We often repeat history not because we forgot about what happened before but because we had no idea what that it happened before. People have not forgotten about inflation. They are encountering it for the first time. Monetary policy seems to operate on a circular time frame. We don’t get better at it over time. We just keep having to learn the same lessons over and over again. It’s like falling in love. Everybody can tell you how to do it, how to choose the right person, how to avoid the pitfalls, and how to manage the exit. But, you actually have to fall in love yourself to learn how love works. Love strikes. It renders people, even central bankers delirious and unable to think clearly. It strikes down cognitive facilities. This is why inflation and strikes are like a married couple. They go hand in hand, over and over again, even though we should know that they should never have gotten together in the first place!
I was one of the few that warned the Fed and Western central banks in my book Signals (2016) that they were making some serious mistakes that would lead to the resurgence of both inflation and geopolitics. I could not understand how they could not see this coming. It seemed so obvious. Negative interest rates + free money = inflation. This has always been so. Now I see that they were love-struck, totally in love with their own monetary policy. Sadly, the love affair has ended. Now we all have to face the consequences – strikes, shortages, sell-offs, and a serious undermining of confidence in monetary policy and in its stewards.
The strikes are popping up all over the place this week. Scandinavian Airlines (SAS) is halting air travel. British Rail is shutting down in the biggest rail strike in 30 years and the NHS is walking out. Casino workers in Atlantic City just voted to strike. Railway workers in Canada are striking too. Everyone will ignore strikes across mainland Europe because they have become so commonplace, though strikes are starting to happen in Germany. That’s more serious. Germans do not strike lightly. It’s beginning with the backbone of the German economy – ports and steel. That’s not surprising with an official inflation rate of over 8% in Germany now. The bigger event is the global labor strike known as “The Great Resignation”. It’s not that these folks are no longer working. They are. They just aren’t working full-time for traditional corporations. That means the corporate sector is now experiencing real labor shortages. Amazon seems to be running out of people to hire! The cost of skilled labor has been rising for years now. The reshoring and return to manufacturing trends have revealed a profound shortage of skilled labor in the West. All this has changed the balance of power between capital and labor. As ever, unless corporate pay up, that means strikes.
So, what is to love about strikes? Strikes are a powerful signal in the economy. They are the human form of re-pricing. In markets, prices move around all the time. Humans move their prices around rather more slowly. This is one reason the world benefits from floating exchange rates. They allow the adjustment burden to fall onto a nation’s current account instead of having it fall onto the backs of a nation’s workers.
Whenever you hear the word “strike” the word “gouging” and the phrase “price controls” will be close behind. The US prefers to bear down on the corporations than to give voice to the strikers. The problem with price controls is that they kill off price discovery. They inevitably result in misallocations of resources. When politicians get really mad they will often try to control both supply and demand. This is what happened in the 1930s. The period of history is lauded by some (Ben Bernanke) who say government intervention in prices was the solution. Others say it was the effort to control both price and supply that prolonged the recession we now call The Great Depression.
If we get enough strikes happening at the same time, we can expect them to start happening together. A General Strike a la 1926 is possible. The iPhone makes is much easier to organize a General Strike today than it was in 1926. Some say we can’t have strikes because we don’t have unions anymore. But the smartphone has replaced the union as a vastly more efficient organizing device!
Today we see governments moving towards CBDC, sovereign digital money. One reason is because it gives policymakers control over not just money but also over behavior. CBDC can be easily used to ration and to control prices, or at least penalize those who try to raise prices. The automatic fines that come from speeding past a camera can now happen to those who raise prices.
The ultimate solution to inflation and its sister called “strike” is to let prices go where they need to go. It’s super painful. It’s why we should have started raising rates long long ago instead of waiting until inflation had a foothold in the world. But, now that we are there, we should study the past to understand what will happen next. The good news about strikes is that Congress and Parliaments hear them. It is the voice of labor and, more broadly, voters, that shake central bankers out of their lovely magical thinking reverie. Paul Volcker used to remind us that it was only after the public started complaining to Congress about inflation that the Congress and White House demanded that they take action. Once the Fed had the political cover, it acted.
That political cover begins with engagement. It’s Elizabeth Warren berating any company that tries to protect its margins from the price pressures American policymakers created with their record fiscal spending and record monetary stimulus. Her anti-price gouging bill may not be going anywhere but wait for it to echo into “price controls”. As Jason Zweigg put it in the WSJ, this old way of fighting inflation “is getting new fans”.
This giant step won’t just be about an interest rate change or even a policy change. It will involve central bankers admitting that they cannot control everything all the time. It will involve conceding that monetary policy is sometimes wrong and policymakers are sometimes very wrong. As an exasperated Paul Volcker warned back in 2013, "Credibility is an enormous asset," he said. "Once earned, it must not be frittered away by yielding to the notion that a 'little inflation right now' is a good thing to release the animal spirits and pep up investment. "Inflation, once it starts, "is hard to control and reverse," and all too often, the Fed is too late to act.
There is something else to remember. Price controls lead to corruption. It’s no accident that the Great Depression and Prohibition went hand in hand. Inflation and price controls together are oxygen to the “off the books” corruption and black market activities. Make it illegal to move a price and someone will meet the need, even if illegally. Al Capone thrived on price controls as well as product prohibitions.
What prompts policymakers to act? The voice of the public. Strikes. Market pundits, myself included, tried to tell the Fed for years that they were on a dangerous path. Some of us were loud. Some of us were quieter. But in the end, market experts don’t change the course of history. The public does. So, while strikes are unpleasant (though many workers will get a much-needed vacation while they are underway), they signal the beginning of common sense coming back into monetary and fiscal policy.
Strikes may lead to cries for price controls and for inflicting punishments on those with pricing power. This is not common sense. It is suicide, as we will soon find out all over again. But this noise will eventually give way to a world where policymakers get over themselves and fall in love with rules again, instead of with their own magical powers. The Taylor Rule will come back into vogue. Hawks will return to roost at the Fed again, even if they won’t rule that roost. The only question is how long will this take? The more strikes, the faster we’ll fall out of love with policymakers and the faster they’ll fall in love with monetary policy discipline. We will learn to love strikes because they are an expression of people-power over the few technocrats who made mistakes.
One thing will impede this process – CBDC. That is a new kind of magic that lets policymakers control both supply and demand, prices and behavior. It’s possible that strikes and inflation will accelerate the move to this new technology because it will allow policymakers to sustain the love affair with their own power. If it does, then all bets are off because monetary policy under CBDC has almost nothing to do with monetary policy under traditional money. CBDC will be a monetary policy revolution. But, we’ll leave that for another day given that they seem to be pretty afraid of the new-fangled technology for now, especially with all the noise from strikes going on!
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Love Strikes
Yes I recall some of your "concerns" in SIGNALS. Honest and forthright article Pippa; you have clearly inherited your fathers genes (don't hear enough from him but I suspect Twitter might annoy him).
For me the critical sentence in your missive is "Today we see governments moving towards CBDC, sovereign digital money. One reason is because it gives policymakers control over not just money but also over behavior."
I firmly and fully believe that CBDC are coming, are coming sooner than most believe and will unquestionably be used to exert "control" within society by governments (just as Trudeau previewed in Canada) against those who don't step into line with the ruler elite narratives.
As a child of the late 60s and 70s in the UK I am fully aware of the impacts of inflation, strikes and the public responses. Ultimately in the UK Margret Thatcher was elected to combat the political mess created by the left and their love of using strikes to try to defeat elected government policy.
My concern today is that a combination of several factors including Central bank failures, a Millennial Generation that has little of the opportunity that the Boomer generation had, the ending of the generalized major power peace that has tenuously reigned since the fall of the Wall, the looming failure of the Sovereign Debt markets, the potential carnage on Boomer pension and social security safety nets and more, will lead to chaos. I think we are about to enter the "Two steps back" portion after the "The three steps forward" bit, post 1945.
I can already sense the masses getting restless and slowly but sure huddling in quiet corners sharpening their pitchforks and putting together their torches.
Strikes.... wow I have not thought about strikes for about 50 years. First hand experience: I was working through college and was threatened by a guy with a crowbar who emphatically informed me that bad things would happen if I crossed the strike picket line. Today, given our labor shortage, I would substitute "electing to not go back to work" for strike. Protesting economic disparity by electing to not work is facilitated by safety net programs that in fact pay people to not go back to work. Follow the bread crumbs: give people money (outright or through low interest rates), people spend money, supply and demand get out of equilibrium, resulting in inflation, which all forces a very painful withdrawal from those very addictive easy money policies. Loved the article.... don't love strikes.