Dear Lauren, and Brittany, and Jon,

This week's episode on inflation left me with many face-palm induced bruises. Since I lent you my face, I hope you’ll lend me an ear.

The Golden Shower of Trickle-Down Economics

Before we dive into inflation, let's take a moment to examine the nuances of our neoliberal Wall Street piss fest.

Trickle-down economics primarily benefits shareholders and Shenzhen. Compare the growth of Chinese wages to those of Americans since neoliberalism took off in the 90's.

But of course, off-shoring has been a great thing for America (just ask McKinsey)! Off-shoring is so great that they had to rebrand it as globalization. Globalization is even good for your health!

For three decades we traded our institutional knowledge, supply chains, and engineering skills for cheap widgets, and now Tim Cook can only find the engineering expertise he needs in China.

Then there's the pissing contest on Wall Street.

We all talk about bank bailouts, but something we don't talk about enough is Jason's boyfriend: the Fed. Many of the tricks the Fed plays to goose the economy exacerbate structural inequality.

1. Low interest rates. At a certain point, lowering interest rates does jack shit for the economy. Keynes called this "pushing on a string." It does, however, make borrowing a lot easier to buy stocks, fuel buybacks, and scoop up single family homes. Silicon Valley's Juicero du jour also benefits from low capital costs.

2. Quantitative easing. The Fed buys bonds to inject money into the "economy," but instead it primarily increases the value of financial assets which in turn "widened the income and consumption gap between the top 10 percent and the rest of the wealth distribution by boosting profits and equity." Wall Street knows this, but no one talks about it.

Layer on corporate tax cuts and capital gains shenanigans, and it's obvious who's winning:

Note these are all structural issues. Without proper tax, antitrust, and investment policies, demand-side stimulus will still end up in a corporate-shareholder circle jerk just like it did during the pandemic.

Inflation

COVID spending amounted to a lot of one-off checks to a lot of people, and not just the Economic Impact Payments everyone shits on.

We gave a lot of people a fuck-ton of money in a very short period of time. The deficit exploded, and the government sold tons of treasuries at 0% rates to a very specific buyer....

...the Fed.

Five trillion dollars were injected into the economy: a HUGE shock to the system. If all this spending was gradual or in a shit economy (e.g. GFC), you would see a normal amount of inflation. In this case, however, we bombed the system with cash in what was a hot economy leading to an astronomical inflationary jump when we reopened. This wasn't the straw that broke the camel's back, as Jon suggested: we nuked the camel. I agree with Jason: we did too little during the financial crisis and did way too much during the pandemic.

People love to point to other economies as a counter example, but they did the exact same thing we did. For example, Europe, Japan, and Canada also bombed their economies with cash backed by quantitative easing, and inflation similarly shot up. Indeed, research from the Fed finds that "excess inflation is significantly correlated with each country's domestic stimulus."

The war in Ukraine exacerbated this, especially in Europe. Foremost, energy costs skyrocketed. Natural gas, for example, went up 180%. Jon scoffed at the importance of natural gas, but 20% of Europe's energy comes from natural gas. Energy underlies everything from home heating to industrial processes. Natural gas prices also affect food prices since it's an important input for producing ammonia, a fertilizer. To make matters even worse for Europe, Ukraine was its breadbasket. Spain, for example, imported 30% of its grain from Ukraine.

Sure supply-chain disruptions also played a role, but now that those issues have abated, you'd expect prices to decrease. Instead they continue to increase because pandemic stimulus is still sloshing around.

Jason's Inflated Ego

Jason's debt = interest rates claim is demonstrably not true. Our debt to GDP in 2000 was 33%, a 30-year mortgage was 8%. Now we're at 115% debt to GDP and mortgage rates are at 6%. Japan is another counterexample. In 2019, Japanese debt to GDP was 200%, and interest rates were negative. US debt to GDP was 100% in 2019 and interest rates were 2%.

His praise of the Fed is also hilarious. The Fed was not only late to raise rates, the Fed continued to expand its balance sheet into March of 2022 even as inflation boomed.

To Kitty's point, the inflation would have likely stopped on its own at some point because COVID spending was an event not a policy. However, interest rates smooth out the inflation over time, so had the Fed not raised rates we likely would have seen even higher prices today instead of tomorrow.

Did the Fed go too far in smoothing out inflation by going to 5%? Despite the rapid rise in rates, we still hit the lowest unemployment level in 52 years and ended up with a record high stock market. Wages are also now increasing faster than inflation, which invalidates the claim that the high rates hampered wage growth. Also 6% is closer to a normal historical rate in a healthy economy: post-GFC rates were an anomaly.

Corporate Greed

Inflation affects everything, including corporate profits which inflate alongside everything else. Yes, CEOs bragged about how they could keep raising prices, but in the end, their profit margins jumped for a bit and then normalized:

In summary, profits briefly increased faster than inflation and then settled in-line after a few quarters. This pattern extends to the 1940s. The Federal Reserve of San Francisco has also debunked the greedflation narrative.

Furthermore, we see a jump in producer prices too.

This is clearly not price gouging, and it's actually really hard to find "all the evidence about price fixing and corporate collusion" that Kitty cited. Frankly, I feel like the corporate greed narrative is an insult to anyone who took econ 101, which Kitty dismissed, especially when all the facts support a simple narrative. "Price gouging legislation," in turn, amounts to pandering that solves none of the structural issues in our economy, structural issues that we see only if we zoom out:

TLDR: COVID inflation came from too much money being spent too fast under both Trump and Biden this money went straight to the top.

Inflating the Wealth Gap

Did the "demand-side" pandemic policies really benefit the middle class? Income distribution says no:

The rich continue to gain power relative to other players in the economy, and our policies will continue to exacerbate this until we make the right changes.

1. Inflation. Policies that lead to inflation, whether fast or slow, are a regressive tax. The rich also buy assets like stocks, real estate, and even commodities to protect themselves from inflation. Meanwhile Grandma's fixed income and bank account get fucked. As such, we must be cautious about how money circulates when we stimulate. Without reformed tax policy, demand-side stimulus amounts to a sugar-high that only exacerbates inequality since the cash still flows to the top.

2. Bogus statistics. Rising wages, even against inflation, mean nothing if income inequality persists. The few continue to gain power over the many. In the end, they drive both our economy and our elections: we need to focus on changes in relative income instead of absolute income.

3. Ultra-low interest rates. As mentioned earlier, rate cuts stimulate inequality rather than the economy past a certain point. Asset prices balloon and capital costs decrease for investors to further financialize the economy. What's worse? Low rates push people into the hands of Wall Street for yield leading to retirement volatility. This also perversely incentivizes the Fed to continuously bailout the stock market since mom and pop are now dependent on Wall Street for retirement. This also leads politicians from all stripes to boast more frequently about a roaring stock market. Wall Street knows we are captive and routinely fucks retail investors. Low rates also make it easier to borrow against stocks to avoid paying taxes. Over a decade of low rates also enriched the tech bros of Silicon Valley.

4. Bailouts. We're still doing this. This time the list included venture capital and crypto companies. This happened under the Biden administration.

5. Quantitative easing. Aside from only buying treasuries and mortgage-backed securities, the Fed also bought corporate bonds to the tune of $13B. What the actual fuck? Wall Street also realized that ZIRP would not last forever and enjoyed selling bonds to the Fed at a premium, bonds they would later buy back at a discount once rates jumped.

6. Housing as an investment asset. The housing shortage that we're all talking about today was known by Wall Street in 2018, and what do you think those pricks did? They took advantage of 0% rates to snap up housing—a quarter of all single family homes for sale at 0% rates since the pandemic. Better yet, real estate and rents are inflation-proof. When Kamala talks about $25K handouts for first-time home buyers, I really wonder if she’s even thought about how the money will inevitably flow from consumers to homebuilders to Wall Street. Investor demand for real assets is inflationary.

7. Tax policy. Our current system rewards investment over work through low capital gains taxes. We’re talking about a difference of 30%+. Obama loved to slam Romney for not paying his "fair share" but that hasn’t changed. Buy, borrow, die needs to die. Corporate taxes are yet another piss show that puts money in the hands of the investor class.

8. Antitrust. Consolidation is bad for capitalism and another disguised form of corporate welfare. See my prior charts. Even China has bolder antitrust policies than America: they broke up Alibaba into six subsidiaries.

Need I go on?

That income chart explains Trump’s rise. While his policies exacerbate these issues, his rhetoric resonates because for 30 years the average American has been squeezed under the status quo. Can you blame them for wanting to burn down the system? A system where the bottom 90% must compete with an ever wealthier 10% to buy a home? A system where these assholes talk gleefully about an economy where we’ll end up renting everything? What we did during pandemic didn't change anything, it amounted to one of the greatest global wealth transfers in history.

Kamala says “We’re Not Going Back” but I wonder if we ever really left.

Cheers y'all, Faraz

PS I have priority tickets for 10/2 because you pricks ran out of space a while back. See you then.