Is inflation the result of anti-competitive behaviour of firms?

Published: Sun 26 June 2022
Updated: Mon 27 June 2022
By steve

In markets.

Sunday 26, June 2022

ABM Industries

We seem to have drifted into a stealth bear market. It’s hard to make money on the long side, as long as the bear is in control, but as the tide turns profits are (in principle) waiting to be taken. This post gives the bull case for ABM Industries. I am always a bit sceptical of freesheet analysis. If I were doing good analysis, the last thing I’d do is give it away for free, so if I see a buy recommendation, I assume that the author is looking to close his position. I know that’s awfully cynical, but …

Central Banks facing unpalatable choices

Graham Benjamin’s Newsletter is worth a read. His latest piece explains that as holders of massive amounts of long-dated govt. debt and corporate credit (and equities, in some cases such as the SNB and the BoJ), CBs simply cannot afford for financial asset prices to go down. Obviously, any losses on govt. bonds held by the banks are simply gains for the issuers of these bonds: the govts. that control the banks. But CBs don’t see it that way. As Benjamin says, brace yourself for aggressive inflation busting.

Monopoly power as a driver of inflation

Inflation is prices going up. The gross income for companies is a product of their volume of sales and the cost of those sales. Labour is one input cost. Bought-in goods and services is another. The other is the cost of finance, i.e. the returns to suppliers of capital. Profits have been going up, since the peak of the lockdown. It looks like this might be a result of high levels of concentration in industry. Matt Stoller argues for this and he makes a very convincing case. OK, it’s hard to demonstrate that lack of competition is a true cause, especially to explain the exact timing of the jump in margins, but a couple of academic studies he reports on appear to back this up. To me, it seems intuititively obvious that the rigors of the pandemic knocked out the weaker players in many sectors, which would then result in the survivors having more pricing power.

Yannis Varoufakis sort of agrees. Well, not quite, but he also agrees that the rise and dominance of the corporate sector has a lot to do with what has happened. He, correctly, points out that a lot of the money created after the GFC never made it to the real economy, and hence the low inflation for the last 15 years. But now, he argues, it’s a choice between saving the corporate sector or getting control of inflation.

Varoufakis is typically apocalyptic in his analysis, but it’s still worth a read:

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 facing busted supply chains 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 revived ruling class. 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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