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Stop Pretending Price Inflation Is a Result of “Too Much” Profit

Some commentators attribute the latest sharp increase in the Consumer Price Index to businesses pushing prices of goods higher in order to secure higher profits. (See the New York Times article “Democrats Blast Corporate Profits as Inflation Surges,” Janu

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Some commentators attribute the latest sharp increase in the Consumer Price Index to businesses pushing prices of goods higher in order to secure higher profits. (See the New York Times article “Democrats Blast Corporate Profits as Inflation Surges,” January 3, 2022). Note that the yearly growth rate of the Consumer Price Index jumped to 6.8 percent in November 2021 from 1.2 percent the year before. However, is it true that businesses are determining the prices of goods and services?

How Prices Are Established

As a rule, a supplier sets the price. After all it is the supplier who offers the goods to the buyers. So it is the supplier who must set the price of a good before he presents the good to the buyers.

In order to secure the price that will improve his lot, the price that the supplier sets must cover his direct and indirect costs and provide a margin for profit. By setting the price, the supplier must make as good an estimate as possible regarding whether he will be able to sell his entire supply at the price set.

The process of making the estimate involves the assessment of the possible responses of the buyers and the possible responses of his competitors—other suppliers. If his estimates are accurate, then he makes a profit. By making a profit, the supplier expands his pool of resources, which in turn enables him to attain more ends. His standard of living improves.

Observe that while the cost of production in some cases would appear to be the main factor in price determination, this is not so. Ultimately, it is the evaluation of the buyer that dictates whether the price set by the supplier is going to be realized. Every buyer decides in his own context whether the price paid for a good betters his life and well-being.

If the cost of production were the driving factor behind setting market prices, then how can we explain the prices of goods that have no cost because they are not produced—goods that are simply there, like undeveloped land?

Likewise, the cost-of-production theory cannot explain the reason for the high prices of famous paintings.

According to Rothbard, "Similarly, immaterial consumer services such as the prices of entertainment, concerts, physicians, domestic servants, etc., can scarcely be accounted for by costs embodied in a product."1

It follows then that businesses striving to make profits cannot cause increases in the prices of goods and services without the consent of consumers.

Defining Price

The price of a thing is the amount of money paid for the thing; for example, the number of dollars per loaf of bread or the number of dollars per shirt. The key driving factors here are the amount of dollars and the quantity of goods.

Now, with all other things being equal, an increase in the amount of money paid for goods and services implies that the price of these goods and services is going to be higher. More money is now paid for these goods and services.

In the absence of an increase in the amount of money there cannot be a general increase in prices. If a business raises the price of its goods and consumers have agreed to this increase then consumers are going to have less money to spend on other goods, all other things being equal. Hence, we will have here a specific price increase but not a general increase in prices.

Inflation Is All about Increases in Money Supply

By popular thinking, it is the role of the central bank to guide the economy onto the path of economic and price stability.

If central bank officials anticipate that the economy will fall below the path of economic and price stability, then officials are expected to prevent this decline through monetary pumping. Conversely, if officials are of the view that the economy is likely to shoot above the stable path, then they are likely to prevent this by reducing the monetary pumping.

In response to covid-19 and in particular the lockdowns and other restrictions, central bank officials expected severe damage to the economy. The economy was expected to fall strongly below the path of stability. In this case, strong monetary pumping was considered as a welcome move. The strong monetary pumping is believed to have brought the economy onto the stable path.

But monetary pumping cannot generate economic stability. The pumping sets in motion an exchange of nothing for something, or the diversion of wealth from wealth generators to the early recipients of the newly pumped money. This undermines the process of wealth generation and weakens the prospects for economic growth.

As a rule, because of the monetary pumping, individuals are going to have more money in their pockets, which they are likely to dispose of by buying goods and services. This means a greater amount of money is going to be spent on various goods and services. This means that the prices of goods and services are going to increase, all other things being equal.

Given the massive increase in the monetary pumping, the yearly growth rate of the US money supply jumped to 79 percent in February 2021 from 6.5 percent in February 2020, according to the True Money Supply metric—an average increase of 43 percent. Allowing for the time lag between changes in money supply and changes in prices, it is not surprising that the momentum of the Consumer Price Index displays massive increase.

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Hence, the culprit here is the alleged defender of the economy—the central bank itself. Curiously, very few commentators are mentioning the role of the central bank in fueling general increases in the prices of goods and services. Note that the massive increase in the growth rate of money supply, coupled with lockdowns and various other restrictions, has intensified the upward pressure on the prices of goods and services. The combination of not enough savings allocated toward the expansion and the enhancement of the production structure and a strong demand for various goods and services due to the massive increase in money supply has resulted in shortages. After a time lag, prices are therefore likely to increase further to eliminate the shortages that have emerged.

Could Price Controls Resolve the Issue of General Price Increases?

Some commentators are of the view that the government should introduce price controls in order to prevent further increases in the prices of some key consumer goods. A policy of restricting price adjustments due to the monetary pumping is going to weaken various marginal producers. Consequently, these producers are likely to move to activities which are not subject to government price controls.

As a result, the supply of some key consumer goods will come further under pressure. So rather than benefiting consumers, such a government policy would hurt consumers’ well-being. Hence, a policy of price controls is likely to increase shortages and stifle the production of goods and services. In fact, this could ultimately lead to the imposition of the price controls on a large variety of economic activities, which in turn is likely to result in the economic system that resembles the former Soviet Union.2

  • 1. Murray N. Rothbard, "The Celebrated Adam Smith," in Economic Thought before Adam Smith, vol. 1 of An Austrian Perspective on the History of Economic Thought (Auburn, AL: Ludwig von Mises Institute, 2006), pp. 433–74, esp. p. 452.
  • 2. Ludwig von Mises, "How Price Controls Lead to Socialism," Mises Wire, Jan. 14, 2016.

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Don’t Believe The Democrats’ “Medical Bankruptcy” Narrative

Don’t Believe The Democrats’ "Medical Bankruptcy" Narrative

Authored by Sally C. Pipes via RealClear Health (emphasis ours),

Americans collectively have about $140 billion in outstanding medical debts, according to a recent study published..

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Don't Believe The Democrats' "Medical Bankruptcy" Narrative

Authored by Sally C. Pipes via RealClear Health (emphasis ours),

Americans collectively have about $140 billion in outstanding medical debts, according to a recent study published by the Journal of the American Medical Association.

Alyssa Keown/Battle Creek Enquirer via AP

Those hefty bills are driving many people into bankruptcy – at least according to prominent progressives. Left-wing leaders have long stoked fears of "medical bankruptcy" to boost support for government-run, single-payer healthcare.

During his last run for president, Senator Bernie Sanders, I-Vt., declared that enormous medical bills force a staggering 500,000 people to declare bankruptcy each year – a fact that, if true, would justify drastic reforms to the healthcare system.

But the dystopian portrait painted by Sanders and his allies doesn't reflect reality. Medical bills can certainly be onerous to many families. But they're rarely the sole, or even the main, cause of personal bankruptcies.

Sanders based his numbers on a 2019 editorial published by the American Journal of Public Health. The authors conducted a study in which about two-thirds of the 700,000 debtors surveyed said medical expenses contributed "somewhat" or "very much" to their bankruptcy.

That's not exactly a direct, causal relationship. A more accurate conclusion would be that medical expenses played a role in families' deteriorating finances.

Often, the main cause of bankruptcy isn't a surge in debt – it's a precipitous drop in income. Someone diagnosed with cancer may certainly face burdensome medical bills. But the far bigger threat to one's finances comes from no longer being able to work full-time – or at all – during a treatment regimen.

Other research confirms that healthcare bills alone rarely drive people into bankruptcy. A 2018 study in the New England Journal of Medicine analyzed the percentage of people with medical bills who went bankrupt, rather than how many bankruptcy filings included some level of medical debt. The study concluded that medical bankruptcies, specifically those caused by hospitalization, make up just 4% of all bankruptcies.

Facts like these haven't slowed the push for single payer. Representative Pramila Jayapal, D-Wash., the chair of the Congressional Progressive Caucus, seized upon the JAMA study's $140 billion statistic soon after it was published, tweeting that the solution was Medicare for All.

The thinking goes that enrolling most Americans in a fully government-run healthcare system funded by tax dollars – rather than the current mix of public and private money – will prevent people from going bankrupt.

But once again, the math doesn't check out. Government-sponsored, single-payer healthcare isn’t "free." It’s funded by enormous, broad-based taxes on businesses and workers alike. Those taxes constrain economic growth and, by definition, leave people with less cash on hand to meet their other financial obligations.

Consider Canada, which has a single-payer system revered by American progressives. A family making the average income of 75,300 Canadian dollars – about US$59,700 – pays $6,500 in taxes just to cover its share of the national health insurance tab, according to a September 2021 report from the Fraser Institute, a Canadian think tank. An average family of four pays an estimated $15,039 in healthcare taxes. Those figures are on top of all the other taxes Canadians pay to support everything from education to national defense.

Canadians pay a higher share of their total compensation to the government than Americans, according to OECD data.

That explains, in part, why Canadians declare bankruptcy at higher rates than their U.S. counterparts. In 2019 – the year before the pandemic and its ensuing flood of stimulus programs caused a marked decrease in bankruptcies in both countries – about 137,000 Canadians sought protection from insolvency, out of a total population of almost 38 million, a rate of 3.6 bankruptcies per 1,000 residents.

That same year, slightly more than 770,000 Americans declared bankruptcy, out of a total population of 329 million at the time – a rate of 2.3 bankruptcies per 1,000 residents.

Medical bills don't cause nearly as many bankruptcies as progressive lawmakers want people to believe. And single payer certainly wouldn't prevent people from going insolvent.

Sally C. Pipes is President, CEO, and Thomas W. Smith Fellow in Healthcare Policy at the Pacific Research Institute. Her latest book is False Premise, False Promise: The Disastrous Reality of Medicare for All (Encounter 2020). Follow her on Twitter @sallypipes.

Tyler Durden Sat, 01/22/2022 - 20:20

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Here Comes The Pivot: JPM Sees Sharp Slowdown In US Economy, “No Further Hawkish Developments From The Fed”

Here Comes The Pivot: JPM Sees Sharp Slowdown In US Economy, "No Further Hawkish Developments From The Fed"

For much of the past month we have been warning that as the broader investing public has been fascinated by the mounting speculation..

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Here Comes The Pivot: JPM Sees Sharp Slowdown In US Economy, "No Further Hawkish Developments From The Fed"

For much of the past month we have been warning that as the broader investing public has been fascinated by the mounting speculation that the Fed will hike 4 times (or even "six or seven" times, thank you Jamie Dimon) and commence shrinking its balance sheet, the US economy had quietly hit a major air pocket  and - whether due to Omicron or because the vast majority of US consumers are once again tapped out (see more below) - US GDP growth is now rapidly collapsing and may turn negative as soon as this or next quarter as the US economy contracts for the first time since the covid shutdowns in Q1/Q2 2020.

Throw in the lack of a new Biden stimulus (BBB is dead as a doornail, courtesy of Manchin), and soaring gas prices (Goldman, Morgan Stanley and Bank of America all see Brent hitting triple digits in the near term, while a Russia-Ukraine war would send oil to $150 and crash the global economy), and we are willing to go on the record that a recession before the November midterms is virtually assured.

But while this is obviously a wildly contrarian view for now, especially with the labor market still supposedly helplessly backlogged with a near record number of job openings coupled with still soaring inflation, others are starting to notice...

... and so is the bond market, which traditionally is the first to sniff out major market inflection points, and which after surging to multi-year highs earlier this week, yields have suddenly slumped.

Nowhere is it clearer what is coming than in the ongoing collapse in the yield curve which at the fulcrum 5s30s, is just 30bps away from where the Fed was when it ended its tightening cycle in 2018.

So it was with some surprise that we were reading the latest big bank weekly reports where precisely this slowdown is being increasingly flagged. Consider the following from JPMorgan's latest Fixed Income Strategy note by Jay Barry (available to professional subs), who writes that JPMorgan's Economic Activity Surprise Index (EASI) "has swung sharply into negative territory in recent weeks, indicating data have underperformed relative to consensus expectations."

This was punctuated by the December retail sales data, as the important control group fell 3.1% over the month (consensus: 0.0%).

The weakness in data, JPM explains for the benefit of the Fed which in hopes of recovering its "credibility" after destroying it in 2021 when it said inflation was transitory and is now scrambling to fix its error is now willing to crash the market just to reduce aggregate demand, "indicates consumption should moderate in 1Q22." And since consumption accounts for 70% of US GDP, guess what that does to overall US growth?

Or don't guess and read what JPM now expects: "we forecast growth decelerated from a 7.0% q/q saar in 4Q21 to a trend like 1.5% in 1Q22." It's not just retail sales, however, or that recent Empire Fed Manufacturing Survey, which just suffered its 3rd biggest monthly drop in history (with only March and April 2020 worse)...

... more locally, initial claims surged 55k to 286k in the week ending January 15, their third straight increase and the highest weekly reading since October.

And while the seasonal volatility in claims around the new year could be amplifying the rise, this was the survey week for the January employment report and presages a much weaker payroll growth this month. In fact, as we discussed in our December jobs report commentary, it is now likely that January payrolls will be negative.

Of course, one can blame the Omicron spike in December for much of this slowdown, and many do - especially those who confused the surge in inflation in 2021 as a "transitory" phenomenon - and are now using covid as a smokescreen to argue that the current slowdown is transitory, but the reality is that there is much more to the current sharp slowdown, and Bank of America's  Michael Hartnett put it best on Friday when he said that the "End of Pandemic = US Consumer Recession" (more here).

Here is the punchline of what the BofA CIO said: "retail sales 22% above pre-COVID levels...

...payrolls up 18mn from lows, inflation annualizing 9%, real earnings falling a recessionary 2.4%, stimulus payments to US households evaporating from $2.8tn in 21 to $660bn in 2022, with no buffer from excess US savings (savings rate = 6.9%, lower than 7.7% in 2019 & and the rich hoard the savings), and record $40bn MoM jump in borrowing in Nov'21...

... "shows US consumer now starting to feel the pinch."

Alongside the realization that an exit from covid means the US is entering a consumer recession, comes Hartnett's admission that any Fed hiking cycle will be short (it not sweet) and will be followed by easing as soon as 2023!.  Indeed, according to Hartnett, while the broader economy certainly needs more hikes to contain inflation, it will take far fewer rate hikes to crash markets, because "when stocks, credit & housing markets have been conditioned for indefinite continuation of "Lowest Rates in 5000 Years" might only take a couple of rate hikes to cause an event (own volatility)".

And since Wall Street always leads Main Street (sorry peasants), it is Hartnett's view that the current "rates shock" is grounds for an imminent "recession fear", and as noted above, the Fed hiking into a slowdown guarantees not only an economic a recession but also a market crisis.

The only question at this point is when will the Fed realize that it can't possibly hike rates enough to offset the surge in inflation which incidentally is not demand driven, but is due to continued supply constraints, over which the Fed has no power!

Which is why JPMorgan's economists go on a limb and perhaps seeking to assure markets, write that "next week’s FOMC meeting will not present the case for further hawkish developments".... and "is only likely to ratify expectations next week and not surprise market participants with another hawkish pivot."

Putting it all together is Goldman Sachs, which agrees with JPMorgan that there will be no hawkish surprises from the Fed, and wrote on Friday that if anything, the Fed will be more dovish than expected, and as such Goldman sees "the conditions in place for a large cover rally into and around the FED next week and when month-end new capital comes back into the equity markets, with corporates dry powder."

Of course, there is always the risk that Joe Biden, now beyond dazed and confused and terrified of the upcoming Democratic implosion after the Nov midterms...

... does not realize how devastating a market crash will be for the US economy where financial assets are now 6.3x greater than GDP...

... and will order Powell to keep hiking and tightening just to break inflation's back (as discussed above, and as Blackrock also noted recently, the Fed is completely powerless to halt supply-driven inflation), even if it means the destruction of the entire wealth effect that the Fed spent the past 13 years trying to create. In that case, all bets are off.

Tyler Durden Sat, 01/22/2022 - 17:00

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10 Travel Destinations For Post-Pandemic Life

10 Travel Destinations For Post-Pandemic Life

On March 11, 2020, the World Health Organization formally classified the COVID-19 outbreak as a pandemic. The resulting travel bans decimated the tourism industry, and international air travel ini

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10 Travel Destinations For Post-Pandemic Life

On March 11, 2020, the World Health Organization formally classified the COVID-19 outbreak as a pandemic. The resulting travel bans decimated the tourism industry, and international air travel initially fell by as much as 98%.

Almost two years later, travel is finally back on the table, though there are many restrictions to consider. Regardless, a survey conducted in September 2021 found that, as things revert to normalcy, 82% of Americans are looking forward to international travel more than anything else.

To give inspiration for your next vacation (whenever that may be), Visual Capitalist's Marcus Lu created this infographic listing the 10 most visited countries in 2019, as well as three of their top attractions according to Google Maps.

Bon Voyage

Here were the 10 most popular travel destinations in 2019, measured by their number of international arrivals.

*Estimate | Source: World Bank

France was the most popular travel destination by a significant margin, and it’s easy to see why. The country is home to many of the world’s most renowned sights, including the Arc de Triomphe and Louvre Museum.

The Arc de Triomphe was built in the early 1800s, and honors those who died in the French Revolutionary and Napoleonic Wars. In 1944, Allied soldiers marched through the monument after Paris was liberated from the Nazis.

The Louvre Museum, on the other hand, is often recognized by its giant glass pyramid. The museum houses over 480,000 works of art, including Leonardo da Vinci’s Mona Lisa.

Art isn’t the only thing that France has to offer. The country has a reputation for culinary excellence, and is home to 632 Michelin-starred restaurants, the most out of any country. Japan comes in at second, with 413.

While You’re There…

After seeing the sights in Paris, you may want to consider a visit to Spain. The country is the southern neighbor of France and is known for its beautiful villages and beaches.

One of its most impressive sights is the Sagrada Familia, a massive 440,000 square feet church which began construction in 1882, and is still being worked on today (139 years in the making). The video below shows the structure’s striking evolution.

At a height of 172 meters, the Sagrada Familia is approximately 52 stories tall.

Another popular spot is Ibiza, an island off the coast of Spain that is famous for its robust nightlife scene. The island is frequently mentioned in pop culture—Netflix released an adventure/romance movie titled Ibiza in 2018, and the remix of Mike Posner’s song I Took a Pill in Ibiza has over 1.4 billion views on YouTube.

Beaches Galore

If you’re looking for something outside of Europe, consider Mexico or Thailand, which are the 7th and 8th most popular travel destinations. Both offer hot weather and an abundance of white sand beaches.

If you need even more convincing, check out these links:

Expect Turbulence

Under normal circumstances, hundreds of billions of dollars are spent each year by international tourists. According to the World Travel & Tourism Council (WTCC), this spending accounted for an impressive 10.4% of global GDP in 2019.

Travel restrictions introduced in 2020 dealt a serious blow to the industry, reducing its share of global GDP to 5.5%, and wiping out an estimated 62 million jobs. While the WTCC believes these jobs could return by 2022, the emerging Omicron variant has already prompted many countries to tighten restrictions once again.

To avoid headaches in the future, make sure you fully understand the rules and restrictions of where you’re heading.

Tyler Durden Sat, 01/22/2022 - 20:00

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