We are living in interesting times. The modern monetary theory has ushered in a new philosophy. If you want to protect the small guy, then protect the big guy. If big guy stays then small guy stays, so just protect businesses from faltering. What started in 2009 as bailout effort to protect financial system , has now become full fledged indemnification policy for the corporates. Fed is buying corporate bonds like anything, RBI has given a loan moratorium and Government has suspended insolvency and bankruptcy code. So, in all, if you are a corporate, it doesn’t matter whether your stress is Covid-related or not, the monetary cum fiscal policy will keep you floating.
Well this philosophy is not bad as it aims at creating more jobs for small guys by protecting the big guys. So, if big guys’ big business prevails then only small guys’ small job prevails. But whether that has really happened ?Has Unemployment really reduced? And if it is reduced what is the cut an employee has taken to save his job? US unemployment levels are continuously hovering at a high level. India doesn’t have good quality indicators to measure unemployment ,however, CMIE indicators show that unemployment has not been contained by the current gush of liquidity. The major flaw of monetary policy is that it attempts to treat two unequal entities equally and believes that it will benefit everyone equally.
The major question on which today’s thinkers should debate is who benefits out of such policies. Does the big guy reduces his margins to protect the salary of his employees? If yes, then why are so many people having pay-cuts while big corporates who have benefitted majorly from gush of liquidity are keeping their margins intact. Recent Wistron incident shows that even apple manufactures are not able to protect the pay of their employees even when FAANG companies have more than doubled their wealth in this recession. So basically , the big guy wants to protect his margins and for him, the most convenient cost cutting measure is to minimize the wage bill as other inputs are largely determined by market whereas labor market is unorganized and less transparent. In fact, the inequality in the world has increased after every recession and the rate at which the the top 10 percent double their wealth is manifold higher then the rest of the lot. And this is done primarily by keeping the corporate margins intact whether the times are good or bad.
So, the Big guy keeps his margin, the income falls or stagnates for the small guy. But the story becomes interesting when inflation enters this space. Inflation is a function of both supply side and demand side events. The commodity prices have picked up steam in last quarters. Oil is also showing steady increase. No doubt that countries now run risk of high inflation. Turkey is already in high inflation zone and emerging markets with limited production base run high on risk of inflation. And once inflation becomes active, it is a tough animal to tame. Inflation accompanied with growth is one thing and inflation spreading in recession is another thing. Soon, the central banks will have to choose that whether they want to keep ignoring inflation or tame the elephant in the room.
But why so much fuss about inflation? So much fuss about inflation is because it makes real income negative especially for the small guy. Thus, while Corporates with higher margins may be able to make some net real income but the small guy is going to find himself constrained to make a living in inflationary atmosphere. A song comes to my mind, which is apt for today’s scenario and especially for small guys including me , is “sakhi saiyan toh khoob hi kamaat hai, mehengai dayan khaye jaat hai”(My dear earns a lot but inflation keeps on eating it).Inflation will first hurt the small guy, then the demand and then the big guy who will possibly again run to government to get relief. However, in high inflation atmosphere, even government will find itself into bigger mess coming out of which can be very painful. Thus, it is important that in our desperation to minimize covid induced pain we may not get ourselves into financial mess whose pain will be much more excruciating and prolonged.