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Episode 268 – There Is No Magic Pricing Fairy with Brian Romanchuk
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“Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
Milton Friedman
This quote by the grandaddy of neoliberal economics is from 1963. Some in the mainstream have been dining out on it ever since.
According to our guest, author and blogger Brian Romanchuk, neoclassical economics relies on mathematical models and fail to capture the complexity of real-world inflation. He highlights the importance of understanding the supply and demand dynamics in setting prices and explains that inflation can be influenced by factors such as supply chain shocks and changes in the labor market.
Brian also points out that it’s not enough to blame inflation on corporate greed; after all, corporations are always driven to maximize profits. He mentions the Cantillon effect, which suggests that the first recipients of newly created money benefit from inflation as prices go up, while the poor and working class bear the brunt of higher prices down the road.
Brian and Steve discuss inflation constraints on fiscal policy. Brian argues that while extreme fiscal policies could lead to inflation, most of the time, fiscal policy is relatively moderate and does not have a significant impact on inflation. They criticize the government for not trying to set prices and argue that the government often follows the private sector’s lead, making things worse.
Brian Romanchuk is the author of several books, including Modern Monetary Theory and the Recovery. He is the writer and publisher of bondeconomics.com. His writings can be found in his Substack, The BondEconomics Newsletter.
@RomanchukBrian on Twitter
Macro N Cheese – Episode 268
There Is No Magic Pricing Fairy with Brian Romanchuk
March 16, 2024
[00:00:00] Brian Romanchuk [Intro/Music]: Since the 1990s, we’ve had perpetually too many high levels of unemployment and underemployment. There wasn’t actual falling prices, but it was very hard to get any inflation. Throughout the 2010s, everyone was predicting high inflation that never happened. It was stuck at 1% and not 2%.
If you just say, well, it’s corporations being greedy. Well, corporations are always trying to make money, I have never lived in an era where corporations were not greedy.
[00:01:35] Geoff Ginter [Intro/Music]: Now, let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.
[00:01:43] Steven Grumbine: All right, this is Steve with Macro N Cheese. Today’s guest is somebody who’s been on several times before, Brian Romanchuk of Bond Economics. This is a guy who knows his stuff. So I asked him to come on to talk to us about inflation because Brian’s written a bunch of books. Check them out. They’re all over Amazon.
Look up his author code, Brian Romanchuk, and you can find access to all of them. Brian is currently writing a primer on inflation. And for those of you who inflation drives you nuts. Not so much because prices went up, but because you can’t tell people that don’t understand inflation, what inflation even is.
So I’m hoping that by having Brian come on, it can help clear up my messaging and also help take away some of the cobwebs and help me get to a better way of enunciating inflation. Let me bring on my guest, Brian Romanchuk, welcome to the show.
[00:02:39] Brian Romanchuk: Hi, thanks, Steve. It’s good to be back. And to just preface, it’s still the manuscript, the inflation book. The working title is “What Is Inflation?” And it’s really a primer, but it’s aimed at dealing with what I see in mainly economic and financial commentary. You see the same things over and over again, I’ve been saying for decades. Mainly discuss finance, usually a business section of newspapers, what you see on Twitter.
It’s that sort of thing, but it’s maybe a little bit more advanced. It’s basically for someone who is already reading the business paper, but also I do try to cover the basics. In the book, I’ve largely abandoned the idea of discussing inflation theories. Although I do have a little bit on the seller’s inflation idea because I have a chapter on the 2020 pandemic inflation spike.
And so that came up and I tied it in . Generally, I’m not talking too much about the good theories, although I talk about some of the stupid theories, which show up a lot. And as a spoiler, most of the stupid theories about inflation come from hard money types. Basically, people who want to either have the US dollar or any currency pegged to gold or bitcoin, there is a lot of silliness that comes out about inflation from those people. And those things tend to be self-evidently wrong. And it’s not just them, they put it out into the finance space and then it’s just repeated and you see the same stories over and over again, incredibly silly things.
That’s the background of what I’ve been thinking about for some time.
[00:04:40] Grumbine: It’s amazing you say that, because that’s typically the libertarian Austrian gold bug people,
[00:04:46] Romanchuk: Yes.
[00:04:46] Grumbine: That believe in the concept of money growth creating inflation. And if I’m quoting Milton Friedman correctly, all inflation is a monetary phenomenon. And it always comes from when the government spends money.
[00:05:01] Romanchuk: Oh, I just want to say that the quote I believe is “inflation is always and everywhere a monetary phenomenon.” I think there was a little bit more, but that’s usually how they cuts down. Yes.
[00:05:12] Grumbine: Ah..
[00:05:13] Romanchuk: Yeah,
[00:05:14] Grumbine: The thing that’s thrown at us all the time is the Cantillon effect. And I never see this in MMT circles talking about Cantillon effect, but I do see it all the time.
[00:05:24] Romanchuk: I think it’s Cantillon, if you want to call it Cantillon… I speak French, I worked in French one point in my life. From an English speaker point of view, it’s like a Y sound. This would be the Cantillon effect. I’ll do one point on the Austrians because you mentioned it, and then I’ll go to the Cantillon effect.
And I could be wrong about Cantillon, which would be quite embarrassing, but yeah, having corrected you and being wrong, that would be my guess. So one of the Austrian things is that they want to define inflation as an increase in the money supply. And it’s a definition. It’s increase in money supply and that’s it.
And they get angry that oh well, the rising prices is something else. And they’ll go back to 18 something and they’ll quote that this was the original usage, which is silly because no one else uses that. And it’s debatable. You can find other uses where inflation refers to rising prices.
Basically you could have monetary inflation and what would be price inflation. There were two different things and people understood that. But some Austrians have a bug about this, and that everyone else is doing it wrong. You can change the definition, go ahead, but no one wants to use that definition, so tough luck, pal.
So the Cantillon effect, if I had my manuscript with me, I do refer to it and summarize it. I don’t want to dig it out. But basically the idea, as it’s always expressed. He had written a book, since it’s quite old now, I’m not going to guess at the year, it’s old enough that’s in the public domain. And so I’ve got the copy, possibly in French, it was translated in english.
I think I might actually have both that can download for free. The idea is when the money is created, because this was during the gold standard era where money was tied to gold. And so the assumption was money creation would be tied to a gold influx. And so gold mines, gold imports. So you’d have an influx of gold.
And the idea is the new money comes into the economy. Or you could have a secondary money creation by the banking system. The idea is that when the money is created, what happens to prices is the first people to get the money, run out and buy stuff and push the price up, and then the money circulates to other people, and then all the prices get pushed up.
To a certain extent, you could just say, well, money growth causes inflation, causes price to rise. It’s supposed to be, here’s the mechanism and this is what you see. Certain things rise first and then the other ones. And the idea is that, oh no, the currency is debased. So the wiley international financiers, hint, hint, their ethnic background, will run out and buy financial assets first, and then the poor, the struggling working class, the middle class, later on get stuck with buying more expensive bread.
And so the idea is that people will get the money first benefit from the inflation by rising asset prices. So it’s a story to a certain extent. But you could say, look, if we go back most money creation can be by the government deficit spending. As it issues spending, that creates money. The money may be drained by bond issuance, but the initial impetus is government money creation.
But you can also have money creation by private banks making loans. This is actually the other manuscript I’m struggling with, is the banking system. When you make a loan, you owe the bank money, but you increase your deposits. If you have a loan and you put the money in your bank account, you’ve grown your balance sheet and the bank grows this balance sheet and your deposit is money.
And that also grows. It’s not insane to suggest that people borrow to buy something that might affect the prices of those things. If people are running out to get mortgages to buy houses, it would not be an insane theory that gosh, house prices might rise. Although house prices in most countries do not show up directly into the CPI.
It’s plausible, but the whole thing is that if there’s a surge of buying in something, the price might go up. Well, that’s sort of it. What did you expect? The price is going up for a reason. The price can go up just because people think the thing is something is worth more, but it can also be that there is an imbalance in the market and people are just buying things. But this is scientific. It’s just a common sense observation at best.
[00:10:37] Grumbine: As we watch the last five years, four years, we started with supply chain shocks. And then people were being given money during the pandemic. Now we’re hearing, well, maybe all that wasn’t necessarily the problem was seller’s inflation. Do we have one kind of inflation? Or do we have multiple kinds hitting us at once that as one dissipated, the other took over?
[00:11:08] Romanchuk: There’s a lot of prices. When we look at the CPI, and I think I just put one of the manuscripts, there’s 80, 000 prices that go into the US CPI, the consumer price index. So there’s a lot of different prices and each one is a price they’re set in markets and prices aren’t handed down by magical laws of supply and demand they’re set by human beings and human beings are funny creatures. And there’s patterns. But people, especially if something’s set in the market, markets do whatever they want, the prices go up.
If you’re looking at oil, they go up, they go down. And it’s hard to make money. They’re not completely predictable. Certain things are, if a price is administered, well, in the sense, if you know what the administrator is going to do, well, it’s predictable. So what happened? I didn’t want to say this is what happened during the pandemic because I could change my mind.
I’m not really writing about theory. And I give a little bit of a narrative and describe it. This is the thing, this thinking and, but I don’t want to pin myself down because I could change my mind. I would say what we see is the very initial wave during the shutdown, there was chaos, it was complete chaos.
And so you had an initial deflation, which people might forget about that price of oil collapsed because suddenly flights were canceled. People couldn’t drive and there’s a huge glut of oil. There’s an initial deflation in certain prices. But then you ran into an initial supply shock. We had toilet paper panics because, oh, they couldn’t produce toilet paper because everything was shut down.
So in a shortage, there’s a lot of arcane debates about supply and demand. It’s not that shocking, when there’s a shortage, that prices will spike. They don’t necessarily have to. You can say, look, instead of raising the price of toilet paper to a hundred dollars a roll, you just limit the number of rolls per customer, that’s quantity rationing. And what I saw locally in Canada was that it was a mixture. Some prices went up, people were just, “calm down, don’t buy 3, 000 rolls of toilet paper,” although some people did. And so on. Flour was a problem… So after that, all the prices, because people weren’t using oil, there was then a spike due to a complete collapse of supply chains, and it was predictable.
And at that same time, because they shut down activity, well, people aren’t paying taxes. This was a deliberate decision. They shut down the economy. Whether that was a good idea or a bad idea, they did it. And they did it for health reasons. And based on Montreal, we were hit with the initial wave almost simultaneously with New York, and the medical system was about to collapse here.
Other places didn’t have the problem, but the medical system here was going to collapse. Quarantines are standard ways of dealing with plagues. So they had to do it. There was a reaction. The economy would have collapsed because people not getting paid, they still need necessities. So there were a number of programs to give people money so that they would have an income flow.
You had a huge blowout in the deficit. And you could say, well, were these programs well run? Well, how could they? The government itself was shut down. All the people who could design the programs were all stuck working from home themselves. So it was chaotic. If you had adequate, well-prepared welfare state mechanisms to handle such a crisis; let’s say if the job guarantee was in place and was set up, they maybe could have been bolted on and it could be done smoother and less money shot at the system.
So it’s not surprising. Nobody was really surprised that if people keep spending money but we can’t produce things, you’re going to get a huge mismatch and there’s an initial price spike. That is completely unsurprising. I don’t think anyone would not have predicted that. But later on, the idea is that when the measures were released, why didn’t the prices go back where they were?
And then you’re looking at what might be called second order effects, that prices kept rising. And certainly there was an issue with the labor market. The labor market since the 1990s, we’ve had perpetually too many high levels of unemployment and underemployment. There wasn’t actual falling prices, but it was very hard to get any inflation.
Throughout the 2010s, everyone was predicting high inflation. It never happened. It was stuck at 1% and not 2%. And what happened is you finally had a tightening of the labor market. Young people could actually get jobs to a certain extent. So if wages go up, that’s an important cost of doing business in the economy.
Cause it’s an input cost and companies are not charities. They’re not going to sell products at a loss. So rising wages is going to force prices higher. And then we get into the question of: are companies raising prices even more than justified by the rise in their input cost to get higher profit margins?
So that’s a seller’s inflation. Corporations with power raise prices more than their input cost so they have higher profit margin. In Canada, the big political fight is the big grocery chains, as is typical for Canada, has become an oligopoly. I’m not sure how many. But basically there used to be many small regional chains.
Everything has been consolidated to a small number of companies, but they keep the old store brands to make it look like there’s more variety than there actually is. And so the question is, were they gouging customers and taking advantage? We can do it. We have the market power. And it’s not a monopoly, but they have so much control, so much market share, they can raise the prices and people aren’t going to shop elsewhere so they can get away with it and they can raise their profit margin. And amazingly enough, the free market conservatives think that idea is bunk. And then everyone else says, no, the grocery chains are gouging people. That’s what’s showing up in Canada and I don’t know, I haven’t looked at it.
I’m not going to wade through the data and get involved in that political argument. If they are, well, it’s bad, but the government has grumbled about it. So we’ll see, but what can you do? So that’s sort of it. It’s a chain of events, but if you go back to the money printing, I think that’s the silly bit.
There were deficits and then you have money growth. A lot of the money printing is the federal reserve being a bunch of crypto-monetarists. Well, not referring to cryptocurrency. The older political meaning of them, they’re not necessarily monetarist, but they’re monetarist fellow travelers. They bought bonds from the private sector so that they grew their balance sheet because whatever reason, it could be the financial markets might’ve had instability.
It’s possible. Canada did. They had not done quantitative easing before, but they did for the first time in the crisis. And their argument is that they did it for functioning of financial markets, which I guess is possible. But by and large, it doesn’t have the economic effect, other than avoiding a collapse of the financial markets, is largely in the imaginations of the people who believe in the money supply.
[00:19:51] Grumbine: You said something extremely important. Prices are not set by some magic fairy. It’s set by people. And going back to my old days in marketing school, we learned to the four P’s of marketing: product, price, promotion, and place. The price is set by a corporation, whether it be a wholesaler or retailer. They set their prices based on the position that they want to take and based on whether or not they think there’s slack in the economy and demand for their product and they can maximize profit.
Why does the standard, conservative, libertarian, but also even liberals, what is it about them that allows them to latch on to the idea that it wasn’t somebody in a room raising prices? That it’s this magical occurrence and therefore we now have inflation?
[00:20:51] Romanchuk: Well, the story I guess would be what I would call neoclassical economics, which is a term that academics might like. Most people would say mainstream, but mainstream is a little bit vague. To be honest, when you think about it, if you talk to a bunch of bank economists, well, are they not mainstream?
That’d be crazy. But to the neoclassical, it’s an academic and it’s the mainstream, orthodox, non MMT, school of economics based on mathematical models. And the core of the models they want to use, where prices come down to basically a supply and demand curve. In the worst case, you draw lines on the blackboard, but the more sophisticated models, there’s a lot of equations, but it comes out to the same thing, that the prices are being set by the intersection of supply and demand.
And these are the models they want to use. But they want it to be mathematical. They can stick in various imperfections, but something like, oh, corporations want to raise the price, doesn’t fit the models. And so there’s a resistance across the board to the idea. Cause from their point of view, it’s that saying corporations want to rise the price.
It has no predictive value. And it’s because you could say, well, If you follow mainstream economists, they laughed about the idea. If they say, if inflation is based on greed, when prices are falling, people weren’t greedy? And the seller’s inflation is beyond that. But if you just say, well, it’s corporations being greedy, well, corporations are always trying to make money.
I have never lived in an era where corporations were not greedy. Things were different in the 1950s, it was a different environment. But since the 1960s, most corporations, the entire focus is making money. So you have to be careful. If you wanted a mathematical model of inflation, you need something to explain.
But that’s the problem. My complaint is that, well, maybe the mathematical models just don’t work, because people are complicated. And I could be right, but it’s the wrong answer if you’re an academic. See, I can write a book and say, well, inflation is complicated and I’m satisfied. I published my book and I go write about something else.
But saying inflation is complicated is very difficult to get, and I don’t know what the target is, five publications a year or whatever they expect academics to put out nowadays. So that’s the thing is they need to write papers that are unique. And so they have a ‘publish or perish’ environment. And the way the neoclassicals publish is they do all kinds of mathematical papers.
I used to be in the applied math business in the 1990s. And so that’s how it works. So you’ve got to publish papers and so you’re just keep doing things. And what happens is you just basically have to keep publishing slight variations on existing papers because everyone needs an insane amount of paper. So that’s why.
So the whole bias is they want a mathematical model. If you don’t get a mathematical model, they’re not interested. But no one wants to admit [I’ve] spent my entire life doing advanced studies. I’ve got degrees. Oh, look, he’s Harvard PhD, blah, blah, blah. And then, oh yeah, by the way, everything I worked on is completely and utterly worthless.
[00:24:38] Grumbine: Just garbage.
[00:24:39] Romanchuk: I have a PhD in a real field, so I don’t care. It’s not my problem, but I can say, look, this is all worthless and I’m fine with it. But if that’s your background, it’s a little bit embarrassing. So no one wants to say that. And so there’s the resistance and that explains the debates to a certain extent. The heterodox economist, it’s a bit more literary and it’s a different convention. It’s not like what I’m used to. As an applied mathematician, I can understand what the neoclassicals are doing. And I understand their publication, how they’re looking at it. But the heterodox is different. It’s a different style. It’s more, I would say literary and it has its good and bad points.
Cause they’re also under the same insane publication pressure. They face the same problem. There’s too many papers being published. So after a while, there’s just too much stuff. There’s far more papers being written than there are papers that really should be read. And that’s it. That’s the university system. It’s failed and that’s it. And because they’re part of it, they can’t escape it. For me, hey, I just publish books. People read them, whatever. Great. But, I don’t have to publish. I’m outside of it and I’m not publishing a lot and I’m not revolutionizing the field, but I can see the problems. I’m up in the peanut gallery, throwing peanuts.
[00:26:10] Grumbine: Well, I’m up there with you.
[00:26:23] Intermission: You are listening to Macro N Cheese, a podcast brought to you by Real Progressives, a non profit organization dedicated to teaching the masses about MMT, or Modern Monetary Theory. Please help our efforts and become a monthly donor at PayPal or Patreon, like and follow our pages on Facebook and YouTube, and follow us on TikTok, Twitter, Twitch, Rokfin, and Instagram.
[00:27:14] Grumbine: One of the things that you just help reveal, and I think it’s really important is this shooting gallery where everybody says MMT doesn’t ever talk about inflation. And then you have MMTers saying, of course we spend up to the point of inflation. Inflation is the key constraint. It’s not the spending that’s causing the inflation.
It’s the asshole with the pen. And so if you want to deal with the asshole with the pen, you’ve got to do something along the lines of price controls. Or something else has nothing to do with the theory of inflation. It has to do with greed or profiteering. You’ve got people saying, we’ve got people are printing money.
So they’re expecting inflation, let’s mark some stuff up and see if we can make a buck or two. And very serious talking about this inflation, that’s a person with a pen marking prices up, and we’re trying to come up with complex formulas and how we’re taking it very seriously. In reality, it seems like a whole bunch of bunk.
[00:28:22] Romanchuk: Yeah. I guess from my perspective, I, to my background was in the fixed income bond market. So, I was observing or maybe forecasting inflation. My interest wasn’t policy. Basically given policies, I might say, well, what is going to happen? But I wasn’t on the policy suggestion side. That’s not really my background.
I don’t have a background of saying, how should you control inflation? It’s been more of a question: Well, what is probably going to happen? And the environments have all been since, well, in Canada, since the early 1980s, it dismantled all the price controls. There are some still. For example, the price of milk in Quebec is fixed.
It’s $7.68, I believe. One thing in Canada that’s different, I think, in other parts of the world, is they sell milk in plastic bags. It’s four litres of milk in three bags, and then you just put that into a jug. It holds it, and then you have also cartons, but I buy the plastic bags. But anyway, so price controls have largely dismantled.
So I’m used to dealing with a system where there are no price controls. There are very limited ones. But even if you have price controls, you run into shortages. The problem with price controls is that if things get out of alignment, if you keep the certain prices. They will eventually, if you’re not careful, we have to produce this at a loss and companies aren’t going to produce things at a loss.
So there are what people call distortions. They existed. Certainly the business sector hated it. They would have to be administered better than they were. They worked in wartime. Price controls and rationing are very good in a total war situation. That’s entirely typical. But wars hopefully end. Then you go back to normal later.
It’s hard to stay on a wartime footing for decades. That’s my concern with price controls. So you could bottle things up and there is the MMT literature. I’m somewhat agnostic on that, but not everyone is. I’m probably closer to the consensus on price control. But, MMT in general, the constraint, I view that as a somewhat theoretical point that the limit on fiscal policy is inflation.
But that’s an extreme. If the U S government decides to hand every single man, woman, and child in the United States, 1 million dollars, what’s going to happen? Well, prices will probably go up, but that’s it. If we look at a very extreme fiscal policy, so that’s the thing. It’s not like the government running out of money or going bankrupt.
But that is for a very extreme policy. Most of the time, fiscal policy is pretty mediocre. And so it’s very hard to trace. And I see some comments, in popular MMT, that they’re trying to blame every wave of inflation on fiscal policy. That doesn’t really work. There’s too many other things going on. You can come up with theoretical models where the government sets the price level, but that’s in a theoretical model that are simplified, and it makes sense from a theoretical point of view. But those models are not very predictive with the actual system we have, which is way more complicated. And generally speaking, the academic MMTers are not saying life is this simple. It is complicated.
But the constraint, why worry about, oh, this is on the extreme, because people are talking about things like default. The fiscal conservatives say, well, we’re going to run out of money. We’re all going to die. Blah, blah, blah. Their frame of reference is the extreme. That’s what they’re talking about. The people talking about a fiscal crisis, they’ve been talking about a fiscal crisis for a very long time.
These fiscal crises never seem to actually happen, other than silliness in the US like the debt ceiling. They’re not actually showing up. Although one could debate, but what happened in the UK, but that’s a micro story. These crises don’t actually happen. The economies tend to just muddle along. Inflation goes up and down, growth goes up and down, so on and so forth.
And if we’re doing forecasting, you have to deal with this muddling along situation. And so you need a more complicated model for that, if you’re going to work. And my complaint is, well, maybe these models stink, but no one wants to discuss that because it puts academics out of business. So they want the models to work because they’re saying, oh yeah, we’ve got all these secret sauce.
Although in practice among the people who are supposed to be forecasting, there is a lot more skepticism. There is a big difference. If you go into finance, if you see people with “economist” on their job description, they’ll be very confident about their economic models for the economy. If you talk to the fixed income strategists, if that’s their title, they might have an economics background, but they’re actually relatively rare, believe it or not, most of them are from the applied sciences. There is way more skepticism. They might not have very sophisticated inflation models, but the ones that survive are skeptical about economic models in general. Their focus is on making money, and so no one’s making money betting on the long term trend. You can make short term bets on inflation, and people do that.
It is possible to do reasonable forecasts of inflation, so long as you get oil prices right. If you can get the direction of oil correct, why aren’t you making lots of money trading oil futures? And so that’s the thing is that inflation forecasts, a lot of it comes down to what is oil doing, and then you have to have a view on the oil market.
[00:34:49] Grumbine: Most times you hear MMTers say what we just talked about, that the real constraint is inflation. But before this became the new framing, the real restraint was real resources. And so I’ve always considered real resources to be the constraint, whether we have enough labor. And when we talk about inflation being the constraint, in what way can inflation be combated in a meaningful way, based on what we’ve just said?
Because what we’re talking about is completely man-made. Again, it comes back to the pricing fairy, it doesn’t exist. How do you meaningfully combat inflation when in reality, what you’re dealing with is people doing things without some control. It has nothing to do with printing money. And to your point, even in a shortage, they don’t have to raise prices.
They could maintain the price level and ride that shock for a little while. And presuming they’ve got enough profit built into their models to survive, they wouldn’t have to pass that on. Help me understand this. Because it seems to me we’re almost placating a group of people by saying, yes, the real constraint is inflation.
The more I learned, the more I dig, the less that makes sense to me.
[00:36:12] Romanchuk: Well, the real resources versus inflation is just that if you attempt to buy more stuff than is really available, you want to buy more toilet paper than is being produced, well, that’s going to show up in inflation. You can attempt to cover it up with price controls. Yes. Inflation due to a shortage is telling you you’ve got a problem.
You have a mismatch. You might have inventories, but if you want to consume more than is being produced, you have a problem. It can’t be done. It’s like wartime, you can’t shoot more ammunition then is being produced. So the inflation being the constraint, well, that’s under the current environment where we’re not attempting to use price controls.
And then you can say, you can try using price controls, but then you have side effects of shortages, you get black markets, et cetera. It’s not perfect. But the other issue is that companies cannot be forced to produce at a loss. If wages go up, prices will have to rise. It’s not just price controls. In Canada, I think it was the six and five program was the last one.
It was wage and price control. So you’re also controlling wages. Well, that means that unions are constrained what they can ask. And so it’s not just stopping corporations from raising prices. You’ve got to stop those greedy workers from getting wage increases. And that also has bad optics. And that’s one reason they were willing to drop them because otherwise companies will just fail.
Okay. They produce at a loss, they fail. Well then the government can prop them up. Well, eventually, to a certain extent, the welfare states ran into a lot of problems and a lot of discontent in the 1970s. And the Post-Keynesians say they’re not as bad as the people said, but there was a lot of things that was very unpopular.
I was young in those days. It’s politically awkward to say, I want 1970s policies. Perhaps, but it’s got to be done intelligently. It’s no magic. You overshoot your real resources, something has to give and whatever it is, it’s going to be unpopular. Right now, the politicians just wanted to get out of that business.
So for a career politician, that was their view. So how do you control? Really, I’m not the person to ask. But the issue is there was a dismantling of price fixing, antitrust. That was the theory because it is harder. And you can say, well, competition, magic capitalism. But competition is a thing. A corporation that has monopoly power or an oligopoly that is conspiring, they have way more power to raise prices.
And I think even Adam Smith complained about this. Other than the diehard libertarians, everyone viewed price fixing to be a problem. And so you could maybe unwind some of that. Certainly, for example, in the US, the whole medical system, it’s a fiasco, and generally speaking, as a Canadian, one of the topics of conversation up here is what a disaster the US medical system is. And for people traveling, people go down there. Making sure you have enough insurance coverage, because a lot of old people spend part of the winter down in Florida. So, getting proper medical coverage for the US, Anything involving medical costs in the US, for example, is a made in US problem. Canada, it’s largely government controlled. And we have different issues, but medical inflation… it’s not a topic that people worry about, shall we say. So that’s one area. The other one is rent and house prices. That is, how do you deal with rents? I’m not sure Montreal still has rent controls.
How you deal with rent, the way that was dealt with in the post war is just build lots of housing, and we’re not building it. What’s happened in Canada is we’ve had a huge wave of immigration and construction did not match the immigration wave. And a lot of the immigrants are students. And so you bring in a lot of people.
Yeah, you’re going to have a shortage. All rents are going to go up. And so maybe you could do rent control. Back in the day when my grandparents came, they just stuck people and they live in sod houses on the Prairie. We don’t like people freezing to death and no one would give planning permission for a sod house in 2024.
But see, that’s a sectoral problem, but something like automobiles, they’re all imported. Well, let’s say US-Canada, it’s joint. There was the auto pact between Canada and the US. So the Canadian automobile industry, there used to be independent companies, but effectively they’re subsidiaries. But the production, it’s in Canada, so it’s shared. But we also have some multinational, but a lot of it’s imported. So the Canadian government can’t tell the Japanese how much to charge for imported autos. So it depends. Each market is different. You certainly can’t do much about gasoline. You can try. What countries do is they offer subsidies for gasoline, and if you look at all the countries blowing up financially, one of the things that typically happens is that their gasoline subsidies became a giant expenditure.
So, you could maybe deal with certain things, but you can’t deal with everything. If you are importing goods, there is someone on the other side not in control of the government. So, And they’re going to charge you whatever they think they can get away with, and you have to accept that. So every market is slightly different, and you have to accept that. It’s not going to be a simple blanket solution that covers every single component of the CPI.
[00:42:48] Grumbine: Let me just take a step back. Warren Mosler will often say, that’s not inflation, that’s a relative value story. He says inflation is always when government decides to pay higher prices for goods and services. And this has been my standard for how I view inflation. When government decides to pay higher prices, we have higher prices.
When government doesn’t, you’re dealing with relative value. Can you help me understand that better? Is that your understanding or did I get that wrong?
[00:43:23] Romanchuk: Well certainly, that is an idealized model. And you can create an ideal economy where you get this. And you could, with the job guarantee.
[00:43:37] Grumbine: The nominal price anchor.
[00:43:39] Romanchuk: Yes. There, the government could just set a very important price. As long as the job guarantee wage is at an economically meaningful wage. If the government gave everyone a job at 50 cents an hour, we’re guaranteeing a job at 50 cents an hour at 2024 prices, well, no one’s going to take it up.
So it would be useless. It would have no effect on the economy and it would be too low, but it would become the de facto minimum wage. Basically the private sector is generally going to have to offer a wage, probably a bit higher. There could be jobs that are actually desirable where they could go under that.
That sounds crazy. Why would you work less? This happens all the time for interns. So you have interns, people with rich parents who can subsidize them often. But basically, to get the job experience, they’ll actually work at a below market wage, and so companies take advantage of that. But generally speaking, other than in cases where people want to get into a company for hopes of advancement, the job guarantee would be the minimum wage.
And so the government would control the minimum wage of the economy. This is more in the US. The federal minimum wage is a very low level. 7 dollars an hour, and that’s nowhere near the prevailing wage in a lot of states, so it’s meaningless. But this would be an actual, there’d be people working at this wage. It would be a meaningful minimum wage.
And so they could control that. That is how I read Warren Mosler’s take. They could do that. It’s an important wage because wages are very important for domestic prices. Anything that is domestic, the ultimate input cost is your local wages. So there you could say, aha, yes, there the theory works. The thing is you still have a private sector wage and that private sector wage, which would be generally higher, that’ll move up and down with supply and demand in the private sector economy.
And not everyone is going to be working the job guarantee wage. Assuming you have a private sector, people will be working in private sector wages, which are higher, and that will still move around. So you’re still going to have parts of the price level, the wages, which are the price of labor, they’ll be moving around.
And so it’s not going to be total control. It’s a lever. But the thing is they’re not even attempting to do that. So the government, generally speaking, are paying the prevailing price. They take bids and they bid at market wages. So to a certain extent, there’s not even an attempt. So if you look at the actual economies around us, the governments don’t attempt to set the price.
Maybe they do in certain areas. But by and large, they aren’t even attempting to set the price. They’re not behaving the way the model says they should operate. And that’s part of the problem. They’re not being sensible. Government in wartime, and Warren Mosler said this, when push comes to shove and the total war is when they can’t afford to be inefficient, suddenly the government’s become much more careful about setting prices, but in peacetime, they don’t have that existential crisis facing them. So they follow what the private sector is doing. So they’re not helping. They make things worse. Under that system, you can’t predict what’s going to happen. You could have high inflation. You could have low inflation. Who knows? You have to look at what’s happening in the private sector that’s driving prices.
And the other thing to keep in mind is that you can’t do anything about imported prices. The US is called a closed economy. The US is so large and a lot of the trade is intrastate trade, not international trade. Whereas in Canada, a spectacular amount of transactions go across the Canada-US border. If you’re a business anywhere in Canada, your natural markets are your home city, the area around there. And then the American cities on the other side of the border, not a city three time zones away, where they speak a different language on some cases. And once you start bringing international, well, then the government can’t do much about that.
They can try regulating, they’re free to ignore what your government wants.
[00:48:25] Grumbine: Brian, I’d like you to give us the final word on inflation for at least this particular conversation. By the way, I really appreciate you doing this and know you don’t feel particularly great right now. So I do appreciate you fighting through that cough.
[00:48:41] Romanchuk: Okay. Now the last word. It’s a complicated story. Most of the problems people have is that they’re reading stuff on the internet that’s not exactly true. I didn’t go through some of the basic problems, but I just want to explain. For example, there was one alternative inflation site. It said, look, food and energy is not part of the CPI, consumer price index.
And people repeat this. Oh, yeah, yeah. Rising gasoline, that’s not in the CPI. What? All you need to do is read the actual report by, in the US, the Bureau of Labor Statistics, or Statistics Canada, and they will tell you exactly what happened in the CPI that month. And they will say, this is all prices, that’s called the headline.
Then they have another index, is the one that is excluding, that’s called CORE, where it’d be excluding food and energy. And economists use that. People will repeat this. Another thing that people will say, well, they’re shrinking the product size. You get less cookies. No, they weigh exactly what’s based off of the weight of the product.
I just take into account all these things that people say. Oh, well, everyone thinks the CPI is too low that things are way more expensive. Whereas if you look at from the serious economists, let’s say actually CPI overstates the level of inflation over the long run. The problem is people want to keep buying the same stuff at the same price.
And things change. I cannot go to Blockbuster TM Video to rent VHS movies anymore on the weekend. They don’t exist. Blockbuster doesn’t exist. VHS video cassettes no longer exist. Things change. And so, prices will change. If there’s a shortage of something, if you’re a free market capitalist, hit the signal.
Don’t consume so much of that. Do something else with your money. If it’s food, eat something cheaper. It’s not necessarily what you want to do, but that’s how it works. And that’s the thing is that people get mad about rising prices and so they’ll believe anything and basically it just gets repeated over and it’s treated as a truth. On the popular discussion, this is why I’m doing a basic one, it’s almost impossible to have a discussion on the topic. Our discussion here was mainly about theory, MMT, that was a higher level. If you discuss on Twitter, most of your responses will be about crazy inflation theories. You have to get away a bit from the crazy inflation theories that have some understanding. Normally, I’m very skeptical, you see, of mainstream economists. If you look at the discussions of the CPI, what is the CPI? They’re actually fairly reliable and sensible. You want to go to those sources, as they explain how is it calculated. And if you see something that seems strange about the CPI, it is probably incorrect. There are some weird things, but most of the things saying, ah, the government is manipulating the statistics is going to be incorrect. So that’s the thing is that there’s high level discussions, which to be honest with what we had, but then what you see on the internet, whoa. And financial media is commentary.
If you go to a bank, most investment banks aren’t going to be publishing really silly stuff. But if you go to, let’s say economics, someone doing financial commentary, don’t trust anything you read there. That’s my warning to the listeners.
[00:52:41] Grumbine: Very good. And I appreciate that so much. Brian, thank you so much for taking the time to talk to us. This subject is the subject that everybody wants to talk about ad nauseum. So, having you come on, provide your perspective has been incredibly helpful to me and hopefully everybody else enjoyed it. My name is Steve Grumbine.
I am the host of Macro N Cheese podcast. We are funded by your contributions. Macro N Cheese is part of Real Progressives, which is a 501(c)(3) nonprofit in the United States. If you feel like the work we’re doing is worth supporting, consider becoming a monthly donor. You can either find us on our website, realprogressives.org and go to donate, or you can go to our Patreon, which is patreon.com/realprogressives. Please check out Brian’s books. They’re all over Amazon. You can find them. Great reads. They are technical. He is not someone that is going to mince words. So check them out. You’ll learn a whole lot. Brian, thank you so much for joining us one more time, sir.
[00:53:45] Romanchuk: Thanks for the invitation.
[00:53:47] Grumbine: Absolutely. All right. Steve Grumbine, my guest Brian Romanchuck, Macro N Cheese. We are out of here.
[00:54:00] End Credits: Macro N Cheese is produced by Andy Kennedy, descriptive writing by Virginia Cotts and promotional artwork by Andy Kennedy. Macro N Cheese is publicly funded by our Real Progressives Patreon account. If you would like to donate to Macro N Cheese, please visit patreon.com/realprogressives.
GUEST BIO
Brian Romanchuk is a consultant and author with 15 years of experience as a senior quantitative analyst in fixed income. Dr. Romanchuk has specialized in the development of research systems and analytics and is currently a consultant and blogger. Brian holds a B.Eng. in electrical engineering from McGill University, and a Ph.D. from the University of Cambridge in control systems engineering and is a Chartered Financial Analyst.
Some of Brian’s work can be found through the navigating following links:
https://talkmarkets.com/contributor/brian-romanchuk/
https://bondeconomics.substack.com
https://substack.com/profile/39698338-brian-romanchuk
Many of Brian’s books can be found here:
https://bookshop.org/search?keywords=Brian+romanchuk
PEOPLE MENTIONED
Milton Friedman
was an American economist and the 20th century’s most prominent advocate of free markets and generally regarded as the school of monetarism’s leading exponent.
https://www.econlib.org/library/Enc/bios/Friedman.html
https://www.britannica.com/topic/monetarism
James “Jim” Grant
is an American writer and publisher, founded Grant’s Interest Rate Observer, a twice-monthly journal of the financial markets and has written several books on finance and history.
https://en.wikipedia.org/wiki/James_Grant_(finance)
Adam Smith
was an 18th century Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Considered by some as “The Father of Capitalism”, he wrote The Wealth of Nations in 1776.
https://en.m.wikipedia.org/wiki/Adam_Smith
https://www.econlib.org/library/Enc/bios/Smith.html
Warren Mosler
is an American economist and theorist, and one of the leading voices in the field of Modern Monetary Theory (MMT). Presently, Warren resides on St. Croix, in the US Virgin Islands. An entrepreneur and financial professional, Warren has spent the past 40 years gaining an insider’s knowledge of monetary operations.
INSTITUTIONS / ORGANIZATIONS
Bureau of Labor Statistics
is a federal government agency that measures labor market activity, working conditions, and price changes in the economy.
Statistics Canada
is the national statistical office of Canada.
https://www.statcan.gc.ca/en/start
CONCEPTS
Modern Monetary Theory (MMT)
is a heterodox macroeconomic supposition that asserts that monetarily sovereign countries (such as the U.S., U.K., Japan, and Canada) which spend, tax, and borrow in a fiat currency that they fully control, are not operationally constrained by revenues when it comes to federal government spending.
Put simply, modern monetary theory decrees that such governments do not rely on taxes or borrowing for spending since they can issue as much money as they need and are the monopoly issuers of that currency. Since their budgets aren’t like a regular household’s, their policies should not be shaped by fears of a rising national debt, but rather by price inflation.
https://www.investopedia.com/modern-monetary-theory-mmt-4588060
https://gimms.org.uk/fact-sheets/macroeconomics/
Modern Money Primer by L. Randall Wray
https://realprogressives.org/mmt-primer/
Federal Job Guarantee
The job guarantee is a federal government program to provide a good job to every person who wants one. The government becoming, in effect, the Employer of Last Resort.
The job guarantee is a long-pursued goal of the American progressive tradition. In the 1940s, labor unions in the Congress of Industrial Organizations (CIO) demanded a job guarantee and Franklin D. Roosevelt supported the right to a job in his never realized “Second Bill of Rights”. Later, the 1963 March on Washington demanded a jobs guarantee alongside civil rights, understanding that economic justice was a core component of the fight for racial justice.
https://www.sunrisemovement.org/theory-of-change/what-is-a-federal-jobs-guarantee/
https://www.currentaffairs.org/2021/05/pavlina-tcherneva-on-mmt-and-the-jobs-guarantee
Federal Job Guarantee Frequently Asked Questions with Pavlina Tcherneva
https://pavlina-tcherneva.net/job-guarantee-faq/
Taxation within a Fiat System
The monetary system that the United States employs is a state money, or fiat, system, and from that framing, the most important purpose of taxes is to create a demand for the state’s money (specifically, for its currency). Further, being the monopoly issuer of its own currency, the state really does not need tax revenue to spend and can never run out of money to pay debts or provision itself so long as it’s spending is denominated in its own currency.
https://realprogressives.org/a-meme-for-money-part-4-the-alternative-tax-meme/
Monetary Agency
The term monetary sovereignty is sometimes used in MMT literature to describe governments that issue their own non-convertible, floating currency. Recognizing that no nation is truly independent or sovereign in an absolute sense in our interconnected world, we prefer to use terms like monetary agency or fiscal capacity. In any case, the key point is that any nation that issues its own currency (e.g. the U.S., Japan, Canada) will generally have more fiscal capacity if it can maintain the following:
-
- Makes no promises to convert its currency to other currencies or gold at a fixed rate.
- Allows the currency to float in foreign exchange.
- Has no (or minimal) debt in other nations’ currencies (or gold).
- Operates a central bank function to manage interest rates and payments.
Countries that do not meet one or more of these criteria are often subject to greater domestic fiscal policy limitations.
https://modernmoneybasics.com/glossary/
Libertarianism
is a political philosophy that upholds liberty as a core value. Libertarians seek to maximize autonomy and political freedom and minimize the state’s encroachment on perceived violations of individual liberties.
https://en.wikipedia.org/wiki/Libertarianism
https://www.theamericanconservative.com/marxism-of-the-right/
Austrian Economics
is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result primarily from the motivations and actions of individuals and their self-interest. Austrian school theorists hold that economic theory should be exclusively derived from basic principles of human action.
https://en.wikipedia.org/wiki/Austrian_school_of_economics
Gold bug
is a term frequently employed in the financial sector and among economists in reference to persons who are extremely bullish on the commodity gold as an investment or a standard for measuring wealth.
https://en.wikipedia.org/wiki/Gold_bug
Inflation/Hyperinflation
is a term to describe rapid, excessive, and out-of-control general price increases in an economy.
https://www.investopedia.com/terms/h/hyperinflation.asp
Cantillon Effect
refers to the idea that changes in the money supply in an economy causes redistribution of purchasing power among people, disturbs the relative prices of goods and services, and leads to the misallocation of scarce resources. The Cantillon effect is named after the 18th century French economist Richard Cantillon who published his ideas in the 1755 book Essay on the Nature of Trade in General.
https://www.thehindu.com/business/Economy/cantillon-effect/article65746967.ece#
Neoclassical Economics
is an approach to economics in which the production, consumption, and valuation (pricing) of goods and services are observed as driven by the supply and demand model.
https://en.wikipedia.org/wiki/Neoclassical_economics
Monetarism
maintains that the money supply (the total amount of money in an economy) is the chief determinant of current dollar GDP in the short run and the price level over longer periods. Monetary policy, one of the tools governments have to affect the overall performance of the economy, uses instruments such as interest rates to adjust the amount of money in the economy. Monetarists believe that the objectives of monetary policy are best met by targeting the growth rate of the money supply.
https://www.imf.org/external/pubs/ft/fandd/2014/03/basics.htm
Gold Standard
is a monetary system where a country’s currency or paper money has a value directly linked to gold.
https://www.investopedia.com/ask/answers/09/gold-standard.asp
Consumer Price Index (CPI)
measures the monthly change in prices paid by U.S. consumers. The Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending and can, with that information, calculate inflation/deflation within the economy.
https://www.investopedia.com/terms/c/consumerpriceindex.asp
Oligopoly
is a market structure in which a market or industry is dominated by a small number of large sellers or producers.
https://www.investopedia.com/terms/o/oligopoly.asp
Heterodox Economics
refers to economic theories that diverge from mainstream or neoclassical principles.
https://corporatefinanceinstitute.com/resources/economics/heterodox-economics/
Monetary/Fiscal Spending
Monetary policy refers to the actions of central banks to achieve macroeconomic policy objectives such as price stability, full employment, and stable economic growth. Fiscal policy refers to the tax and spending policies of the federal government. In the United States, fiscal policy decisions are determined by the Congress and the Administration; the Federal Reserve, as the central bank, plays no role in determining fiscal policy.
Debt Ceiling
The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.
https://www.investopedia.com/terms/d/debt-ceiling.asp
https://stephaniekelton.substack.com/p/the-debt-ceiling-limit-is-destructive
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“Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
Milton Friedman
This quote by the grandaddy of neoliberal economics is from 1963. Some in the mainstream have been dining out on it ever since.
According to our guest, author and blogger Brian Romanchuk, neoclassical economics relies on mathematical models and fail to capture the complexity of real-world inflation. He highlights the importance of understanding the supply and demand dynamics in setting prices and explains that inflation can be influenced by factors such as supply chain shocks and changes in the labor market.
Brian also points out that it’s not enough to blame inflation on corporate greed; after all, corporations are always driven to maximize profits. He mentions the Cantillon effect, which suggests that the first recipients of newly created money benefit from inflation as prices go up, while the poor and working class bear the brunt of higher prices down the road.
Brian and Steve discuss inflation constraints on fiscal policy. Brian argues that while extreme fiscal policies could lead to inflation, most of the time, fiscal policy is relatively moderate and does not have a significant impact on inflation. They criticize the government for not trying to set prices and argue that the government often follows the private sector’s lead, making things worse.
Brian Romanchuk is the author of several books, including Modern Monetary Theory and the Recovery. He is the writer and publisher of bondeconomics.com. His writings can be found in his Substack, The BondEconomics Newsletter.
@RomanchukBrian on Twitter
Macro N Cheese – Episode 268
There Is No Magic Pricing Fairy with Brian Romanchuk
March 16, 2024
[00:00:00] Brian Romanchuk [Intro/Music]: Since the 1990s, we’ve had perpetually too many high levels of unemployment and underemployment. There wasn’t actual falling prices, but it was very hard to get any inflation. Throughout the 2010s, everyone was predicting high inflation that never happened. It was stuck at 1% and not 2%.
If you just say, well, it’s corporations being greedy. Well, corporations are always trying to make money, I have never lived in an era where corporations were not greedy.
[00:01:35] Geoff Ginter [Intro/Music]: Now, let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.
[00:01:43] Steven Grumbine: All right, this is Steve with Macro N Cheese. Today’s guest is somebody who’s been on several times before, Brian Romanchuk of Bond Economics. This is a guy who knows his stuff. So I asked him to come on to talk to us about inflation because Brian’s written a bunch of books. Check them out. They’re all over Amazon.
Look up his author code, Brian Romanchuk, and you can find access to all of them. Brian is currently writing a primer on inflation. And for those of you who inflation drives you nuts. Not so much because prices went up, but because you can’t tell people that don’t understand inflation, what inflation even is.
So I’m hoping that by having Brian come on, it can help clear up my messaging and also help take away some of the cobwebs and help me get to a better way of enunciating inflation. Let me bring on my guest, Brian Romanchuk, welcome to the show.
[00:02:39] Brian Romanchuk: Hi, thanks, Steve. It’s good to be back. And to just preface, it’s still the manuscript, the inflation book. The working title is “What Is Inflation?” And it’s really a primer, but it’s aimed at dealing with what I see in mainly economic and financial commentary. You see the same things over and over again, I’ve been saying for decades. Mainly discuss finance, usually a business section of newspapers, what you see on Twitter.
It’s that sort of thing, but it’s maybe a little bit more advanced. It’s basically for someone who is already reading the business paper, but also I do try to cover the basics. In the book, I’ve largely abandoned the idea of discussing inflation theories. Although I do have a little bit on the seller’s inflation idea because I have a chapter on the 2020 pandemic inflation spike.
And so that came up and I tied it in . Generally, I’m not talking too much about the good theories, although I talk about some of the stupid theories, which show up a lot. And as a spoiler, most of the stupid theories about inflation come from hard money types. Basically, people who want to either have the US dollar or any currency pegged to gold or bitcoin, there is a lot of silliness that comes out about inflation from those people. And those things tend to be self-evidently wrong. And it’s not just them, they put it out into the finance space and then it’s just repeated and you see the same stories over and over again, incredibly silly things.
That’s the background of what I’ve been thinking about for some time.
[00:04:40] Grumbine: It’s amazing you say that, because that’s typically the libertarian Austrian gold bug people,
[00:04:46] Romanchuk: Yes.
[00:04:46] Grumbine: That believe in the concept of money growth creating inflation. And if I’m quoting Milton Friedman correctly, all inflation is a monetary phenomenon. And it always comes from when the government spends money.
[00:05:01] Romanchuk: Oh, I just want to say that the quote I believe is “inflation is always and everywhere a monetary phenomenon.” I think there was a little bit more, but that’s usually how they cuts down. Yes.
[00:05:12] Grumbine: Ah..
[00:05:13] Romanchuk: Yeah,
[00:05:14] Grumbine: The thing that’s thrown at us all the time is the Cantillon effect. And I never see this in MMT circles talking about Cantillon effect, but I do see it all the time.
[00:05:24] Romanchuk: I think it’s Cantillon, if you want to call it Cantillon… I speak French, I worked in French one point in my life. From an English speaker point of view, it’s like a Y sound. This would be the Cantillon effect. I’ll do one point on the Austrians because you mentioned it, and then I’ll go to the Cantillon effect.
And I could be wrong about Cantillon, which would be quite embarrassing, but yeah, having corrected you and being wrong, that would be my guess. So one of the Austrian things is that they want to define inflation as an increase in the money supply. And it’s a definition. It’s increase in money supply and that’s it.
And they get angry that oh well, the rising prices is something else. And they’ll go back to 18 something and they’ll quote that this was the original usage, which is silly because no one else uses that. And it’s debatable. You can find other uses where inflation refers to rising prices.
Basically you could have monetary inflation and what would be price inflation. There were two different things and people understood that. But some Austrians have a bug about this, and that everyone else is doing it wrong. You can change the definition, go ahead, but no one wants to use that definition, so tough luck, pal.
So the Cantillon effect, if I had my manuscript with me, I do refer to it and summarize it. I don’t want to dig it out. But basically the idea, as it’s always expressed. He had written a book, since it’s quite old now, I’m not going to guess at the year, it’s old enough that’s in the public domain. And so I’ve got the copy, possibly in French, it was translated in english.
I think I might actually have both that can download for free. The idea is when the money is created, because this was during the gold standard era where money was tied to gold. And so the assumption was money creation would be tied to a gold influx. And so gold mines, gold imports. So you’d have an influx of gold.
And the idea is the new money comes into the economy. Or you could have a secondary money creation by the banking system. The idea is that when the money is created, what happens to prices is the first people to get the money, run out and buy stuff and push the price up, and then the money circulates to other people, and then all the prices get pushed up.
To a certain extent, you could just say, well, money growth causes inflation, causes price to rise. It’s supposed to be, here’s the mechanism and this is what you see. Certain things rise first and then the other ones. And the idea is that, oh no, the currency is debased. So the wiley international financiers, hint, hint, their ethnic background, will run out and buy financial assets first, and then the poor, the struggling working class, the middle class, later on get stuck with buying more expensive bread.
And so the idea is that people will get the money first benefit from the inflation by rising asset prices. So it’s a story to a certain extent. But you could say, look, if we go back most money creation can be by the government deficit spending. As it issues spending, that creates money. The money may be drained by bond issuance, but the initial impetus is government money creation.
But you can also have money creation by private banks making loans. This is actually the other manuscript I’m struggling with, is the banking system. When you make a loan, you owe the bank money, but you increase your deposits. If you have a loan and you put the money in your bank account, you’ve grown your balance sheet and the bank grows this balance sheet and your deposit is money.
And that also grows. It’s not insane to suggest that people borrow to buy something that might affect the prices of those things. If people are running out to get mortgages to buy houses, it would not be an insane theory that gosh, house prices might rise. Although house prices in most countries do not show up directly into the CPI.
It’s plausible, but the whole thing is that if there’s a surge of buying in something, the price might go up. Well, that’s sort of it. What did you expect? The price is going up for a reason. The price can go up just because people think the thing is something is worth more, but it can also be that there is an imbalance in the market and people are just buying things. But this is scientific. It’s just a common sense observation at best.
[00:10:37] Grumbine: As we watch the last five years, four years, we started with supply chain shocks. And then people were being given money during the pandemic. Now we’re hearing, well, maybe all that wasn’t necessarily the problem was seller’s inflation. Do we have one kind of inflation? Or do we have multiple kinds hitting us at once that as one dissipated, the other took over?
[00:11:08] Romanchuk: There’s a lot of prices. When we look at the CPI, and I think I just put one of the manuscripts, there’s 80, 000 prices that go into the US CPI, the consumer price index. So there’s a lot of different prices and each one is a price they’re set in markets and prices aren’t handed down by magical laws of supply and demand they’re set by human beings and human beings are funny creatures. And there’s patterns. But people, especially if something’s set in the market, markets do whatever they want, the prices go up.
If you’re looking at oil, they go up, they go down. And it’s hard to make money. They’re not completely predictable. Certain things are, if a price is administered, well, in the sense, if you know what the administrator is going to do, well, it’s predictable. So what happened? I didn’t want to say this is what happened during the pandemic because I could change my mind.
I’m not really writing about theory. And I give a little bit of a narrative and describe it. This is the thing, this thinking and, but I don’t want to pin myself down because I could change my mind. I would say what we see is the very initial wave during the shutdown, there was chaos, it was complete chaos.
And so you had an initial deflation, which people might forget about that price of oil collapsed because suddenly flights were canceled. People couldn’t drive and there’s a huge glut of oil. There’s an initial deflation in certain prices. But then you ran into an initial supply shock. We had toilet paper panics because, oh, they couldn’t produce toilet paper because everything was shut down.
So in a shortage, there’s a lot of arcane debates about supply and demand. It’s not that shocking, when there’s a shortage, that prices will spike. They don’t necessarily have to. You can say, look, instead of raising the price of toilet paper to a hundred dollars a roll, you just limit the number of rolls per customer, that’s quantity rationing. And what I saw locally in Canada was that it was a mixture. Some prices went up, people were just, “calm down, don’t buy 3, 000 rolls of toilet paper,” although some people did. And so on. Flour was a problem… So after that, all the prices, because people weren’t using oil, there was then a spike due to a complete collapse of supply chains, and it was predictable.
And at that same time, because they shut down activity, well, people aren’t paying taxes. This was a deliberate decision. They shut down the economy. Whether that was a good idea or a bad idea, they did it. And they did it for health reasons. And based on Montreal, we were hit with the initial wave almost simultaneously with New York, and the medical system was about to collapse here.
Other places didn’t have the problem, but the medical system here was going to collapse. Quarantines are standard ways of dealing with plagues. So they had to do it. There was a reaction. The economy would have collapsed because people not getting paid, they still need necessities. So there were a number of programs to give people money so that they would have an income flow.
You had a huge blowout in the deficit. And you could say, well, were these programs well run? Well, how could they? The government itself was shut down. All the people who could design the programs were all stuck working from home themselves. So it was chaotic. If you had adequate, well-prepared welfare state mechanisms to handle such a crisis; let’s say if the job guarantee was in place and was set up, they maybe could have been bolted on and it could be done smoother and less money shot at the system.
So it’s not surprising. Nobody was really surprised that if people keep spending money but we can’t produce things, you’re going to get a huge mismatch and there’s an initial price spike. That is completely unsurprising. I don’t think anyone would not have predicted that. But later on, the idea is that when the measures were released, why didn’t the prices go back where they were?
And then you’re looking at what might be called second order effects, that prices kept rising. And certainly there was an issue with the labor market. The labor market since the 1990s, we’ve had perpetually too many high levels of unemployment and underemployment. There wasn’t actual falling prices, but it was very hard to get any inflation.
Throughout the 2010s, everyone was predicting high inflation. It never happened. It was stuck at 1% and not 2%. And what happened is you finally had a tightening of the labor market. Young people could actually get jobs to a certain extent. So if wages go up, that’s an important cost of doing business in the economy.
Cause it’s an input cost and companies are not charities. They’re not going to sell products at a loss. So rising wages is going to force prices higher. And then we get into the question of: are companies raising prices even more than justified by the rise in their input cost to get higher profit margins?
So that’s a seller’s inflation. Corporations with power raise prices more than their input cost so they have higher profit margin. In Canada, the big political fight is the big grocery chains, as is typical for Canada, has become an oligopoly. I’m not sure how many. But basically there used to be many small regional chains.
Everything has been consolidated to a small number of companies, but they keep the old store brands to make it look like there’s more variety than there actually is. And so the question is, were they gouging customers and taking advantage? We can do it. We have the market power. And it’s not a monopoly, but they have so much control, so much market share, they can raise the prices and people aren’t going to shop elsewhere so they can get away with it and they can raise their profit margin. And amazingly enough, the free market conservatives think that idea is bunk. And then everyone else says, no, the grocery chains are gouging people. That’s what’s showing up in Canada and I don’t know, I haven’t looked at it.
I’m not going to wade through the data and get involved in that political argument. If they are, well, it’s bad, but the government has grumbled about it. So we’ll see, but what can you do? So that’s sort of it. It’s a chain of events, but if you go back to the money printing, I think that’s the silly bit.
There were deficits and then you have money growth. A lot of the money printing is the federal reserve being a bunch of crypto-monetarists. Well, not referring to cryptocurrency. The older political meaning of them, they’re not necessarily monetarist, but they’re monetarist fellow travelers. They bought bonds from the private sector so that they grew their balance sheet because whatever reason, it could be the financial markets might’ve had instability.
It’s possible. Canada did. They had not done quantitative easing before, but they did for the first time in the crisis. And their argument is that they did it for functioning of financial markets, which I guess is possible. But by and large, it doesn’t have the economic effect, other than avoiding a collapse of the financial markets, is largely in the imaginations of the people who believe in the money supply.
[00:19:51] Grumbine: You said something extremely important. Prices are not set by some magic fairy. It’s set by people. And going back to my old days in marketing school, we learned to the four P’s of marketing: product, price, promotion, and place. The price is set by a corporation, whether it be a wholesaler or retailer. They set their prices based on the position that they want to take and based on whether or not they think there’s slack in the economy and demand for their product and they can maximize profit.
Why does the standard, conservative, libertarian, but also even liberals, what is it about them that allows them to latch on to the idea that it wasn’t somebody in a room raising prices? That it’s this magical occurrence and therefore we now have inflation?
[00:20:51] Romanchuk: Well, the story I guess would be what I would call neoclassical economics, which is a term that academics might like. Most people would say mainstream, but mainstream is a little bit vague. To be honest, when you think about it, if you talk to a bunch of bank economists, well, are they not mainstream?
That’d be crazy. But to the neoclassical, it’s an academic and it’s the mainstream, orthodox, non MMT, school of economics based on mathematical models. And the core of the models they want to use, where prices come down to basically a supply and demand curve. In the worst case, you draw lines on the blackboard, but the more sophisticated models, there’s a lot of equations, but it comes out to the same thing, that the prices are being set by the intersection of supply and demand.
And these are the models they want to use. But they want it to be mathematical. They can stick in various imperfections, but something like, oh, corporations want to raise the price, doesn’t fit the models. And so there’s a resistance across the board to the idea. Cause from their point of view, it’s that saying corporations want to rise the price.
It has no predictive value. And it’s because you could say, well, If you follow mainstream economists, they laughed about the idea. If they say, if inflation is based on greed, when prices are falling, people weren’t greedy? And the seller’s inflation is beyond that. But if you just say, well, it’s corporations being greedy, well, corporations are always trying to make money.
I have never lived in an era where corporations were not greedy. Things were different in the 1950s, it was a different environment. But since the 1960s, most corporations, the entire focus is making money. So you have to be careful. If you wanted a mathematical model of inflation, you need something to explain.
But that’s the problem. My complaint is that, well, maybe the mathematical models just don’t work, because people are complicated. And I could be right, but it’s the wrong answer if you’re an academic. See, I can write a book and say, well, inflation is complicated and I’m satisfied. I published my book and I go write about something else.
But saying inflation is complicated is very difficult to get, and I don’t know what the target is, five publications a year or whatever they expect academics to put out nowadays. So that’s the thing is they need to write papers that are unique. And so they have a ‘publish or perish’ environment. And the way the neoclassicals publish is they do all kinds of mathematical papers.
I used to be in the applied math business in the 1990s. And so that’s how it works. So you’ve got to publish papers and so you’re just keep doing things. And what happens is you just basically have to keep publishing slight variations on existing papers because everyone needs an insane amount of paper. So that’s why.
So the whole bias is they want a mathematical model. If you don’t get a mathematical model, they’re not interested. But no one wants to admit [I’ve] spent my entire life doing advanced studies. I’ve got degrees. Oh, look, he’s Harvard PhD, blah, blah, blah. And then, oh yeah, by the way, everything I worked on is completely and utterly worthless.
[00:24:38] Grumbine: Just garbage.
[00:24:39] Romanchuk: I have a PhD in a real field, so I don’t care. It’s not my problem, but I can say, look, this is all worthless and I’m fine with it. But if that’s your background, it’s a little bit embarrassing. So no one wants to say that. And so there’s the resistance and that explains the debates to a certain extent. The heterodox economist, it’s a bit more literary and it’s a different convention. It’s not like what I’m used to. As an applied mathematician, I can understand what the neoclassicals are doing. And I understand their publication, how they’re looking at it. But the heterodox is different. It’s a different style. It’s more, I would say literary and it has its good and bad points.
Cause they’re also under the same insane publication pressure. They face the same problem. There’s too many papers being published. So after a while, there’s just too much stuff. There’s far more papers being written than there are papers that really should be read. And that’s it. That’s the university system. It’s failed and that’s it. And because they’re part of it, they can’t escape it. For me, hey, I just publish books. People read them, whatever. Great. But, I don’t have to publish. I’m outside of it and I’m not publishing a lot and I’m not revolutionizing the field, but I can see the problems. I’m up in the peanut gallery, throwing peanuts.
[00:26:10] Grumbine: Well, I’m up there with you.
[00:26:23] Intermission: You are listening to Macro N Cheese, a podcast brought to you by Real Progressives, a non profit organization dedicated to teaching the masses about MMT, or Modern Monetary Theory. Please help our efforts and become a monthly donor at PayPal or Patreon, like and follow our pages on Facebook and YouTube, and follow us on TikTok, Twitter, Twitch, Rokfin, and Instagram.
[00:27:14] Grumbine: One of the things that you just help reveal, and I think it’s really important is this shooting gallery where everybody says MMT doesn’t ever talk about inflation. And then you have MMTers saying, of course we spend up to the point of inflation. Inflation is the key constraint. It’s not the spending that’s causing the inflation.
It’s the asshole with the pen. And so if you want to deal with the asshole with the pen, you’ve got to do something along the lines of price controls. Or something else has nothing to do with the theory of inflation. It has to do with greed or profiteering. You’ve got people saying, we’ve got people are printing money.
So they’re expecting inflation, let’s mark some stuff up and see if we can make a buck or two. And very serious talking about this inflation, that’s a person with a pen marking prices up, and we’re trying to come up with complex formulas and how we’re taking it very seriously. In reality, it seems like a whole bunch of bunk.
[00:28:22] Romanchuk: Yeah. I guess from my perspective, I, to my background was in the fixed income bond market. So, I was observing or maybe forecasting inflation. My interest wasn’t policy. Basically given policies, I might say, well, what is going to happen? But I wasn’t on the policy suggestion side. That’s not really my background.
I don’t have a background of saying, how should you control inflation? It’s been more of a question: Well, what is probably going to happen? And the environments have all been since, well, in Canada, since the early 1980s, it dismantled all the price controls. There are some still. For example, the price of milk in Quebec is fixed.
It’s $7.68, I believe. One thing in Canada that’s different, I think, in other parts of the world, is they sell milk in plastic bags. It’s four litres of milk in three bags, and then you just put that into a jug. It holds it, and then you have also cartons, but I buy the plastic bags. But anyway, so price controls have largely dismantled.
So I’m used to dealing with a system where there are no price controls. There are very limited ones. But even if you have price controls, you run into shortages. The problem with price controls is that if things get out of alignment, if you keep the certain prices. They will eventually, if you’re not careful, we have to produce this at a loss and companies aren’t going to produce things at a loss.
So there are what people call distortions. They existed. Certainly the business sector hated it. They would have to be administered better than they were. They worked in wartime. Price controls and rationing are very good in a total war situation. That’s entirely typical. But wars hopefully end. Then you go back to normal later.
It’s hard to stay on a wartime footing for decades. That’s my concern with price controls. So you could bottle things up and there is the MMT literature. I’m somewhat agnostic on that, but not everyone is. I’m probably closer to the consensus on price control. But, MMT in general, the constraint, I view that as a somewhat theoretical point that the limit on fiscal policy is inflation.
But that’s an extreme. If the U S government decides to hand every single man, woman, and child in the United States, 1 million dollars, what’s going to happen? Well, prices will probably go up, but that’s it. If we look at a very extreme fiscal policy, so that’s the thing. It’s not like the government running out of money or going bankrupt.
But that is for a very extreme policy. Most of the time, fiscal policy is pretty mediocre. And so it’s very hard to trace. And I see some comments, in popular MMT, that they’re trying to blame every wave of inflation on fiscal policy. That doesn’t really work. There’s too many other things going on. You can come up with theoretical models where the government sets the price level, but that’s in a theoretical model that are simplified, and it makes sense from a theoretical point of view. But those models are not very predictive with the actual system we have, which is way more complicated. And generally speaking, the academic MMTers are not saying life is this simple. It is complicated.
But the constraint, why worry about, oh, this is on the extreme, because people are talking about things like default. The fiscal conservatives say, well, we’re going to run out of money. We’re all going to die. Blah, blah, blah. Their frame of reference is the extreme. That’s what they’re talking about. The people talking about a fiscal crisis, they’ve been talking about a fiscal crisis for a very long time.
These fiscal crises never seem to actually happen, other than silliness in the US like the debt ceiling. They’re not actually showing up. Although one could debate, but what happened in the UK, but that’s a micro story. These crises don’t actually happen. The economies tend to just muddle along. Inflation goes up and down, growth goes up and down, so on and so forth.
And if we’re doing forecasting, you have to deal with this muddling along situation. And so you need a more complicated model for that, if you’re going to work. And my complaint is, well, maybe these models stink, but no one wants to discuss that because it puts academics out of business. So they want the models to work because they’re saying, oh yeah, we’ve got all these secret sauce.
Although in practice among the people who are supposed to be forecasting, there is a lot more skepticism. There is a big difference. If you go into finance, if you see people with “economist” on their job description, they’ll be very confident about their economic models for the economy. If you talk to the fixed income strategists, if that’s their title, they might have an economics background, but they’re actually relatively rare, believe it or not, most of them are from the applied sciences. There is way more skepticism. They might not have very sophisticated inflation models, but the ones that survive are skeptical about economic models in general. Their focus is on making money, and so no one’s making money betting on the long term trend. You can make short term bets on inflation, and people do that.
It is possible to do reasonable forecasts of inflation, so long as you get oil prices right. If you can get the direction of oil correct, why aren’t you making lots of money trading oil futures? And so that’s the thing is that inflation forecasts, a lot of it comes down to what is oil doing, and then you have to have a view on the oil market.
[00:34:49] Grumbine: Most times you hear MMTers say what we just talked about, that the real constraint is inflation. But before this became the new framing, the real restraint was real resources. And so I’ve always considered real resources to be the constraint, whether we have enough labor. And when we talk about inflation being the constraint, in what way can inflation be combated in a meaningful way, based on what we’ve just said?
Because what we’re talking about is completely man-made. Again, it comes back to the pricing fairy, it doesn’t exist. How do you meaningfully combat inflation when in reality, what you’re dealing with is people doing things without some control. It has nothing to do with printing money. And to your point, even in a shortage, they don’t have to raise prices.
They could maintain the price level and ride that shock for a little while. And presuming they’ve got enough profit built into their models to survive, they wouldn’t have to pass that on. Help me understand this. Because it seems to me we’re almost placating a group of people by saying, yes, the real constraint is inflation.
The more I learned, the more I dig, the less that makes sense to me.
[00:36:12] Romanchuk: Well, the real resources versus inflation is just that if you attempt to buy more stuff than is really available, you want to buy more toilet paper than is being produced, well, that’s going to show up in inflation. You can attempt to cover it up with price controls. Yes. Inflation due to a shortage is telling you you’ve got a problem.
You have a mismatch. You might have inventories, but if you want to consume more than is being produced, you have a problem. It can’t be done. It’s like wartime, you can’t shoot more ammunition then is being produced. So the inflation being the constraint, well, that’s under the current environment where we’re not attempting to use price controls.
And then you can say, you can try using price controls, but then you have side effects of shortages, you get black markets, et cetera. It’s not perfect. But the other issue is that companies cannot be forced to produce at a loss. If wages go up, prices will have to rise. It’s not just price controls. In Canada, I think it was the six and five program was the last one.
It was wage and price control. So you’re also controlling wages. Well, that means that unions are constrained what they can ask. And so it’s not just stopping corporations from raising prices. You’ve got to stop those greedy workers from getting wage increases. And that also has bad optics. And that’s one reason they were willing to drop them because otherwise companies will just fail.
Okay. They produce at a loss, they fail. Well then the government can prop them up. Well, eventually, to a certain extent, the welfare states ran into a lot of problems and a lot of discontent in the 1970s. And the Post-Keynesians say they’re not as bad as the people said, but there was a lot of things that was very unpopular.
I was young in those days. It’s politically awkward to say, I want 1970s policies. Perhaps, but it’s got to be done intelligently. It’s no magic. You overshoot your real resources, something has to give and whatever it is, it’s going to be unpopular. Right now, the politicians just wanted to get out of that business.
So for a career politician, that was their view. So how do you control? Really, I’m not the person to ask. But the issue is there was a dismantling of price fixing, antitrust. That was the theory because it is harder. And you can say, well, competition, magic capitalism. But competition is a thing. A corporation that has monopoly power or an oligopoly that is conspiring, they have way more power to raise prices.
And I think even Adam Smith complained about this. Other than the diehard libertarians, everyone viewed price fixing to be a problem. And so you could maybe unwind some of that. Certainly, for example, in the US, the whole medical system, it’s a fiasco, and generally speaking, as a Canadian, one of the topics of conversation up here is what a disaster the US medical system is. And for people traveling, people go down there. Making sure you have enough insurance coverage, because a lot of old people spend part of the winter down in Florida. So, getting proper medical coverage for the US, Anything involving medical costs in the US, for example, is a made in US problem. Canada, it’s largely government controlled. And we have different issues, but medical inflation… it’s not a topic that people worry about, shall we say. So that’s one area. The other one is rent and house prices. That is, how do you deal with rents? I’m not sure Montreal still has rent controls.
How you deal with rent, the way that was dealt with in the post war is just build lots of housing, and we’re not building it. What’s happened in Canada is we’ve had a huge wave of immigration and construction did not match the immigration wave. And a lot of the immigrants are students. And so you bring in a lot of people.
Yeah, you’re going to have a shortage. All rents are going to go up. And so maybe you could do rent control. Back in the day when my grandparents came, they just stuck people and they live in sod houses on the Prairie. We don’t like people freezing to death and no one would give planning permission for a sod house in 2024.
But see, that’s a sectoral problem, but something like automobiles, they’re all imported. Well, let’s say US-Canada, it’s joint. There was the auto pact between Canada and the US. So the Canadian automobile industry, there used to be independent companies, but effectively they’re subsidiaries. But the production, it’s in Canada, so it’s shared. But we also have some multinational, but a lot of it’s imported. So the Canadian government can’t tell the Japanese how much to charge for imported autos. So it depends. Each market is different. You certainly can’t do much about gasoline. You can try. What countries do is they offer subsidies for gasoline, and if you look at all the countries blowing up financially, one of the things that typically happens is that their gasoline subsidies became a giant expenditure.
So, you could maybe deal with certain things, but you can’t deal with everything. If you are importing goods, there is someone on the other side not in control of the government. So, And they’re going to charge you whatever they think they can get away with, and you have to accept that. So every market is slightly different, and you have to accept that. It’s not going to be a simple blanket solution that covers every single component of the CPI.
[00:42:48] Grumbine: Let me just take a step back. Warren Mosler will often say, that’s not inflation, that’s a relative value story. He says inflation is always when government decides to pay higher prices for goods and services. And this has been my standard for how I view inflation. When government decides to pay higher prices, we have higher prices.
When government doesn’t, you’re dealing with relative value. Can you help me understand that better? Is that your understanding or did I get that wrong?
[00:43:23] Romanchuk: Well certainly, that is an idealized model. And you can create an ideal economy where you get this. And you could, with the job guarantee.
[00:43:37] Grumbine: The nominal price anchor.
[00:43:39] Romanchuk: Yes. There, the government could just set a very important price. As long as the job guarantee wage is at an economically meaningful wage. If the government gave everyone a job at 50 cents an hour, we’re guaranteeing a job at 50 cents an hour at 2024 prices, well, no one’s going to take it up.
So it would be useless. It would have no effect on the economy and it would be too low, but it would become the de facto minimum wage. Basically the private sector is generally going to have to offer a wage, probably a bit higher. There could be jobs that are actually desirable where they could go under that.
That sounds crazy. Why would you work less? This happens all the time for interns. So you have interns, people with rich parents who can subsidize them often. But basically, to get the job experience, they’ll actually work at a below market wage, and so companies take advantage of that. But generally speaking, other than in cases where people want to get into a company for hopes of advancement, the job guarantee would be the minimum wage.
And so the government would control the minimum wage of the economy. This is more in the US. The federal minimum wage is a very low level. 7 dollars an hour, and that’s nowhere near the prevailing wage in a lot of states, so it’s meaningless. But this would be an actual, there’d be people working at this wage. It would be a meaningful minimum wage.
And so they could control that. That is how I read Warren Mosler’s take. They could do that. It’s an important wage because wages are very important for domestic prices. Anything that is domestic, the ultimate input cost is your local wages. So there you could say, aha, yes, there the theory works. The thing is you still have a private sector wage and that private sector wage, which would be generally higher, that’ll move up and down with supply and demand in the private sector economy.
And not everyone is going to be working the job guarantee wage. Assuming you have a private sector, people will be working in private sector wages, which are higher, and that will still move around. So you’re still going to have parts of the price level, the wages, which are the price of labor, they’ll be moving around.
And so it’s not going to be total control. It’s a lever. But the thing is they’re not even attempting to do that. So the government, generally speaking, are paying the prevailing price. They take bids and they bid at market wages. So to a certain extent, there’s not even an attempt. So if you look at the actual economies around us, the governments don’t attempt to set the price.
Maybe they do in certain areas. But by and large, they aren’t even attempting to set the price. They’re not behaving the way the model says they should operate. And that’s part of the problem. They’re not being sensible. Government in wartime, and Warren Mosler said this, when push comes to shove and the total war is when they can’t afford to be inefficient, suddenly the government’s become much more careful about setting prices, but in peacetime, they don’t have that existential crisis facing them. So they follow what the private sector is doing. So they’re not helping. They make things worse. Under that system, you can’t predict what’s going to happen. You could have high inflation. You could have low inflation. Who knows? You have to look at what’s happening in the private sector that’s driving prices.
And the other thing to keep in mind is that you can’t do anything about imported prices. The US is called a closed economy. The US is so large and a lot of the trade is intrastate trade, not international trade. Whereas in Canada, a spectacular amount of transactions go across the Canada-US border. If you’re a business anywhere in Canada, your natural markets are your home city, the area around there. And then the American cities on the other side of the border, not a city three time zones away, where they speak a different language on some cases. And once you start bringing international, well, then the government can’t do much about that.
They can try regulating, they’re free to ignore what your government wants.
[00:48:25] Grumbine: Brian, I’d like you to give us the final word on inflation for at least this particular conversation. By the way, I really appreciate you doing this and know you don’t feel particularly great right now. So I do appreciate you fighting through that cough.
[00:48:41] Romanchuk: Okay. Now the last word. It’s a complicated story. Most of the problems people have is that they’re reading stuff on the internet that’s not exactly true. I didn’t go through some of the basic problems, but I just want to explain. For example, there was one alternative inflation site. It said, look, food and energy is not part of the CPI, consumer price index.
And people repeat this. Oh, yeah, yeah. Rising gasoline, that’s not in the CPI. What? All you need to do is read the actual report by, in the US, the Bureau of Labor Statistics, or Statistics Canada, and they will tell you exactly what happened in the CPI that month. And they will say, this is all prices, that’s called the headline.
Then they have another index, is the one that is excluding, that’s called CORE, where it’d be excluding food and energy. And economists use that. People will repeat this. Another thing that people will say, well, they’re shrinking the product size. You get less cookies. No, they weigh exactly what’s based off of the weight of the product.
I just take into account all these things that people say. Oh, well, everyone thinks the CPI is too low that things are way more expensive. Whereas if you look at from the serious economists, let’s say actually CPI overstates the level of inflation over the long run. The problem is people want to keep buying the same stuff at the same price.
And things change. I cannot go to Blockbuster TM Video to rent VHS movies anymore on the weekend. They don’t exist. Blockbuster doesn’t exist. VHS video cassettes no longer exist. Things change. And so, prices will change. If there’s a shortage of something, if you’re a free market capitalist, hit the signal.
Don’t consume so much of that. Do something else with your money. If it’s food, eat something cheaper. It’s not necessarily what you want to do, but that’s how it works. And that’s the thing is that people get mad about rising prices and so they’ll believe anything and basically it just gets repeated over and it’s treated as a truth. On the popular discussion, this is why I’m doing a basic one, it’s almost impossible to have a discussion on the topic. Our discussion here was mainly about theory, MMT, that was a higher level. If you discuss on Twitter, most of your responses will be about crazy inflation theories. You have to get away a bit from the crazy inflation theories that have some understanding. Normally, I’m very skeptical, you see, of mainstream economists. If you look at the discussions of the CPI, what is the CPI? They’re actually fairly reliable and sensible. You want to go to those sources, as they explain how is it calculated. And if you see something that seems strange about the CPI, it is probably incorrect. There are some weird things, but most of the things saying, ah, the government is manipulating the statistics is going to be incorrect. So that’s the thing is that there’s high level discussions, which to be honest with what we had, but then what you see on the internet, whoa. And financial media is commentary.
If you go to a bank, most investment banks aren’t going to be publishing really silly stuff. But if you go to, let’s say economics, someone doing financial commentary, don’t trust anything you read there. That’s my warning to the listeners.
[00:52:41] Grumbine: Very good. And I appreciate that so much. Brian, thank you so much for taking the time to talk to us. This subject is the subject that everybody wants to talk about ad nauseum. So, having you come on, provide your perspective has been incredibly helpful to me and hopefully everybody else enjoyed it. My name is Steve Grumbine.
I am the host of Macro N Cheese podcast. We are funded by your contributions. Macro N Cheese is part of Real Progressives, which is a 501(c)(3) nonprofit in the United States. If you feel like the work we’re doing is worth supporting, consider becoming a monthly donor. You can either find us on our website, realprogressives.org and go to donate, or you can go to our Patreon, which is patreon.com/realprogressives. Please check out Brian’s books. They’re all over Amazon. You can find them. Great reads. They are technical. He is not someone that is going to mince words. So check them out. You’ll learn a whole lot. Brian, thank you so much for joining us one more time, sir.
[00:53:45] Romanchuk: Thanks for the invitation.
[00:53:47] Grumbine: Absolutely. All right. Steve Grumbine, my guest Brian Romanchuck, Macro N Cheese. We are out of here.
[00:54:00] End Credits: Macro N Cheese is produced by Andy Kennedy, descriptive writing by Virginia Cotts and promotional artwork by Andy Kennedy. Macro N Cheese is publicly funded by our Real Progressives Patreon account. If you would like to donate to Macro N Cheese, please visit patreon.com/realprogressives.
GUEST BIO
Brian Romanchuk is a consultant and author with 15 years of experience as a senior quantitative analyst in fixed income. Dr. Romanchuk has specialized in the development of research systems and analytics and is currently a consultant and blogger. Brian holds a B.Eng. in electrical engineering from McGill University, and a Ph.D. from the University of Cambridge in control systems engineering and is a Chartered Financial Analyst.
Some of Brian’s work can be found through the navigating following links:
https://talkmarkets.com/contributor/brian-romanchuk/
https://bondeconomics.substack.com
https://substack.com/profile/39698338-brian-romanchuk
Many of Brian’s books can be found here:
https://bookshop.org/search?keywords=Brian+romanchuk
PEOPLE MENTIONED
Milton Friedman
was an American economist and the 20th century’s most prominent advocate of free markets and generally regarded as the school of monetarism’s leading exponent.
https://www.econlib.org/library/Enc/bios/Friedman.html
https://www.britannica.com/topic/monetarism
James “Jim” Grant
is an American writer and publisher, founded Grant’s Interest Rate Observer, a twice-monthly journal of the financial markets and has written several books on finance and history.
https://en.wikipedia.org/wiki/James_Grant_(finance)
Adam Smith
was an 18th century Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Considered by some as “The Father of Capitalism”, he wrote The Wealth of Nations in 1776.
https://en.m.wikipedia.org/wiki/Adam_Smith
https://www.econlib.org/library/Enc/bios/Smith.html
Warren Mosler
is an American economist and theorist, and one of the leading voices in the field of Modern Monetary Theory (MMT). Presently, Warren resides on St. Croix, in the US Virgin Islands. An entrepreneur and financial professional, Warren has spent the past 40 years gaining an insider’s knowledge of monetary operations.
INSTITUTIONS / ORGANIZATIONS
Bureau of Labor Statistics
is a federal government agency that measures labor market activity, working conditions, and price changes in the economy.
Statistics Canada
is the national statistical office of Canada.
https://www.statcan.gc.ca/en/start
CONCEPTS
Modern Monetary Theory (MMT)
is a heterodox macroeconomic supposition that asserts that monetarily sovereign countries (such as the U.S., U.K., Japan, and Canada) which spend, tax, and borrow in a fiat currency that they fully control, are not operationally constrained by revenues when it comes to federal government spending.
Put simply, modern monetary theory decrees that such governments do not rely on taxes or borrowing for spending since they can issue as much money as they need and are the monopoly issuers of that currency. Since their budgets aren’t like a regular household’s, their policies should not be shaped by fears of a rising national debt, but rather by price inflation.
https://www.investopedia.com/modern-monetary-theory-mmt-4588060
https://gimms.org.uk/fact-sheets/macroeconomics/
Modern Money Primer by L. Randall Wray
https://realprogressives.org/mmt-primer/
Federal Job Guarantee
The job guarantee is a federal government program to provide a good job to every person who wants one. The government becoming, in effect, the Employer of Last Resort.
The job guarantee is a long-pursued goal of the American progressive tradition. In the 1940s, labor unions in the Congress of Industrial Organizations (CIO) demanded a job guarantee and Franklin D. Roosevelt supported the right to a job in his never realized “Second Bill of Rights”. Later, the 1963 March on Washington demanded a jobs guarantee alongside civil rights, understanding that economic justice was a core component of the fight for racial justice.
https://www.sunrisemovement.org/theory-of-change/what-is-a-federal-jobs-guarantee/
https://www.currentaffairs.org/2021/05/pavlina-tcherneva-on-mmt-and-the-jobs-guarantee
Federal Job Guarantee Frequently Asked Questions with Pavlina Tcherneva
https://pavlina-tcherneva.net/job-guarantee-faq/
Taxation within a Fiat System
The monetary system that the United States employs is a state money, or fiat, system, and from that framing, the most important purpose of taxes is to create a demand for the state’s money (specifically, for its currency). Further, being the monopoly issuer of its own currency, the state really does not need tax revenue to spend and can never run out of money to pay debts or provision itself so long as it’s spending is denominated in its own currency.
https://realprogressives.org/a-meme-for-money-part-4-the-alternative-tax-meme/
Monetary Agency
The term monetary sovereignty is sometimes used in MMT literature to describe governments that issue their own non-convertible, floating currency. Recognizing that no nation is truly independent or sovereign in an absolute sense in our interconnected world, we prefer to use terms like monetary agency or fiscal capacity. In any case, the key point is that any nation that issues its own currency (e.g. the U.S., Japan, Canada) will generally have more fiscal capacity if it can maintain the following:
-
- Makes no promises to convert its currency to other currencies or gold at a fixed rate.
- Allows the currency to float in foreign exchange.
- Has no (or minimal) debt in other nations’ currencies (or gold).
- Operates a central bank function to manage interest rates and payments.
Countries that do not meet one or more of these criteria are often subject to greater domestic fiscal policy limitations.
https://modernmoneybasics.com/glossary/
Libertarianism
is a political philosophy that upholds liberty as a core value. Libertarians seek to maximize autonomy and political freedom and minimize the state’s encroachment on perceived violations of individual liberties.
https://en.wikipedia.org/wiki/Libertarianism
https://www.theamericanconservative.com/marxism-of-the-right/
Austrian Economics
is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result primarily from the motivations and actions of individuals and their self-interest. Austrian school theorists hold that economic theory should be exclusively derived from basic principles of human action.
https://en.wikipedia.org/wiki/Austrian_school_of_economics
Gold bug
is a term frequently employed in the financial sector and among economists in reference to persons who are extremely bullish on the commodity gold as an investment or a standard for measuring wealth.
https://en.wikipedia.org/wiki/Gold_bug
Inflation/Hyperinflation
is a term to describe rapid, excessive, and out-of-control general price increases in an economy.
https://www.investopedia.com/terms/h/hyperinflation.asp
Cantillon Effect
refers to the idea that changes in the money supply in an economy causes redistribution of purchasing power among people, disturbs the relative prices of goods and services, and leads to the misallocation of scarce resources. The Cantillon effect is named after the 18th century French economist Richard Cantillon who published his ideas in the 1755 book Essay on the Nature of Trade in General.
https://www.thehindu.com/business/Economy/cantillon-effect/article65746967.ece#
Neoclassical Economics
is an approach to economics in which the production, consumption, and valuation (pricing) of goods and services are observed as driven by the supply and demand model.
https://en.wikipedia.org/wiki/Neoclassical_economics
Monetarism
maintains that the money supply (the total amount of money in an economy) is the chief determinant of current dollar GDP in the short run and the price level over longer periods. Monetary policy, one of the tools governments have to affect the overall performance of the economy, uses instruments such as interest rates to adjust the amount of money in the economy. Monetarists believe that the objectives of monetary policy are best met by targeting the growth rate of the money supply.
https://www.imf.org/external/pubs/ft/fandd/2014/03/basics.htm
Gold Standard
is a monetary system where a country’s currency or paper money has a value directly linked to gold.
https://www.investopedia.com/ask/answers/09/gold-standard.asp
Consumer Price Index (CPI)
measures the monthly change in prices paid by U.S. consumers. The Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending and can, with that information, calculate inflation/deflation within the economy.
https://www.investopedia.com/terms/c/consumerpriceindex.asp
Oligopoly
is a market structure in which a market or industry is dominated by a small number of large sellers or producers.
https://www.investopedia.com/terms/o/oligopoly.asp
Heterodox Economics
refers to economic theories that diverge from mainstream or neoclassical principles.
https://corporatefinanceinstitute.com/resources/economics/heterodox-economics/
Monetary/Fiscal Spending
Monetary policy refers to the actions of central banks to achieve macroeconomic policy objectives such as price stability, full employment, and stable economic growth. Fiscal policy refers to the tax and spending policies of the federal government. In the United States, fiscal policy decisions are determined by the Congress and the Administration; the Federal Reserve, as the central bank, plays no role in determining fiscal policy.
Debt Ceiling
The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.
https://www.investopedia.com/terms/d/debt-ceiling.asp
https://stephaniekelton.substack.com/p/the-debt-ceiling-limit-is-destructive