INFLATION in both Canada and the U.S. is calming down.
In September, inflation actually fell below the Bank of Canada’s target of two per cent — ringing in at 1.6 per cent. While that’s certainly welcome news, there’s still, clearly, a lot of economic insecurity out there.
We’re seeing it play out in social factors – people who are homeless, petty and violent crime, and political unrest and political extremism. In fact, the inflation that we went through over the last three years was one of the sharpest spikes since the early 1980s.
Historically, inflation inflicts pain in many ways. When consumer prices keep going up, it’s a special hardship for people on fixed incomes while asset owners and bondholders don’t like it either.
Now, the reflexive explanation for about 50 years has been Milton Friedman’s view, that “inflation is everywhere – a monetary phenomenon.” It’s accepted as an assertion of fact that inflation is caused by government.
Friedman said as much many times, including in his on-the-nose speech “Inflation Is Created by Government and by No One Else.” Friedman’s argument treats money as a giant pool and adding more dilutes it.
While it makes intuitive sense at first, the more you look at it, the less sense it makes. For example, if spending and putting new money into the economy is inflationary, how can taxing and removing money from the economy also be inflationary? as one of the most famous examples of hyperinflation as a cautionary example of government money-printing, we have had the history wrong.
An International Monetary Fund paper on the crisis pointed out the problem — the central bank had been privatized and banks were essentially allowed to print their own money – which they did. The hyperinflation stopped immediately when Germany introduced a new currency and better controls.
It’s also notable because Friedman is also at odds with Adam Smith and his classic writings in “Wealth of Nations,” where he made it clear that one of the causes of price hikes was concentration of market power and collusion – cartels.
Smith famously wrote, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” In other words, who made it clear that one of the causes of price hikes was concentration of market power and collusion – cartels.
When we talk about growing “inequality” what we are really talking about is concentration of ownership – which is also a concentration of pricing power. Of course, these are all things that a business and an investor seek – but that business is only going to maintain returns like that if its customers have money. other side of it, as an individual or a business, and you’re the one being put over a barrel by a vendor or supplier who knows they are the only game in town.
There’s no question, for example, that high inflation in Canada was driven by soaring energy prices in the oil and gas sector and the invasion of Ukraine. In the U.S., oil executives were openly talking with the OPEC cartel to hold prices higher and restrict production. That has an impact in Canada.
Rafi Tahmazian, a senior portfolio manager at Canoe Financial in Calgary, told CBC, “Imagine a bank machine that’s broken and it’s spitting out $100 bills and there’s not enough people to pick them up and there’s $100 bills gathering on the ground. This is how profitable these businesses are right now.”
Of course, for an ATM to release a fire- hose of cash, there has to be a vacuum hose of cash at the other end. We need to remember that nice problems to have are still problems because total market dominance comes at the expense of market principles like competition, innovation and entrepreneurship.
In the U.S., they have anti-trust and in Canada we have anti-combines legislation. It’s because the economy and corporations have changed massively since Smith’s time and, to be frank, since Friedman’s. Reality-based economics is always better than the alternative.
