By Ron Paul, for Birch Gold Group
A recent article from The Guardian says that high corporate profits are a big cause of the rising cost of living. Their source:
The report, compiled by the progressive Groundwork Collaborative think tank, found corporate profits accounted for about 53% of inflation during last year’s second and third quarters. Profits drove just 11% of price growth in the 40 years prior to the pandemic, according to the report.
That’s a shocking finding! Corporations were able to more than quadruple their profits in the middle of 2023!
But is it really true?
It’s a question worth answering! Especially considering the recent memo from the White House, laying out a plan to combat “price gouging” from companies. The memo claims greedy corporations are keeping “prices elevated despite inflation falling.”
Clearly they’re confusing two entirely different things…
Inflation is not the same as rising prices
We first need to know what inflation actually is. For a word that gets used so much (especially in the last three years!), a lot of people misuse it.
Henry Hazlitt, a well-known economist and journalist, once defined inflation very clearly:
Inflation is an increase in the quantity of money and credit.
See, most people think “inflation” means rising prices. But that’s not right!
Hazlitt continues:
Its chief consequence is soaring prices. Therefore inflation – if we misuse the term to mean the rising prices themselves – is caused solely by printing more money. For this the government’s monetary policies are entirely responsible.
This means that when the government prints more money, it causes prices to go up. So, inflation isn’t just about rising prices; it’s about the government creating more money.
Mainstream economists think that rising prices are the same thing as inflation. They see prices going up and assume that prices are the problem. They’re missing the real cause: too much money being printed. I explained the difference between price fluctuations and inflation in my article Forget About the Gold Standard, Let’s Talk About the Copper Standard.)
The researchers at Groundwork Collaborative made this mistake. They wrote as though “inflation” and “rising prices” are the same thing. But they aren’t.
That’s not the only mistake the researchers made, though.
Where do prices come from?
According to Groundwork Collaborative, corporations set prices.
Okay, let’s think about this. Imagine you operate a gas station. You want to make more money. What do you do?
According to these researchers, all you’d have to do is raise the price of gas. Problem solved! You charge more, your customers have to pay more – they suffer to put money in your pocket.
Is that really how the economy works?
If a greedy gas station owner raises the price at the pump, most people will drive down the street to a competitor and pay less, Wouldn’t you?
Of course you would.
A gas station owner who attempted “price gouging,” like the White House says, would most likely not find himself wealthier. He’s a lot more likely to find himself bankrupt.
In reality, “price gouging” only works when buyers have no alternative. In fact, we enjoy a huge number of alternatives for virtually everything we buy! We can comparison-shop and find the best prices for every single purchase.
See, corporations don’t just decide what their prices are going to be. It’s what people are willing to pay for a product or service that sets the price.
If the cost to make something exceeds the price we’re willing to pay, then the company fails.
The whole concept of “price gouging” only works when customers have no choice. In a free market, when customers have no choice, entrepreneurs step in to give customers a choice. This is how free markets work!
The White House wants you to think that corporations set prices. This isn’t quite right… Corporations set the price they’d like to get for a product – but customers decide how much they’re willing to pay. Corporations know how much something costs; customers decide how much it’s worth.
That’s where prices come from.
What makes prices change?
Basically, three factors make prices change:
- Supply
- Demand
- The value (or purchasing power) of currency
Everyone understands how supply and demand work. Zucchinis are dirt cheap from May to August (at least they are here) because that’s when they ripen. Want a zucchini in December? That means importing it from Mexico or Guatemala – and that zucchini costs more.
That is not inflation.
That’s just a price fluctuation based on supply and demand.
Here’s another example:
A solar panel requires quite a bit of metal: Aluminum, copper, silver, steel and zinc. When solar panels are popular, manufacturers use more of these metals – demand goes up, and metal prices follow.
That is not inflation.
Rising demand for these metals makes it more expensive to produce solar panels, so solar panel prices go up. Is that inflation?
No, it is not.
Prices change constantly for reasons like this! This is how markets work.
The missing piece in the story is the part the government actually has control over, and that’s the supply of currency.
When the Federal Reserve prints more money, it makes each dollar worth less. This causes prices to rise for everything, from the raw materials companies use to make products to the prices we pay for finished goods.
When the Federal Reserve pushes interest rates down, that lowers the cost of credit. (Think of credit as spending money before you earn it.) More credit makes each dollar worth less, just like money-printing does.
That’s what inflation is.
Higher prices are a symptom of inflation, not inflation itself.
Corporations have no more control over the supply of currency or credit than you and I do. Inflation devalues their money, too.
Now do you understand why it’s bone-headed to blame greedy corporations for higher prices?
A different way to think about your dollars
Most people think about how many dollars they have. What they don’t think about is what those dollars can buy.
It’s so hard to make people understand the difference. Here’s a thought experiment:
What if the Federal Reserve doubled the amount of money in everyone’s bank accounts overnight?
Would we all wake up rich? Would we be able to afford twice as much house, an extra car?
…well, no. Because the value of currency goes down when supply goes up.
We’d very quickly discover that a world with twice as many dollars has prices twice as high, too.
This is what the White House doesn’t seem to understand. This is why deficit spending (basically credit) doesn’t create wealth. This is why the Federal Reserve can’t give everyone the same purchasing power Elon Musk has.
Increasing the money supply, whether it’s through money-printing or deficit spending, makes prices go up. That’s inflation. No greedy corporations are behind it – just a greedy government.
Once you understand this, then you understand how crucial it is to preserve your purchasing power from inflation. I strongly recommend diversifying your savings with physical precious metals. That’s the best way I know to prevent the corrosive effects of inflation from destroying your purchasing power.
Better still, You not only safeguard your own family’s financial future, you also strike a blow for the principles of sound money and economic liberty.
Personally, I believe these principles are vital for a free and prosperous society.
With global instability increasing and election uncertainties on the horizon, protecting your retirement savings is more important than ever. And this is why you should consider diversifying into a physical gold IRA. Because they offer an easy and tax-deferred way to safeguard your savings using tangible assets. To learn more, click here to get your FREE info kit on Gold IRAs from Birch Gold Group.
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Well, that and this. If an item cost wholesaler $1 and then it raises to $2. Wholesaler needs a 20% profit for business to stay open. So instead of making 20 cents it now needs 40 cents. Voila and down to retail prices.
Everybody exploits every opportunity. Get rid of government, and everyone has fewer manipulated opportunities.
Gummint is the ultimate market distortion factor.
Too many bootlickers. Capitalism is a society of bootlickers and willing slaves all desperate to be the next slave owner.
The ends of capitalism and communism are the same.
No one has been able to adequately explain this to me but when they say the government “prints more money” which causes inflation, what does that mean? Hardly anyone uses cash anymore so it’s a bit misleading. Don’t banks create more money when they extend vast amounts of credit for people to use to buy cars and houses, etc.? Every time a bankruptcy is filed and approved, doesn’t that make more money? It’s as if someone paid off your debt – and we did!
No better book on banking and where all the bullshit comes from:
https://cdn.mises.org/Mystery%20of%20Banking_2.pdf
Corporations are price gouging and governments and their banking overlords are inflating. It is not an either/or.
FedGov, Inc.