Western governments were forced to channel some of the new rivers of central-bank money to the locked-down masses within economies that, over the decades, had depleted their capacity to produce stuff and were now  to boot. As the locked-down multitudes spent some of their furlough money on scarce imports, prices began to rise. Corporations with great paper wealth responded by exploiting their immense market power (yielded by their shrunken productive capacity) to push prices through the roof.

After two decades of a central-bank-supported bonanza of soaring asset prices and rising corporate debt, a little price inflation was all it took to end the power game that shaped the post-2008 world in the image of a . So, what happens now?

Probably nothing good. To stabilize the economy, the authorities first need to end the exorbitant power bestowed upon the very few by a political process of paper wealth and cheap debt creation. But the few will not surrender power without a struggle, even if it means going down in flames with society in tow.

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  1. Mikel

    Indeed. It’s going to be a power struggle that creates change and not policy tweaking.
    Wealth inequality is only getting worse because this is an extremist economic ideology akin to a religious cult.

    So another thing to consider: Prices will not be able to be lowered with fewer and fewer people having to buy enough goods/services to sustain profit margins that justify high asset prices.

  2. Thuto

    Re: accepted wisdom of too much money printing causing inflation and Japan as a counterpoint.

    Yves you made a similar remark to a comment I posted a few weeks ago on this subject, and brought up Japan as an illustrative example of how the generalized layman’s definition of inflation I.e. “too much money chasing too few goods” doesn’t have ironclad explanatory powers on the relationship between money supply and inflation in the economy. I found your point enlightening, but was still left with an open question about where structural context fits into all of this. I refer specifically to the role of culture and how, for instance the Japanese, both individual consumers and corporates, are notorious hoarders of cash (in contrast with more hyper-consumerist cultural settings like the US) with a much lower propensity to splash the cash, and if this wouldn’t in part explain why Japan seems to be such a puzzling counterpoint vis a vis loose monetary policy resulting in inflation. In other words, isn’t the Gordian knot of deflation in Japan partly explained by its high savings culture, which if true would attenuate the impact of money printing on price levels?

    1. tindrum

      Dear Thuto,
      At the very least your explanation leads to the conclusion, that printing money does not in and of itself create inflation.
      Japan may be a nation of savers but Italy and Spain and the USA probably are not and the ECB and Fed have been printing money with gay abandon since 2008 (14 years ago just to be clear) with zero inflationary pressure in Europe or the USA until about last Tuesday.
      ECB money printing and US money printing and Japanese money printing all generated asset price inflation (shares, property) but zero actual inflation.
      Clearly as long as the freshly printed money remains in the hands of a few billionaires, who presumably already have enough toilet-rolls and pasta then we are not going to see inflation, but the Rembrandt that I was always meaning to buy for the downstairs bathroom has probably drifted beyond my financial reach.

      1. Thuto

        Thank you Tindrum. The Cantillon Effect and the proximity to the money spigot by the few billionaires who gather up the money coming out of the printing press and splash the largesse to inflate asset prices does explain a lot, that’s why I suppose one sees an inverse correlation between money supply and money velocity during times of putative economic stimulus, the billionaire bottleneck upstream stops inflation in its tracks.

      2. Mikel

        Look at “cost of living” instead of “inflation”.
        The cost of living is real, undisputable, and in our faces. It’s not a figment of the imagination.

        Also, while there is a Cantillion effect, there is also the “gentrification effect” to consider.
        I made up that term “gentrification effect” but it’s easy to guess what I’m talking about.

      3. digi_owl

        Stop flipping worrying about government “money printing” already.

        Far more money is printed by all the credit cards, car loans and mortgages going round.

        If anything the “money printing” from the government side may be helping ease the pain from all that debt based money.

    2. JohnnyGL

      Hi thuto,

      When i was younger, i got interested in the japanese economy and the history of the east asians financial crisis in 1997-98. I’ve long since come to the conclusion that using explanations like ‘culture’ is just a way of economists hand-waving away results they don’t like or understand.

      1. JohnnyGL

        To expand a bit further, things like household savings rates are basically just the downstream effects of the economic model that a country is following. Those notorious Japanese savers have become far less parsimonious over time.


        In the US, savings rates have spiked periodically as a crisis hits and households adjust to deal with income/employment shocks.

        Also, Yves did a good write up years ago about how US corporations became huge net savers after the tech bust in 2001-02 and remained net savers through the whole economic cycle in the run up to the financial crisis of 2007-08. That reduced investment by corporates meant lower income for households, and less ability to save and manage debt…until the whole thing came to a shuddering halt!

        My point in outlining the above is to illustrate that 1) these sorts of ‘cultural’ phenomenon aren’t fixed and change over time and across countries. There’s nothing particularly unique about Japan in that respect.

        Also, 2) household savings at the aggregate level isn’t really determined at the discretion of the households making their own independent decisions. They’re the result of external circumstances that the households themselves have to navigate. For example, are wages and purchasing power being held down by an undervalued currency in order to prioritize export competitiveness? Are households cutting spending in reaction to a spike in job losses? Is the government or the corporate sector borrowing/spending heavily? If so, where is that spending being allocated? These are all the sorts of things that households have to navigate and react to and savings rates often reflect those circumstances.

        I hope this is helpful in considering the points you were making above.

          1. Revenant

            Remember also that Japan invented Shimomuran economics.

            Shimomuran was a Japanese official allegedly inspired by Roosevelt’s investment credit creation. Link is here including the mention in passing that the postwar BoJ describes the investment credit created as equity in its balance sheet ascribed to “the people’s savings”!

            I used to be able to find a link with actual BoJ accounts showing this line but it has disappeared down the intertubes :-(


            NB I am also convinced yhetr used to be an article recounting how Shimomura was a young official dealing with Japan’s colony of Machukuo which pioneered unfunded state expenditure on investment (money printing), which powered the lightning fast industrialisation of Manchuria and gave it a higher standard of living than the Japanese home islands. Again, I cannot find this so maybe I misremember!

    3. aj

      I don’t remember who said it (might have been Yves) but whenever someone mentions “the” economy always ask “whose economy?” Talking about the economy, we often find ourselves falling victim to the fallacy of division. Certain sectors, classes, or individuals can be doing better or worse regardless of what the whole is doing. It’s only in understanding those trade-offs that we can truly understand what is happening. It’s like trying to understand the outcome of a basketball game, knowing only that in total more points were scored than in the previous game.

      1. eg

        It may have been Mark Blyth relating an incident when someone in an audience in northern England responded to a speaker making an assertion about GDP growth with the rejoinder “your GDP, not mine” or words to that effect

      2. sulfurcrested

        Perhaps the expression “the economy” is merely that – an expression that is shorthand for this & not that.
        In truth, where does the economy begin or end? Mum’s doing the dishes – not economy? Tom’s selling illegal drugs – economy?

    4. drumlin woodchuckles

      What would happen if American consumers with “some” cash became japaniform cash-hoarders instead of hyper-spenders?

      How many American consumers would have to hoard how-much cash-in-general overall to have some kind of visible effect within the US?

      Has anyone thought about that? Does anyone have any vague “what-if” type estimates based on various theoretical percentages of American cash-havers going from super-spender to super-hoarder?

  3. Amateur Socialist

    I keep wondering why the pandemic isn’t cited more often as a major driver of inflation world wide. The uncertainty wrt workforce availability and supply chain disruptions have added significant costs to most businesses. If you are adapting to a significant number of employees either out sick or performing at reduced capacity, that is going to drive additional hiring to cover. Similarly some organizations might overstock to avoid supply disruptions. So they pay for warehousing or end up liquidating excess at discounts. Either way higher costs are being “baked in” over time as the pandemic goes on.

    I realize this runs counter to the prevailing “Everything is awesome” “Mission Accomplished” narrative with covid in the west. And it’s probably difficult to measure, since the additional costs will vary widely by the type of business. But it’s reasonable to expect that most businesses are at least hedged in some way against future mandatory shutdowns etc. which would also tend to inflate costs.

    This pandemic inflation effect is likely a driver everywhere. So even in countries that didn’t print so much money you still get the additional costs/inflation drivers caused by pandemic uncertainty. Which appears likely to remain with us for some time.

    1. jsn

      The pandemic, Ukraine and corporate profiteering account completely for our current inflation.

      The problems are ideological now: the elites narrative requires the pandemic to be over, Russia to be in collapse and monopolists getting massively richer off profiteering to float all boats.

      They’ll continue pouring water into that bathtub until we drown, or get out and throttle them, but getting out and throttling them presents something of a coordination problem, they being few and well funded, we being many, diffuse and poor.

      1. David in Santa Cruz

        Economists always seem to miss the boat when it comes to the mass psychology that drives human social behavior.

        The global pandemic served to confirm the prevailing notion of scarcity on a planet with an exploding population, finite resources, and a rapidly deteriorating climate. Combined with the Thatcherite/Libertarian elevation of the ideology of selfishness it is hoarding and rationing that are driving inflation.

        Workers are mostly giving-up or holing-up, which creates the illusion of labor scarcity when the cross-border labor arbitrage that has prevailed for the past quarter century has been rendered unattractive or even untenable by pandemic-related quarantines and lock-downs. The American governing elite obsession with sanctions will only exacerbate the problem.

        1. digi_owl

          Because they have for decades taught that macro economics can be derived from aggregated micro, aka individual homo economics acting “rationally”.

          Only that any proper scientists will lecture on emergent properties when going from physics to chemistry to biology. You simply can’t describe a frog from particle physics alone. Nor can you describe the world economy by taking one wall street banker and multiplying by 8 billion.

      2. drumlin woodchuckles

        “What can we do?” will have to begin from the fact that we are many, diffuse and poor. The only thing us can do is individual actions which don’t affect them unless/until enough of us are taking these individual actions to add up to an additive mass of difference being made.

        So creative individuals can suggest things an individual can do which “would” matter if “hundreds of millions of other individuals” all separately did the same individual things. And either an inspiring vision of individual actions adding up to collective revenge would spread throughout the masses of millions of individuals or it would not spread.

        ” What can I do that would hurt, or even destroy, the enemy . . . if a hundred million other people did the same thing? Well, I can do that. And if no one else does it, that is not my fault. I lived my witness.”

        1. sulfurcrested

          What can we do?
          A humble suggestion -publicly, consciously & united in deliberate campaign, just stop voting.
          If 10’s of millions agree that they will not vote b/c NO party/person will actually represent them, then that might be to begin the Elites (& their political tools) decline.
          Anyway, just a thought….

          1. drumlin woodchuckles

            At this stage, every thought deserves thought.

            Even if I stop voting for people altogether, I would still vote in referrendums and initiatives. I voted for state-legal marijuana in Michigan and we got state-legal marijuana in Michigan. And a part of that state-legalization is for the legalization of 12 personal subsistence plants per year in any state-resident’s home garden or residence, for personal subsistence use.

  4. Robert Hahl

    The Chinese belt and road initiative is being financed with US dollar loans, which, according to Michael Hudson, are often extended or forgiven in exchange for equity in the new enterprises. So China is de-dollorizing, and so is Russia obviously, and probably so are lots of others. How could this process not produce inflation?

    1. tindrum

      good point – if the US treasury or Fed can not or does not sterilise these cash flows then I guess it must be inflationary. But, I am guessing that when country ‘A’ (Indonesia for example) uses borrowed Chinese dollars to buy stuff from country ‘B’ (Germany for example) then Germany will just buy T-Bills with those dollars with the result that the only change is that the Chinese have fewer T-Bills and the Germans have more. Or am I missing something here?

    2. TimD

      Yes and foreigners used their dollars to also by US assets like real estate, companies and government debt. What happens to the prices of those assets during de-dolarization? I can see companies upping what they charge to maintain profits and share prices along with companies that own rental real estate for rent doing the same.

      1. sharonsj

        I live in a generally not well off area of Northeastern Pennsylvania. There are not a lot of good jobs. However, the rents for apartments and store fronts have gotten outrageous. My little town (pop. 550) has had a storefront empty for years; the asking rent is over $800. A small apartment in one of the “armpits” of the area is asking $1200 a month. I’m starting to wonder if a homeless encampment will soon pop up….

        On another note, I went to sell stuff at a flea market on the NY/PA border. The entire area is “country” not city. Selling was dismal and people were only spending on “practical” items that were cheaper than store-bought. Plus a large number of browsers had Trump/patriotic wear. Sorry, but I just don’t expect most of those folks to understand what’s really happening.

        1. TimD

          The economy of today is not the same as the one 20 years ago – or even 40 years for that matter. Big companies have moved into residential housing and they price for return – after all they have shareholders to take care of. There are less and less of the small operations left and the big companies have one goal.

          From what I heard 17% of the people who supported Obama, switched to Trump in 2016. Many are the typical blue-collar types who used to have good jobs until the country free-traded them away. The Democrats largely ignored them, in fact WJ Clinton said they had nowhere to go but vote Democrat – that turned out not to be accurate.

    3. Susan the other

      Interesting point. It’s too coincidental that the BRI came along just as our capitalist-globalist paradigm became too overextended to grow any bigger. Ergo no profits – not even financialized ones. I don’t understand why we are behaving as if the BRI is such a danger to our way of doing things. And we are busy trying to rationalize how we will cope with it all: cooperative competition; two separate settlement systems; wringing out all of our own overcapacity; cutting back; preparing for better sustainability, etc. Economic growth is akin to inflation as one can replace the other to keep things running.

  5. Mickey Hickey

    Oligopolies and monopolies rule the roost. One could even look at China which has become a sole source for many goods as contributing to the problem. Marx had some accurate insights into what is happening. The MBA schools are also adding emphasis that the correct goal to maximise profit is to become a monopoly. It makes sense to me, the lack of gov’t intervention I put down to the 1% purchasing politicians.

  6. Stephen

    My early economics training was in the monetarist school. But this ignored the possibility of money expansion predominantly enabling asset and non traded service sector price inflation but with goods market deflation (the China effect). This article feels a good explanation overall and I agree with the comment that the 2008 bubble was financial in orientation.

    Continued interest rate rises will surely kill this whole house of cards: affecting asset prices, the VC sector, the PE sector and all of the service industries that depend on these being frothy. All of the key people concerned are wealthy and well connected. Jacob Dreizin in one of his articles made the fair point that when push comes to shove the authorities are more likely to let inflation rip than kill asset prices by raising interest rates indefinitely.

    My understanding of the standard theory is that interest rate rises cut demand by reducing the borrowing used to buy goods (and assets) and by making people with assets poorer, therefore consuming less. If the cause of inflation though is supply market issues (and other related problems) hitting basic commodities such as food then it is not certain that such a mechanism will even work. Or at least it will work very bluntly.

    There may not be much of a policy trade off in reality. There might be very little that the financial authorities can do that is meaningful at the macro level. Maybe more fundamental micro policy / industrial policy interventions are needed. Which are longer term and not the alleged quick “fix” of macro economics.

    My other thought is that for twenty years or so we have also seen a financial merry go round that requires the overseas parties who earn current account currency surpluses to buy US / western capital assets, feeding the asset boom and enabling our consumption. But western countries have shown once and for all vis Ukraine related sanctions that they are not a safe haven for foreigners to invest in. This in itself must surely over time upset the overall merry go round that is in place. We are clearly in for a reset of some form. It will not be over quickly, I sense.

  7. TimD

    I never trusted the assumption that Velocity is constant in the old MV=PQ equation. Trend real economic growth in developed countries is about 1/2 of what it used to be before the widespread adoption of neoliberalism, and governments have been printing and pumping for years without much effect on inflation.

    All this has happened at a time when China was expanding its manufacturing base and keeping costs low. Now that the Chinese want to spread the wealth a bit more, that will mean higher wages and prices for their goods. At each level, contractors, importers, wholesalers and retailers get to add a bit more profit in the process. How do countries that have deindustrialized control that? They can’t compete by reindustrializing, well not in the short term anyways, they just have to pay.

    1. Tom Pfotzer

      Good analysis, Tim.

      Every time I bring up the “decelerating velocity” point, people say “it’s just a derived number, GDP/money supply, doesn’t mean anything”.

      But I think it does. Regardless of how it’s _computed_, I think there’s a high likelihood that concentration of wealth = reduced money supply turnover. How many yachts can an oligarch use?

      Less turnover means less aggregate demand, and aggregate demand here in the U.S. has been sickly for some time (decades), and constitutes the principal reason that so much monetary and more recently fiscal stim has been done.

      One of the other, less-forceful reasons that inflation was contained here in the U.S. is that producers had limited pricing power. Low ag demand .vs. production capacity.

      And that changed with Covid. Now got pricing power, and raise prices they did!

      And your point about China’s wage-rates setting the floor for the global wage-price are right on, and as soon as China’s done with that role, well, there’s about 20 other countries trying to get next-in-line.

      To your point about “just have to continue to pay”…well, maybe. If China eye-poking doesn’t desist shortly, there are going to be some supply constraints, and that will lead to a scramble to stand up domestic production. Which is likely to be inflationary.


      1. TimD

        Thanks Tom, the other trick with monetarism is that the wealthy can invest their money anywhere in the world and will chase profits by investing in low-cost production environments. Then they can bring profits back through tax havens and foreign investments. So even when governments are pumping money into the economy, it does not necessarily translate into growth – it could be capital flight and increased imports.

        We ordered a dishwasher in April and was told it would be delayed – supply chain issues. Today they still don’t have a delivery date, said that there is a chip shortage and that if we were to buy it today the price has gone up by 20%. They will honor the original price, they have to, but it is not like they are offering us a discount because of our inconvenience.

        It is made in America but the parts are from everywhere.

    2. Mikel

      “without much effect on inflation”….
      I’m tempted to say “without much effect on any prevailing establishment’s THEORY of inflation.”

  8. Objective Ace

    the West’s authorities now face an impossible choice: Push conglomerates and even states into cascading bankruptcies, or allow inflation to go unchecked.

    Given that the problem is “Corporations.. exploiting their immense market power” and charging monopoly prices for their goods and services, why is bankruptcy needed? The solutions seems to be breaking up monopolies and/or regulating these companies more akin to public utilities. Nowhere am I seeing a good rationale for why or how forcing these companies into bankruptcy helps with inflation. If anything it just makes the problem worse as the remaining companies have even more monopoly/pricing power.

  9. Tom Pfotzer

    Buying power of dollar, last 100 years. St. Louis Fed Reserve.

    Inflation has been a constant, and it’s worse than reported. That’s why all those phony exclusions like energy and food from the CPI.

    Inflation from wage-rate increases was throttled by globalization and automation. Those are extremely deflationary forces, and they are out in gale-force for the past 40 years.

    And the money supply expanded massively during that same period.

    The inflation we have now is from

    a) collective realization that our money is currently and will prospectively devalue rapidly (more inflation to come), hence the run-up in asset prices, recursively aggravated by flight to stability (hard assets) in the face of anticipated additional inflation and further flight, and

    b) momentary disruptions from Covid. Profiteering, supply disruptions, wage pressure, free-money-firehose

    and soon to be

    c) durable supply disruptions from Russia-China eye-poking

    Difference between Japan and U.S. is that we spend, they less-so. Why is that? China has eaten Japan’s export lunch, putting enormous pressure on job viability. They’re more scared for their job security than we are. And that’s why all the stim-programs that Japan tried didn’t work to get the export engine re-fired.

    Look what they’re up against: China, Korea, Taiwan, VietNam, Thailand. Perfect storm of export-earnings threats.

  10. Tom Pfotzer

    Buying power of dollar, last 100 years. St. Louis Fed Reserve.

    Inflation has been a constant, and it’s worse than reported. That’s why all those phony exclusions like energy and food from the CPI.

    Inflation from wage-rate increases was throttled by globalization and automation. Those are extremely deflationary forces, and they are out in gale-force for the past 40 years.

    And the money supply expanded massively during that same period.

    The inflation we have now is from

    a) collective realization that our money is currently and will prospectively devalue rapidly (more inflation to come), hence the run-up in asset prices, recursively aggravated by flight to stability (hard assets) in the face of anticipated additional inflation and further flight, and

    b) momentary disruptions from Covid. Profiteering, supply disruptions, wage pressure, free-money-firehose

    and soon to be

    c) durable supply disruptions from Russia-China eye-poking

    Difference between Japan and U.S. is that we spend, they less-so. Why is that? China has eaten Japan’s export lunch, putting enormous pressure on job viability. They’re more scared for their job security than we are. And that’s why all the stim-programs that Japan tried didn’t work to get the export engine re-fired.

    Look what they’re up against. China, Korea, Taiwan, Viet Nam, Indonesia. Perfect storm of same-tradable-goods competition.

    So, Japan faces deflation from globalization and automation, just like we do. But they also face export-earnings curtailment. Triple whammy.

    1. Tom Pfotzer

      Sorry for the double-post. Didn’t seem to “take” the first one, so I tried again.

  11. Susan the other

    So Varoufakis’ “What is to be done” question requires an answer. In view of some basic realities like overpopulation; climate change; the limits of the planet and the limits of growth and thus the limits of profits, it really is time to do some planning. We should stop with all the TINA-free-market fantasies and start doing serious planning. If the basic human necessities were planned and provided it would stabilize financial systems. Let speculation happen elsewhere – but not at the expense of the well-being of societies. That in turn will stabilize free enterprise because it won’t be cannibalizing its own support. The book review yesterday about how Marxists keep thinking in terms of controlling the means of production needs to be modified to control the means of finance is sort of looking at this – but the only way to control the means of finance is with serious social planning. Not free marketeering.

    1. Tom Pfotzer


      How do you suggest we begin the planning process? What forum, what participants, what debate mechanism, etc.?

      I concur that a major increase in focus and intensity is required.

      How do we solicit input and do the winnowing, and thereby get enough consensus about “what to do” so as to earn commitment?

  12. Trainer

    I wonder if all this talk about inflation, and mores specifically stagflation, is a fear that sales volumes might be collapsing.

    If sales volumes have not recovered to their pre-pandemic levels, then companies might be raising prices to try and maintain their past revenue and growth levels. It’s hard to tell if this is the case, because most companies are not required to report how many units of a good or service they sell.

    We can probably assume that clothing retailers are selling a lot fewer units post-pandemic, because of work from home and less frequent social engagements ( restaurants, theater, ect. ). And we can similarly assume the travel and hospitality industry is selling a lot fewer of every service they offer post-pandemic. And we can similarly assume that grocery stores were selling a lot more units at the height of the pandemic, but this has likely tapered off as lockdowns have relaxed. Anecdotally, I see far fewer people on weekends in grocery stores which suggests consumers might be buying less because of much higher prices. This at a time when some of the biggest beneficiaries of pandemic lockdowns, like Amazon and Target and Walmart, are now reporting major inventory gluts from overstocking during the pandemic good times ( Amazon is currently trying to sublet 30 million square feet of overbuilt warehouse space ).

    One industry where we can see unit sales is the automotive industry. According to WolfStreet, the number of new vehicles sold in 2021 has collapsed to 1978 levels, but the sale price of these vehicles has spiked to record highs. And the number of new vehicles sold in 2022 are so far ( up to June ) about 18.5% lower than 2021 levels.

    I’m not suggesting that raising prices has not been profitable ( so far ). There are lots of stories that describe how inflation has led to soaring corporate profits. And corporations that regularly sell only a fraction of their finished products, like the highest end luxury houses, will probably benefit most from being able to grossly inflate their prices.

    But all of this is short term thinking. If you keep raising prices without maintaining sales volumes, then these volumes will keep spiraling down in a race to the bottom. And this will cause horrible problems for economic stability and consumer demand.

  13. McWatt

    i think Trainer is on to something here. Massive price hikes from distributors in our home furnishings business in January of this year with fewer year over year customers lead to higher gross sales numbers with smaller profits.

    Also seeing a complete collapse in customer service from distributors. No one wants to see or talk to us anymore.

  14. elkern

    I’m no Monetarist, but I do think the mechanism they describe for inflation makes sense and can be a contributing factor. (Basic Supply & Demand; when Supply of Money goes up, “price” of money goes down).

    But where the money goes matters. The Big Stim starting in 2008 ALL went to Wall Street, and it really didn’t trickle out to Main Street (in USA at least). It is as if The Fed was printing money, but only in denominations of $1M-$1B. You can’t buy a six-pack at the corner store with a $1M bill; but put a few together, and you can buy an apartment in Manhattan or some Art in France. High-end Assets *did* see serious inflation, but all those $1M bills circulated up in the stratosphere, and the price of beer didn’t go up (much). When Government does real Fiscal Stimulus (that was a Thing, once…), it’s like printing $100 & $20 bills, and those actually *do* get spent at local shops.

    In USA, a lot of those $M bills went into Real Estate. A lot of homes got turned into short-term rentals; Vulture Capital gobbled up a lot of single-family houses; both put upward pressure on long-term rental costs. Then when Covid hit, a lot of Urban Zillionaires bought bug-out homes in rural areas near their favorite tourist towns, which pushed things over the edge. RE inflation had been quietly building up, but was mostly hidden by the generally rising economy of the Obama years, and the pro-cyclical stimulus of the Trump years. Covid effects just exposed what was already happening.

    Covid also triggered a bunch of actual Fiscal Stimulus, just as the inflation caused by Trump’s Tax Cuts for the (kinda) Rich started to trickle down. I was expecting a crash in the 3rd or 4th year of Trump’s reign anyway, based on prior experience with GOP management of the economy + Trump’s managerial “competence”. IMO, the pressures were all building up, & Covid just popped the balloon a little before it would have popped on its own.

  15. Dick Swenson

    If anything is needed to prove that economics is in no way a science, it is a blog such as this. “Inflation”, seem to be a poorly defined word at best, and its cause(s) is (are) argued about in a manner that reminds me of the blind philosophers feeling an elephant and trying to describe it.

    How is it that discussions such as those above can exist? If we can’t agree on what inflation is and define a solution (???) for inflation based on that definition, how can we ever hope to test our understanding of inflation, its causes and mechanisms to mediate it?

    Inflation seems to have been discussed for years, yet it still “occurs” and no one can provide an explanation or method for moderating its alleged ill effects. Doesn’t this sound crazy? Why do we have academic departments devoted to economics, prizes, and overpaid “economists” in businesses? What are they talking about and what are they doing about it?

    Very confusing and frustrating.

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