Can Unions Cause Price Inflation?
Central banks around the world have painted themselves into a corner as of late, as their plans for injecting hundreds of billions of dollars worth of credit into the financial markets butts up against their desire to avoid massive price increases.
Rather than take the blame for this predicament, the financial central planners have characteristically started pointing fingers elsewhere.
In the January 5–6 weekend edition of the Wall Street Journal, we learn that it is apparently unions who are now at fault. FULL ARTICLE
Comments (12)
Garrett Schmitt
Thanks for the well-written aritcle! For another example, take a look at the scuffle over UK public sector pay raises.
http://news.bbc.co.uk/2/hi/uk_news/politics/7176170.stm
In this case, the Government has not merely stopped at the assertion that union demands for pay increases push inflation. It bemoans the detrimental effect of short term union contracts on inflation expectations!
Published: January 10, 2008 9:20 AM
Jake
We are (or most of us here) aware how Central Banks cause inflation. But are they really currently inflating the way the media leads us to believe. Are we being suckered???
These two articles by Michael Shedlock makes me think otherwise. It appears that the current money supply trends are deflationary!!!
http://globaleconomicanalysis.blogspot.com/2008/01/money-supply-trends-are-deflationary.html
http://globaleconomicanalysis.blogspot.com/2008/01/no-helicopter-drop-for-failed-banks.html
The experts thoughts would be appreciated.
Published: January 10, 2008 9:49 AM
jack green
Can Unions Cause Price Inflation
EVERY TIME THE BANK MAKES A LOAN THE BANK CREATES MONEY OUT OF 'THIN AIR' THAT MY FRIEND IS PURE INFLATION I THINK THAT WILL REACH PEOPLE THAT HAVE NO IDEA ABOUT THE FREE ENTERPRISE SYSTEM - WHICH IS A WILLING BUYOR AND A WILLING SELLOR 'THEM YOU HAVE A DEAL' THAT IS WHAT MADE AMERICA FOR THE FIRST 124 YEARS FROM 1787 TO 1913 NO INCOME TAX NO FEDERAL RESSERVE SYSTEM AND THE STATE LEGISLATURE APPOINTED THE U.S.SENATORS WE HAD THE GREATEST GROWTH DURING THAT PERIOD THEN WE HAVE HAD FROM 1913 TO PRESENT SINCERLY JACK GREEN
Published: January 10, 2008 12:26 PM
billwald
Inflation is better measured by the hours the working class must work to get food, shelter, and housing. "Money" is only the conversion factor between one's working time and the acquisition of consumer goods. Less than 5% of the "money" in circulation is cash and most of the American cash is in Europe or Asia. There is no practical difference between a person having unpaid time on his employer's books or money on a bank's books. Either can be converted to consumer goods and services.
Just happenstance that the middle class growth paralleled union growth and middle class shrinkage is paralleling union shrinkage?
Published: January 10, 2008 12:30 PM
Al
Historically Union membership is at it's highest when inflation is at it's lowest. Union membership is at it's lowest when inflation is at it's highest.
This what some labor economists use an argument against unions causing inflation.
Published: January 10, 2008 2:47 PM
Paul Marks
If unions are allowed to violate the common law by, for example, obstucting the entrance to a place of business ("picket" it) and are allowed to violate common law in other ways by the Statutes of Government, then they may indeed be able to increase the wages and condidions of their members more than free market would do - for awhile at least.
See Ludwig Von Mises - Human Action.
W.H. Hutt - The Strike Threat System.
And F.A. Hayek - Unemployment and the Unions.
And unless the is an increase in the money supply (i.e. government inflates the money supply) there will not be some vast increase in prices.
However, eventually there will be something else - higher and higher unemployment.
In the end the economy is so undermined that ever the union members in work end up with LOWER wages and WORSE conditions than would have otherwise been the case had the unions not been given these powers by government.
Published: January 10, 2008 3:53 PM
newson
to jake:
regarding mike shedlock's deflation scenario - check out the stefan karlsson link (start from jan 3 and work forward): http://stefanmikarlsson.blogspot.com/
karlsson is an austrian economist who i respect, i always stop off there en route to mises. he often comments on other economists, and has cruel things to say about frank shostak, amongst others. but he's on the money more often than not. you can fire questions at him via the blog.
Published: January 11, 2008 1:13 AM
newson
to billwald:
many people in the developed world forget how heavily unionized parts of the third world are. if unions were responsible for the flourishing or otherwise of the middle class, south america would be like hawaii. unions are incidental to prosperity at best, harmful at worst. well said, paul marks.
Published: January 11, 2008 1:19 AM
newson
stefan karlsson (austrian economist) has been flagging the coming recession for a while now:
http://stefanmikarlsson.blogspot.com/2007/12/why-us-recession-is-already-here.html
the birth/death model badly tends to underestimate job growth at the start of the economic cycle (the so-called bush "jobless recovery" following the tax cuts), and overestimates job growth going into recession. see karlsson december 8 for a more exhaustive treatment.
looking at the comparatively small job losses in the construction sector post-bubble, blind freddy would have realized that most of the laid-off were illegals, and so invisible to the statisticians. you'd have to check the remittance figures to mexico to get any idea of the real impact. one suspects it's huge already.
Published: January 11, 2008 1:39 AM
Jake
Thanks Newson!!!
I have added his blog to my favourites list...including the Shedlock's and Schiff's I've already added.
Lots of good arguments and thinking doing the rounds. This stuff is awsome!
Published: January 11, 2008 2:08 AM
Jeff M. Weeks CPA, SA Fin
CAN UNIONS CAUSE PRICE INFLATION ? ( NO NOT THE GENERAL LEVEL OF ALL PRICES, BUT WAGES INFLATION YES ! IN THE FORM OF NON - PRODUCTIVE WAGES-COST-PUSH-INFLATION SPIRAL !)
UPDATE3
FOREWORD : an Australian Perspective
( welcome ? ) back to Big Unions & Big Business of the 70's & 80's for the Land of the Paid Long Weekend :
& their Sweetheart Deals ;
to which Small Businesses ( Jobs Growth Engine ) have never had these privileged luxuries as a Safety Net for misguided re/Distribution of Wealth ( National Money Pot ).
not so much as " Back to the Future " as now : more of " Forward to the Past "
Disciplinary Unions, experienced in a long history at manufacturing grievances, which has now made them good at it right down to the individual Member & in this instance, the most contentious Issue for the moment was Work CHOICES :
either
· Individual Private Contracts : I.E. FLEXIBLE WAGE RATES which did not exist during the last Great Depression ;
or
· Mass Union Regulated, De Facto, Quasi Government
which won the day & perhaps the remainder of the Decade ;
seems as though Unions have always been more preoccupied with the intent of securing PAID, FULL employment for their Mass MEMBERS only, so they can maximise on Due Revenues, rather than,
Individuals : part - time paid or sometimes unstructured, part - time or full - time UNPAID, employment existing in small but growing, Family Businesses, where often, older but experienced Principals usually have to perform a variety of job tasks every day over many years just to survive operationally if not also financially, & without a Mentor or Peer to give them recognition or reward ;
& have nothing to look forward to but a Capital Gain ( if any ) when they are forced to sell - up, as a recompense for their Life's Capital investment not only of their Savings ( if any, but more in the form of unpaid wages ) ploughed - back, but also years off their productive personal Lives ;
similar to Carers who went unnoticed until the recent generosity & foresight of the then, Liberal Government : one of many genuine, part / equality " Reforms " to their credit ;
certainly, if any unpaid " House Wives / Persons " are ( left ? ) next to receive a Government allowance, well then, at risk Farmers & other Small Businesses, unpaid, should also receive the same Classification as a form of Retainer, particularly if they are Front - line Stakeholders with a number of unrecognised multi - skills, Sets involvement in Rural &/or Tourism / Hospitality, Service Industries, as the unseen & unrewarded " Value - Added ".
In Sum : the 07 Election was determined by 1 short word starting with a Capital Y ;
no not Spam Yahoo ! Yippy ! or Yuck ! or even Yen or Yuan !
= YOUNG
young FIRST TIME ( inexperienced ) Voters barracked for a young ( also inexperienced ) Labor Rudd ( Rudd erless ) Government ( instead of strong, experienced Liberal Oarsmen, who have made unselfish, difficult but, to their own merit which has now paid the ultimate Political Price & now unjust Labor humiliation, Unpopular Economic decisions for the National good of ALL Australians ).
Somebody forgot ( or the Parental / Educational / Job, System, failed ) to teach these Work / Life Starters, Economic HISTORY of the 70's, 80's & 90's ( 3 Decades of successive Labor Governments' repeated errors ) ;
instead these Generations X, Y, Z's & the next Me Generation, were blinded with Political Science & Union Rhetorics ( & Theatrics ).
UNPRECENTED in the History of the Financial World : new but more permanent in nature, Global, rather than just Regional, Economic activity Phenomena
Citizens Electoral Council of Australia ( CEC )
Dear Sirs / Madams,
similar to the ancient Chinese Philosophy of Yin ( - ) Yang ( + ) :
for every negative there is always a positive & visa versa ( Counter - cyclical, in Economic terms ) ;
on a Macro as well as a Micro level, my particular Essay could be titled :
" Consumerism Vs Capitalism " ( Power Sources independent of Politics ) :
notably the Economic level of Aggregate Private Sector Spending is determined by both :-
· Consumerism : & in particular,
Household Spending ( which use to be fairly constant with Population Growth )
&
Business Investment ( which use to be the basic determinant / key factor, in the level economic activities / fluctuations ),
are faster - moving, more resilient but centred, shorter - term, deeper, autonomous, Individual/Household goals of mainly basic " necessaries of Life " : food, clothing, shelter, & Health, Education ( Social Welfare / not so autonomous Investment expenditure in the last 2 mentioned components, both of which added significantly to the inflation rate during 1974 - 75 during the Whitlam / Cairns Era ) ;
In the short term variations in stocks / inventories ;
In the medium term usually, this also includes PRIVATE capital formation : residential & business construction, motor vehicles, etc. ;
&
· Capitalism : & in particular, Capital Works ( Government sponsored as a last resort ? ), are slower - moving, more cumbersome but versatile, longer - term, broader Business/Government goals of mainly Regional & National, Infrastructure & Security ( Economic as well as Social, & Defence ) ;
In the long term, usually, this also includes PUBLIC capital formation : railway & highway construction, the building of reservoirs & power stations, etc. ;
Shifts in the Capital Consumption Schedule give rise to bodily shifts in the aggregate spending schedule, & like any other autonomous changes, they give rise to the secondary effects of the Multiplier Process.
In the 1925 - 29 period, approximately 50 % of public investment & 25 % of total Australian investment was supplied from overseas sources. The heavy overseas borrowing by public authorities during the 1920s was invested by governments in large - scale Public Works projects which did not at 1 st return any benefits to the economy as a whole. In 1928 payments amounted to 18.5 % of the value of Exports.
The consequence of heavy foreign capital borrowings during the 1920s was an increased interest burden which remained fixed in sterling ( British Pound ) for the most part whilst the Australian currency rapidly fell BY 58 %, due to the " rapid fall in Australian export ( JMW performance Quantitatively & ) prices ( JMW Qualitatively ),
which in GOLD ( JMW the Daily Spot Price of which, along with other Precious Metals & Commodities would have been quoted in British Pounds Sterling at the time, long before the postwar II Marshall Plan USD $ of 1947 ),
declined by the end of 1931 TO about 32 % of the 1927 - 28 level "
JMW just importantly, & to exacerbate the Stirling fixed interest rate obligations, the total value in AUD $ terms, of Exports ( Performance ) including GOLD, fell BY 35 % from the Peak of 1924 - 25 to the Trough of 1930 - 31 ; ( 1931 was the year that AUD $ devaluation stabilised against the British Pound Sterling ) ;
consequently National ( money ) Income declined commensurately, by 31 % from it's 1928 - 29 Peak ( 5 year lag with the Export performance Peak ) to it's 1931 - 32 Trough ( 1 year lag, which would have meant that the then, Bank of International Settlements [ BIS ] time frame became more favourable [ too little too late ]).
In 1933 Franklin D. Roosevelt had issued an executive order to make it illegal for Americans to own gold. To assist in financing the Vietnam War, President Richard M Nixon went a step further by cutting the last links to the GOLD STANDARD in 1971, invalidating Citizens' legal right to redeem USD $ for gold. This time, OECD Countries, predominantly Trade Surplus / Creditor Nations China, Russia, India & Oil Exporting States, are indirectly assisting in financing the " War on Terror " by bearing the Defaults brunt of sub - Prime Loans that came about by surplus Foreign Currencies, Capital Inflows to America when it's own Currency & Economy was much more resilient.
in response to your e - Mail 09/11/07 :
" Interest rate rise won't fix financial crises ; only LaRouche's HBPA will save Australian families, farms "
regarding the stupendously high $700 TRILLION - plus ! ( is this word a misprint or typo error ? which should have started with a big B ? ), Derivatives ( or Hybrid ) Market/s ( not including the largest & most profitable investment [ equaliser ] Markets of all, the Foreign Exchange Currency Markets ? ) ;
& not withstanding that Since 1945, there has been a pronounced, postwar ( WWII ) upward trend in economic activity, fluctuating around a RISING SECULAR TREND, i.e. the trend over time has been upwards, but it is not a smooth upward movement ( this would correlate with the exogeneous factor of total World Population absolute numbers & Global Growth rates, the greatest " Cycle " of them all, also given that the Booms ( Peaks ) & Depressions ( Troughs ) of the Australian economy have been closely related to the fortunes of our international trading activities ) ;
I am surprised & dismayed that you have made this $700 Trillion assertion including interest rates, without mentioning other essential Micro & Macro variable components to this always, complex & ever changing Economics Equation to achieve ideal outcome/s Formula ;
( Human Nature governing Human Behaviour is exceedingly complex even before getting down to the DNA Micro level ! similar to biological memory micro - chips ;
Economic & Market Events & Shocks motivate Social Actions summed up in 1 word primeval SURVIVAL as in Group Hunting, which drives Social Mood / Herdings, which in turn drive Social Behaviours ( the very NATURE of Human Instincts determine Human Behaviour responses or reactions ) ;
thus ALL, hopefully orderly, or disorderly Market BEHAVIOUR, especially in specific Commodities & Precious Metals, & more so than broad Finance & Commerce, as illustrated by www.elliottwave.com & mentioned again below, is also exceedingly complex ;
given that Markets are a Financial Translation of the MASS accumulative ( & opposite ) effects of both sides to decision - making of many, seemingly, unrelated [ if not also unconnected ] INDIVIDUALS ).
Re : my previous Mises Economics Blog 25/01/07 Milton Friedman's Great ( unemployment ) Depression " Government Intervention " in full at bottom / last page & 1 paragraph quoted here :-
" Monetary Policies : ( AUTOMATIC STABILISER interest rates & money supply [ Volume including Credit & Commercial Loans X Velocity of circulation including currency ] usually in a INVERSE relationship, resulting in supposedly, desired foreign exchange rates outcome/s & levels, or any variable/s combination / magnitude, thereof ) "
in Memory of all of those Families & Friends who suffered unnecessarily, from severe hardships during the Great Depression as " Financial Fodder " ; ( as did an incalculable number of foot Soldiers & Citizens before & after them, as " Canon Fodder " [ excuse the pun ; for God, King & [ or ] Country ] in many Conflicts leading up to, & including the World Wars I & II )
basically & simply put, Inflation ( without which Deflation exists ) is the causal effects, excluding seasonal factors & certain longer - term trends, of :-
· too much credit/money
AND
· too little goods/services ( without which Stagflation exists ),
all at the SAME time, in a fully employed economy still experiencing the continuous momentum of aggregate spending from the previous Expansionary / Upswing / Recovery, periods ;
or in more detail, after the EXPANSIONARY ( Upswing / Recovery preceded by the Upturn which was usually the resumption or enlargement of autonomous investment, bringing into operation the function of the multiplier & acceleration mechanism ) Phase of any ( external ) Trade / ( internal ) Business, Cycle when both Household & Business economic activities are still increasing, Inflation ( price Instability ) will always occur when there is no offsetting productivity gains ( qualitative including Technological Change &/or quantitative including Labour Change ) relative to that of cost increases ( incremental price flow-ons &/or currency depreciating purchasing power ) ;
the reverse ( or yin ) can be said after the CONTRACTIONARY ( Downswing / Recession preceded by the Downturn which was usually the cessation or reduction of autonomous investment, bringing into operation the reverse function of the multiplier & acceleration mechanism ) Phase when both Household & Business economic activities are still decreasing, causing Deflation ( or Disinflation ? pertaining to lack of Households / Government, Credit / Money in circulation &/or Private Hoardings from previous Dis - Savings ).
Both of these Economic situations could be regarded as either Individual, Household, Business or Government, opportunities or threats, depending on which Sector & which Trade/Business :
· minor 5 - 8 - 10 years, since 1945
&/or
· longer 15 - 25 years " Kuznets ",
&/or
· very long / ½ century / " Kondratieffs ",
Cycle/s, exiting/entering Mode, a particular Entity happens to be in ( or out :-] ), before, during &/or after, hopefully orderly, or disorderly oscillations between Economic Swings & Market Shifts.
unfortunately, your " hyperinflation " Scenario will indeed, be a very much WORSE reality if/when a combination of Australian Labor States domination continues with a newly elected Australian Federal Labor Government, & consequential greater influence from any Power Brokers ( similar to the most recent Russian Oligarches who presided over the dismantling of the old Soviet Union fabulously wealthy State - owned Industrial Assets to centrally planned - Private Enterprise, Cartels ) who usually want to, or both:-
· dictate Wealth Creation which is 1 of the functions of a Free Market / Private Enterprise, Sector on the one hand,
&/or at the same time,
· dictate re/Distribution of Wealth which is 1 of the functions of Government ;
but in the form of un - productive wages on the other hand as we have seen during the 80's full - employment economy, whilst presiding over privilege or elite Unions in a non - productive wages-Cost-Push-inflation spiral ( wages inflation ) for those people lucky enough to have full - time, paid jobs at the time, rather than a more productive, ( Consumer ) Demand-Pull situation ( general prices inflation ) ;
( Moreover & from a USA perspective, it has previously been suggested over the years that Multi - Million $ SalesPersons' Commissions & Bonuses should be discouraged if not restricted to lower levels & similarly, Executive Salaries & Bonuses should be capped to a maximum of say $ 200, 000 - $ 300, 000 p.a per Individual, as a " success fee " commensurate only with the same % increase in Firm's Net Profits for the same period ;
had these financial deterrents been in place before the current Global Monetary Crisis, caused by reckless Sub - Prime Lending, but fuelled beforehand by outrageous Commission & Bonus incentives, Economic & Market Events & Shocks would have not occurred or at very least, could have been less severe ;
it is interesting to note : the Financial Market difference, but also magnitude of Sub - Prime / " Delinquent " Loans outstanding, for each Country, respectively ! :-
· USA : " stand - alone " / State Banking System - 25 %
· Australia : National / Branch Banking System - 3 % ; )
the prosperity of which, was not then ( & never has been in the past / never will be in the future ) shared equitably with the greater majority of Australians, as in the following illustrations :-
a combination of Australian Labor States domination continuation with a newly elected Australian Federal Labor Government will make the following past Episode/s in the Land of the Paid Long Weekend look like a Sunday School Picnic :
1) Labor Prime Minister Whitlam / Cairns Era of the 70's :
( 1 st of Labor's non - productive [ or anti - business ? ] Socialistic Programmes very ill - timed, coinciding, unfortunately with the 1 st Oil Shocks, & the momentum of which, carried over into the 1980's )
· 1972 - 1974 oil prices quadrupled ;
&
· 1976 - 1980 oil prices more than doubled ;
&
· 1987 - 1989 oil prices doubled ;
&
2) Labor Prime Minister Hawke / Keating Era of the 80's :
( gung ho Entrepreneurialship by " WA Inc. " Union/Labor Government Partnership, with its oil & natural gas, Riches ; which is sill doing very nicely thank you very much 2 Decades later ;
not exactly reminiscent of, but is it still Australia's equivalent to : the USA " Roaring 20's " ? ) ;
can it be claimed from a Market Maturity perspective, that Australia was then / may still be ? 60 years behind. America's contemporary equivalent was perhaps the Dot.com Tech Bubble of the 1999/2000 period.
&
3) Labor Prime Minister Keating / Kelty Era of the 90's :
" the Recession that we [ banana Republic Australia ] had to have " unfortunately coinciding with a Secular ( " soft " ) Depression ( Trough ) similar to that of the 1890's Bank failures, for the WHOLE of this Decade & which Economists ( " soft Scientists " ) are now just beginning to accede to Re : B o J to the present day ! which initially, made the classical Economic Error of raising interest rates [ which has the same effect as decreasing money supply ; before lowering to MINUS - 0.5 % towards the end of the Decade ! ] & as the 1929 USA Federal Reserve Bank Governors did : see my Milton Friedman Great ( unemployment ) Depression Blog, bottom / last page ; & on this occasion caused by the preceding Decades Oil & Wages SHOCKS beginning in the 1972 - 1989 period, also suffered by Japan ;
followed by USA S&L ( Savings & Loans ) Crisis, Russian Default, & then the Asian Currencies Crises ;
the 1929 Stock Market " Crash " actually began momentarily as a Market SUSPENSION as the old fashion " Ticker Tape " could not keep up with the huge volumes of shares traded ! the main body of Traders & " Herd " wrongly interpreted this Suspension as a CRASH, which then became self - fulfilling, self - inducing & self - perpetuating.
Not so today : since the advent in the 1970's with the CREDIT CARD ( another Technological Change superimposed upon the Internet Revolution ) = instantaneous, ELECTRONIC " Global Village " ;
Let us not forget the ( 1 st British ) INDUSTRIAL Revolution defined as " Social & Economic Changes " was a misnomer : should have been named " Industrial ( Labour Change ) EVOLUTION " ;
Unions came about initially, by " accident " ( excuse the pun, see further ) as it was seen to be SOCIALLY prudent, & quite rightly so, to protect the young & frail workers as INDIVIDUALS in NEW work processes / NEW jobs of the time, from the mid 18 th to the mid 19 th Centuries in the form of Child " Chimney Sweeps " ( simply because of the SIZE of Chimneys ! ), & as Mariners or Miners, apart from the Cornish ( because of the size factor once again ) & Spinning Mill Women ( 1 st mechanized [ " Jenny " ] production, preceding Henry Ford ) ;
notably, this was the very 1 st time that ( mainly ) women, Workers were organised in Factories, OUTSIDE of their private homes as with past Traditions, engaged only with " piecemeal Cottage Industry " !
Ironically, following on from the 1 st Oil Shocks of the 70's resulting in more expensive Commuting costs, together with that of Infrastructure ( Office Towers ) costs ; & with the advent of the INTERNET ( Technological Change ) ;
Home Work ( Labour Change ), assisted also in the 80's by Microsoft DESKTOP / PERSONAL COMPUTERS, & software packages for the 1 st time ( which it can be argued, was the 2 nd Industrial Revolution ), has now come back to the fore, not just for Women this time, but for Men also, in the form of Jobs Growth for Small Businesses, only !
& quite rightly so, as the 1 st Oil Shocks convinced USA Service Sector / Office Workers to " Telecommute " from Home ( to the Office ) at an ever increasing rate & several years ago absolute numbers of participant Workers &/or % of Work time achieved at Home was estimated to be as high as 30 % in some Sectors !
which it can also be argued, is the 2 nd Industrial ( Labour Change ) Evolution currently taking place, bringing Work BACK to the Home, from where the 1 st Evolution all began.
However, the current Trend is for Larger Businesses to increase production by Acquisition to achieve higher sales, rather than Organic growth similar to that of Small & Family Businesses.
Another great, IRREVERSIBLE, economic impetus / " Historical Accident " in the 1970's, equivalent to that of past Gold Discoveries & Inventions of previous Eras
( & later, Modifications in the form of Innovations ; the following of which, can be described as AUTONOMOUS INVESTMENT )
but more PERMANENT in nature, was the advent of the CREDIT CARD ( another Technological Change superimposed upon the Internet Revolution ) = instantaneous, ELECTRONIC " Global Village " ;
( this is UNPRECENTED in the History of the Financial World, acting together with a number of other Global, rather than just Regional, new Economic activity Phenomena ; not only the Consumerism : Internet & Credit Card Revolutions as highlighted here, but also Capitalism : SW(I)Fs Trillions of USD $ Capital Works as highlighted on page 5 ) ;
the Purchasing Power of Individuals / Households was personalised for the very 1 st time, which has permitted Individual / Household Debt during the 1980's & 1990's to increase exponentially as an unchecked Consumerism & has become 1 of the primary World, Economic Drivers since. Notwithstanding, that this new Credit Card Revolution converted normally laggard
· Domestic Consumption spending previously indicated by new motor vehicles registrations ; to a leading Indicator / precursor ( & stimuli ) of
· Business Activity ( Capitalism ) which has up until then, been traditionally the primary Historical Indicator for past Economic Fluctuations.
Since 1945, there has been a pronounced, postwar ( WWII ) upward trend in economic activity, fluctuating around a RISING SECULAR TREND, i.e. the trend over time has been upwards, but it is not a smooth upward movement ( this would correlate with the exogeneous factor of total World Population absolute numbers & Global Growth rates, the greatest " Cycle " of them all, also given that the Booms ( Peaks ) & Depressions ( Troughs ) of the Australian economy have been closely related to the fortunes of our international trading activities ) ;
At the same time the previous predominance, of Government Debt ( normally during & after Downturns to Downswings / Recessions, usually caused by Consumer Pessimism / Financial Crises & Wars ) was REPLACED with Private Sector / Household Debt ( normally during & after Upturns to Upswings / Recoveries usually caused by Consumer Optimism ) ;
hence my Macro / Micro Economics Essay Title : Consumerism Vs Capitalism ( & Private Debt Vs Public Debt ), once again.
the REAL 1 st Industrial ( Technological Change ) REVOLUTION arrived with Henry Ford's Model T production line & USA's wise, late entry, into the MASS MADNESS of World War I.
since then Unions have been in ideological conflict between themselves, Individuals & mass, Workers on the one hand, & Labour Change as opposed to Technological Change, on the other hand.
apart from the ( permanent ? ) Human Condition " to belong ", the Labour CYCLE has turned full circle once again, with the advent of INDIVIDUAL WorkPlace Health, Safety & Productivity, Issues due to Technological Change, as greater Work Choices option/s,
rather than MASS Labour Change & Workers' :
· Rights to Strike !
rather than,
· Rights to Work ?
or in the form of a non - productive contest between the haves & have-nots.
the recent 22 % interest rate quoted as occurring during the Liberal Fraser / Howard Era needs NO apology but further OBJECTIVE examination in its proper perspective & context of the Micro & Macro Economic conditions that existed during that particular ECONOMIC TIME FRAME ;
all Governments, both in Australia & Overseas, INHERIT the consequences of PREVIOUS Governments incorrect Timing &/or Policies ( Countercyclical, Monetary &/or Fiscal ), Decision - making, depending on the Stage/s at which local ( Micro ) & World ( Macro ) Trade/Business, Cycles have reached in any supposedly, freely Democratic, Market driven Private Enterprise System ;
tracing the breadth & depth in MAGNITUDES of Market PSYCHOLOGY associated with either severe reactions or mild responses AFTER, hopefully orderly, or disorderly Economic or Market Events during any Stages or Phase of an Economic Cycle can also be illustrated by EWI Elliott Wave Theory [ International ] www.elliottwave.com in HISTORICAL Charts & Graphs, & can also be interpreted as a form of Household & Business AFFORDABILITY INDEX ;
that could be one of several accompaniments/enhancements to RBA ( Reserve Bank of Australia ) Data as well as in every Treasury / Economics ( " soft Science " ), Curriculum, & before any Countercyclical measures by Monetary &/or Fiscal, Policies are decided upon.
Let us also not forget, that this CURRENT round of Global inflation is exacerbated unavoidably, by the " War on Terror " multi Billions per week ( severe, non - productive consumption ) by USA & it's Coalition Forces as the UN World Police, as well as, sadly, the cost of young, talented lives or livelihoods, which may delay any Recession if need be ;
( this is simply the CONTINUATION of the 1947 Marshall Plan resulting in a Berlin East / West DIVIDE immediately after World War II [ another Technological Change ] which assisted in developing the USD $ as a dominant Trading currency ( in the West for the 1 st time ), firstly, amongst the Occupied Countries & prevented Old Russia from dominating the WHOLE of Europe, Militarily back then but possibly not now Economically with New Russia's newly " found " [ or fought ] oil & natural gas, Riches ) ;
offset only but thankfully, by :-
· the NEW productivity of China, India & other late emerging, Developing Nations, including Brazil, but was preceded before that with the Oil Shocks of the 70's & consequent Wages Shocks of the 80's, as previously mentioned ;
&
· now, after several Decades of the not so productive, recycled " Petro Dollars " swamping the Globe, which is only just beginning to be employed in perhaps more productive, fantastic but long over due, CAPITAL WORKS programmes in Dubai, etc. & soon to be, the New Russia ?
The Real Estate Markets in Dubai, Doha & Jeddah are roaring along, with investments in the regional construction boom now topping an incredible USD $ 2 . 4 TRILLION for Projects either underway or in development ; this dwarfs Australia's current AUD $ 82 billion Construction start - up " binge ".
all of which, could act as Sector Specific CONDUITS ( Inflationary Gap " Bridge " as it were ) between faster moving Consumption & slower moving Capitalisation ( both Economic Equation variable components were suggested as the Title to my Essay at the beginning ) & particularly now, as Western, Developed Countries once again, approach FULL Market Maturity.
For 10 years there has been a massive bull market in globalisation, securitisation & financialisation, including oil beginning in the 1972 - 1989 period ;
Now it seems that we are also in the greatest monetisation of Real Estate Assets, in the history of the World.
Another current Trend is for the various ( Government ) Sovereign Wealth ( JMW International ) Funds ( SW(I)Fs ) in the East to invest Billions of USD $ Trade Surplus cash to correct the fundamental Global imbalance/s of a shortage of Capital in the West. ( Notably, most of the World's Oil Reserves are also controlled by State owned oil companies & therefore used as a tool for Foreign Policy & National Security ). The end result is that the World's wealth producing assets are being transferred from Debtor Nations to Creditor Nations.
hence my Macro / Micro Economics Essay Title : Consumerism Vs Capitalism, once again.
This situation has been contributed to a large degree by United States which has gone from being the World's largest Creditor to the World's largest Debtor, Nation in one generation.
In the 1980's
· previous USA Domestic Trade & Commerce had generated the largest GNP Economy in the World, followed by
· USA Exports, Investments & Armed Forces Overseas !
an old saying in Financial Services : " If America sneezes, the rest of the World catches a Cold " ( JMW & little ole Australia catches Pneumonia ! ) ;
a Stock Brokers saying " one can't lose by taking a Profit " should be coupled with a Stock Traders saying " let Profits run " / " cut your Losses " ;
It seems apparent from a Global perspective, that the dislocative series of short but severe ( deeper ) Depressions ( e.g. 1930 - 33 with higher unemployment in the order of 20 - 30 % ) & Wars that the whole World experienced leading up to & during the 10's - 40's have now become more entrenched : longer, drawn out, but milder if not more benign ( shallower ) Deflations ( " soft Depressions " e.g. 1890's Bank failures ) & Regional Conflicts, during the 60's - 90's, perhaps because of Technological Change, also influencing Labour Change, in shrinking the World to an instantaneous, ELECTRONIC " Global Village " of 6 billion people, all competing for the SAME basic " necessaries of Life " : food, clothing, shelter, & Health, Education as mentioned under Consumerism at the beginning of my Essay ; resulting in a progressive series of fluid Market Maturities on gigantic scales, as predicted by Alvin Tofler in " Future Shock ", one of many past & present Futurists.
In Conclusion, it could be postulated that Australia's & perhaps other Nation's, immediate past 70's & 80 's ( Asset ) price Inflation ;
( not so 90's, as this WHOLE Decade was in a Secular ( " soft " ) Depression ( Trough ) similar to that of the 1890's Bank failures, which Economists ( " soft Scientists " ) are now just beginning to accede to Re : B o J to the present day ! as mentioned earlier & repeated here for further emphasis ;
which initially, made the classical Economic Error of raising interest rates [ which has the same effect as decreasing money supply ; before lowering to MINUS - 0.5 % towards the end of the Decade ! ] & as the 1929 USA Federal Reserve Bank Governors did : see my Milton Friedman Great ( unemployment ) Depression Blog, bottom / last page ; & on this occasion caused by the preceding Decades Oil & Wages Shocks beginning in 1972 - 1989 period, also suffered by Japan, & unfortunately coinciding with Labor Prime Minister Keating's " the Recession that we [ banana Republic Australia ] had to have " ;
followed by USA S&L [ Savings & Loans ] Crisis, Russian Default, & then the Asian Currencies Crises ) ;
Economic & Market Events or Shocks, if not all, of which are still emanating through the local if not also, World Economic System ;
the resultant " GENERATIONAL Inflation " is still rewarding past enterprising & entrepreneurial Asset allocations, but only for those Stakeholders already fully invested, as a " bonus " dividend, as it were, & buffer against further " inflation " ( price instability ) to come as well as the initial Foreign Currencies Capital Inflows ( e.g SW(I)Fs ) towards a perceived cheaper Foreign Home, Exchange Currency, & as surely Future Generations, will in turn, also experience & be " rewarded " for their investments when due.
Many thanks & sincere regards, Jeff M. Weeks CPA, SA Fin (since 1972)
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Dear Mateusz Mackaj,
I read with as much curiosity as interest, your thought provoking article:-
" Friedman for Government Intervention : The Case of the Great Depression ".
Unfortunately the Great ( Worldwide ) Depression of 1930 - 33, touched if not affected directly for many Decades to come, many millions of Families & Friends ( both my Parents, as with a significant number of School - Children at the beginning of the Depression, were thrown into Adult Work responsibilities to try and assist in supporting their own Families, unemployed Adults ; higher unemployment in the order of 20 - 30 %, & younger Brothers & Sisters schooling ), & allowed unkindly Opportunists to come to Power ( e.g. Stalin, Hitler etc. ).
freely elected democratic Governments are usually economic " moderators " ( as well as re/DISTRIBUTORS of Wealth ordinarily CREATED by " free Market Forces " / Private Enterprise System ) by way of :-
· Monetary Policies ( AUTOMATIC STABILISER interest rates & money supply [ Volume including Credit & Commercial Loans X Velocity of circulation including currency ] usually in a INVERSE relationship, resulting in supposedly, desired foreign exchange rates outcome/s & levels, or any variable/s combination / magnitude, thereof )
&/or
· Fiscal Policies ( Government Spending / injection of Capital Works [ as a last resort ? ] & Taxation incentives / disincentives, also affecting Domestic / Household activity as well as the Overseas ( Exports earnings / Imports payments ) Sector & various " leakages " there from ) not as much automatic & slow moving ;
I believe that the aim of present day Governments ( & consequently Reserve Bank Governors, who are often, now trained Economists ), is to safeguard by the above - mentioned AUTOMATIC STABILISER/S, their own particular INTERNAL Economies, ( Macro Policies to Micro consequences ; inflation etc ) & therefore the welfare of their own Peoples ( employment etc ).
In contrast, the then 1929 USA Reserve Bank Governors, thought it was ONLY their duty to safeguard the foreign exchange rate/s of the time only ( Micro Policies to Macro consequences ), by increasing interest rates as BANKERS ( & not Economists ), causing credit as well as money supply to be decreased by 1 / 3 rd as you have reported, instead of
· REDUCING interest rates
&/or
· INCREASING credit &/or money supply,
respectively.
This trusted stewardship of a Country's economy, would often take into account at what stage/s of the Business / Trade, Cycle has been reached, & whatever economic stimulus ( or any combination, if any ) is required to be increased or decreased, at either, near the bottom or top, respectively, of any " Bust " / Trough ( under - stimulated ) or " Boom " / Peak ( over - stimulated ), Episode/s.
The Great ( unemployment ) Depression was on such a insidious but epic scale that Government " intervention " was ALSO required ( but unfortunately of the wrong kind &/or magnitude, in not dampening Public confusion, then disarray, then panic ), in the same way that " intervention " would be required for any Natural Disaster : fires, floods or famine ; storms & tempest ; earthquakes & tidal waves ; not to mention man - made Wars & conflicts, by mobilising & diverting scarce financial if not also, human Capital where it is mostly needed as quickly as possible ;
or are these Cases too, best left to the ponderings of " free Market Forces " once again, & their " Captains of Industry " ??
Many thanks,
Jeff M. Weeks CPA, SA Fin
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86 - 90 Railway Terrace, Peterborough, SA 5422, South Australia.
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Mises Economics Blogs 01 / 25 / 07 & 12 / 17 / 07 & 01 / 11 / 08
Published: January 11, 2008 3:46 AM
Andreas A
An excellent article! One, perhaps minor, quibble:
Is it not an oversimplification to say that "it's wrong to blame unions for rising prices"?
Clearly, unions cannot CAUSE inflation- only governments can print money. But as the vehicles for the most egregious political intervention in the market process, unions are surely responsible for the POLITICAL EXPEDIENCY of inflation (and the resulting rise in prices).
Without inflation, the effect of coercive wage "agreements" imposed by unions would be unemployment in the sectors in which union power was most "successful". Inflation is the result of political capitulation to union power and of political pandering to union demands. It is a crude,hugely unjust and ultimately destructive political device to mitigate(or, rather, to conceal)the consequences of union power.
It is certainly the fault of governments that they tolerate and protect union blackmail and that they resort to inflation to shield unions from the otherwise visible consequences of their activities. But that doesn't mean it's wrong to blame the blackmailer.
Published: January 13, 2008 2:45 PM