To understand the “state of the union”, we need to understand inflation as we await President Biden’s speech tonight.
US energy giant ExxonMobil posted an annual profit of $55.7 billion, the largest ever for any US energy company. This was $10 billion more than its previous high of $45 billion in 2008 and its return on capital was 25 percent. ExxonMobil share prices rose 80 percent last year. Only tech giants Apple and Microsoft have reported higher profits so far. Chevron reported record 2022 profits of $35.5 billion. ConocoPhillips, Marathon Petroleum and other major energy companies are also expected to report record or near record profits. Shell made a record profit of almost $40 billion in 2022, more than double that of the previous year after oil and gas prices soared following Russia’s invasion of Ukraine.
When big corporations engage in price gouging, creating record profits, while also adversely inpacting the economy at large, the obvious consequence is higher inflation. To maintain a given profit margin a fossil fuel company mandates a certain price for gasoline. If that price results in profits being doubled, then obviously this is price gouging, profiteering to the detriment of American consumers, except for the oil companies and their major shareholders. As this price gouging is taking place, we the people, get incessant MSM reporting on the “horrors” of inflation. Then we hear about the Fed raising rates, and inflating mortgage and car payments. This amounts to price gouging for the big banks, mortgage lenders. Yes, the non-wealthy sector of the population suffers, but we get BS news on our infotainment media sponsoring such “news”. The most powerful corporations use the pandemic as an excuse to spike prices, furthering the welfare of the wealthy and beggaring everyone else.
To get to the crux of the matter, our economy is run by the superwealthy in the system of casino capitalism. It is pump and dump. The conventional language is bull and bear markets, where pumping upward is the bull market and dumping causes the bear market. In the 1970’s the stock market was dismal, as this decade was marked by oil shocks and stagflation, and the international gold standard of Bretton Woods was ended by Nixon in 1971 when America’s gold reserves had become insufficient for Europeans wanting to cash in their dollars for gold at $35. By January 1980, the dollar plunged to 1/850 of an ounce of gold (meaning that gold spiked to $850 an ounce on Jan. 21, 1980). Inflation means dollars are worth less. Therefore, Paul Volcker had to crush inflation via his “dollar shock therapy”. The U.S. was faced with the possibility of horrific hyperinflation a la 1923 Weimar Germany. So Volcker “saved the dollar” by raising the fed funds rate to 20% in March 1980. He briefly lowered it in June. When inflation returned, he raised the rate back to 20% in December and kept it above 16% until May 1981. That extreme and prolonged interest rate rise was called the Volcker Shock. It did end inflation while simultaneously causing the 1981-82 recession.
From this point forward we’ve had casino capitalism, a series of bull markets interspersed with periodic recessions or crashes, the worst crash being in 2008, when the subprime mortgage bubble burst. Last year, a correction of 15% occurred, perhaps due to covid supply chain disruptions along with inflation hurting businesses with declining sales (with the obvious exceptions of big oil, big tech, and other price gougers).
Getting back to economic fundamentals: Inflation benefits lenders. The entire economy is based on debt and the biggest players are the big banks on top of the societal/economic power pyramid. The pump and dump scheme means that an alliance of the big banks and corporate vultures find the right time to cash in their portfolios, triggering panic selling by the masses, thus triggering a market correction or a major crash. When stocks plummet the fat cats buy them up at bargain basement prices and start the pump cycle all over again.
In prior eras, before the New Deal and Great Society programs existed to help common folks, there was no real strategy to deal with crashes or “panics” as they were called then. A global depression began in 1873 and lasted over 20 years. Deflation was a catastrophic problem for Americans then. Crop prices plummeted, this reducing purchasing power for rural Americans comprising the bulk of the population. During the Great Depression from the fall of 1930 to the winter of 1933 the Fed reduced the money supply by nearly 30 percent. This was an epic fail. Secretary of Treasury Andrew Mellon advised President Hoover to “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down… enterprising people will pick up the wrecks from less competent people.” This was emblematic of classic “pump and dump” economics. Ruining the lives of the non-wealthy was simply collateral damage as part of the business cycle. Keynesian “social democratic” policies were not yet tried. Unemployment peaked at 25% in 1933 (was reduced down to 10% in 1941 before WW2 “saved the economy”) and wages plummeted also, meaning that aggregate demand plummeted. Companies cannot survive when people earn less or earn nothing. Without government intervention there is no method for recovery. Less spending leads to less profits leads to more people laid off and so on. The big lesson learned was Keynesian economics of deficit spending to give people money to buy stuff to boost companies’ profits so they can hire workers, pay higher wages. Of course, World War II skyrocketed aggregate demand and unemployment fell to 2%. But social democratic “big government” policies doubled the GDP from 1933 to 1941. Inflation is part of this restorative scenario. In periods of deflation, plunging wages and plunging profits, we have a true disaster for all involved.
Let’s learn about inflation in its historical context and realize deflation is far worse.
SOURCES:
Price-gouging drives record profits at US energy giants – World Socialist Web Site (wsws.org)
Shell profits double to record $40 billion (msn.com)
Paul Volcker, His Shock, Rule, and a New Bretton-Woods (thebalancemoney.com)
From the 1974-75 Recession to the ‘Volcker Shock’ – A Critique of Crisis Theory (wordpress.com)
The Great Depression | Federal Reserve History
Were There Any Periods of Major Deflation in U.S. History? (investopedia.com)