Understanding the Real Drivers Behind Today's Inflation Crisis
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Chapter 1: The Inflation Landscape
Inflation is currently a pressing issue, with prices for essentials like food, fuel, education, and healthcare soaring without relief in sight. As of February, inflation in the USA hit 7.9%, marking the highest level in four decades. The emergence of high inflation raises concerns about stagflation, a situation where economic growth stagnates while inflation continues to escalate. This scenario is alarming as it leads to rising prices without corresponding increases in income.
The ongoing global tensions, including a pandemic that persists, a trade conflict between the world's largest economies, and fears of nuclear conflict, exacerbate the stagflation threat. Amid these crises, it’s easy to overlook the actual origins of our inflation woes. Contrary to popular belief, the US-China trade war and the conflict between Russia and Ukraine are not the root causes of inflation; rather, they are catalysts for a process that began much earlier.
Let's dive deeper into the mainstream narrative surrounding inflation to uncover its true origins.
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Section 1.1: Misattributing Causes of Inflation
Over time, various events have been scapegoated for rising prices. In the past, oil-producing nations exchanged conspiracy theories about oil price manipulation, which contributed to significant fluctuations in oil prices. More recently, the US-China trade disputes were blamed for inflation, with tariffs on Chinese imports leading to increased retail prices.
Then came COVID-19, with China again facing the brunt of blame as its strict lockdowns disrupted global supply chains. As businesses struggled to operate, the supply of essential goods was significantly impacted. Currently, the Russia-Ukraine conflict is being cited as a primary factor in soaring inflation, particularly because both countries are major exporters of wheat and sunflower oil. The argument is that supply disruptions due to the war are leading to rising food prices globally.
Subsection 1.1.1: The Temporary Nature of Current Events
While these events make for compelling headlines, they often only have a short-term impact on inflation. Using sensational events to explain price increases may attract attention but fails to address the underlying issues contributing to high inflation today. For instance, companies were already aware of the risks associated with relying heavily on a single country for supplies, prompting them to diversify their supply chains well before the trade war escalated.
In the US, this shift could enable distributors to bypass tariffs and restore prices to pre-trade war levels.
Section 1.2: Central Banks and Their Role
Another perspective suggests that central banks like the Federal Reserve are primarily responsible for inflation due to extensive money printing to support banks and fund COVID relief packages. This viewpoint, popular among crypto enthusiasts, posits that an increased money supply inevitably leads to inflation.
However, this argument often overlooks a key distinction: it's not merely the money supply that drives inflation, but rather the velocity at which money circulates in the economy. The Federal Reserve could theoretically create vast sums of money, but if that money remains stagnant, inflation would not result. In contrast, if that money enters circulation and stimulates spending, prices are bound to rise.
Chapter 2: Corporate Practices Fueling Inflation
The first video, "Russia is not a superpower, but China is | Paul Krugman," discusses the geopolitical implications that contribute to economic fluctuations.
The real catalyst behind persistent inflation lies with corporations themselves. Corporate management has ingrained the notion that their primary duty is to maximize shareholder profits, a concept rooted in Milton Friedman's philosophy. This "Friedman doctrine" suggests that businesses exist solely for profit maximization.
In practice, corporate executives often echo this belief, emphasizing their commitment to shareholder value. Yet, this is not a legal requirement; corporations are not mandated to prioritize shareholder returns. Nonetheless, executives face immense pressure from institutional investors, including hedge funds, which often prioritize short-term gains.
As a result, companies create practices aimed solely at achieving immediate profits, often at the expense of long-term sustainability. For instance, the "just-in-time" production model prioritizes efficiency over stability, leading to complex logistics that exacerbate environmental concerns. This model has convinced us that sourcing materials from distant locations is more cost-effective than producing locally, but it comes with significant hidden costs.
In sum, corporations have externalized these costs, shifting the burden of environmental degradation onto society.
Final Thoughts
While some may hope for simple solutions to the inflation crisis, the reality is more complex. Supporting local businesses and advocating for better corporate practices are steps in the right direction, but they are insufficient for addressing systemic issues. Comprehensive, macro-level solutions are necessary to tackle the roots of inflation effectively.
The second video, "Why Russia and China Have Quietly Fallen Out," provides insights into the shifting dynamics between these two nations and their economic implications.