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Profit-Price Spiral: Excess Profits Fuelling Inflation, Not Wages

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Re: Profit-Price Spiral: Excess Profits Fuelling Inflation, Not Wages

#31

Post by deprecative »

wnevets wrote: post #14
loandbehold wrote: post #6

Earlier quoted context omitted.

Competition is supposed to drive prices down to the equilibrium level. Why is it not happening? Are produces colluding to fix prices? Why new players are not entering the market to take advantage of higher prices?

> Why is it not happening? because it was a cold war fairy tale.

Capitalism leads to monopolies and related economic structures. It's best for every large player to carve out territory whether it's geography or specialization niche. The fallacy is that this will be a meritocracy. It's not. It's wealth concentration. The haves will buy innovation and deprive the market of competition to themselves. This happens again and again and again.

Re: Profit-Price Spiral: Excess Profits Fuelling Inflation, Not Wages

#32

Post by mitthrowaway2 »

Auracle wrote: post #29
diordiderot wrote: post #26

Earlier quoted context omitted.

> price competition sets in You going to start an airline, a Telco, or meat processing plant because the others are colluding

So, literally everyone is colluding then?

Wouldn't they be? These days, most people and institutions who own shares of a company tend to own a similar fraction of the shares of the competitors, too.

That's the basic premise of index funds.

Presumably when they vote, their interest will be in seeing the entire index go up, not one company stealing the market share of another.

Re: Profit-Price Spiral: Excess Profits Fuelling Inflation, Not Wages

#33

Post by otherme123 »

acslater00 wrote: post #18

Fake news. This is a measure of where inflation "goes", not what fuels inflation. The narrative that profits are "fueling" inflation is completely made up and the people pushing it are lying to everyone for political reasons. Inflation is caused - in most countries - by excessively loose monetary policy (sometimes fiscal policy, sometimes both). If government policy creates inflation (average prices go up) that money…

Any book about history of inflation shows the same pattern repeated over and over again, for the last 10,000 years: the government debases the money, e.g. the one ounce pure gold coin now is half gold half copper. They start to pay with those coins, at first at the same prices, but with the new demand rising prices go up. The government always try to put the blame on the greedy merchants, and always try to put price caps, to pass laws forbidding price rises, etc.

The dynamic of inflation makes this narrative plausible: when the government spends their new debased money, the first to get them are their providers, and their volume rises. As with every demand spike, prices go up, but the closer you are to the money printing, the best deal you get being able to spend new debased money as it was the old money. Wages are usually the last to get the rise, so the worker see how the bussiness raise their prices "greedily" while they don't get wage raises.

Re: Profit-Price Spiral: Excess Profits Fuelling Inflation, Not Wages

#34

Post by friendzis »

loandbehold wrote: post #6
yawnr wrote: post #3

It does really feel like the cat is out of the bag that producers anywhere in the supply chain of housing and food realized they could do whatever they want and we can all suck wind. Every significant expense I have is up more than 40% in the past two years.

Competition is supposed to drive prices down to the equilibrium level. Why is it not happening? Are produces colluding to fix prices? Why new players are not entering the market to take advantage of higher prices?

Why would it happen? Competition is only supposed to drive prices down in free markets with relatively high elasticity. When producer/retailer sees that inflation is perfectly good excuse to raise prices now to account for future cost increases without sacrificing demand, they do exactly that. And why would you raise prices by lower magnitude or even lower them when elasticity is so low that lowering prices literally hurts profits?

Smart people can argue why elasticities are so low across the market, but IMO low elasticity is one of the major drivers behind equilibrium working a little bit differently than you would expect from high school level economics.

Re: Profit-Price Spiral: Excess Profits Fuelling Inflation, Not Wages

#35

Post by Fervicus »

acslater00 wrote: post #18

Fake news. This is a measure of where inflation "goes", not what fuels inflation. The narrative that profits are "fueling" inflation is completely made up and the people pushing it are lying to everyone for political reasons. Inflation is caused - in most countries - by excessively loose monetary policy (sometimes fiscal policy, sometimes both). If government policy creates inflation (average prices go up) that money…

> governments that overstimulated their economies

I don't understand the nuances of global economics, but makes you think how and why so many governments made the same monetary policy mistakes in lockstep.

Re: Profit-Price Spiral: Excess Profits Fuelling Inflation, Not Wages

#36

Post by dools »

acslater00 wrote: post #18

Fake news. This is a measure of where inflation "goes", not what fuels inflation. The narrative that profits are "fueling" inflation is completely made up and the people pushing it are lying to everyone for political reasons. Inflation is caused - in most countries - by excessively loose monetary policy (sometimes fiscal policy, sometimes both). If government policy creates inflation (average prices go up) that money…

> This is a measure of where inflation "goes", not what fuels inflation. The narrative that profits are "fueling" inflation is completely made up and the people pushing it are lying to everyone for political reasons.

Inflation is an increase in price level. When prices go up, one might consider that the price of inputs has gone up, or that profits has gone up, or both.

If the inputs go up, and the price stays the same, profits would go down, and there would be no change in price level. If companies are unable to be profitable in the face of rising inputs, they will collapse.

If inputs go up, and profits stay the same, prices would increase in line with the increase in inputs, ie. an increase in price level, ie. inflation.

If inputs go up, and profits increase, then prices will increase more than the cost of inputs would dictate, ie. inflation.

You can't say that the price increase in things like fuel and food were the result of profligate government spending, because that would suggest people are taking money they received from the government as covid stimulus and increasing their consumption of food and fuel.

You can't say that price levels have increased because of increased labour costs, because real wages have declined.

You can't say that companies have increased prices only sufficiently to offset the increase in inputs, because then profits would not have increased.

What you can say, though, is that the cost of inputs went up, there was a fiscal stimulus due to covid, people had increased spending power, and companies that sell "must haves" increased their prices to absorb that increased spending power, over and above what was required to satisfy increased input costs.

Then, because price levels went up (due to increased profits absorbing additional spending power) governments increased interest rates, making things more expensive for the very people whose increased spending power had just been absorbed by said companies.

Re: Profit-Price Spiral: Excess Profits Fuelling Inflation, Not Wages

#37

Post by Fervicus »

deprecative wrote: post #31
wnevets wrote: post #14

Earlier quoted context omitted.

> Why is it not happening? because it was a cold war fairy tale.

Capitalism leads to monopolies and related economic structures. It's best for every large player to carve out territory whether it's geography or specialization niche. The fallacy is that this will be a meritocracy. It's not. It's wealth concentration. The haves will buy innovation and deprive the market of competition to themselves. This happens again and again and again.

We see less of these kinds of problems the closer we are to a free market. A pure free market is not realistic, but sadly our current flavor of capitalism has headed far away in the opposite direction.

Re: Profit-Price Spiral: Excess Profits Fuelling Inflation, Not Wages

#38

Post by astrange »

flangola7 wrote: post #24
astrange wrote: post #11

Earlier quoted context omitted.

If the bank collapsed you'd lose because the bank has your paycheck in it.

Deposits are insured for regular people amounts of money.

No, I mean your employer's payroll account, and their payroll processor's.

Re: Profit-Price Spiral: Excess Profits Fuelling Inflation, Not Wages

#39

Post by acyou »

loandbehold wrote: post #6
yawnr wrote: post #3

It does really feel like the cat is out of the bag that producers anywhere in the supply chain of housing and food realized they could do whatever they want and we can all suck wind. Every significant expense I have is up more than 40% in the past two years.

Competition is supposed to drive prices down to the equilibrium level. Why is it not happening? Are produces colluding to fix prices? Why new players are not entering the market to take advantage of higher prices?

Where I live, fuel, food, housing and other commodity prices are heavily controlled by a few central distributors. Those distributors are in turn controlled by, well, a few key corporations, including several levels of civil government.

New market entrants will conveniently be denied permits, or made to abide by the letter of the law, where other blessed groups are granted the grace of government officials looking the other way.

How is a new market entrant fuel distributor supposed to come in, when a single refinery exists to supply fuel? Same question, where a government monopoly sells electricity, how are we going to get competition?

Where I live, housing costs are triple or more in the city core as in the suburbs. But, gas prices are identical at every station, with zero apparent geographical variation! Same thing for grocery store prices, where food prices are identical in areas with 3x industrial and commercial leasing costs. For the gas, apparently, a tax on the commuters is what's balancing things out, but it doesn't add up.

What's more likely is that prices are being carefully centrally controlled, and have been for quite some time. And, this seems to be doing a great job of keeping inflation in check.

The above is not a criticism, just a statement of observation. The above scheme is working quite well for many people. It seems unfair to some.

Is there a formal economic theory that bases the generation of value off of the creation of economic inefficiencies? I definitely think we're there, and that the theory is correct. Efficient markets are not highly productive. What's highly productive is wasting a lot of energy and resources in various areas of activity. Where productivity means that you produce a lot. Wars, the Great Pyramids, "green" technologies come to mind.

Viewed this way, wage growth will happen if and when consumer spending is again considered to be a driver of economic growth. If we think that businesses are going to deploy cash more profligately than consumers, then cash will be (and should be) funnelled into businesses, so that they can drive economic activity.

For awhile now, Western consumers have been doing an awesome job of driving economic activity in other countries (exporting manufacturing economies). Western policy makers are super sick of this and it shows.

If you were given $100,000, what would you spend it on? And how would that drive further economic activity?

Re: Profit-Price Spiral: Excess Profits Fuelling Inflation, Not Wages

#40

Post by simple-thoughts »

Note that higher interest rates necessitates higher corporate profits. If corporate profits didn’t rise with interest rates, then the risk adjusted return on equity would drop relative to the risk free rate. Imagine you’re considering stocks versus bonds at 5% versus 0% on bonds- given the risks stocks hold, bonds look relatively more attractive. The other side of higher equity costs is less funding for business investment - fewer loss leaders, fewer vc funded firms running quarterly losses, and so forth.
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