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?”
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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.
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.
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Blumen replies on the basis of Austrian Credo on Credit being the first cause of a boom bust cycle implying rising-falling inflation; then demolishes the wage argument as inflation cause.
Another point caught my attention: considering a rise in employment as a cause for inflation; I don’t think enterprises would start employing people with no expansion projects, just for pure love to employment I mean. I expect them to rise employment as answer to (at least perspectively) rising demand; a higher employment should involve higher supply to meet higher demand including the larger-employment-base due.
There is no reason for the employer to innovate when the supply/demand of both money and product are at equilibrium.
Any raise in wage would raise for the employer the demand for money (to pay the employees) and the demand for more production. Depending on the business she could use innovation to raise production per employee. That way she could raise income while keeping the unit price the same or lower her demand for money by letting redundant employees go.
This innovation would increase the value of the business: the business owners wealth. Most likely it would even lower the unit price while raising the profit. Win-Win for everyone.
To raise prices would not change the equilibrium: It would only decrease the value of the money. The costumers would still pay the same percentage of their income for this product. In effect making the paycheck raise just fiction. Lose-Lose for everyone.
It’s hard to find an out when your deflation prediction has gone sour. Deflation predictors, however, are a hardy bunch and God knows they have been doing this for a long time. So their response to being wrong (again and again) usually follows these two lines:
1- Make illogical and inconsistent arguments as you have pointed out.
2- Push out the date at which deflation will set in.
Some things never change.
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