MediumTex wrote:
AgAuMoney wrote:
Sustained inflation has been supported when the society experiencing inflation has no or even negative wage growth, but sufficient buyers in other societies increase spending sufficient to support prices. (weimar)
Sustained inflation has been supported by consuming savings and by increasing debt. (weimar, argentina, brazil, zimbabwe)
Sustained inflation has been supported by declining standard of living (fewer and then no luxuries and even descending into starvation). (weimar, argentina, brazil, zimbabwe)
Sustained inflation has been supported by people working multiple jobs and/or putting more people to work (women then children instead of school and/or partnerships and co-ops) instead of supporting idle hands. (argentina, brazil, zimbabwe)
Sustained inflation has been supported thru the support of family and friends in other areas. (zimbabwe)
These are reality and have been experienced dozens of times in the 20th century, and innumerable times before that in countries of every size and stage of development.
Don't count on wage growth to warn of or as a requirement for sustained inflation. It may happen, it may not.
In the U.S. people have little to no savings to draw down and credit is contracting, so the basic tool to respond to rising prices here will be wages.
If wages are not rising, I don't know where the money will come from to pay higher prices.
Official savings stats are just the bank deposits. They do not include other assets like brokerage accounts, IRAs and 401(k)s. Also given it takes 18months on average for the bank to kick you out after you quit making payments many people in the U.S. are spending by not paying their house payment (increasing debt). (My next door neighbor missed his october payment, hasn't paid since, has had renters in the place since last summer, foreclosure auction first scheduled for september and could be pushed out as many of them are. If that ain't livin...)
Once those avenues are exhausted (if they had them at all) the next place is usually sacrifice and decreased standard of living. Such as by moving from the house with a $3000/month mortgage to a rental at $1000/month. OK, that's $1000/month additional if they weren't paying their mortgage anyway, but it is a $2000/month savings if they had to integrity to pay until they moved out and it is definitely a cut in lifestyle.
And wages do not include unemployment benefits, welfare, food stamps etc. which attempt to track cost of living so that demographic will continue buying in spite of price increases. You could probably lump those in with support coming from friends and family elsewhere (that either aren't affected by the inflation or are more prepared to handle it).
All those ways I mentioned originally and elaborated on above are ways that rising prices could be paid without increasing wages.
In general, how do you see a period of deleveraging accompanied by economic contraction leading to a sustained upward spiral in prices?
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As far as women and children going to work, in an economy that already has 9%+ unemployment, I don't know how much success these groups would have entering the workforce.
I'm not talking about "work that pays something like my old job" or even "work that will pay the bills". I'm talking any work you can find. Even shadow employment -- join or replace the illegal immigrants and other undocumented workers just like desperate people always have. Anything to bring in a little extra cash (to buy that six pack over and above the food stamps).
I have a neighbor who in 2007 thought he was going to be rich. He'd sold his business and put $1.4M into buying his house, a cabin in the mountains and a chunk of land to develop. He had the roads built, lots surveyed, test wells, power, telephone all ready to start selling lots. He and the lenders were into it about $4M but those lots were going to bring in at least $12M and more for him if he could build some nice custom homes. Then the bottom fell out. For the past two years he has been driving around the country in an old toyota pickup repairing roofs (mostly) and other repairs and construction after storms and other natural events. He still has his house and his family is still here. He has been forgiven over $1M in debt and the other lenders have quit threatening to take the land because they don't believe the threats any more themselves. They are now being very cooperative hoping that he'll somehow be able to start selling lots and make back something on their investment. He hasn't taken unemployment or any gov't aid, his wife is working stocking shelves and two teenagers have found work around town. And some of us have helped out a bit with a meal or a bag of groceries or $50 to take his wife out when he is able to get back to visit. That's what I'm talking about. Five years ago I didn't know what kind of man he was. Now I do.
With every sustained inflation some prices go up and some prices go down. For example we have had sustained inflation in the U.S. for about 100 years and the rate is accelerating with the last 50 being far worse than the first 50. Yet computers are much cheaper than they were 50 years ago. And the gov't says automobiles are much cheaper as well (hedonic adjustment) even at 10x the price. I know phone calls are much cheaper, and even the cost of having a phone is less.
The austrian school definition of inflation is much less complex than trying to define inflation by its effects.
You claim increasing wages are necessary for sustained inflation. What do you believe is the causal relationship between inflation and wages that makes increasing wages necessary? Higher wages cause inflation? Must precede inflation? Must catch up with inflation? Or what?
If rising wages are necessary, how can the U.S. have had sustained inflation in excess of wage increases?
Can you point to a prior experience with a modern industrial economy in which a credit fueled asset bubble burst and created basically deflationary economic conditions in which there was a sustained upward spiral in prices? I am not aware of any, but you may know of one.
Not offhand. Very few "modern industrial economies" in the world have completed their experience with a "credit fueled asset bubble burst." Even fewer have done when the world is resource constrained and when it was a global credit bubble taking down a large portion of those "modern industrial economies".
What would it take to convince you that we are in a multi-year deflationary period in which there is likely to be lots of slack in the economy and not much pricing power for anyone?
When I don't see prices increasing and when actual money supply (not just claimed derivative values) is decreasing. Today food, fuel and all sorts of other commodities are in an increasing trend. Sure we had a bit of a pullback in oil last month, and copper and steel dropped a bit earlier in the year, but the trendline is clear. Increasing prices.
The CPI swamps this effect by the imputed rent and hedonic adjustments.
In light of those facts, what would it take to convince you that inflation is currently happening? Ok, you admit "inflation is happening in some areas." Close enough I suppose.
Obviously if it is happening, it can happen. We have had decreasing wages and increasing prices. How do you explain it? Why do you think we have inflation happening in those areas given the massively deflating credit bubble?
What would you say are the key economic differences between the U.S. and Japan today and the U.S. today and the U.S. in the 1930s? I'm trying to rationalize how we would get inflation in the U.S. today when Japan today and the U.S. in the 1930s encountered deflationary conditions following the bursting of their respective credit fueled asset bubbles.
I'm not familiar with what happened in 1930's Japan.
I also don't think it valid to limit comparison to those countries conditions then and now.
I think a key difference is the world. In 1930 resources were not as constrained world-wide as they are now and much of the world was still reeling and in recovery from WWI. The U.S., relatively undamaged, had been booming, not just credit bubble and speculation, but solid industrial growth feeding pent up internal demand as well as world-wide post-war demand. Suddenly when the credit bubble burst all that demand went away. Supply didn't, at first. Huge deflation right there as the first widget/bushel or what have you costs a lot (already paid for during the boom), but the 2nd one costs very little (lots of room to drop prices in the bust).
Industry copes, corrects and continues. I think that would have been the end of it, and by 1932 we'd have been well into recovery but for Hoover stepping in and trying to fix it. Previous bursting bubbles had been short term like that, even with larger initial corrections and Hoover and the economists of the day expected the same. But they also expected the gov't stepping in was going to help. I, along with the Austrian school believe it hurt. Then FDR continued and amplified those plans and drug us deeper and deeper into the morass of central planning with production quotas, production limits, price controls, fudged economic reports and all the associated political uncertainty and high tax rates.
US today vs Japan... Japan started with huge savings. We start with a huge debt and a consumer culture. Japan still keeps saving, but we'll drag ourselves to the market to buy the latest big screen and stop for a super big gulp or a big mac on the way (my MCD thanks you). Our gov't actually encourages this, but I don't know why since many of us get depressed if we can't buy something, and so that will be the last thing to go. And when we cannot buy for ourselves, we get the gov't to buy for us. Maybe that will be the very last thing to go.
OK, but as for what is different in the U.S. today vs 1930's...
Today we have a debt nearing 25% of GDP (if you believe GDP numbers) and liabilities reaching at least 4x and as much as 8x that amount (from many of the programs started in the 1930's). The U.S. has been "borrowing" money like a mad man (created in large part out of nothing so it really isn't accurate to say borrowing, except we're going to owe interest payments on it to the Fed, hmm) and spending it on all sorts of stuff while promising to spend even more in the future. That can cause and sustain inflation, and has in every previous instance (typically during wars).
Today we have a very hungry middle kingdom that was before the bubble burst and still is consuming everything produced. China and other countries have a surplus to spend and are spending it to buy food and other commodities and assets. I propose that as long as they spend it, we'll continue to see inflation in those things they are buying.
Today (if you believe it) we have passed the point of peak oil, and definitely inside the U.S. we rely on the kindness of strangers to provide oil at whatever price the market will bear. In 1930 we provided our own oil and the supply was bigger every day plus we did not use near as much of it. From oil comes prices changes on all other goods.
And then there is the Austrian/monetarist viewpoint... In the 1930's FDR had to confiscate gold and change the dollar value to create more money to fund his programs. That was inflationary, but according to Bernanke, not inflationary enough. So today BO and the Bernanke Fed conspire to have the Fed backstop treasury auctions to 1) lower interest rates, and 2) ensure the gov't has money to spend. Bernanke has published many ideas for how to be more inflationary so as to correct the past Fed mistakes. Who's to say he won't use them and create the inflation he thinks we need?
Today we have a gov't that wants us to turn food (corn) into fuel (ethanol) and so is subsidizing corn ethanol to the tune of 40c/gallon for millions of gallons while driving up the price of corn (2x in the past few years) and the acres planted in corn instead of other crops. Hows that for wrapping monetarist and supply/demand inflation into one neat little package?
Today we have a gov't that supports the price of sugar (2x world prices) both by import tariffs, import restrictions and by purchasing and destroying tons of sugar (good years) and subsidizing the cost of sugar (bad years) for US producers to guarantee a minimum price. (Another depression-era program, btw, which is why we use so much corn syrup.) And why can't we use sugar in ethanol? Because then you have to pay the inflated sugar price and plus won't get the ethanol subsidy which means your ethanol is going to be priced higher than corn ethanol. Oh, but we do import millions of gallons of sugar ethanol from brazil, where they make it from weeds that grow naturally (sugar cane) and can ship it to the U.S. cheaper than we can produce subsidized corn ethanol. How far are sugar prices going to fall? Not much!
Today we are spending billions of dollars fighting wars and maintaining hundreds of military bases around the world. In the 1930's the U.S. gov't was directly spending under 5% of GDP. Today it is over 10%. Gov't spending is inflationary just by supply and demand (it increases demand and decreases supply), or by the Austrian perspective of increasing the money supply.
Spending by the U.S. consumer is important, but is dwarfed by everything else going on both US gov't and foreign spending. And never forget that Bernanke and the gov't want inflation and they hold all the cards.
