Transcription
I love the inflation. And the other thing is that oil would go to $250 a barrel. It's at 85, which is pretty amazing.
>> How does someone whose whole claim is about how he's going to bring prices down like nobody ever has before say that he loves inflation?
>> Wholesale prices seeing their highest annual increase in more than 3 years.
>> Life starts to feel more and more unaffordable.
>> Meet Steve Keen, the economist who predicted the 2008 crash before it happened. Now, he says rising oil prices and wrong economic decisions could push the world toward another crisis.
>> People who were able to purchase goods and services before this ridiculous war began are not going to be able to afterwards. A president living in a fantasy world whose entire narcissistic personality world in which he is the most important person on the planet, he knows everything. Well, we know that's not true.
>> Americans are feeling the heat, most visibly so at the pump.
>> Some places we're still at $4 a gallon for gasoline. And then diesel, don't get me started on that. It's insane.
>> It's a lot harder to stretch a dollar than it used to be.
>> New data shows inflation hit 4.2% in May. Although it's less than half of the 9% hit during a post-COVID supply disruption, it's the highest level in 3 years. Much of that came from a surge in energy prices, up 23% from a year before. Asked about these figures, the man who promised to bring prices down on day one of his presidency had this to say.
>> The numbers were great. You know what I really love? I love the inflation.
>> When when the war is over?
>> Yes.
>> It's coming down.
>> I I know you can't
>> It's going to come down like a rock.
>> How does someone whose whole claim is about how he's going to bring prices down like nobody ever has before say that he loves inflation? I think this is one of those things which escapes from Trump's mind before he has any chance to to censor what's going on inside there because we think about oil prices as consumers. When the prices rise, we pay more in our consumption bill. But equally, if we're paying more for the purchase of the oil, then people selling the oil are making a larger price themselves. And these are the sorts of people that I think Trump is unconsciously channeling there, because if you have higher prices for oil caused by the disruption of the Strait of Hormuz that he himself triggered, then those friends of his are going to get higher prices for their oil, and they're going to be happy, and he's channeling their happiness there without realizing, without even thinking about what's the impact upon the people who elected him into this office in the first place. And the whole idea that prices are going to come down after the war shows that he has no idea of the damage that the war has done to the production facilities in that region of the world. We haven't lost entire oil refineries yet. We've lost large components of different parts of oil refineries. We have damage to the actual system by which the oil comes out of the ground, because if you have something like an oil well, and you don't have the flow going continuously, then when it stops, it is not an easy job just to restart it again. Only people who think this are the people who've got no exposure to production at all, and I think that desperate definitely includes a property speculator and slum landlord Donald Trump. So, the confidence that he has comes from a lack of knowledge about the production system, not from awareness in any sense at all. My interpretation of that uh I love the inflation is channeling that his friends are telling him, "We're making huge profits now because the margin that we're able to charge above the cost of getting the oil out of the ground and out of Texas wells and so on is great. We're all smiling." And he comes out and says the same thing. Whether there'll be any attempt to retract that, I I very much doubt. Uh but his basic arguments, first of all, are not from the perspective of the people who elected him. The Make America Great Again people thought they were going to get reliable oil, cheaper prices. Everything is going to be easier under Donald. Uh and also no wars, of course. Well, so much for that. They've had two wars this year so far, Venezuela and what he's doing with Iran. The whole idea that the war is going to end, when? When are we going to see into this toing and froing? Partially, the problem is that Trump claims to be looking for a negotiated settlement, but how can you have a negotiated settlement when you can't trust one of the parties involved in the negotiations? And the party you can't trust is Trump himself. The fact that the Iranian side can't trust the American side to keep 20 bargain that they negotiate is likely to encourage them to continue the war because they appear to have the upper hand. The classic saying that the first bad casualty of war is the truth is amplified by social media, by completely spurious claims being made, predominantly by the American side. It appears what the Iranian side says is closer to what's actually happening in terms of the number of sites attacked, damage being done is far less than what Trump thinks that damage is. And have a listen to what's said by the economist following up here in a moment. Let's have a listen to him.
>> We are a consumer economy. The way people spend and how much they spend has huge impacts on the way the economy runs. And it's the expectation of rising prices that can make people go out and buy quickly or sooner, not put off big purchases. And that makes inflation worse.
>> Now, this is the way that economists think. And just as much as I'm going to attack Trump for his incoherent reasoning abilities, the same thing applies to economists because if you listen again to what was said in that statement, what he's basically saying is a demand-driven version of inflation. So, the idea is that because consumers see prices rising, they bring forward purchases they would otherwise delay. And therefore, the expectation of rising prices leads to rising prices. Now, that might sound clever to some extent. And there is a certain amount of the this happening in the real world. When you take a look at the velocity of money, for example, the rate at which money turns over in an economy, the highest rate of turnover of money was in the 1970s with the highest rate of inflation. The broadest measure of money I've ever created is called the money of zero maturity, things which you can instantly use to go to go shopping, fundamentally. It combines all the ideas of M2, M3, M4, and money market funds, and so on. There's the measure of the amount of money in the system, and then there's a measure of how often the money turns over. If you take a look back at the '60s, before the neoliberal period began, then we had money turning over about 1.8 times per year. So, that would mean that the
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>> gross domestic product was, say, 18 trillion. You had 10 trillion dollars in circulation, which turned over 1.8 times per year, and that gives you the nominal value of GDP. Now, you can see how this began taking increasing in the late '60s as the inflation rate started to rise, and you finally had, in the period of the highest inflation in the 1980s, money was turning over not 1.8 times a year, but virtually twice as often, 3.5 times a year. So, there is a case where people are experiencing high inflation, and the inflation back then was substantially higher than we've experienced recently. If you take a look at the inflation rate in the 1950s and '60s, we had higher inflation than that we're having right now. Up to 10% inflation. That was actually due to the Korean War. But then you had the whole period of the '50s and '60s with extremely low inflation, lower than we're getting right now. Inflation rates of about 1%. But then in the late 1960s, that inflation rate began to rise. We got a peak level of inflation in 1970 of 6%, then down to 3% in 1972. And then at the time of the Yom Kippur War, which was the first major oil shock, this was a war fought between Israel and the Arab states. It was over in six days. It's also called the Six-Day War. It was just after the formation of the OPEC, the Organization of Petroleum Exporting Countries. And one of their first actions after the war, of course, these are almost all Arabic countries at the time, the decision was to boycott supplies of oil to anyone who had supported Israel in the war. And of course, that meant America. So, the price of oil went from $2.50 [clears throat] a barrel in the before the war began, in the 1973, to $10 a barrel at the end of the year. Now, that was the main cause of the inflationary surge. Then we had a second time, this was called the second OPEC shock, and inflation hit 15% at that stage. Again, it was caused by the cost of oil, not the demand for oil, the cost of oil. Because the price of oil went from $2.50 a barrel back here to $10 at this stage, and then from $10 to $40 a barrel. That's what gave us the main inflation in the 1970s and '80s. This is the inflation that's is the sort of mental framework for economists. You don't want that level of inflation to start again. But this is an inflation which was caused by a supply shock. And we're having the same experience again now. And what are the economists blaming this inflation on now, it's a demand shock. They think it's the fact that people see prices rising, because they see them rising, they expect them to continue rising, therefore they go shopping earlier, they don't delay purchases, that leads to a demand driven rise in the increase in prices. That is not what we're experiencing. We're experiencing a supply shock, and the main cause of the inflation is the increase in the cost of oil, because energy is an absolutely critical input to production. You can produce nothing without energy. My classic saying on that front is that labor without energy is a corpse. Capital without energy is a sculpture. If you don't have energy as an input, you can't produce any output whatsoever. So, the cost of oil feeds through into the cost of production of everything. This is not a demand driven function, it is a cost driven function driving up the prices. So, the whole idea that you can control this by putting up interest rates feeds into the type of economic models that places like the Federal Reserve put forward. These are all neo-classical models that based on the neo-classical approach to economics that I believe we should have abandoned at least a century ago giving all the intellectual and empirical problems with it. In these models that economists of the Federal Reserve and economists and academic institutions throughout the states have put together, the cause of inflation is fundamentally expectations of inflation, and the main volatility comes from consumers. The technical models that the neo-classical economists produce are called DSGE models, and that stands for dynamic stochastic general equilibrium models. And these are fantasies. There's no way they describe the real world. They fundamentally argue that individuals now can predict the future. The models that economists are advised by in institutions like the Federal Reserve assume that consumers are trying to maximize the growth of their consumption, not just for themselves, but for their entire all themselves and their descendants over time. The concept in these models is that volatility is caused by changes in consumer behavior, and they call the the expression they use for this they they talk about what they call an Euler equation, which in my opinion is insulting a great mathematician. But the concept they have is that consumers can easily modify their consumption now, whereas investment is locked in by the fact that you can't rapidly change the capital stock. They presume consumers rapidly change their consumption in response to shocks to technology and shocks to preferences as they describe them. So they treat consumption as the volatile component of economic activity and investment as the stable component of of in total demand. Now when you look at the empirical data, the exact opposite applies. Consumption tends to be a fairly stable function of income. Investment is volatile. Investment is what changes radically and causes booms and busts. So the mental model that economists have focuses upon the wrong factor. They see consumption as the volatile factor rather than investment, and they believe that by putting up the interest rate, they make it more expensive to consume. You can't leave aside money for your future descendants, which they literally assume you're doing in these models to enable people to pay taxes in the future. So they believe that interest rates control the consumption behavior of individuals. Now, you don't think about the interest rate when you go shopping at Walmart. Okay? It is not something which is the forefront of your mind. What actually happens when interest rates get put up by the Federal Reserve is that that is then used by private banks as an excuse to increase the interest rate they charge on mortgages. Now, what that means is anybody who's got a mortgage, a floating rate mortgage, ends up paying a higher level of interest on that mortgage, and therefore they have less money left over for consumption. That's what reduces that the impact on the private sector. Now again, this is left out of these mainstream models. They obsess about level of government debt and ignore the level of private debt. And for that a president living in a fantasy world who's in total narcissistic personality world in which he is the most important person on the planet, he knows everything. Well, we know that's not true. Economists themselves have fantasy models of how the economy actually operates. But the real reason that increasing interest rate squeezes individuals is because individuals end up households and firms end up paying more interest on their debt to the private sector. The main way that interest rates affect the level of economic activity is by meaning people have got to pay a higher rate rate of interest to the finance sector for the debt they borrowed from the private sector. That's completely ignored by the mainstream. Now, do you want that at the moment because this is giving a double whammy to people who currently have private debt, both households and firms. If you have debt, you have to service it. You need to pay the interest on that debt. If the government puts up the interest rate on bonds, then the response of the financial sector is to increase the interest rate on mortgages and on corporate loans as well. And that therefore means that there is more money coming out of the private non-financial sector and going to the the banks who spend more slowly than the rest of us do anyway. But what caused the 2008 crisis? And remember that conventional economists did not see a crisis coming. People like Ben Bernanke who ran the Federal Reserve at the time in 2007 thought 2008 was going to be a fabulous year. They had absolutely no idea that a crisis is going to come through. Now, what actually caused the crisis was we had a huge level of private borrowing for the subprime bubble. And people were the amount of money that people were borrowing into existence by taking out mortgages to buy a house and expecting the house price to rise reached 15% of GDP equivalent in America. And then in it fell from plus 15% to minus five. That's what gave us a severe downturn in 2007 to 2009 that made the the great financial crisis that it was. This time round we don't have a high level of credit demand anymore and they even though house prices are rising, people aren't borrowing money hand over fist as they were in the period from 2000 to 2007. But if you have debt, you have to service it out of cash flow. Now, what's going to happen courtesy of the Strait of Hormuz is a whole range of companies are going to find that cash flow is no longer possible. If you can't get the sulfuric acid, then you can't make the copper. That means you then sell the copper and cover the debt that you accumulated uh fee when you borrowed money to build the mines and start making the the manufacturing processes involved in making data centers and so on. So, you're going to not have the cash flow. Workers whose jobs disappear because there's no longer the oil to enable them to be employed in the factories they're working in, they are going to be unable to service their mortgages. So, rather than a decline in the credit causing a crash, which is what happened in 2008, this is going to be a decline in gross domestic product, income being earned by people, meaning that they could initially service their debts when we had pre-war period, but because the war is cutting off the supply of energy, that in fact also cuts off the production. Cuz when you take a look at the data, fundamentally what we call GDP is actually energy turned into useful work. We are wealthier than our not in century forebears because we consume more energy. Fundamentally, that's what we're doing. So, if you have a 10% fall in energy supplies and something of that magnitude is feasible for what's happening with the guy with the Strait of Hormuz, then that 10% of fall in energy means ultimately about a 10% fall in GDP. That therefore means that the debt to GDP ratio rises, not because people are borrowing more money, but because GDP itself physically falls because of the damage done to the production capability of the planet by what's happening the Persian Gulf on the Strait of Hormuz. So, that is going to be a physical reason for a financial crisis. So, in 2008 we had a financial crisis driven by speculation by people about rising house prices leading to ridiculous levels of borrowing that stimulated the economy while people were borrowing then when they could no longer service the debt and you had the plunge, it went from stimulating the economy adding an additional 15% to total demand to subtracting 5% from it. That's what happened in 2008. What's going to happen this time round is we're cutting off the legs of GDP. You've still got the same level of private debt. You've still got the same need to service that level of private debt. And at the same time, the level of GDP is falling so you have less income to service that debt. Now, in that situation the Federal Reserve putting up interest rates is a complete mistake. The mistake is they think this is driven by excessive demand. That is not the case. People who were able to purchase goods and services before this ridiculous war began are not going to be able to afterwards a substantial proportion of them because the energy needed to to enable them to work in those factories, the inputs like sulfuric acid, like helium, fertilizer again, people with agricultural debt, they're not going to be able to service that debt because of the fall in the total level of output. So, the last thing you want to do is have this at the same time the Federal Reserve putting up interest rates in the belief they're stifling excess excess demand. There is no excess demand. So, we have not just one fool in charge being Trump, we have two fools uh working with foolish ideas. Trump himself with his own narcissistic ego believing this war would be over in a few days. That's one huge cause of chaos right now. But another cause of chaos is economists who have models that have no bearing that have no relationship to the real world interpreting this as a demand driven crisis when it's actually a supply driven crisis. And that is what's going to mean that we potentially have a financial crisis when the shortages of oil start to feed through the system on top of the the damage to uh productive capability itself. We're going to find people unable to use that productive capability to service their debts. So, we can have a financial crisis on top of the physical crisis caused by the shutdown of the supply of goods through the Strait of Hormuz.