Are Inflation Concerns Inflated?

There is perhaps no phrase better known by non-economists than the Uncle "Milton-the-Monster" Friedman's quip that "Inflation is always and everywhere a monetary phenomenon". Yet somehow those actually employed by the financial "industry" and the reporters writing about it have apparently never heard it before. 

There's a reason for that.

What economists, and their co-conspirators - politicians - are counting on is that their fellow bedfellows, the MSM (as in mainstream media, an acronym we seldom hear this decade but that was ubiquitous during the last two) will keep doing the bang-up job of conflating inflation with the cost of living. But, taking the quoted Friedman truism (everything the theorists of Free Market Totalitarianism stated, until 2008, were undebatable facts, kowtowed to with a religious fervor and not to be argued with ... akin to Paula Krugman's Nanny-like scolding of anyone daring to dissent from his Krugmaniacal postulations) into consideration, they are two separate, albeit related, phenomena.

With the collapse of the fracturing industry's money-losing extravaganza, where investors' cash was pumped-and-dumped, via the printing extravaganza at the Fed that pumped a tsunami of funny-money into their bank accounts, until those speculators were wrung as dry as a two-year-old fracked well, the firehose of natural gas that had been spewing from those wells as alarmingly as conspiracy theories from a MAGAts mouth, has been truncated, leaving the cheap input into, not only the petrochemical industry and fertilizer production, but electricity production, as well, cut off at the knees. 

On the face of it, this isn't very surprising. After all, we have the Republican Party, a party in the thrall of rabid conspiracy theorists and radical insurrectionists, still being referred to, by that always late-to-the-party aforementioned MSM, as "Conservative", while their Democratic counterparts, whose president just today detailed the economic outlook for the country by abandoning the working class to instead focus on ensuring the success of the disastrously resource-hungry middle class, as "Liberal," abandoning the working class, which is made up of essential workers, laboring in sweatshop conditions, for under the cost-of-living wages with no health insurance, pension plan, or even, often, any sick leave. It's no wonder people don't know their left hand from their right any more. I mean, "What's left when the right is wrong?"

All that Natural Gas was not being produced to satisfy demand, but as a side-effect of the effort to squeeze the very last drop of oil from the North American hinterland. This burgeoning oil production was considered so vital to the Empire's continued rampage through Afghanistan et al, with more federal dollars being slathered over a nation thousands of miles away than the amount allocated to any of the States over which it actually exercised sovereignty, that the leader of one of its political parties went essentially unchallenged when he declaimed that, "Climate Change is a hoax." While his opposition, that spent the better part of two years trying to prove the unprovable, namely that Russians had "attacked" (as declaimed by Rachel Madcow, time after time, after time ... ) our elections (all while completely ignoring China's SCMP newspaper where, to this day, you can read verbatim most of the GOP's conspiracy theories, which, given their own lack of imagination, they pick up and propagate, via Fox and Fiends, all over the US airwaves, spreading Red Party propaganda far more effectively than China ever could) sat silently by while said acclamation resulted in the escalation of an already ruinous energy policy that has turned the country into a hellscape of weather-related repercussions.

Now, although hydraulic fracturing of the continent proceeds apace, that pace isn't close to the frantic rush to strip the continent of all its oil that reigned while the GOP still held the reins of power and could therefore siphon the resultant bonanza of cash into their own pockets, which would leave  the Dems high and dry in 2024 when that output would have passed its peak. That didn't pan out quite as they had planned. Which is why the GOP has gone even more ape-shit crazy than it did when Clinton's victory put a similar crimp in the well-laid-out plans of the nascent Bush Dynasty in '92.

Today, rig count goes up at a level concomitant with a plateauing of production, not a steady push for more more more, and that, when coupled with an environment wherein investors are actually demanding a return on their investment, the burgeoning gas production that is generated with each new drill bit sunk into the earth, isn't forthcoming when the industry's strategy is to collect the steady dribbling of oil that results from the millions of rigs and is collected to brighten our energy picture, but such output is then not complemented with any bonanza of Natural Gas. Instead, the gas that is produced is considered too paltry to justify the investment in infrastructure required to collect it and is therefore flared, or simply allowed to leak, into the atmosphere. The result of this egregious loss is that the natural gas available to produce electricity is thereby severely curtailed. That translates into a hike in its price. And since the majority of power plants in the country and around the developed world are now retooled to fire up only with gas, that in turn translates into higher prices around the globe for electricity. 

And this is where we get back to inflation. 

The higher price that electric generation is continuing to extract from the environment must of necessity be reflected in its cost. Because, like a triple helix, energy, environment and economics, are inextricably entwined in a tight embrace, one that, logically enough, impacts the cost to produce, and therefore the price, of yet another "e", Electricity.

In speaking of helices, a spiral necessarily comes to mind, and it is an inflationary spiral that is a danger to economies, not inflation per se. And what has economists fretting is the current strength of the working class, not the climb in energy prices alone, because without the necessary bargaining power, labor's demands would continue to be suppressed, and the wage part of the inflationary spiral curtailed. That was the case in the eighties. As what we are witnessing may well be a repeat of the oil crises of the  seventies, although, I suspect, without its geopolitical intensification (although the Nordstream pipeline could possibly play the part that the Oil Embargo once did). 

As the China bashing continues unaffected by the change in the Party in control of the White House, the young men and women of the country are left in ignorance of the machinations of Reagonomics that ruled the country in the decade of Greed it ushered in. No longer tasked with creating jobs, but destroying them, as that task was shuffled off to where it didn't, and doesn't, belong ... to the Fed. So that the executive branch could start the process of lopping off jobs from the economy and increasing the financialization of it, putting money, as the man who termed the phrase Voodoo Economics, Bush père, promised his fellow GOP'rs, "into the right hands." Those hands being those of the "job creators." The jobs they were creating however, weren't in the US ... they were in China ... and they counted in the millions. This broke the back of labor and broke the inflationary price/wage spiral that had dominated the economy and was coined stagflation. 

Now, although they are loathe to mention it, that stagflation had another facet to it, and that was the price of oil. Before the 70's, it was around $3/bbl. Ridiculously cheap. When the price of a resource that drives the economic engine increases by a factor of 6, problems ensue.

During WW2 the US and its allies "Rode to victory on a wave of oil" (nowadays we'd say "surfed", but that was said well before the Beach Boys (who weren't "boys" at all)), to quote Lord Overstone (who actually said it about WW1), and Keynesian economies around the globe, none more so than the US, strove to keep the black gold flowing so as to float their economies via a raft of oil production, and ward off recession from the collapse in the demand for their Merchants of Death production. One of the US strategies for this transition was Eisenhower's Interstate highway system which would cement the automobile into place as the mainstay of an economic boom using the Defense budget as its mainstay, a side effect of which was to strengthen the war-time Unions' grip on industrial Corporations, which forced them to continue to cover health insurance, offer employee pensions, paid leave, and other gimmees. 

Now, with the government as your customer, as anyone who reads this blog knows, the contractor supplying them uses a cost-plus approach, taking their percentage of profit no matter how much their end products overrun their initial costs estimates, enabling them to pay their investors dividend amounts that are amped by citizens' tax dollars: a direct infusion into those non-existent Miltonian "Free Markets" from every tax-paying citizen whether they own stocks or no, and most of us don't and didn't then. 

But this dynamic can't so simply be extrapolated onto the civilian economy where those union demands and shareholder dividends must now be actually accounted for by actual production numbers and profits that can't be jerry-rigged simply by squeezing a Congressman. Instead customer prices have to be raised. But when those customers are wage-earners, they must in turn demand higher wages, which means the products they produce are more expensive, which leads to more demands for higher wages, and thus you see how it can so easily spiral out of control. 

By moving those industries to low-to-practically-no wage platforms via FDI into Communist China, Industry not only broke the wage/price spiral, but eliminated the need to spend on R&D to clean up industrial processes and manage their waste in an environmentally sound manner. Win-win, n'est-ce pas?

This crashed the earning power of the labor force, then mainly made up of males, but the side effect of this Republican ruse destroyed the ability to maintain a single-provider household resulting in a burgeoning  in the number of females joining the workforce so they could maintain the standard of living that a single-paycheck was once able to provide, but that Reaganomix successfully destroyed. So even as its Moral Majority minority held sway over its Party Platform, and rabid anti Communists roiled the polity with red-baiting and never-ending demands for increases in "Defense" spending to "fight the Communist Menace" (but really to continue to pay the cost-plus demands of its greedy contractors), its economic policies surreptitiously undermined the very policies that brought it to power, lending aid to Corporations to move their operations to a one-Party Communist Regime for the express purpose of destroying the bargaining power of unionized Labor, forcing women to join the workforce in numbers greater than during War time, making stay-at-home Moms practically obsolete.

If you wonder how the GOP can come up with and support the most outlandish conspiracy theories ever dreamed up, it may well be because that is what their party does, they mouth pabulum their constituents want to hear, while enacting economic policies that are in complete contradiction to their stated objectives ... over and over again, knowing full well their ill-educated masses will never grasp the connection, while the feckless opposition party sits silent.  

Thus it should come as no surprise that all of a sudden inflation is of such concern to a GOP that sowed its seeds. But the permanent rise in energy prices is not inflation, it is a reflection of those market dynamics the Red Party is so enamored of. As the environmental costs that the energy industries have historically sloughed off become too onerous for the environment to absorb, the costs don't simply evaporate like the former President's copious amounts of hairspray (he's bragged to his adoring, cheering fans that he used the aerosol sprays, caring not a jot what effect it has on the ozone layer).

Not to say that this in any way implies that I understand how this will ripple through the economic system, nor what effects it will have on our lives, other than make them an order of magnitude costlier. All I mean to emphasize is that the way in which their bandying about the term inflation has nothing to do with what their Hero, Milton Freidman, described it as (that hero being the architect of the Voodoo economics that precipitated not only the crash of the Savings and Loan industry in the eighties, but the crash of 1987, 1998, 2000, and the onset of the 2008 Depression from which we have yet to extricate ourselves). And no, although you will still, thirteen years later, hear economists say that we had not yet recovered from the Financial Crisis when Covid struck a body blow to economic output, crises, by their nature, are short-lived; otherwise it's not a crisis, it's the new normal ... much like the Climate Crisis. Which is not a crisis either, nor is it an emergency, it is our new normal. And the economy in a perma-depression is the new economic normal, and, if you believe that economics, energy, and the environment are as inextricably entwined as I do, then energy now predictably takes a hit in that its costs, going into the future, must now be absorbed, not by the environment, but by the economy, which must therefore increase the price its consumers bear for, well, consuming it.

That, to my understanding, is not inflation. That is a permanent increase in the cost. One that will of necessity ripple through the entire economy.

And That's what Friedman meant: price is a monetary phenomenon, whereas cost is intrinsic.

Even as costs escalate, which they have been doing, price can either be purposely manipulated, as in outright gov't subsidies to consumers, or become unhinged from them (in either direction) such that a gallon of gas can still, in the South, and Texas in particular, sell for less than $2/gallon. Because the real costs, the actual environmental costs associated with flaring a non-renewable energy source straight into the atmosphere, are not paid by those incurring them, so they can pass on those savings to their customers. The costs, of course, are absorbed by the rest of us, being, as we are, despite our penchant to deny it, part of the natural environment.

But whereas before the burden of those environmental costs were sustained by others, such as Pacific islanders whose geography is disappearing under rising seas, the costs are more and more being borne by the very customers who are saving money via low prices at the pump. When you have Shell Oil burdening its shareholders with CSS technology that will do nothing to remove enough CO2 from the atmosphere to change the constant search for a new equilibrium the earth's systems are climatologically engaged in, Shell Oil will do what Corponations do, what they are in business to do, they will shift that investment burden from the shoulders of its shareholders, where it belongs, onto those of its customers, by raising prices and thereby profits and shareholders' dividends. 

This paradigm shift in the dynamic of Corponational malfeasance is in full display in the Texas Electric outage that left its citizens freezing to death in their homes. The costs of the outage, and the subsequent outlay to insulate equipment against the inevitable recurrence, are borne by their ratepayers not by the utilities on whose books they belong, they simply, with the full blessing of the bought Governor Abbott, palmed off onto their customers the Capital outlay costs that should be borne be investors.   

That is my rambling explanation for why we hear nothing, not a word, about inflation being a monetary phenomenon. Prices and costs have been so separated from each other, in an economy that subjects to the whip anyone else in the world who doesn't adopt its Market-based system wherein those two gel, because nobody has remove the punch bowl just as the Red Party got started. So in many ways the USA resembles the sclerotic USSR far more than it does today's Mother Russia, which is a better example of an economy that lets the oligarchs rule and the polity languish in declining living standards and political repression. This state of affairs the GOP has wet dreams of replicating. (Yes, Rachel, that's right. They emulate Russia; but that's not a crime). 

Because America will ALWAYS be a Socialist Nation. That is, after all, what a Democracy is.