Do Contemporay Economic Theories Apply to This Version of Capitalism?

by Dean Prigelmeier, President of Proactive Technologies, Inc.

Lately, Americans have been in heightened state of anxiety and distress over confusing messaging. After all of the uproar by employers that they just can’t find skilled workers, now business talk shows are saying that employers are looking at layoffs because the economy is “too hot,” as if shedding the workers they struggled to find is a good thing for profits. Maybe reducing payroll from the balance sheet looks good for this quarter or next but destroying long-term capacity for a brief illusion seems counter-intuitive.

Rising prices of just about everything are eating away at the meager and long-overdue wage increases employers used to entice candidates to apply and hired workers to stay. It seems like a collision of America’s two economies, which has been on this course for 30 years.

We are bombarded by the current “reason” for this uncertainty that will always lead to a disproportionate impact on workers, and it is “inflation.“ What is it? Inflation is generally defined as “too many dollars chasing too few goods.“ It’s the old “supply and demand“ scenario and we have been taught when demand exceeds supply, prices rise.

The Federal Reserve defines inflation as “the increase in the prices of goods and services over time. Inflation cannot be measured by an increase in the cost of one product or service, or even several products or services. Rather, inflation is a general increase in the overall price level of the goods and services in the economy.”

There are different causes of inflation which determine the rate of inflation. Capital.com says “a sudden increase in the price of goods and services has a domino effect on the economy. The depreciation of money comes with a decrease in demand for products and services. Unemployment rates rise, as manufacturing firms are forced to lay off workers. The fear of inflation can also result in hoarding, when retailers and consumers buy excessive amounts of certain goods to not pay higher prices once inflation occurs.” They go on to say the main causes of inflation are “demand-pull inflation” and “supply-push inflation,” which determine the rate of inflation increase: moderate inflation, galloping inflation or hyper-inflation.

Most economists believe that inflation is usually a monetary phenomenon, meaning the appearance and rate of inflation are determined by the Federal Reserve Central Bank. Congress established three key objectives for monetary policy in the Federal Reserve Act: maximizing employment, stabilizing prices, and moderating long-term interest rates. But many feel so much money has been created over the last three decades by the Federal Reserve, providing easy, low (almost zero) interest borrowing to banks and, therefore, large institutional borrowers such as banks that speculate, private equity investment groups and wealthy individuals that there is a lot more to the story than traditional inflation.

Even though the vast majority of Americans cannot access this money, it is backed by the full “faith and credit” of the United States, meaning all taxpayers. Since 1971 when President Richard Nixon took the US Dollar off the world gold standard which determined how much paper currency could be printed, money printed after that by the U.S. was a “fiat currency;” a type of currency that is not backed by any commodity such as gold or silver. It is typically declared by a decree from the government to be legal tender. New money printed is added to the “National Debt.”

Since for the last 30 years U.S. policy of concentrating on becoming a service economy instead of the successful manufacturing and export-based economy that served this country well prior, the U.S. became the world’s largest import country, running trade deficits every year since 1990 that had to be funded by borrowed money. So, the Federal Reserve printed money to keep the economic wheels turning, hoping none of its lenders – the ones that buy U.S. bonds – would ask for its money back too suddenly.

The National Debt continued to decline after its World War II high of over 110% of GDP (Gross Domestic Product) to 30% in the 1980s. With the radical shift in U.S. export policy from the 1990’s on, the cumulative National Debt rose again swiftly to 100% of GDP and in 2022, the National Debt totals $31 trillion. This is different than the U. S.  budget deficit, which explains the financial place where the U.S. government ends up annually.

Since the U.S. Gross Domestic Product – a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries – today is so heavily weighted by service sector (including financial) transactions, in 2017 it reached an 80% level of the entire GDP number.

The Federal Reserve now is concerned with a potentially pending “recession,” which is defined by them as “two consecutive quarters of negative GDP growth.” The definition with more consensus is “a business cycle contraction when there is a general decline in economic activity… This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock, the bursting of an economic bubble, or a large-scale anthropogenic or natural disaster.“ The Federal Reserve’s preoccupation with presenting it as a contraction in GDP growth invokes more of a sense of urgency requiring a monetary solution, which appeases Wall Street and sets them off speculating on who with a seat at the trading table will be the winner by moving their wealth around – usually directly or indirectly devastating the “real economy” that effects the vast majority of Americans directly.

Most people are unaware that a lot of the prices of goods are determined by “futures trading,“ which impacts the price of services that depend on goods. Large investors and investor groups bet on the future price based on world events, the power that the amount of money they’re investing creates, and in some cases monopoly power. These investors never take possession of the commodity they are trading, such as oil, lumber, corn, soy beans, or oranges. They only speculate on a future price point and place their bet, then try to affect the movement toward that point which will bring them a great return.

Distorted rises in future prices offers good cover to businesses that are utilizing today’s crisis in commodities in determining the pricing of their products. In many cases they have already purchased the commodity at a price that the market will bear. But if the media goes into a frenzy about the future price, exactly what investors want, it drives future pricing even higher as corporations report record profits. This gives other businesses a reason to raise their current prices higher than what the market established until consumers no longer will pay that price for that product or service.

Another hot topic for the media is the Federal Reserve raising interest rates “to stem inflation.” First of all, anything the Federal Reserve does today to raise the interest rate will not be realized until we are in 1 ½ to 2 years down the road. However, rises in the interest rate, or even talk of raising interest rates, significantly affects the stock market and ultimately individual’s 401ks.

Since the early 1990s, the Federal Reserve has been it’s been operating on a “near zero “interest rate for borrowing. This preferred interest rate only applies to large and very wealthy individuals. Large banks can borrow money from the federal reserve at a 1/2 – 1 percent interest and lend it to credit card customers at 17 to 27%. They can use depositor’s money for speculation, granted by the repeal of the Glass-Steagel Banking Act of 1933.  If the banks fail in their speculation, such as the Crash of 1929 or 2008, the call goes out immediately that the taxpayers are liable for the bailing out the banks and speculators. The profits are privatized to the bank shareholders while the risks are socialized at the taxpayer – the essence of neoliberalism (not to be confused with Liberalism). Such a privileged position – one that I think all small businesses and entrepreneurs would love to be able to secure. The U.S. government often expresses great concern and empathy for the failure for large, in many cases multi-national, operations, as in 2008 when an estimated $11 trillion was added to the National Debt to prop up banks and affected industries, and the losses assigned to everyone else. But, shamefully, they then blame the taxpayer for reckless spending and force solutions such as raising interest rates to theoretically draw back excess money floating in the economy. Consequently, the negative impacts are most profound on the real economy citizens when it becomes another excuse for banks to increase credit card rates and mortgage loan rates, and others use that as the excuse to raise prices.

Over the last three decades we have seen this form of capitalism increase in the wealth at the top 1%- “the wealth gap.” Nearly 400 families control 70% of the US wealth. Wages have been held stagnant for 40 years and benefits that used to be part of every employer’s employment package have gone away or whittled down – which becomes at risk of cost inflation along with all other living costs.

The question; is this version of capitalism sustainable? How far can this distortion grow until social unrest brings about a substantial reaction? Small and midsize enterprises, the ones that cannot access all of these wonderful perks of this capitalism, tend to suffer from the actions of the bigger corporations moving the economy in ego-centric directions. Policies to remedy negative events caused by large corporations and misguided economic policy that derail the economy will negatively affect small and medium size firms first and most, then their workers and all of the 99%, that had nothing to do with the disruption.

Many economists concerned with, or opposed to, neoliberalism that have been previously pushed aside by supply-side, neoliberal economists who have been the darlings of the media and who promote this current version of capitalism, seem to be finally finding their voice. Questions are being asked that should have been addressed 30-40 years ago. We all need to be asking questions as if it means the world to us…because it does.

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