|
Mike Shedlock gives a
rather Austrian-flavored explanation of inflation, noting that it is
"best described as a net expansion of money supply and credit"
through fractional reserve banking; that it cannot accurately be measured;
that it can not accurately be measured with a fixed index; and that it
generates a boom and bust cycle.
Then why does he, in this
post, approvingly cite Billmon referring to the Neo-Keynesian theory of
"cost-push inflation" and a "wage-price spiral"?
Suppose that wages in some
industry rise. Then can this lead to a rise in the general price level?
Suppose that the industry is one that has relatively inelastic demand for its
output, so it can pass along its cost increases in the form of higher prices.
Then, in order to pay these higher prices, the purchasers of the output must,
somewhere along the line, spend less on something else. There will be no
general rise in prices. There can only be a general rise in prices if there
is an increase in the quantity of money and credit money in the economy.
Shedlock goes on to state:
It [inflation] all comes down to wages and housing and
jobs. Without meaningful rises in employment and wages, the former above the
birth rate plus the rate of immigration (both illegal and illegal), and the
latter above the TRUE cost of living, inflation really does not have a
chance. Yes at 1% we had sustainable inflation. An incredible housing boom
was the result. The better question (looking ahead) is "What Now?"
...
It is really simple: "wage increases, job growth, and housing that does
not bust". I see little reason to change course now. In fact, treasuries
are probably a screaming buy.
None of: wage increases, job growth, economic growth, a
strong housing market are necessary in order to have have inflation. All that
is necessary is an expansion of money and credit in the banking system. The
Fed offers credit to banks at a fixed rate. If the Fed keeps the short-term
rate of interest below the level at which borrowing and saving would be in
balance, the Fed and/or the banking system will create enough credit to
balance out the difference.
Real wage growth is not a
pre-condition of inflation. Nor are negative real wage growth and inflation
mutually exclusive. Wages, in real terms tend to fall periods of high
inflation because wages typically do not adjust as rapidly as prices. If
enough money and credit is pumped into the system, nominal wages will
eventually increase but real wages may or may not.
Real wages tend to grow during
economic expansions and shrink during recessions. It was thought, prior to
the 70s, that inflation could only occur if the economy became
"overheated" due to an unsustainably high growth rate. But the
stagflation of the 70s destroyed this. The country went through a period of
simultaneous inflation and recession, during which real wage growth was
negative.
Inflation is a monetary
phenomenon. Print enough money and it will find a home, somewhere.
Robert Blumen
Robert Blumen is an independent
software developer based in San Francisco, California
| 
