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Breaking the expectations of the little guy
Re: Rapid rate hikes critical to ‘break’ rising inflation expectations, says former BoC governor David Dodge, David Parkinson, May 1, 2022
When bank economists talk about rapid rate hikes to break "expectations", their idea is to slow the economy, create fear of unemployment, and thereby stifle labour's ability to demand pay increases in line with rising prices.
But interest increases are also very profitable for financial institutions who have "priced" them in, i.e. made speculative bets that pay off handsomely. Unfortunately for the rest of us, sharply increased interest rates do not resolve supply chain issues, prevent the spread of Covid, nor stop the war in Ukraine, all main inflation drivers.
Nor do rate hikes deal with another inflationary source - corporate price-setting that has vastly increased profit margins during the pandemic. For example, the profit margin for the FIRE sector (finance, insurance and real estate) rose from a previous average of 14% to 22% in 2021.
So instead of admitting their role in this inflationary outbreak, the interest-conflicted chorus of bank economists see their mission as breaking the expectations of the little guy.
1. The desperate need for a paradigm shift in establishment macroeconomics, Prof. Mario Seccareccia
"How can central bankers morally justify raising the income of one group, the rentiers, in order to constrain the growth of another social group, the wage earners, in the name of combatting inflation? This begs the obvious question of “combatting inflation for whom?” Because of its contradictory nature, a monetary policy instituted by central banks that is concerned uniquely with fighting inflation has a permanent bias against wage growth."
2. The last thing policy makers should be thinking about right now is creating a recession
Economist William Mitchell:
The last thing any policy maker should be aiming for at present is a recession or even a “sharp slowdown”. You can be sure that the only ones damaged by that sort of strategy will be the workers, while the banksters will get away with millions.
And, a recession will not ease the supply constraints.
It would just bring the demand side down in line with the reduced supply capacities at present, cause massive income and job losses, and then, sometime in the future, as the pandemic eases, and ships and trucks start moving again, we would all wonder what the hell it was all for.
Well, it would be clear what the motivation would have been.
Continue the transfer of national income to the top-end-of-town and keep the workers from gaining some much needed real wages growth.
3. You know who likes lackluster economic growth? The rich. Jeff Spross
"Elites obviously don't want to completely tank the economy. But it certainly works for them if it stays modestly stagnant, maximizing the growth of the pie while minimizing worker bargaining power."
4. RBA rejects theory that interest rate rises cure Covid and make trucks go faster
"Remember the ‘markets’ is just a collection of economists who work for financial institutions that make more profits when interest rates are higher. It is no wonder they are always demanding higher rates. That is what vested interests are about. And for the media to just continually give them a platform..is a disgrace.
Remember, that when the ‘market’ says it is ‘pricing in’ rate rises, what they are actually doing is placing bets on the central bank increasing rates and then running a propaganda campaign that says rate rises are inevitable."
5. IMF and World Bank at odds with each other over interest rate hikes
"The World Bank President said recently that central banks should not be relying on interest rate hikes:
The inequality gap has widened materially, with wealth and income concentrating in narrow segments of the global population. Rate hikes, interest rate hikes, if that’s the primary tool, will actually add to the inequality challenge that the world is facing.
So what are they proposing?
Fiscal support for the poor to reduce the impact of fuel and food price rises. In other words, income support to maintain nominal spending in real terms.
Why would they do that if there is inflation?
Because they seem to understand that the inflationary surge is not a demand event and will not be resolved by further cutting nominal incomes."
6. Canadian billionaires’ wealth skyrocketing amid the pandemic
"When you add up the total wealth growth of Canada’s richest 20 billionaires since the March 2020 COVID-19 lockdown, their wealth has ballooned by $37 billion.. during some of the most economically catastrophic six months in Canadian history.
Low-wage, frontline workers have been putting themselves in harm’s way to keep our cupboards stocked with groceries and essentials, to keep the lights on and to care for children and the elderly. Public support for these newly recognized essential workers led to a brief $2/hour “pandemic pay” increase for many. But this was short-lived and quickly clawed back in early June by companies owned by the very billionaires on the top 20 list."
7. The Rise of Corporate Profits in the Time of Covid, DT Cochrane, 6 April 2022
"in 2021 corporations brought in unprecedented levels of profit largely by increasing what they charge for their goods and services. This allowed corporations to almost double profit margins in 2021 to 16%, compared to the 9% average for 2002 to 2019.
When corporations choose to raise their prices in order to boost their profit margins, they drive up inflation.
The profit margin for FIRE companies was the highest for 2002 to 2019, and the sector had the largest percentage point increase in 2021, rising to 21.8% from an average of 14.4%. However, the profit margin of service & retail almost tripled, rising from an average of 4.4% through 2019 to 11.1% in 2021."
Modern Monetary Theory in Canada