Tag Archives: Money

Surge Pricing and Dirty Deals

I’m sorry I haven’t been posting weekly like I promised to. February has not been kind to me. But I wanted to quickly fire off a post relating to two topics I’ve recently seen in the news.

The first has to do with the infamous Wendy’s “surge pricing” announcement which the company has already walked back on. As I know not all my readers are American, I’ll explain both Wendy’s and surge pricing.

Wendy’s is a fast food burger chain just like any other American chain. Surge pricing meanwhile is what Uber and Lyft do when there is a very high demand all of a sudden, prices shoot up during that time, leaving customers to balk at paying 50$ for a ride home from a baseball game, when getting into downtown may have costed just 30$. Many Wendy’s customers likewise were furious at the price of a burger going up and down during the day, possibly meaning they’d pay for their food than someone who’d walked in just a few minutes earlier.

The story got so much traction that Senator Elizabeth Warren even tweeted about it, trying to play up her corporate greed narrative. Little does Warren know that we’re now living in the era of Corporate Generosity.

Nevertheless I’m always surprised that someone with the credentials of Warren is so economically illiterate. Surge pricing has been going on for decades, perhaps centuries even. The earliest examples I can think of are matinees, theatre productions (or movies) that are shown during the daytime for a cheaper cost than the evening. It costs exactly the same to run the shown at either time, so why is the daytime show cheaper? And if you’ve ever seen a bar with a “happy hour” or a restaurant with an “early bird special,” or Halloween candy sold half-off in November, you’ve also seen surge pricing in action.

What’s going in here is simple supply and demand. The price of a good or service is *not* based on the cost to make it, the price comes from the interplay of supply and demand. The price fluctuates even if the cost does not because sellers are trying to clear the market. Lower demand? Lower price.

But a restaurant also has service and shifts. Any server serving one customer must necessarily be not serving another. Yet at the same time, servers paid for 8 hour shifts, and few people would work a job where they’re only paid minimum wage for 2 hours. The cost of transport alone would eat into your wage. What this means is that if everyone only comes to eat during dinner (let’s say a 2 hour period from 4-6pm), then the servers are sitting around for 6 hours doing nothing, then madly scrambling for 2 hours. During those 2 hours, many customers might come in only to find the line is too long, or they might be able to eat but find the service poor due to overworked servers.

Thus, for decades restaurants have lowered prices during the “slow” parts of the day to entice people to eat at those times instead of during the rush. This is exactly the same mechanism as Wendy’s “surge pricing,” only it’s framed differently. But it’s still the case that they’re charging more at dinnertime even though their costs are the same.

Surge pricing like this is actually a very good thing. It evens out demand in service industries, allowing more people to be served during a day while still letting the wait staff work full 8-hour jobs. And certain customers can take advantage of this, getting a lower price at the cost of not eating during a “normal” time. Warren (and other outraged twitterati) are simply jumping on a poorly framed policy to score very stupid political points. In fact, Burger King decided to dunk on Wendy’s poorly framed surge pricing policy by highlighting their own better-framed surge pricing policy. Every restaurant is like this, and it’s actually A Good Thing.

Speaking of restaurants but not about Good Things, Gavin Newsom is quite nakedly corrupt. I had only heard mild criticisms of Gavin before, but there were some Democrats I know claiming he was basically the candidate-in-waiting should Biden not run. He is Governor of America’s largest and wealthiest state, and would surely win election because the only thing Republicans could ever say against him were tired tropes about “Commiefornia.” But actually it turns out here’s corrupt.

I know this because he handed a political kickback to his buddy who owns at least two dozen Panera Bread restaurants. California is set to raise the minimum wage to 20$/hr, except at restaurants that serve freshly bread baked. No, bagels and pastries do not count as “bread.” Panera is one of the very few restaurants that does this, and so they will still be allowed to pay their employees just 16$/hr.

You might think this would cause many restaurants to start opening up bakeries, but it gets even more corrupt: the restaurant must have been serving freshly baked bread in September 2023 to qualify. So only Panera is grandfathered in. Essentially, Gavin Newsom decided to directly use a government law to enrich his friend and confidant, and no one seems to really care.

Now of course he wasn’t handing his friend state money. But he was writing legislation that imposes costs on every single one of his friend’s rival businesses, while shielding his friend. That will allow his friend (whose name I just looked up is “Greg Flynn”) to profit much more than anyone else from fast food, since he can keep the same prices while paying his staff 80% less than the competition.

Some of the twitterati have tried to defend Gavin indirectly, saying that it’s obviously corrupt but that this carve-out won’t actually do anything. They say that since every other restaurant will have to abide by the 20$/hr minimum wage, it means no one will ever work for Panera for less than 20$/hr either. But that ignores that people take jobs based on more than just the wage. Maybe the Panera is closer to you than the Taco Bell, maybe you hate the smell of fried foods and are loathe to work at McDonald’s, maybe you don’t own a car and the Panera is the only restaurant in walking distance. Or maybe you have classes and Panera can offer you hours that better fit your schedule.

And Greg Flynn knows this. He knows that he will likely be able to find at least some workers willing to work for just 16$/hr, that’s why he asked Gavin to put that in the bill. But corruption and friend-dealing has never been punished too strongly in America, no matter how much partisans rage about how “the other side” is corrupt. Still, the naked corruption on display may have hurt Gavin in a national election, so Democrats are probably happier he didn’t decide to challenge Biden.

Is it culture? Or is it incentives?

The Internet in general is US-centric. So even on the European parts of the Internet it’s common for countries (or the entire continent) to compare themselves to America. There are thousands of things you could compare, but the most contentious is probably the economic comparisons. America has recently grown much more strongly than Europe, and it doesn’t take an economist to realize that nearly all of the world’s top companies and startups are located in America. San Fransisco alone has more billion-dollar startups than entire countries, and before you say “that’s just silicon valley,” New York and Boston aren’t far behind.

There are a million ways to explain this discrepancy and plenty of reasons why Europeans may even think it’s good. We could talk all day about whether worker’s rights are fundamentally incompatible with cut-throat capitalism, and if Europe has therefore chosen the better path. But the most flawed reason I see bandied about is that Europe just has the wrong culture for this kind of stuff.

Europe is more laid back, less aggressive. Their investors prefer same, consistent gains. The European mindset isn’t focused on innovation, and culturally Europeans aren’t focused on business the way Americans are.

I think these explanations are wrong and dumb, and I’d use more expletive words if I hadn’t made a New Year’s Resolution not to do so in my writing. I don’t think Europeans are culturally less attuned to startups and Big Business, I think the legal framework prevents it.

Not long ago, Europe was seen as the beating heart of innovation and technology. Industrial progress, scientific progress, just go to any chemistry or physics class and see how many formulas are named for Germans. But now America dominates the industries, and I think it’s because of government, not culture.

The American business framework provides significant bankruptcy protection. People mocked Trump for his many bankruptcies, but most investors know that 90% of good ideas fail and the last 10% have to cover those loses. Bankruptcy is a way for investors to mitigate their downside, and thus allows for bigger risks to be taken.

The American financial system also gives significant benefits to investors, giving them greater flexibility in buying and selling their company to whomever they wish. Until Biden and Trump brought protectionism back to the fore, it was not uncommon to see American companies sold to foreign investors with little fanfare. Nativists and racists may complain about *gasp* Chinese people owning an American company, but from the investor’s perspective selling the company is a good way to cash out his winnings from the investment. Foreign buyers compete with American buyers, and this increase in demand means prices go up. This means the sale price of companies goes up, and that increases the returns on an investor’s investment.

But long before Trump, Europe was made famous in the tech world for blocking foreign buyers from its companies. Again, nativists wrongly think that this strengthens the European tech industry by “keeping it in European hands.” But when an investor sells out, they get cash in return. What do you think they do with that cash? They don’t hoard it like Smaug the Dragon, they reinvest it. Because they’re investors. By blocking foreign buyers, you reduce buying pressure, you reduce how much money investors can get out of their investment, and you therefore reduce their upside potential. Is it any wonder then they’d prefer a safer investment, when Europe is happy to cap the gains on any risky tech investment they make?

And Europe prides itself on fining big tech companies for any reason whatsoever. But surely it’s obvious that a government hostile to profitable tech companies would scare off anyone wanting to make a profitable tech company near them. Better to start in America or get out of Europe ASAP. Microsoft and Apple can afford billion dollar fines, but such sanctions could be lethal to a smaller European tech company. So again investors are scared off, entrepreneurs are scared off, and Europe wonders why it doesn’t have a tech sector.

“But what about ASML and Spotify!” And what about them? For every single, solitary European company that manages to rise above the hostile governing environment, there are 10 American companies that rose under easier circumstances. Spotify started in 2006, and since then Massachusetts alone has started Draft Kings, Moderna and Intellia Therapeutics, all of comparable value to Spotify. And Massachusetts has half the population of Sweden.

People respond to incentives, and the incentives for risky tech investment are very poor in Europe. Bankruptcy is easier in America, returns are (or were before Biden and Trump) less likely to be capped by protectionist policies, and (before Biden) the government generally has taken a more lax approach to dealing with corporations. You can debate if these things are good or bad, but I find them far more likely reasons for America’s tech dominance than “culture” or “attitude.”

“The Crime of ’73”

Boy, these posts aren’t quite coming out weekly now are they?

I might have posted on this topic before, but I wanted to write something down and this was on my mind. It’s interesting how the controversies of yesteryear always fade away, even though in their day they dominated the news and the mind-space of politically conscious voters.

Take the Silver vs Gold movement. When America was founded, it had a bi-metallic standard, meaning that both silver and gold were legal tender. Congress set down in writing how much weight of silver made a dollar and how much gold made a dollar, and so both could be used to buy and sell. But of course, as commodities the price of silver and gold in the market would fluctuate, but congress didn’t understand or act quickly enough to fix things.

For example, silver mines in Mexico continued to run and depressed the price of silver relative to gold. This created an arbitrage opportunity because the price of gold was higher than that of silver:

  • Take 10 silver dollars and exchange them for 10 gold dollars, as they are equivalent
  • Take the gold dollars to Mexico and melt them down.
  • Take that gold and exchange it for raw silver
  • Bring that silver back to the Mint in America and demand to have it struck into silver dollars. Because of the price difference between silver and gold, the silver you brought back will make more than 10 dollars worth, so you can pocket the extra as your profit.
  • Start back from the beginning, trading 10 silver dollars for 10 gold dollars

This happened because congress set a fixed value for a commodity who’s value changed on the market, and as that value changed there was arbitrage created. Gold flowed out of the country and was replaced with silver. When the California gold rush happened, the price of gold suddenly decreased and the whole process reversed. Congress didn’t understand what was happening, and so simply decided to remove the bimetallic standard to stop this from happening.

But now we get to “The Crime of 1873.” When congress removed the silver standard in 1873, silver miners could no longer have their pure silver struck into coins that could be used as tender. The mint was by far the largest purchaser of silver and so removing silver from the standard removed most of the demand and so killed the price. Congress therefore upended the livelihoods of thousands of miners and mining towns by changing the laws on coinage. And those people never forgave them.

For years this “Crime” was the hottest topic in certain political sections. It was the litmus test for candidates and parties. And it was the entire foundation of the presidential candidacy of William Jennings Bryan. For years, certain voters would never vote for a candidate or party who had supported the “Crime,” and they may not have even kept polite company with voters who supported those candidates. In its time, the “Crime” was seen as the greatest betrayal possible, and plenty of people pointed to it as the reason for national or local economic problems. They blamed the “Crime” and hoped that overturning it would fix things.

Of course, America never regained the silver standard. For a time, the Federal government compromised and declared it would still buy silver from the miners directly, but in time even this subsidy was removed. The people affected by the “Crime” probably never forgave the Republicans (who passed the bill) for what they did. Indeed the “Crime’s” authors had a hard time defending their actions in the face of angry voters. Some authors claimed that the bill didn’t do what critics claimed, and that the US had technically been non-silver since 1853. Others claimed that ending the silver standard was an unintended biproduct. But this had the perverse effect of amplifying conspiracy theorists who believed the bill was passed with malicious intend, and giving ammo to those who wanted to overturn it.

In the 1880s and 1890s, the “Crime of 73” was as much a controversial topic as any political topic today. Friendships could be ended by it. But it too did pass. I think most of the controversies of our day shall also pass, these days even American History students will barely remember the “Crime.”

Have IPOs become more speculative?

This post is very late because I didn’t feel good about my conclusions, but here it is.

I’ve been wondering if IPOs have become more speculative of late. Rumors abound that OpenAI (makers of ChatGPT) may IPO soon and they’ve been quoted as having a billion dollars in revenue and a valuation of 80 billion. 80 times profit is already a pricey valuation, 80 times revenue is even moreso. And other even more speculative IPOs have happened in recent memory. Companies like CRISPR Therapeutics and Beam Therapeutics IPO’d when they have essentially no revenue, just patents.

It was once said to me that IPOs are “supposed” to be for a company that is profitable. The company shows the world that it is profitable and can thus afford to pay a dividend. The investors of the world will then pay for stock in the company in order to grow their money. So the company gets a big pile of cash by selling shares, and the investors get shares which pay a dividend and may grow in value also.

The above is a very 20th century view of investing, these days dividends aren’t all that popular to begin with. So too does it seem that many companies will IPO long before they can afford a dividend, and long before they are profitable at all, so why are investors investing and buying these stocks?

It isn’t necessarily a bad move for investors to buy stock in OpenAI if it does IPO. The investors are speculating that while it’s not profitable now, it will be in 10 or 20 years. In essence, an IPO like this lets investors play the role that venture capitalist play. Venture capitalists invest in many startups long before they see revenue or profit, and they bank on the fact that while 10 startups may fail, the 1 that succeeds will let them see more than 10x gains. With companies IPOing early, normal investors can now also play this game. Beam Therepeutics, CRIPSR Therapeutics, and OpenAI may all fail, but if you invest in them and 10 other speculative companies, then maybe 1 will succeed which will give you gains that wipe away all your loses.

So I can’t say that companies IPOing earlier and earlier is a bad thing. As long as they don’t lie on any of their forms, then investors know exactly what they’re getting into. Investors know that they’re buying into a very speculative, pre-profit, maybe even pre-revenue company. But if it works out, they can make big gains. And remember that “investors” here isn’t just faceless, deep pocketed billionaires. Investors is also every person with a 401k or IRA. They too can buy into these companies using their own money and play at being venture capitalists. And if its so profitable for venture capitalists to do this, then why shouldn’t the rest of us do the same?

But while I cannot say this is a bad thing, I also cannot say if this trend is even happening. Remember I started this story by asking if IPOs are happening earlier and earlier. Is it true that in the 20th century, most IPOs were of profitable companies, and in the 21st century most IPOs are of unprofitable ones? Or is that simply recency bias at work? I tried and tried but couldn’t find hard numbers on this kind of thing, which is why it took me so long to write this post.

Either way, if OpenAI does IPO I might toss a few dollars their way. Intellectually I know I probably can’t beat the market, but emotionally it’s fun to pretend I can. And where’s the harm in that?

Fitch Downgrades America’s credit rating

I’ve spoken before about how credit rating agencies are downgrading the debt of nations. Now, Fitch has downgraded America’s credit rating from AAA to AA+. Once again I’m seeing a lot of conspiracy theories about this and I thought I’d take a moment to hit back against them.

The first conspiracy is the common one that the financial system is conspiring against the common man. This sort of conspiracy is no different from the old “evil bankers control the world” trope, but it gets a lot more traction online when it’s framed with a leftist slant. To be blunt, the financial system is competing with itself more than it is conspiring with itself. Fitch is competing with the other credit rating agencies (Moody’s, S&P) and if it downgrades America’s credit for no reason, it would lose trust in the eyes of the financial institutions which pay for its ratings.

Ratings agencies rate all kinds of debt, not just sovereign bonds. And financial institutions will pay for those ratings so they know where to invest and where to avoid. Trust is key to this, and without trust, Fitch would die. If financial institutions don’t trust Fitch’s ratings, they simply won’t pay for them and will take their business elsewhere. So Fitch cannot in any way downgrade ratings in a way that the broader financial market would not agree with, otherwise it would destroy trust and tank its business model.

In this, there is a common chicken and egg problem with ratings agencies in that they usually only change their ratings when the broader market is already leaning in a certain direction. IE they are followers, not leaders. But that that just lends more credence to their ratings. The market was already very willing to believe that America needed a downgrade, so Fitch isn’t doing anything out of the ordinary. It’s the politicians who have screwed the people on this one, not the ratings agencies.

The other, similar conspiracy I’ve seen is that the ratings agencies are conspiring to undermine Biden and tank his presidency. Biden has been trying to tout the strong economy, and some liberal commentators have been upset that the public doesn’t always buy it. So of course this must be just another GOP plot to brainwash the voters that the Biden economy isn’t awesome.

I would point out however that American real wages are still below where they were when Biden took office. Note for example that real wages declined 3.6% from June 2021 to June 2022. That’s a big dip, and people notice it. People’s ambivalence about the economy isn’t some nefarious plot, it’s very clear when listening to people’s complaints (inflation) and looking at the data (real wages dropping). It’s also quite understandable that ratings agencies have looked at this very same data, as well as the rising debt amid partisan bickering over how to pay it. From this, they might reasonable downgrade America’s credit rating. Not everything is a conspiracy against one’s favorite politician.

Many people will point to 2008 and the financial crisis about why we can never trust ratings agencies again. But that was over a decade and a half ago and every country added new laws to constrain financial institutions. Saying you can’t trust Fitch because of 2008 is like saying you can’t trust the Labour Party because they were in charge during 2008.

So Fitch has downgraded America’s credit rating, and it seems the financial markets were broadly ready to believe them. Rather that stew in conspiracies, it is better to take these criticisms to heart and find a way to fix them.

Why are conspiracies about the stock market so common?

The obvious answer to the question posed in the title is that the market is complicated, and therefore people who don’t understand it are more likely to fall into conspiracies than to admit their ignorance. But I truly am blown away by how common stock market conspiracies are amongst “retail” investors. I don’t just mean the meme stock traders, many many retail investors I’ve spoken to have conspiracies about how the amorphous Wall Street is driving the market one way or the other in order to “punish” someone. Usually the argument goes that X company is a threat to Wall Street, either because it supports some politics that Wall Street doesn’t or because its technology is highly disruptive to an entrenched industry. Therefore Wall Street “punishes” it by deliberately pushing down its stock price.

Just as an aside, that disruptive tech idea is dumb merely on the face of it. The idea is usually said to me as “Wall Street has too much money invested in Y industry, and X company has a technology that could totally disrupt it. Wall Street is protecting its investment by forcing down X company.” This is dumb on the face of it: Tesla, Amazon, and Apple were all exceptionally disruptive and still grew by leaps and bounds. Just because some investors have their money tied up in Ford doesn’t mean other investors won’t give Tesla a shot. Not every investor on Wall Street is invested in the same things, so the idea that they would act as a collective unit is nonsense.

As another aside, I wrote early about how this was a conspiracy I see a lot when talking about nuclear fusion. The idea is that fusion is such an amazing energy source that all other energy sources can’t compete, so they work together to keep it down. But if they can keep down fusion, why haven’t they kept down every other disruptive tech that upended industries through creative destruction? I never get a good answer.

Anyway I think this widely held believe, that Wall Street “punishes” stocks and causes them to go down, is simply another case of people not understanding that the market is filled with individuals acting in their own selfish interest. The only way Wall Street could act as a collective would be if each and every investor was forced to act the same way no matter what.

Say Company X has stock selling at 20$. Some Wall Street investors think that 20$ is a fair price for that stock. But some Wall Street investors are angry that Company X has technology which will disrupt their investments, so they want to “punish” it and force its price down to 1$. They can try to do this by selling the stock, but if the stock falls to say 15$, then the investors who think 20$ is a fair price will happily snap it up, because if 20$ is a fair price, then 15$ is a deal. Quickly the buying pressure from investors who think it’s undervalued should overwhelm those who want to push it down, and the price would stabilize.

Now there are two reasons this mechanism could fail. One is that all investors are forced to act in concert, which again doesn’t make sense at all. Investors compete fiercely with one another, they do not work together for common benefit. And furthermore working together creates a huge prisoners’ dilemma, if even one investor breaks with the group at large, they can reap enormous rewards by buying up stock with a fair value of 20$ for just 1$. Getting to 20x your money for free is a huge incentive to break with the collective, and no greedy investor would pass such an inventive up.

The second reason this mechanism could fail is that there are very few investors who believe the fair value is 20$, and most agree the value is 1$. But that isn’t a conspiracy in action, that’s price discovery in action. The price is an equilibrium between the expectations of the buyers and the sellers. If more and more people think its fair value is higher than at present, its price will go up. If more and more people think its fair value is lower, price will go down.

Trying to “force down” the price of a stock below its fair value is not a profitable way of doing business. No one investor or group of investors control the market, the market is a huge competition between all investors. And so while selling a stock for a price below its fair value can momentarily drop the price, it’s also a great way to lose your own money. Meanwhile if the market is filled with investors who think the fair value is higher, they’ll buy the stock back up to the original point. All you’d succeed in doing with this trick is burning your own money.

The price of your favorite stock went down because more investors thought it was overvalued than thought it was undervalued, not because of some huge Wall Street conspiracy.

If the weavers get replaced by machines, who will buy the clothes?

I’ve seen way too many articles about AI casting doom and gloom that it will “replace millions of jobs” and that this will lead to societal destruction as the now job-less replacees have no more money to spend.  The common refrain is “when AIs replace the workers, who will buy the products?”

This is just another fundamental misunderstanding of AI and technology.  AI is a multiplier of human effort, and what once took 10 men now takes 1.  That doesn’t mean that 9 men will be homeless on the street because their jobs are “replaced.”  The gains reaped from productivity are reinvested back into the economy and new jobs are created.

When the loom replaced hand-spinning weavers, those weavers were replaced.  But they could eventually find new jobs in the factories that produced looms, and in other factories that were being developed.  When computers replaced human calculators, those calculators could now find jobs programming and producing computers.

For centuries now, millenia even, technology has multiplied human effort.  It used to take dozens of people to move a single rock, until several thousand years ago someone had the bright idea of using ropes, pullies, and wheels.  Then suddenly rocks could be moved easily.  But that just in turn meant the demand for moving rocks shot up to meet this newer, cheaper equilibrium, and great wonders like the Pyramids and Stonehenge were suddenly built.

The same will be true of AI.  AI will produce as many new jobs as it creates.  There will be people to produce the AI, people to train the AI, people to ensure the AI has guardrails and doesn’t do something that gets the company trending on Twitter.  And there will be ever more people to use the AI because demand is not stable and demand for products will rise to meet the increase in supply generated by the AI.  People will want more and more stuff and that will lead to more and more people using AI to produce it.

This is something that people get hung up on, they think that demand is stable.  So when something that multiplies human effort gets created, they assume that since the same amount of products can be produced with less effort, that everyone will get fired.  Except that demand is not stable, people have infinite wants and finite amounts of money. 

Technological progress creates higher paying jobs, subsistence farmers become factory workers, factory workers become skilled workers, skilled workers enter the knowledge economy of R&D.  These new higher paying jobs create people who want more stuff because they always want more stuff, and now have the money to pay for it.  This in turn increases demand, leading to more people being employed in the industry even though jobs are being “replaced” by machines.

To bring it all back to weavers, more people are working in the textile industry now than at any point in human history, even though we replaced weavers with looms long ago.

AI will certainly upend some jobs.  Some people will be unable or unwilling to find new jobs, and governments should work to support them with unemployment insurance and retraining programs.  But it will create so many new jobs as well.  People aren’t satisfied with how many video games they can purchase right now, how much they can go out to restaurants, how much housing they can purchase, etc.  People always want more, and as they move into higher paying jobs which use AI they will demand more.  That in turn will create demand for the jobs producing those things or training the AIs that produce those things. 

It has all happened before and it will happen again.  Every generation thinks that theirs is the most important time in the universe, that their problems are unique and that nothing will ever be the same.  Less than three years ago we had people thinking that “nothing will ever be the same” due to COVID, and yet in just 3 short years we’ve seen life mostly go back to normal.  A few changes on the margins, a little more work from home and a little more consciousness about staying home when sick, but life continued despite the once-a-century upheaval.

Life will also continue after AI.  AI will one day be studied alongside the plow, the loom, and the computer.  A labor-saving device that is an integral part of the economy, but didn’t lead to its downfall.

Corporate Greed is over, now comes corporate generosity

If you’ve been to the grocery store recently, you have probably seen an incredible sight. Eggs are now selling for less than they did in 2022. Walmart says they’ll sell me eggs for 1.19$ a dozen, and Target will sell them for 0.99$ with a special discount. Considering that at the beginning of 2023, eggs were selling for as much as 5$ a dozen, this comedown is remarkable.

It gets to the heart of a discussion about the origins of inflation though. The classical definition of inflation is too much money chasing too few goods. That means that when either the money supply is increased or their is a shortage of goods, we should expect to see inflation. This thesis does seem to have played out in 2021-2023. The money supply was increased enormously in 2020 and 2021, while COVID restrictions meant the supply of goods was constrained and could not rise quickly to meet it.

But that isn’t the definition that has been gaining traction. Recently folks have pointed to corporate greed as the primary driver of inflation. Under this thesis, inflation is not driven by the money supply or the goods supply, but by corporate greed in and of itself. If corporations weren’t greedy, they wouldn’t raise prices. But if prices go up because corporations are greedy, doesn’t that mean they go down because corporations are generous?

I’d like to see someone like Bernie Sanders explain the fall in egg prices. Why aren’t Walmart and Target just being greedy like all the other companies? If it’s so easy to raise egg prices by being greedy, then what mechanism could possibly make prices fall? What possible reason could their be for a fundamentally greedy company to willingly lower prices and receive less money?

For that matter, why is Exxon-Mobile being so damn generous? Over the past year, crude oil prices have gone from 100$ to just 70$. Exxon-Mobile was public enemy number 1 when gas prices were high, and was blamed for being too greedy. Have they now become generous instead? Have all the oil companies become generous? Why are the oil companies so much more generous than all the other companies?

It gets to the heart of the problem, inflation isn’t driven by corporate greed. Corporate greed is a constant, I’d go so far as to say human greed is a constant. Corporations (on average) demand the highest possible price for their goods that the market will bear. Laborers (again on average) also demand the highest possible price for their labor that the market will bear. No one ever willingly takes a pay cut without good reason, good reason usually being they have no other choice.

If corporations want to raise their prices above what the market will accept, then they’d be like me walking up to my boss and demanding a million dollar salary. They won’t get what they want no matter how hard they try. If Walmart raises the price of eggs, then Target can steal all of their business by keeping its egg prices low. People stop buying eggs at Walmart, they instead buy eggs from Target or from one of the hundreds of small and independent retailers that still dot America. Grocery stores are not a monopoly in our country, they do not have the power to set prices on their own. They are always in competition with each other and prices reflect that competition.

By the same token, if I demand a million dollar salary, my boss just won’t pay it. If I say I’ll quit if I don’t get it, he’ll show me the door. I am competing with hundreds of other workers in my field and so I cannot raise the price of my labor over and above what others are charging or else I’ll get replaced. It is a fact that many people ignore, but there is a market for labor just as their is a market for any other good. And the labor market has sellers (workers) and buyers (employers) just like any other. So when trying to answer questions about (say) the egg market, it’s useful to first think about how it works in the labor market. We are probably all more familiar the labor market with since if you’re reading this blog you’ve likely worked in your life.

So, in the labor market, can the sellers of labor (the workers) raise their prices just by being greedy? No, of course not. Without some decrease in supply or increase in demand, the price (salary) of laborers doesn’t go up, and workers who refuse to work for the market raise simply won’t receive job offers. It’s the same with corporations and it’s the same with goods inflation. Prices of goods aren’t driven by greed. They’re driven by supply shortages and a glut of money, both of which are in part exacerbated by government policies.

The current administration has continued Trump’s protectionist trade policies, which prevent American companies from being forced to compete with overseas companies. And both congressional spending and the Federal Reserve’s balance sheet have expanded considerably, bringing more and more money into the money supply. Too much money chasing too few goods, that is what causes inflation.

It’s official, we’re now being taxed to pay back Peter Thiel

I posted a while ago about how the Biden administration was bailing out SVB without calling it a bailout. Basically Silicon Valley billionaire and hedge fund managers (like Peter Thiel) put all their money in a bank well in excess of the 250,000$ FDIC insurance limit. That limit is a known risk. If the bank you use goes bankrupt, and if you exceed that limit, the FDIC is only obligated to give you back 250,000$. Doesn’t matter if you had 250,001$ or 999,999,999,999$, FDIC is only obligated to give you 250,000$.

But that would be unfair to the billionaires. After all, why should they ever suffer the consequences of their actions? So instead the administration promised that every single depositor would be made fully whole. This was spun as them protecting the little guy, but the little guy was already covered by the 250,000$ insurance. I don’t have more than that in the bank, neither does anyone else I know. If my bank goes bankrupt, I will be fully paid back because my deposit is far less than 250,000$. If you have more than that amount, then you are solidly rich and do not need a government bailout.

But the bailout came anyway. The FDIC handed out money to cover the billionaires and hedge funds. Now that money has to come from somewhere. Biden promised it wouldn’t come from the taxpayers of course, but it still is coming from the little guy. It’s coming from our bank accounts.

Every person who owns a bank account is paying a small amount of tax into the FDIC insurance program. It won’t show up as a line item in your bank statement, but it’s there all the same. But for every bank account held by a bank, they have to pay a little bit into the FDIC. That cost naturally gets passed on to the holder of the bank account, just like every other tax. When the tax on cigarettes rises, the price of cigarettes rises. So too is it with bank accounts. You won’t see the tax as money rushing out of your account, but you will see it as less money going in. The bank will pay you less interest on your deposits because they have to take some off the top to pay for the FDIC insurance. And if there was no FDIC insurance, you’d get more interest.

You can see this exact same scenario if you look at big bank accounts. There are some banks with accounts which hold millions, even billions of dollars. The FDIC is only obligated to pay back 250,000$ in the case of bankruptcy, but a responsible billionaire who does not need a government bailout will pay for deposit insurance which covers more than the 250,000$ FDIC limit. That deposit insurance will decrease the amount of interest paid on the deposit, or even remove the interest entirely to pay the insurance. If you have to pay for insurance, you get less interest.

Everyone with a bank account has to pay for FDIC insurance, we don’t even get a choice. And now we need to pay for even more insurance to refill the FDIC’s account since they emptied it to bail out Peter Thiel

The FDIC plans to hit big banks with a tax to refill its account. This is being spun as a progressive redistribution from the rich to the poor. It’s the opposite. If a tax is levied on Walmart, Walmart just raises its prices, and the Walmart customers pay that tax themselves. The vast majority of Americans have their money in a big bank like Bank of America. So the big banks are going to pass this new tax onto their depositors, just as they pass the FDIC insurance tax onto us. You and I will be receiving less interest on our deposits now, because the FDIC spent all their money on Peter Thiel and co. Take from the poor to give to the rich, socialize loses and privatize profits. It’s 2008 all over again.

I know the amount is small. It’s probably going to be no more than a few dollars in lost interest in my account. But a few dollars times the 100 million or so Americans who bank with big banks makes the few billion dollars needed to bail out Peter Thiel and co. And it shouldn’t be this way, we should not be paying for their mistake.

And I know I keep harping on Peter Thiel, but it’s because a bunch of so-called “progressives” are refusing to even contemplate that this is a bailout taking money from the poor. By ignoring the context you can see SVB and its depositors as “the little guys” and Bank of America as “the rich” so taking money from Bank of America to give to SVB depositors is re-distributive. But it isn’t so. SVB was the bank of billionaires and hedge funds, Bank of America is the overwhelming bank of America’s poor and middle class. Taking from Bank of America to pay back SVB’s depositors is taking from the poor and middle class to pay back the billionaires. And reminding those “progressives” of exactly who is being paid back is just something I feel I should do.

Quick Post: WTF happened with Silicon Valley Bank

So I’m really only making this post so I can link to it in another post, but while there have been plenty of explainers going around about what happened with Silicon Valley Bank (SVB) I wanted to get all the facts as I know them in one place.

Basically, Silicon Valley Bank had a bank run and needed a bailout. Why?

When you deposit your money into a bank, the bank pays you interest on the money. You are giving what is essentially a loan to the bank, and they in turn use that money to give loans to other people. The assumption is that the interest they get on their loans is more than the interest they pay you for your money, so the bank can always stay profitable.

Banks have their best relationships with the people who deposit money into them, so those tend to be the ones they reach out to and offer loans. Whatever bank you deposit your paycheck into is likely going to be the one that offers you a car or a house loan. But SVB was taking deposits from Tech startups and Silicon Valley hedge funds. Those guys don’t need or want loans. They raise money through equity, not loans. So while lots of deposits flowed into SVB, far fewer loans flowed out.

So how could SVB make money without loans? They bought bonds instead. Government bonds are just a loan you give to the government after all, and SVB thought that using their deposits to buy bonds was a surefire strategy because the government will never default. Remember that banks don’t ever just sit on loads of cash, they have to sell assets if they want “liquidity” (finance speak for cash). But if depositors want their money back, SVB can just sell bonds and give them cash, while if depositors hand them more money, SVB will use that money to buy government bonds.

But then inflation came, and brought with it interest rates. We’ve discussed before about how when interest rates rise, the price of an old bond falls. If you bought a bond paying 0.25% and interest rates have gone up to 5%, no one will buy your bond without a heavy discount. So 3 years ago a tech startup deposited $100 dollars into SVB, and SVB bought 100$ worth of bonds. Now the startup wants its money back but the 100$ bond SVB has bought has given them almost no interest (0.25%!) and has collapsed in price. When SVB sells its bond, it gets back WAY less than 100$.

So when interest rates rose, SVB’s bonds were all worth a lot less, but they were obligated to sell them to pay back their depositors. That would be fine if only a few depositors wanted their money, SVB can take a loss and make back the difference with profit elsewhere. But if ALL their depositors want their money back, SVB cannot cover.

And the depositors did want their money back. Startups backed by hedge funds get piles of money by selling stock, IPO’ing, and selling equity. Then they handed that money to SVB. Stock prices collapsed in part due to rising interest rates, the flow of cheap money stopped. Because of that, startups needed to take their money back out of SVB to keep the lights on. Money was flowing out but nothing was flowing in.

So SVB had a massive interest rates risk on both sides of its balance sheet. Interest rates decreased the amount of money going in (by tanking the stock market and making IPOs and share selling less common) while also decreasing the value of the assets SVB held (by making their government bonds worth less). Add onto that that inflation increased the amount of money flowing out (since startups needed to pay more for everything) and SVB was primed for a bank run. Depositors realized SVB didn’t have enough cash to cover everyone’s deposits, and so they all rushed to take all their money out before it collapsed.

And so collapse it did, and the government handed it a bailout. I’ll write more about that tomorrow.