Soaring costs have failed to impede the unprecedented profitability of corporations, defying the conventional workings of capitalism. Over the past year, consumers and businesses worldwide have grappled with persistent inflation, while companies, including those in the Fortune 500, have reaped record-breaking profits.
This alarming trend caught the attention of voices predominantly aligned with the left, such as U.S. Sen. Bernie Sanders and TV personality Jon Stewart, who recently grilled former Treasury Secretary Larry Summers. Now an economist from one of the world's oldest and most esteemed investment banks - Société Générale - has joined the chorus.
Albert Edwards, a global strategist at the 159-year-old bank, has just released a scathing note on what he dubs "greedflation." Edwards points out that corporations, particularly in developed economies like the United States and the United Kingdom, have exploited rising raw material costs resulting from the pandemic and the conflict in Ukraine as a pretext to raise prices and expand profit margins to unprecedented levels.
It's worth noting that Société Générale is steeped in history and considered one of the "systemically important" banks by the Financial Stability Board, the G-20's global financial system watchdog.
Edwards, in his Global Strategy Weekly edition published in April, states that throughout his four decades in finance, he has never witnessed anything as astounding and unparalleled as the levels of corporate greedflation prevalent in this economic cycle. This sentiment is supported by a January study from the Federal Reserve Bank of Kansas City, which found that "markup growth" (the increase in the ratio between a firm's price and its production cost) played a more significant role in driving inflation in 2021 than in previous economic eras.
Under normal circumstances, escalating commodity prices and labor costs tend to squeeze corporate profit margins, especially during an economic slowdown. But Edwards highlights data from the Bureau of Economic Analysis (BEA) released in April, demonstrating that profit margins in the fourth quarter remained near record highs relative to costs.
The strategist admits to expecting a sharp decline in margins toward the end of last year as the economy faltered, only to be proven profoundly wrong. Consequently, Edwards expresses concern that if consumers continue to grapple with inflation, the "super-normal profit margins" of corporations in the United States and beyond could potentially ignite social unrest.
"The end of greedflation must surely come. Otherwise, we may be looking at the end of capitalism," Edwards warned.
With the S&P 500 continuing to climb going into 2023, and stocks like Apple Inc.
Edwards's note may prove significant in bringing a perspective that has so far resided on the progressive fringes into the mainstream. For instance, a debate surrounding greedflation emerged recently during Stewart's interview with Summers on his new Apple TV show "The Problem."
Stewart raised the question of why corporate profits were not being addressed, asserting that it is believed that they contribute significantly to inflation. Summers promptly rejected the notion that corporations had suddenly become greedy, but Edwards appears to be suggesting that such a view is entirely plausible.
Is it time to regulate prices? Edwards proposes a controversial solution to combat the rise of greedflation, which he claims reflects his waning confidence in the capitalist system itself. Reminiscent of the failed price and income policies of the 1970s, Edwards suggests resorting to price controls. While historically criticized for causing various calamities, from the downfall of the Babylonian Empire to the infamous gas lines during the Nixon and Carter administrations, price controls may now be warranted because of what Edwards sees as a fundamental breakdown in capitalism.
The strategist cites a paper by University of Massachusetts Amherst economists Isabella Weber and Evan Wasner, titled "Sellers' Inflation, Profits and Conflict: Why Can Large Firms Hike Prices in an Emergency?" The study found evidence of corporations engaging in "price gouging" during the pandemic and argues that temporary price controls may be the only way to avert the potential "inflationary spirals" resulting from such practices.
According to Edwards, price controls are a favored method of regulation to combat greedflation.