Ivy League professor and Nobel Prize winner, Joseph Stiglitz recently spoke to CNBC providing 3 reasons why the Fed’s rate hikes will make (price) inflation worse. It begins with his analysis, in which no further details were provided, just his conclusion. According to the interview:
The first is that the overwhelming source of inflation, by Stiglitz’s analysis, is supply-side disruptions leading to higher prices in oil and food, even causing a shortage of baby formula.
We understand the existence of “supply-side” disruptions. However, we mustn’t pretend that a baby formula shortage, no matter how devastating that may be, is a leading cause of universal price increases in all goods, services, and assets. There is still a noticeable failure at diagnosing the cause of our current inflation problem.
To say that supply side disruptions just happened across the globe, or that it is due to government lockdowns occurring some time ago still doesn’t seem quite right. Contrast this to an alternative idea, that the nearly $7 trillion increase in the M2 money supply since 2020, corresponding with the Fed’s $5 trillion increase in its balance sheet, should shoulder the blame.
Supply-side disruptions can be acknowledged, but an academic like Stiglitz needs to address what effect the increase in the money supply had in causing these disruptions. Afterall, the whole point of injecting trillions of dollars in monetary and fiscal stimulus was to increase the demand for goods and services. Unfortunately, production is not instantaneous in the real-world; it should be reasonable to understand how increasing the money supply increases the demand for goods, and since production always lags, supply issues arise.
Of course, forcing an economic shutdown plus trillions of dollars in stimulus ensured certain doom from the start.
The Columbia University professor continued:
The second reason, Stiglitz said, was evidenced by the fact that margins for major corporations have been rising along with their input costs.
Without seeing his analysis, it sounds more like a talking point appealing to the masses. However, it implies that “major corporations,” are in the wrong for increasing profit margins. In his own words:
They’ve not only been passing on the cost but passing it on even more.
Even if his data supported this, it invokes an idea that increasing profit margins at this time is somehow bad, and that in the past margins were more acceptable, speaking to some notion of an ideal profit margin not occurring at this time.
It can be dangerous, as it invites the opportunity for academics or planners to suggest ways to fix this alleged problem, potentially through more intervention or higher taxation under the pretense of leveling the playing field for the poor, weak and disadvantaged.
Tying his analysis back to the Fed, he believes that raising rates “may lead to even more inflation.”
His third point suggests raising rates hurts the housing market. Given the housing asset bubble created by the Fed, and sky-high debt across all levels of personal, corporate and government, this is nothing new. Even Jerome Powell has long since warned us that raising rates will lead to “some pain.”
Stiglitz raises more questions than he answers. But it’s helpful to see how arguments supporting socialism always fail to arguments supporting capitalism. What would have been more interesting is if he spoke to the profit margins universities have been receiving, and how much the government's student debt forgiveness program and $1.7 trillion student loan account receivable constitutes a cost involuntarily passed on to the public.
