Top Scoops

Book Reviews | Gordon Campbell | Scoop News | Wellington Scoop | Community Scoop | Search

 

Keith Rankin : Inflation, Deflation, Balance

Inflation, Deflation, Balance


Keith Rankin, 2 March 2015

Journalistic economics tends to see 'good' or 'bad' in the various economic measures that we frequently hear in the news. This motivated me to write a piece Normative Economic Journalism (28 Feb 2015) in The Daily Blog about the use of colour shading in a particular website www.tradingeconomics.com and how it made it look that Syria was by far the world's best performer on inflation. Syria's annual inflation rate was listed as minus 29 percent.

I also made various observations about how countries like Switzerland and Denmark which presently have negative interest rates also have deflation, and that very easy monetary policies is these and other countries were in fact facilitating deflation rather than stimulating inflation.

A couple of comments raised issues to which I responded. Here are those threads.

First reader comment: "It seems to me that QE did create a lot of inflation, just not in things that are included in consumer price indexes – the traditional measure to inflation. Real estate, stocks, etc have increased in price a lot lately, is that not inflation?"

My response (slightly edited):

Buying financial assets is saving, not spending. QE prevented financial asset prices from falling. New money is injected into the economy when banks (especially central banks) buy assets. In practice it allowed the rich to hold money as a form of asset. Increased inequality and miserliness mean that more income is directed into holding assets rather than buying stuff.

Money has become one of those assets, and, as Keynes showed, with deflation money becomes an increasingly attractive asset. The inflationary danger occurs if too many people holding money as a form of saving suddenly decide to spend that money. Those people would be competing with workers and capitalists for goods and services which the economy could supply only some of.

Money itself is not inflationary. It is the decision by many people simultaneously to switch from a saving strategy to a spending strategy – eg to spend their hoards of financial assets – that sparks inflation. Inflation will then occur – and on a substantial scale – if assets are already held as money, or if the asset hoards can be easily converted to money without those hoards losing value.

Inflation in economics is a process of rising prices of newly produced goods and services. It is neither about the prices of financial assets nor other items that already exist. So a surge in the prices of second-hand bicycles is not inflation. Unspent money is a financial asset. So is anything else, such as land or second-hand art, that serves as a means of parking income. Asset prices are presently inflating (financial inflation but not economic inflation) because too much income is being parked and not enough is being spent. So simultaneous asset price inflation and consumer price deflation are compatible, if not complementary.

At present there is no sign of any huge switch from saving to spending. There is no present sign that people already with substantial holdings of financial assets wish to liquidate those assets in favour of goods and services. The ructions that do take place are about changes in the preferred mixes of the assets that make up the hoards of the rich. The magma chamber of the inflationary super-volcano is those asset hoards, not the quantity of money in the banking system. QE has pacified any rumblings of that volcano. It’s one volcano that’s not about to blow. The dangers lurk elsewhere; implosion rather than explosion. The forces that drive the market economy are too weak, not too strong.

Second reader comment: "'The forces that drive the market economy are too weak, not too strong.' There is certainly always an explanation that appears to clarify why the market economy fails to produce desirable public goods. Having witnessed thirty years of market failures from the Rogergnomic reforms I no longer credit such facile excuses".

My response (slightly edited):

When I say that “The forces that drive the market economy are too weak, not too strong”, I mean that market forces are too weak to drive markets. I am not making any normative comment about the virtues of the pure market economy.

I do however accept markets as an important reality; and I do not have sufficient imagination to conceive of a workable economic order that suppresses market forces.

We might consider which of the following are more likely to deliver dystopian outcomes: market forces too weak (persistently weak spending on goods and services); market forces far too strong (persistent and substantial overspending on goods and services creating serious inflation); or market forces of demand that balance the constraints of supply.

The balanced scenario not only averts implosion or explosion, it also creates the conditions (adequate or better incomes of ordinary households) through which households can choose to reduce their labour supply while still maintaining a balance between supply and demand. And this scenario can create the conditions through which people are willing to contribute to the creation of public goods; the vision is one of shared economic security with the help of public and collective goods, rather than one of private economic security through excessive private ‘rainy-day’ saving.

Something like public equity dividends or a universal basic income is necessary to allow this resource conservation-enabling balance to take place. Public equity benefits strengthen market forces that are too weak, making it easier for workers to say ‘no’ to exploitative labour contracts, and (through the resulting higher hourly wage rates) allow us to choose to work fewer hours, to save less, and to spend less on things we value less than our time.

When market forces ('spending power') are strong and well distributed, ordinary people are better able to make real choices. Our economic future looks brighter when it's possible for ordinary people to make real choices; eg choices that allow us to collectively work less, not more. And choices that facilitate shared security, rather than the deflationary choice of everyone seeking security through private savings.

Global market forces are weak at present; deflationary. Monetary policies cannot reverse this, and may even aggravate this condition. The way forward is to strengthen market forces by allowing people on lower incomes to spend more without having to borrow more. We need to strengthen our welfare states through the concept of public equity.

ENDS

© Scoop Media

 
 
 
Top Scoops Headlines

 

Gordon Campbell: On Why The Supreme Court Is A Bigger Threat Than Trump To US Democracy

If you need a chilling reminder of how weirdly different the United States is to New Zealand…then abortion rights is the place to start. Last Friday, in a case called Hopkins vs Jegley , the 8th Circuit Court of Appeals upheld the right of the ... More>>


The Conversation: Rogue Poll Or Not, All The Signs Point To A Tectonic Shift In New Zealand Politics

Richard Shaw AAP(various)/NZ Greens (CC-BY-SA)/The Conversation Strong team. More jobs. Better economy. So say the National Party’s campaign hoardings. Only thing is, last Sunday’s Newshub-Reid Research poll – which had support for the Labour ... More>>

Dunne Speaks: It's Time For Matariki Day

The period of Matariki, the celebration of the Māori New Year, which began earlier this week, is being celebrated increasingly as an important national event. While many other countries have their own form of New Year celebrations, Matariki is uniquely ... More>>

Gordon Campbell: On Why We Shouldn’t Be Pushed Into Re-Opening Our Borders

I believe in yesterday as much as Paul McCartney, but it was bemusing to see the amount of media attention lavished last week on the pandemic-related musings by former government science adviser Sir Peter Gluckman, former Prime Minister Helen Clark ... More>>

The Coronavirus Republic: Three Million Infections And Rising

The United States is famed for doing things, not to scale, but off it. Size is the be-all and end-all, and the coronavirus is now doing its bit to assure that the country remains unrivalled in the charts of infection . In time, other unfortunates may well ... More>>

Binoy Kampmark: Altars Of Hypocrisy: George Floyd, Protest And Black Face

Be wary what you protest about. The modern moral constabulary are out, and they are assisted by their Silicon Valley friends in the Social Media club. Should you dare take a stand on anything, especially in a dramatic way, you will be found out ... More>>

Binoy Kampmark: Welcome Deaths: Coronavirus And The Open Plan Office

For anybody familiar with that gruesome manifestation of the modern work place, namely the open plan office, the advent of coronavirus might be something of a relief. The prospects for infection in such spaces is simply too great. You are at risk from ... More>>


Binoy Kampmark: Why Thinking Makes It So: Donald Trump’s Obamagate Fixation

The “gate” suffix has been wearing thin since the break-in scandal that gave it its birth. Since Watergate, virtually anything dubious and suggestive, and much more besides, is suffixed. Which brings us to the issue of President Donald Trump’s ... More>>