Pricing Power (Pt. 1)

12+ When an inflation regime shifts, there’s only one question that really matte
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Mike Hanlon
Mike Hanlon
1 year ago

I spent a chunk of my career in academia, and as an academic economist, I was deeply frustrated by (1) the profession’s complete lack of understanding of how inflation is transmitted through the economy; and (2) its complete disinterest in even thinking about that question. As Romer wrote in his Advanced Macroeconomics text, a standard in that profession, “[I]nflation’s costs are not well understood. There is a wide gap between the popular view of inflation and the costs of inflation that economists can identify. Inflation is intensely disliked… [y]et economists have difficulty in identifying substantial costs of inflation.”

If it’s not real, then don’t worry about it, especially if you want a tenure-track job at a name-brand institution.

Intentionally or not, this note explains (in part) why inflation has real economic effects. It’s not because of “menu pricing” or some other silly explanation, but rather because actors in a given ecosystem have different access to that ecosystem’s exogenous source of funding. Therefore, inflation disrupts the ecosystem in all sorts of ways (maybe some of them are actually good, but a lot of them are definitely bad). It’s a super simple observation, but I think a profound one, and it compelled me to upgrade to a paid subscription. Thanks.

Ben Hunt
Ben Hunt
1 year ago
Reply to  Mike Hanlon

Spot on, Mike. As a former academic, too, I recognize my experience in everything you say here. Welcome to the pack!

Mike S
Mike S
1 year ago

“If you can’t see how this relates to the legacy of the financial crisis; the legacy of quantitative easing; the deflationary impact of globalization and technological innovation–well, if you can’t see how all this interrelates, I’m not quite sure what to tell you.” —Demonitized *BL…the vast majority of people can only be brought to beliefs other than those held by their society and peers either when they are young, or after prolonged and catastrophic failure–either of their personal method for living life or of their society’s way of running the world. We are now at the stage where these two forces are coming together. Our societies have failed to run themselves acceptably since 2008, and the youngs have no attachment to the status quo since it has never, ever worked for them. Change is thus not only possible, it is now inevitable. But what sort of change it will be depends on the ideas lying on the ground. ——– *Deflation to Inflation…a Sea-Change coming, there’s always one coming, great use of buzzwords, fear-factor and pure hyperbole! Munger says dogma cabbages up ones mind, so true. What you see may not be… *In theory QE reduces the yield on fixed income assets, encourages bank lending assuming banks find creditworthy borrowers, and increases the price of floating net asset value of other assets. The stock market goes up do to the re-balancing of risk portfolios and increased valuation of non-financial assets compared to risk free alternatives. QE causes a re-valuation upward of… Read more »

J Z
J Z
1 year ago
Reply to  Mike S

“The FED is trying to get the country to a better place”…… You know, with LA teachers went on strike with average of 75K annual salary, and Yellow Vest all over Europe, my son can NOT even have a stable preschool teacher because of housing cost forced them to move around, and government workers tapped out after missing just TWO paychecks due to government shut down, I am NOT sure this country is going to a better place other than asset price rise and widening wealth gap. Is Ben a missionary? Kind of, for the small crowd following his work. Does Ben move the narrative of the entire market or economic themes? No. Does Ben sell fear? No. He sells Epsilon Theory. Is Epsilon theory BS? I don’t know. Back in 2014 days when I was confused and looking for answers, there were news letter sellers and media outlet promoting fear of inflation with 10 thousand $ gold and deflation depression with 600$ gold. Ben’s call was muddling through. Now he calls zeitgeist into real world inflation (NOT asset) based on Epsilon Theory’s monitoring of narrative. If your “alpha” (something you understand but everybody else fails) understanding of of how money, banking, economy works leads to low inflation or deflation for ever, so be it. For myself, I do NOT know what’s going to happen. I think Ben’s take is he does NOT know either due to the 3 body problem. So let’s call it as it goes. Clear eyes,… Read more »

Christopher Enea
Christopher Enea
1 year ago

When I initially read your question “do you have pricing power?”, I initially thought of my pricing power as an employee. While my answer as an individual to this question is “to some extent”, my answer as an employee is an almost emphatic “no”. The average worker has virtually no pricing power in today’s employment market and hasn’t for some time as made evident by the lack of real wage growth over the past few decades. I can only see this getting worse in the future as automation and AI reduce the demand for human labor.

So I guess the question becomes “how do we increase our individual pricing power?” We learn new skills. We gain knowledge and experience. We offer our services to the customer and not our employer. For many people, I think this means escaping from the employee/employer relationship. Start a small business, freelance on the weekends, sell wedding invitations on Etsy, write and record valuable content. Yes, it might mean a bit of suffering in the short term, but regaining our individual pricing power is worth it. So is regaining our personal sovereignty.

J Z
J Z
1 year ago

This is labor thinking. This note is “capital” thinking. I think the goal is to identify businesses or resources that will survive the inflation while those who are lack of pricing power will die in inflation. Whether inflation will happen or NOT is up to debate. But if it does happen, I guess we all want to hold securities that can survive that.
I am proud of my skill and stuff that I design, but for labor pricing power, as you said, with globalization and AI, it will be harder and harder. Capital take all, Labor be damned. I think the W2 folks are fighting an uphill battle. Ignoring automation and globalization, just for the argument of what happens to labor negotiation power when “stagflation” arrives, I think Labor, the W2 middle class will be destroyed as well. Since price rise but economy suffocate and high unemployment rate.
I guess we all have to learn to grab a piece of good capital to survive as opposed to keep fighting the uphill battle of labor pricing power.

BobK71
BobK71
1 year ago

The winning coalition during the Glorious Thirty Years post-war comprised of Western governments and voters. (The coalition being the joint major beneficiaries of issuing money and financial assets by the West.) This was sold as a Keynesian-economics/great-society-for-all project.

When the glory faded from Western social democracy in the 70s (i.e. that particular bubble had burst,) the winning coalition went back to its age-old composition of top politicians and bankers. This was sold as a supply-side-economics/fiscal-and-personal-responsibility/globalized-economy project, and was heralded by the Reagan/Thatcher political revolution in the early 80s.

We’re seeing the end of this later bubble, with the Western populace up in arms for being left out in the cold for 30+ years, and inflation/redistribution (alone or in combination with something else) is definitely likely the next play by the elites.

A good sign of this is that The Economist, the last bastion of the state-bank alliance, has discussed but not vilified Universal Basic Income. Can you imagine this in the 80s and 90s?

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