12. Inflation continued

 So: inflation is at the highest level in about 30 years.

In today's Globe and Mail, there are two interesting articles

On politics of inflation: the opposition party knows that high inflation is government's fault

There is a good explanation of what may happen:

"High inflation, which has been off the Canadian political radar for best part of three decades, is the ultimate pocketbook issue. A sharp jump in the general price level erodes the buying power of a dollar and cuts into [real] wages. Central banks typically respond by raising interest rates to reduce demand in the economy, meaning that mortgage rates and other debt servicing costs are almost certainly going up over the next year."

More importantly: how inflation becomes entrenched

"Already, the country’s largest public-sector union, the Public Service Alliance of Canada, is warning that it expects wages to keep up with what it calls “soaring” inflation when it negotiates contracts for 110,000 civil servants in 2022. They’re asking for raises of 4.5 per cent each year for three years. Talks start in January.

PSAC members won’t be the only ones looking for wage increases. Employees who feel they are losing purchasing power want to be kept whole. Unions will push for higher raises, not just for this year, but over the course of their contracts."

The second article nails the problem: if inflation feeds into wage contracts, then it will last. Higher wages lead to higher costs lead to higher price increases and high inflation continues.

11. Inflation in Canada

 From Statistics Canada:

The Consumer Price Index (CPI) rose 4.4% on a year-over-year basis in September, the fastest pace since February 2003 and up from a 4.1% gain in August. Excluding gasoline, the CPI rose 3.5% year over year in September.

Prices rise in all eight major components, 12-month % change

	August 2021	September 2021
All-items Consumer Price Index	4.1	4.4
Food	2.7	3.9
Shelter	4.8	4.8
Household operations, furnishings and equipment	1.5	1.5
Clothing and footwear	-0.2	0.2
Transportation	8.7	9.1
Health and personal care	2.9	3.0
Recreation, education and reading	2.2	2.1
Alcoholic beverages, tobacco products and recreational cannabis	2.6	2.1

10. Inflation in the US

 Today in the morning the US Labour department published inflation data for October.

Statistics Canada will publish Canadian October data on November 17, so we will have a look then.

Here is what is happening in the US:

Summary

More information

Inflation is 6.2%, the highest since 1990. Main reason: energy prices increased by 30%. Food prices increased by 5.3%. Excluding food and energy, the inflation rate was 4.6%, the highest since August 1991. Used cars (26%) and new cars (10%) contributed a lot, but the increase in prices for shelter (3.5%) was also higher than the goal of monetary policy (around 2% inflation).

9. Labour shortages

 Labour is now in short supply.  Yet employment is still lower than 2 years ago. This causes endless problems for many businesses. So the question is: where did the workers go?

Paul Krugman, in an opinion in the New York Times, summarizes explanations:

1. Enhanced unemployment benefits during the pandemic provided financial cushion that workers use to search for a better job

2. People are still weary to go to work; also, they may have problems with care for their children

3. A nudge: workers in poor jobs realized how bad their jobs were. And so they quit and look for something better.

Of course these explanations are not mutually exclusive.

8. Taxing the gadzilionaires

8.  According to an analyst at Goldman Sachs, Elon Musk is going to be the first person to reach the wealth of $1 trillion (i.e. $ 1 000 000 000 000). The analyst based it on the projections of the value of the other company Mr. Musk set up: Space X.

For now (as of yesterday) he is worth a mere $ 275 000 000 000 - see Real Time Billionaires (forbes.com). Still far from the nominal value of the Zimbabwean note I showed you, but getting there.

There are 11 people/families in the world worth over $100 billion.

Right now the way to avoid paying taxes by rich people in the US goes as follows:

1. Do not sell shares

2. Borrow money against the shares to finance your expenses

3. Give the shares to your offspring in your will

4. When you die, they do not pay any tax on the capital gains.

So if Mr. Musk passed away today, and if he had left all his shares to X Æ A-12, the capital gains of $279 billion would not have been taxed.

In the US, they are trying to extract some of this wealth by introducing a billionaire tax. If you have at least $ 1 billion, or had an income of at least $100 million in each of the last three years, you will have to pay a tax on unrealized capital gains.

Why are they doing it? Not because they think it is a good idea. This is the best Democrats have left as earlier proposals for a tax increase would not be passed by Congress.

7. Expiration of Covid benefits; and Canadian banks commit to environmental causes

1. Canada Covid-induced benefits (a wage subsidy and a rent subsidy (for firms and non-profits, not for individuals) are set to expire on Saturday.

If you follow the discussion whether to extends benefits, you can learn why governments find it easier to give money than to take them away. Most of the discussion is about hospitality industry, which still faces some restrictions. But the subsidies apply to all businesses that had a revenue decline of at least 10% since the pre-pandemic times. 

Of course if you ask people who receive money (or their representatives, for example business associations) they will tell you extending the benefits is absolutely necessary. This is an example of skewed incentives: they get the full benefit, but pay only a fraction of the cost, with the rest of the bill picked up by taxpayers.

You can read more about it here:

Canada’s COVID-19 benefits are set to expire on Oct. 23. Here’s what you need to know - The Globe and Mail

2. And on a positive note, the big Canadian banks signed up to the United Nations Net-Zero Banking Alliance, formally committing to shifting their lending away from projects and activities that generate greenhouse gas emissions “to align with pathways to net zero by mid-century, or sooner.” 

Opinion: Canada’s banks join Mark Carney, signaling a shift from the West’s fossil fuel dependency and delighting OPEC - The Globe and Mail

6. Debt limit again, and international trade is expected to grow

 

The Council of Economic Advisers is an office that advises the US President President. Here is what they have just written:

A default would send shock waves through global financial markets and would likely cause credit markets worldwide to freeze up and stock markets to plunge,” officials at the White House Council of Economic Advisers warned. “Employers around the world would likely have to begin laying off workers.”

The potential for an ensuing global recession, they wrote, could be worse than the 2008 financial crisis, because it would come as countries continue to struggle to escape the coronavirus pandemic. Adding to the burden, Congress and President Biden would be unable to spend money to prop up the economy until the debt limit, which caps the amount that America can borrow, is raised.

“The federal government could only stand back,” they wrote, “helpless to address the economic maelstrom.”

In other news

According to the World Trade Organization, world trade will continue to increase, especially exports from Asia. They expect the problem with freight across the Pacific to become less pronounced. But Africa will be left behind because of limited access to vaccines.

Global Trade Boom to Continue After Covid-19 Reopening Bounce - WSJ