Lessons from the Ides of March: Conflict is The Real Driver of Inflation

Two speeches I delivered a year apart - on March 15 2022 & 2023 - spell warnings on the real causes of inflation - conflict, climate change, crisis profiteering and central bank policy.

In my time in the Manitoba legislature, I often delivered warnings about budgets and used the opportunity to warn the government about the bigger picture, challenge their assumptions (and propaganda).

As it happened, two of these responses to the budget were delivered on March 15, 2022 and 2023 - the “Ides of March” - a day with real historical resonance when it comes to talking about budgets and debt.

One of the issues blatantly obvious issues with inflation has been that the pandemic, conflict in Ukraine, and massive storms from climate change have raised prices, due to shortages, and uncertainty. The other major driver has been not just two, or three years of bad Central bank policy, but 30 years.

In the 1970s, Milton Friedman, is that “Inflation is always and everywhere, a monetary phenomenon.” This argument has been used to make an argument that if governments increase spending, it increases the money supply, and therefore prices go up. This seems to make sense at first, but clearly falls apart when you look at what happened in the pandemic, when people and businesses income disappeared. If government replaces that lost money, and it is spent the same way, how is it inflationary?

A working paper from the Post-Keynesian perspective argues that “Inflation is always and everywhere ... a conflict phenomenon:”

https://www.ipe-berlin.org/fileadmin/institut-ipe/Dokumente/Working_Papers/ipe_working_paper_224.pdf

This argument seems to be pretty self-evident, especially when you consider the direct effect of the invasion of Ukraine on global energy prices, but also because conflict increases uncertainty and reduces options.

Anyway - here’s my take on inflation, and a few warnings that seem to be coming true.

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The First Warning: March 15, 2022

“There are lots of calls for people to reduce taxes because of higher gas prices. You know, we're all supposed to be sacrificing. This cost is a result of the cost of the invasion of Ukraine. That we all need to be sacrificing.

It would be great, quite frankly, if some of the oil companies were willing to show some sacrifice and perhaps step back on either profit-taking or on dividends rather than gov­ern­ments always being expected to be the ones who cave in. The iron rule of cor­por­ate pricing is supposed to be inflexible while gov­ern­ments always have to be caving in. It's really quite unfor­tunate.

When we look at what's causing inflation, there are a number of things. Lots of people want to talk about fiscal spending. It's not fiscal spending; fiscal spending almost never causes inflation.

What's happened is a number of things.

One is that we've seen massive supply disruptions around the world because of COVID. There are over 200,000 people around the world stuck on ships who have not been able to come ashore because–and haven't been able to deliver materials, because no one will take them onboard.

These supply chains in them­selves have been a cause of increasing prices and inflation. That's about COVID; it's got nothing to do with what [local gov­ern­ments] are doing, it's happening all over the world.

The other thing about it is, frankly, climate change. We haven't talked about climate change much in a while. It's still a crisis. And the fact is, it's one of the major crises driving inflation.

We had massive storms that wiped out roads in BC that cut off vital trans­por­tation links and infra­structure links that our trade, that actually–you know allow us to ship stuff out of Manitoba and out of Canada and to take trade and products in from Vancouver. Those are broken. Why? Because we had extreme weather events tied to climate change.

I was talking to somebody at the plumbing shop who said, why do they have all these restrictions? Why do they have shortages?

There've been massive storms in the Gulf of Mexico that have wiped out oil refining capacity, that have wiped out resins that make plastic as a result of climate change. Climate change is one of the major things that's driving extra costs because it's massively disrupting capacity.

The third thing is some­thing that has nothing to do with democratically elected gov­ern­ment.

It's actually the fact that the Bank of Canada decided to drop interest rates as low as they possibly could and increase borrowing.

So what we've seen is a massive, unaffordable increase in housing because banks have been encouraged to lend more and more and more. And I've talked about private debt, that I think we've got a very serious situation in Canada because people are just being priced out of the market.

I was talking to a real estate agent. He said it's almost impossible for somebody coming up right nowadays, in their twenties, to be able to afford a first home without taking on absolutely colossal amounts of debt right at the begin­ning of their life. That's some­thing that shouldn't be happening, but it's some­thing that was, I believe, a mistake on the part of the Bank of Canada.

That, too, has been driven by policies, including policies of this gov­ern­ment, because they allowed evictions to happen. So people have been driven out of their homes, driven out of their apartments, which is allowed for 'renovictions' and flipping, and massive increases in the price of rent and price of housing, which fun­da­mentally underpins the entire economy.

Those are the real drivers of inflation. It's not fiscal spending. It's not CERB. It's not the fact that people were made–we can make sure that people could actually, you know, afford groceries.

It's the fact that we have, over­whelmingly, in this crisis, we've seen the fortunes of the very richest massively increase, whether it's Jeff Bezos or some­body like Elon Musk, people at the bottom end and the vast majority of people are struggling because they're having to pay much, much more for the necessities of life.

Now, look, some of these are things that are beyond what this gov­ern­ment can do, but they also need to be addressed as a reality because there are things this gov­ern­ment, as a province, can still be doing in order to protect people from higher rents, to protect people but to stand up for busi­ness and make sure that they're not being oppressed with a colossal burden of debt.

But the other thing about it is to speak up, emphatically challenge the idea that, you know, that when we talk about massive, in­cred­ible increases in oil prices, we are absolutely justified in asking whether, in a crisis, somebody is price gouging–or what used to be called profiteering in the war.”

The Second Warning : March 15, 2023

“We have a growing crisis because interest rates are going up and we're already seeing the contagion spread across the world.

The funny thing about this budget is actually it reminds me of the NDP's 2008 budget, where they also promised a billion dollars of tax cuts, talked about all the tax and busi­ness cuts they delivered. And when did it happen? It happened right before the 2008 global financial crisis. Where they said, well,”there's going to be no problem.”

[Today] Why are our coffers bursting? Well, the coffers are bursting because of inflation. Why is inflation high? Well, because we have a war. And what's costing a lot of money? Well, gas. But we're not hearing people complain about the gas companies, who are price gouging, which, we should be. That's because inflation is some­thing that happens in the private sector with prices.

      We've warned against price gouging. We've warned against price gouging for three years, because that's one of the risks because of what happens in a pandemic. People take advantage of it.

And I've communicated this before in this Chamber, but I'll repeat it: we should all be really concerned about what's been happening to the economy as a whole because of what's been happening with interest rates.

Last summer Edward Chancellor, who's a his­torian and a journalist, he's a senior member of the asset allocation team of the Boston invest­ment firm GMO. On an online website called The Market, [he gave] an interview in which he said “it will turn out to be largely impossible to normalize interest rates without collapsing the economy.”

Quote:

“By aggressively pursuing an inflation target of 2 per cent and constantly living in horror of even the mildest form of deflation, central banks not only give us the ultra-low interest rates with their unintended con­se­quences in terms of the every­thing bubble, they also facilitated the misallocation of capital of epic proportions. They created an over-financialization of the economy and a rise in indebtedness. Putting all this together, they created and abetted an environ­ment of low productivity growth.”

Mr. Chancellor then went on to cite a Canadian economist, William White, who was actually born in Kenora, Ontario, a former deputy governor of the Bank of Canada, who worked at the bank of international settlements and who predicted the 2008 financial crisis.

On a number of occasions, Mr. White warned Federal Reserve chairman Alan Greenspan to his face that the US economy is facing a financial crisis. Unfor­tunately, he was ignored.

He has continued to be outspoken in warning that we are facing a global insolvency crisis. Mr. White has written of central banks that, quote:

“they have pursued the wrong policies, not just in the last couple of years, but over the past three decades, which have caused ever higher debts and greater instability in the financial system.”

Now, to be clear about this, it is the Bank of Canada and other central banks that are respon­si­ble for this crisis, not elected officials. Central banks are in­de­pen­dent. They're supposed to be in­de­pen­dent. There are strict rules ensuring central bank in­de­pen­dence, but that will not, of course, stop the Canadian people from blaming the Prime Minister, members of Parliament or the gov­ern­ment of the day.

But I'm very concerned that the result of this is that the Bank of Canada has been trying to engineer a recession in order to pop Canada's housing bubble and bring down prices, which are high because of an inter­national war and a hangover from a pandemic that isn't really quite finished.

Housing prices are already dropping, but because Canadian real estate is such a large part of the Canadian economy, it's going to have an outsized impact. If people are already finding them­selves underwater on their mortgages, which is only more than their house is worth, then that traps them financially.

It means they can't leave. If they lose their job, they can't move because they end up having a house and more debt than they can possibly pay off. Because even if they pay off the asset the mortgage is applied against, they're still in the hole, and that's a dangerous place to be. And Canadians' personal debt levels are over $2 trillion. Much of that is in mortgages and, frankly, the Bank of Canada has been trying to control inflation by bankrupting individuals and busi­nesses.

I've also spoken to busi­nesses who are enor­mously concerned because they took on enormous amounts of debt during the pandemic because that was all that was offered.

Because gov­ern­ments –like this one [The Manitoba Governmement], ordered busi­nesses to shut down with compensation, ordered people not to work without compensation.

So we had no paid sick days, we had no adequate compensation and over 80 cents on every dollar in assist­ance that flowed into this province was federal, not prov­incial. The Province didn't hold up its side of the bargain, and that's a huge problem right now because they're trying to paper the entire province with money without actually solving the problems that need to be addressed.

And it also has to be said, is that we're continuing on an ongoing policy blunder that happened in 2008. Then, the Harper Conservative gov­ern­ment and the Bank of Canada, in their response to the 2008 global financial crisis, decided to bail [banks] out. Canada's banks at the time were effectively insolvent. They were broke. Their liabilities exceeded their value. In 2008-2009 the Harper Conservative gov­ern­ment of the Bank of Canada bailed out the banks and backstopped them to a value of about $200 billion.

Now, contrast that with the support that was given to the Canadian people or even to prov­incial gov­ern­ments–to demo­cratic­ally elected prov­incial gov­ern­ments. They faced freezes and cuts. They could find $200 billion to bail out the banking system, but froze payments to Manitoba and our 1.4 million residents for six years.

That measure was seen around the world because Canada's banks didn't fail because essentially our bank bailout was more or less concealed. They sort of boasted, though, we have good regula­tion, we have strong regula­tion, when really it had been a five-alarm fire.

But that measure only postponed a further reckoning and it was misinterpreted as a success. And when the pandemic struck, similar measures were taken again by CMHC and the Bank of Canada. And it's an insolvency crisis.

And what's an insolvency crisis? These are technical terms, insolvency versus liquidity. Liquidity means you're short on cash; insolvency means you're going broke.

So, really… our debt is so high that people are on the verge of bank­ruptcy, they're on the verge of insolvency. Busi­nesses, now banks, the contagion is now spreading across the world. There's Credit Suisse in Europe, which is now in danger.

You have the Silicon Valley Bank, which is the second largest bank failures in US history. They had $200 billion; it was worth $200 billion. Manitoba's GDP is about 60 or 70 billion dollars Canadian. So, we're talking about a US bank with a value sub­stan­tially similar to several Canadian provinces suddenly going broke.

So, central banks, in response, they've lowered interest rates. But what that did is that is it meant that the people who could borrow, could borrow more - people who have good credit ratings could take on far, far more debt and they could use it to buy up other companies and they could use it to bid up the price of real estate, and that's what's happened.

And the other thing is that when you lower interest rates, it means that people who couldn't borrow before all of a sudden can. So you have–they call it easy money, but the–it means that that money is flowing further and deeper and whole bunch of people who've never been in debt before suddenly are and everybody else is in a whole bunch of debt more, as well.

And because it's so much easier for people who make more, who already have large amounts of property or wealth, to get that debt at an in­cred­ibly easy interest rate, it means they can bid up the price of every­thing. And they can afford to keep doing that for a while, anyway, because they'll buy up housing, they'll buy–but mostly it's stuff that's [already existing].

They're not investing in innovation, they're not investing in building new factories. It's all about bidding up the price of stuff that already exists. So, you'll take one old–you'll–so, you'll see lots of mergers and acquisitions, and you'll see the price of every­thing–especially property–go up.

And this is a huge problem for farmers as well. I am aware of “perimeteritis” in this province. And one of the things about this is that I always think of people living in rural and northern Manitoba as the canary in the coal mine, because they are going to lose their services first, whether it's health care or edu­ca­tion and that goes many times over for First Nations, It's essentially a contraction to the centre.

That’s where people say “We're going to do all our services from Winnipeg, and everybody else, it's cheaper and easier to run it from Winnipeg,” - except for all the people who have to come here for it.

In the past few years, because of low interest rates and amazing amounts of debt, we've seen in­cred­ible increases in the price of farmland. Well, what happens when you're a new farmer and you come in, and you just spent millions of dollars for your farm?

Well, the more you pay for an asset, the harder it is going to be to get paid back for it. So, of course food prices are going to rise, because all of a sudden, the cost of your overhead–your debt overhead on your farm–has gone up.

And it's a huge problem, it's a huge problem for young farmers trying to access, to get into farming; for anybody who wants to get into farming.

But this is the central issue that has been missed, because instead of trying to unwind it or find ways to deflate this debt in a way that makes sense, that doesn't punish people–instead, what's happening is that we're seeing interest rates go up, and it's putting banks at risk. Banks: lenders as well as to say nothing of the borrowers.

Now, in the event of a market crash, Mr. White, who, if there were a real Nobel Prize in economics, he should get it because of his con­tri­bu­tions - He spent years and years predicting exactly what would happen in 2008, only to be ignored; he's a Canadian economist, he should really be hailed for his work.

And he's warned: we need various ways to carefully restructure debts, and the Canadian–current Canadian federal and prov­incial bank­ruptcy laws are not enough, either because the defaults–and he said, look, when people are going to go broke, either it can happen in a way that's disorganized or a way that's organized.

It can be orderly or it could be chaotic, and we're much better off if we can negotiate this way and do this in a way that's fair, and equitable and planned–rather than seeing a blowout, where you just have a whole series of defaults go, like a chain reaction.

I just feel the need to put these things on the record; there have been banks who are predicting that Canada could face one of its largest housing downturns in history, and even risks of a financial crisis, which means that all of a sudden the banks aren't able to handle it, because the many mortgages that they've registered as assets will plunge in value.

And it really doesn't take that much, when you consider how much–how much money Canadians have been spending on real estate lately. And I do want to send this warning, because this has potential economic and political effects, both of a recession–but we already have a highly divided, polarized country.

This is the sort of thing that'll be weaponized by extreme political elements, because it will drive people into desperation. And that's some­thing we should be doing every­thing we can to avoid.

And it's worth remembering: all financial crises originate in the financial sector, and that the con­di­tions for crisis were created by the Bank of Canada and other central banks, because they've been mispricing risk across the entire economy for an entire gen­era­tion.

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The Third Warning: From History - Ides of March, 44 BC

Today, if people know about the Ides of March at all, it’s likely because that’s when the Roman Emperor Julius Caesar was murdered. In Shakespeare’s play, Julius Caesar, he is warned by a fortune-teller that he should “Beware the Ides of March.”

Caesar’s murder on the Ides of March was not a coincidence. March 15 in Ancient Rome, was “the day of reckoning” - the day when debts and taxes needed to be paid.

Caesar became emperor after a civil war - which he won. There was still widespread unrest and discontent, and Caesar launched a series of economic reforms, which included “granting property to retiring soldiers, redistributing land to the poor and canceling debts—proved popular with the military and Rome’s lower and middle classes.”

In Rome, the Ides of March was - in a sense, the end of the Roman Fiscal Year. The people the citizens owed their money to were Roman Oligarchs - quite a few of them Senators, and Caesar’s political opponents.

That is one of the reasons for the Senators’ murder plot, which was astonishing in its brazenness - 60 Senators descended on Caesar, in the Senate itself, stabbing him to death in a frenzy, that has been described in great detail.

Caesar has been portrayed as the villain in all this - as a “tyrant” for taking too much power. Being called a “tyrant” that was used in other cases where new rulers issued similar decrees of debt relief, challenging local elites.

from the time that the Roman oligarchy overthrew the last king in 509 BC down to the time when Julius Caesar was killed in 44 BC, you had five centuries of debt revolts. The plebeians in Rome, like many Greeks, demanded the debts be cancelled.

That demand was what prompted the call for democracy in Greece and in Rome. They needed political democracy with everybody able to vote and serve in the government in order to have a government that could cancel the debts and redistribute the land.

But the oligarchy resisted this policy, seeking to hold onto its creditor claims that kept the population at large in dependency and outright bondage. In the 7th and 6th centuries BC, most Greek cities were overthrown by leaders called tyrants. They were basically reformers who overthrew the closed local aristocracies, cancelled the debts and redistributed land to the people. Solon abolished debt bondage in Athens in 594 BC (but did not redistribute land) via his “shedding of burdens,” his seisachtheia, referring to the debt burden. A similar radical restructuring occurred in Sparta…

Greece ultimately was conquered, sacked and looted by Roman generals, first in 147 BC then in 88 BC under Sulla. Rome took over, and its oligarchy was intransigent. They accused popular leaders wanting to cancel the debts of “seeking kingship,” and usually killed them.

The people accusing Julius Caesar of being power-mad were allied with his assassins, and were defending those murderers, who were acting out of selfishness and greed.

It’s not the usual take - but Julius Caesar was murdered because he was taking on wealthy elites to ensure homes and jobs for veterans.

I only recently learned the significance of the Ides of March in the Roman Empire as a day of redemption or of reckoning, as well as the motivations of Caesar’s assassins - they wanted to keep the debt crisis going. And they did. It was at this point that democracy in Rome died, and it ceased to be a Republic, and became an Empire.

When we look around the world today, and see the violence, and dehumanization, anger, division and desperation, and extreme politics, perhaps the explanation for what we are dealing with is a “debt revolt.”