After almost a year of denial, the Federal Reserve has finally acknowledged that inflation is here. In a hearing in Congress in late November, Jerome Powel said it was time to “retire” the word “transitory” when it comes to inflation. https://news.yahoo.com/fed-chairman-jerome-powell-retires-the-word-transitory-in-describing-inflation-162510896.html
In a massive overreaction to COVID-19, the Federal Reserve pumped up M2 money supply by huge amounts in the early months of 2020. https://seekingalpha.com/article/4478065-inflation-and-the-great-supply-lie. This, in fact, is inflation. When most people speak of “inflation”, what they are referring to is a general rise in prices, which is a consequence of inflating the money supply.
The result of Federal Reserve monetary policy, combined with Congressional action like enhanced unemployment benefits and stimulus checks, is the biggest spike in the consumer price index in almost forty years. https://thehill.com/policy/finance/585263-annual-inflation-rises-to-68-percent-the-highest-rate-since-1982
Unable to address the fundamental problems of government spending more money than it takes in as taxes, and the Federal Reserve’s monetization of the debt, the Biden Administration has found a new (old) scapegoat.
This was a popular scapegoat of politicians back in the 1970s when the United States last faced massive inflation: supposed corporate “profiteering”.
The argument goes something like this: business profits are increasing and prices are increasing, therefore, the reason prices are increasing is because of increased profits. The Biden administration is making this argument with respect to meat prices and meat producers. As the Wall Street Journal notes:
“Prices have climbed 16% at the meat counter in the last year…” (“Carving Up Biden’s Inflation Beef The White House needs a refresher in the law of supply and demand.” Jan. 7, 2022; https://www.wsj.com/articles/carving-up-bidens-inflation-beef-meat-producers-tyson-prices-11641587628?page=1 )
The Wall Street Journal article goes on to say that profits for meat companies are also up:
“The White House targets four large producers that publicly report financial information. It says gross profits at Tyson, JBS, Marfrig and Seaboard Foods have increased more than 120% since before the pandemic while their gross margins are up 50%. Tyson’s last quarter earnings report shows it ‘made record profits while actually selling less beef than before,’ the White House says.” (Id.)
The Biden Administration’s response to rising prices caused by inflation is to threaten antitrust action on meat companies. But, they haven’t bothered to ask a simple question: If companies could just arbitrarily raise prices and increase their profits like this, why didn’t they do it all along? Why did it just happen now?
Once it is understood that inflation of the money supply, that is printing of money by the Federal Reserve, is the primary culprit for a general rise in prices, then the increased profits can be properly seen as an effect of inflation. Furthermore, it can be seen that such increased profits are temporary, assuming that the Federal Reserve doesn’t continue to inflate the money supply.
Meat producer profits are up because the costs on the goods they are selling are from a time before the Fed’s money printing. As time passes, the costs of raw material and labor will catch up, and will cause those profits to evaporate.
It takes time for a product to be manufactured. A business uses inputs from an earlier time to sell that product at a later time. If the business produces a product at T1 (Time 1), when the value of the dollar is worth more, and then sells that product at T2 (Time 2), when the value of the dollar is now worth half what it was at T1, then the price of the product will get bid up twice as high in T2. This will create a profit on paper, but when the business goes to buy more raw materials and labor in T3, it is going to find that those prices have doubled, so the profit is short lived.
For instance, meat producers raised and grew cattle at a certain cost in T1. Their costs were for things like rental prices for land to graze the cattle on, feed for the cows, water, and labor costs to take care of the cows. Additionally, there are the costs for slaughtering and processing the cattle, which requires plants, laborers, and other equipment. Then there’s the cost of transporting the meat to grocery stores and storing it in refrigerators.
At T2 (Time 2), the Federal reserve then began inflating the money supply. This money was dispersed into the economy through bank loans, stimulus checks, and enhanced employment benefits to consumers. Since the amount of goods in the economy did not increase, this increased demand for goods and services, for things like beef, bid up prices by consumers using the new money. This led to a general rise in prices for goods and services in the economy.
On the meat company’s books, they had incurred costs for the beef already in stores at an earlier time, at T1. The increased consumer demand bid up the sales price of that beef already in stores that was produced in T1. This is then reflected in T2 as increased profits for meat producers.
However, when meat producers go back to produce more beef in T3 (Time 3), they will find that their costs have increased. Employees are demanding higher wages. Landlords are charging more for grazing cattle on land. The feed prices for cattle have increased. Energy costs for slaughtering, shipping, and refrigerating beef have increased. As a result, the profits, in terms of the percentage of their margin between the costs of production and the price of sale of beef, returns to what it was before the Federal Reserve began inflating the money supply.
George Reisman notes this phenomena in his book “Capitalism: A Treatise on Economics”:
“…inflation raises the apparent or, as economists say, the nominal rate of profit that businesses earn….To understand what is involved, it must be realized that the costs which enter into the profit computations of business firms are necessarily “historical”—that is, the outlays of money they represent are made prior to the sale of the products….Now to whatever extent inflation occurs, the sales revenues of business firms are automatically increased: the greater spending that inflation makes possible is simultaneously greater sales revenues to all the business firms that receive it. Since costs reflect the given outlays of earlier periods of time, the increase in sales revenues caused by inflation necessarily adds a corresponding amount to profits….The extra profits are almost all necessary to meet higher replacement costs of inventory and plant and equipment, and the rest are necessary to meet the higher prices of consumers’ goods that the owners of businesses were previously able to buy in their capacity, say, as stockholders receiving dividends.” ( Capitalism: A Treatise on Economics, George Reisman, Kindle Location 10366 to 10389)
This assumes that the Federal Reserve doesn’t continue to inflate the money supply. Additional rounds of inflation will temporarily create more illusory profits for businesses. Furthermore, these businesses are likely to suffer reduced real profits, as opposed to their nominal profits, as they are pushed into higher income tax brackets, causing them to pay additional taxes.
The solution to the problem of a general rise in prices over time is for the Federal Reserve to stop inflating the money supply, and for Congress to reduce governmental spending to levels commensurate with the amount taken in as taxes, not to scapegoat the producers.
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