You're not going to believe this: Inflation/deflation debate still alive?

[bart]

Re: You're not going to believe this: Inflation/deflation debate still alive?

I find it quite informative the graph that you post above, Bart. It reminded me to a table of data referring to the evolution of the minimum wage here in Mexico. As measured per Mexican CPI data, in real terms it was at the highest level in 1976, after a decree on the final period year by Luis Echeverría. We see that the bulk of the afterwards deterioration was during the rampant inflation period, namely between 1976 and 1988, and that later governments until 2000 maintained a loss in Minimum wage deterioration, being, numerically and in real terms, the Vicente Fox period the first one that ended with a minimal loss of minimum wage in real terms.

Table can be found, with related explanation in spanish from Manuel Aguirre Botello, the author of it, HERE

Why is the minimum wage so important in Mexican Economy?

Before the rampant inflation period, tariffs and fines were set on a base level, and corrected (if applicable) every now and then according to decrees. At the early 80's since it got too difficult to be legislating constantly the new tariffs, which were eaten alive by inflation before being implemented, the idea was to link them to a base price that anyway had to be modified as pertaining by mexican legislators. The most widespreadly used price tag that has always been subject to decreed increases is the daily minimum wage.

Other issue is that there are three numbers nationwide for the Minimum Wage in Mexico.

Just to set another example where inflation turned rampant with an inflation in wages that kept losing in real terms and has not "catched" price inflation until both were leveled to a single digit.

Very interesting parallels that you noted for Mexico, and especially that it also started in the '70s. Thanks... and for once I'll refrain from any tinfoil hat views about the parallels. ;)

[Charles Mackay]

Re: You're not going to believe this: Inflation/deflation debate still alive?

In keeping with the spirit of Bruce's msg, I'll keep mine pithy.

Monetary inflation occurring simultaneously with credit deflation will continue for some time... probably until some black swan event. Best investment stance is to build your own personal hedge fund to be long gold and natural resources and short the credit bubbles like real estate, finance, and maybe the bond market. ;)

[phirang]

Re: You're not going to believe this: Inflation/deflation debate still alive?

I've been pondering points on actual situation worldwide, and referring it to late 70's and early 80's, and how it all worked down here in Mexico. What bugs me the most is the possibility of bank bailing by nationalization.

On September 1st, 1982, at the final Government yearly inform of López Portillo, he cried while he was pondering the critical situation that the administration of his predecessor, Luis Echeverría, and his own, put Mexico on. At the end of his speech, after trying to convince the public he was acting patriotically, he decreed to nationalize all private banks in Mexico.

What did the privatization of banks in Mexico brought to Mexican Economy?

First of all we have to remember that 1150 companies of all kinds of business were owned by Mexican Government by the year 1982.

As we have seen first hand, when a company is owned by a Government, there is no clear progress and development incentive due fundamentally, that as the owner, the government will keep supporting it no matter what their income is, and will use it on contracts since there is not the need to bid for them.

This lack of incentives makes any company to become ostracized, bureaucratic on both its internal management and work methods, and that bureaucratization is precisely what prevents innovation and modernization.

When a national government obtains monopoly not only in the money generation business, but also in the internal handling of it (Via the FIRE Economy) all kind of distortions regarding the growth of economy prevail. There is not a clear incentive to control money creation, since all of it is managed by the government, therefore, destroying confidence on the soundness of the policies under which money is managed. International investment flows away, and the government goes bankrupt. That is precisely what happened on Mexico between 1971 and 1982.

After the nationalization of Mexican banking system, no bank or country in the world lent any money for 26 months to Mexico. Most of the credit line opening as after those 26 months were not because of improvements on internal monetary policies, but due to the needs generated by the reconstruction of national infrastructure that had to be done after the September 19th 1985 8.1 Richter Earthquake.

How can US government support a nationalizing of the FIRE Economy? Could it stand for an extended period without external financing of deficit? If the internal monetary policies keep as they are, Would US bonar survive a loss of confidence from the rest of the World?

SHort answer: no.

Long answer: the US has a lot of very desirable intellectual property and strategic assets that it can cannabilized to survive in the short-term, but the Empire is gone and, in the long-run, the USD.

[ocelotl]

Re: You're not going to believe this: Inflation/deflation debate still alive?

I've been pondering points on actual situation worldwide, and referring it to late 70's and early 80's, and how it all worked down here in Mexico. What bugs me the most is the possibility of bank bailing by nationalization.

On September 1st, 1982, at the final Government yearly inform of López Portillo, he cried while he was pondering the critical situation that the administration of his predecessor, Luis Echeverría, and his own, put Mexico on. At the end of his speech, after trying to convince the public he was acting patriotically, he decreed to nationalize all private banks in Mexico.

What did the privatization of banks in Mexico brought to Mexican Economy?

First of all we have to remember that 1150 companies of all kinds of business were owned by Mexican Government by the year 1982.

As we have seen first hand, when a company is owned by a Government, there is no clear progress and development incentive due fundamentally, that as the owner, the government will keep supporting it no matter what their income is, and will use it on contracts since there is not the need to bid for them.

This lack of incentives makes any company to become ostracized, bureaucratic on both its internal management and work methods, and that bureaucratization is precisely what prevents innovation and modernization.

When a national government obtains monopoly not only in the money generation business, but also in the internal handling of it (Via the FIRE Economy) all kind of distortions regarding the growth of economy prevail. There is not a clear incentive to control money creation, since all of it is managed by the government, therefore, destroying confidence on the soundness of the policies under which money is managed. International investment flows away, and the government goes bankrupt. That is precisely what happened on Mexico between 1971 and 1982.

After the nationalization of Mexican banking system, no bank or country in the world lent any money for 26 months to Mexico. Most of the credit line opening as after those 26 months were not because of improvements on internal monetary policies, but due to the needs generated by the reconstruction of national infrastructure that had to be done after the September 19th 1985 8.1 Richter Earthquake.

How can US government support a nationalizing of the FIRE Economy? Could it stand for an extended period without external financing of deficit? If the internal monetary policies keep as they are, Would US bonar survive a loss of confidence from the rest of the World?

[metalman]

Re: You're not going to believe this: Inflation/deflation debate still alive?

Has anyone else noticed that 99% of the threads on iTulip die a quick death? Wonder why?

I suggest posters concentrate more on getting a central point accross, rather than on apparently attempting to wow us with their depth of knowledge, which I'm sure is extensive. We get it, you are bonafide.

I'm reading a lot of posts here that go on and on w/o really saying anything or bothering to sum up their point. That point can get lost in the details and long, complex, often run-on sentences being used. Some of us have jobs and other interests and can't devote 5 minutes of parsing your post to get to the point.

For example. My rubuttal to one post on Argentina would be relatively short and sweet.

"Prices rising for wages and goods don't cause inflation. Inflation causes prices to rise." W/O even reading much about it, I'm guessing Argentina's government printed too much money. Am I close?

Or

"The reason we masses had cash for $4 cups of coffee and $3,000 TV sets was that it was all borrowed or printed money. Those days are over. Get used to it. It was never real." Prices of stuff we don't really need (McMansions, fancy coffee, personal services, etc) will fall while prices of stuff we do need (food, energy) will rise.

I realize economics is complex. "makes Mongo's head hurt". But to expect any sizeable number of people to read what is basically a PhD thesis in every post is asking a lot.

I'm guilty also, I run on in my posts as well. But simply thinking of a simple way to say something instead of using the most words possible is a good start.

what did the man say, 'sorry for the long letter, if i had more time i'd have written a shorter one".

i can live with anything here. the topics we tackle here are ambitious even for trained economists. some folks need a lot of words to say a little others can say it in a few... we all started from different places and we're all in different places. sometimes we don't have time to write a short post. that means the reader has to do more work. you get back what you put in, is your point, and it's a good one.

[CanuckinTX]

Re: You're not going to believe this: Inflation/deflation debate still alive?

I'll second that Bruce.

Even though I have a degree in Economics and MBA in Finance I feel pretty stupid some days trying to figure out what the heck some people are trying to say.

[jk]

Re: You're not going to believe this: Inflation/deflation debate still alive?

But when loans are written off through default, there is no deflation because the money that was borrowed into existence was already spent and remains in the economy.

but the note was near-money. when i own a tbill, e.g., i think i'm holding money, even though i'm just holding a note. when loans are written off through default, the holders of those formerly valuable loans feel much poorer.

Re: You're not going to believe this: Inflation/deflation debate still alive?

Has anyone else noticed that 99% of the threads on iTulip die a quick death? Wonder why?

I suggest posters concentrate more on getting a central point accross, rather than on apparently attempting to wow us with their depth of knowledge, which I'm sure is extensive. We get it, you are bonafide.

I'm reading a lot of posts here that go on and on w/o really saying anything or bothering to sum up their point. That point can get lost in the details and long, complex, often run-on sentences being used. Some of us have jobs and other interests and can't devote 5 minutes of parsing your post to get to the point.

For example. My rubuttal to one post on Argentina would be relatively short and sweet.

"Prices rising for wages and goods don't cause inflation. Inflation causes prices to rise." W/O even reading much about it, I'm guessing Argentina's government printed too much money. Am I close?

Or

"The reason we masses had cash for $4 cups of coffee and $3,000 TV sets was that it was all borrowed or printed money. Those days are over. Get used to it. It was never real." Prices of stuff we don't really need (McMansions, fancy coffee, personal services, etc) will fall while prices of stuff we do need (food, energy) will rise.

I realize economics is complex. "makes Mongo's head hurt". But to expect any sizeable number of people to read what is basically a PhD thesis in every post is asking a lot.

I'm guilty also, I run on in my posts as well. But simply thinking of a simple way to say something instead of using the most words possible is a good start.

[*T*]

Re: You're not going to believe this: Inflation/deflation debate still alive?

Some say the world will end in fire,
Some say in ice.
From what I’ve tasted of desire
I hold with those who favor fire.
But if it had to perish twice,
I think I know enough of hate
To know that for destruction ice
Is also great
And would suffice.

Robert Frost

[grapejelly]

Re: You're not going to believe this: Inflation/deflation debate still alive?

I think the two big mistakes that people make is to judge inflation by wage prices, and to fail to understand the debt default is not deflationary.

First, Rick and Mish do not understand that inflation is created by borrowing money. That is how money is created. Through borrowing. Inflation happens when people borrow at a rate that exceeds the rate of economic growth.

Second, folks like Rick and Mish believe deflation happens through defaulted loans. Their argument is that widespread defaults lead to deflation.

But when loans are written off through default, there is no deflation because the money that was borrowed into existence was already spent and remains in the economy.

Only paying back loans results in deflation, because only paying a loan back removes that money from the economy. Paying back loans is flipside of inflation. Defaults are not the flipside of inflation. You can have widespread defaults and still have high inflation, but you cannot have people paying back their loans without a falling money supply and deflation.

[phirang]

Re: You're not going to believe this: Inflation/deflation debate still alive?

a chat I had with an econ friend of mine who's at MIT:


" inflationary spiral .. that's the key thing to control here ... i mean all you need is sufficient consumption curtailings to induce that to not happen -- could include maintaining low wages among other things ... the oil shocks i think as they run their course will induce this anyway .. im not concerned about an inflationary spiral. .. this is cuz the oil shocks .. ppl tend to misread it as an increase in the price of a huge component of our consumption bundle. the better way to understand it is like an adverse productivity shock -- it makes us less cost effective in production in all industries because its like increasing the marginal cost everywhere. "

[donalds]

Re: You're not going to believe this: Inflation/deflation debate still alive?

Fred, you say:

"We don't say that the peso exchange rate is the cause of Argentina's economic problems but an expression of them."

You also write:
"Social, domestic/political, geo-political/global and other factors are entangled in the US, the result of which is leading to inflation and a "currency crisis," to use Paul Volcker's term."

E.J. says above:
"The inflation is launched by a disturbance in the exchange rate value of the currency."

So . . . taken together, inflation results from currency "disturbance" which itself is the result of (using Argentina as an example applicable to the US) "economic problems."

So, we are in agreement: inflation and currency "disturbances" are the result of social, political and macro economic developments. In addition, it should be understood (and I think it is) that inflation/currency movements and their consequences are the result of global developments, that is, should be understood in a global context.

My point is this: taking all of the above into consideration, would it not be analytically more accurate to argue one's case relying on an analysis of social, political and macro economic factors? Granted, such an analysis is often touched upon in iTulip. But does not too much attention to inflation/currency (recognized as symptom not cause) serve to conceal the more significant factors at play? Recognizing that currency movements and rising or declining prices is simply the outcome of larger developments, why not focus on these developments, and then relating them back to price/currency movements . . . rather than the reverse?

Understanding price/currency movements - admittedly crucial to one's understanding - should serve to flesh out these larger developments. My point is that too much focus - getting caught up in these movements - can result in failure to flesh out more important and substantial developments, with the misfortune of leaving the subject matter unduly concealed in what can amount to a fetish, where movements of prices/currency exchange can seem to take on a life of its own, and thus by weight of argument be confused as the casual agent rather than the consequence. Doing so results in the failure to accurately address the inflation/deflation debate.

Aside: I am part owner of a farm in far southeast S. Dakota and in contact with residents in Iowa. The consequences for food prices due to the recent flooding in the midwest and especially in Iowa is loaded with uncertainties. But I think it safe to say that those consequences will be much more significant in the relative near future than they may now appear.

[FRED]

Re: You're not going to believe this: Inflation/deflation debate still alive?

As for Argentina . . . bad, bad example. As expected, the confusion here lies in turning cause and effect upside down. Many factors were at play in Argentina, which reflect a complexity that attributing inflation to currency-centric depreciation fails to take into account. The world is not so simple. The failure of the Argentina economy can be attributed to many factors, but that regarding currency is symptomatic. The same can be said about inflation in Argentina. Social, domestic/political, geo-political/global and other factors were entangled in Argentina, the result of which lead to inflation and a currency crash, not the other way around.

http://www.newleftreview.org/?view=2410

This is why Argentina is a good example. Read the article again. We don't say that the peso exchange rate is the cause of Argentina's economic problems but an expression of them. The inflation is related to depreciation in the US in a similar, albeit, different way than it was in Argentina.

Social, domestic/political, geo-political/global and other factors are entangled in the US, the result of which is leading to inflation and a "currency crisis," to use Paul Volcker's term. In our case:

• Dependence on foreign borrowing to finance consumption and operate the government
• Dominance on the Finance, Insurance and Real Estate (FIRE) sectors of the economy for economic growth
• Burden of economic rent extraction in the form of public and private sector debt
• Low national and household savings rates
• Dependence on domestic consumption for 70% of GDP
• Persistent trade deficits
• High energy intensity, the amount of energy needed to produce a dollar of GDP growth
• Dependence on energy imports

These inevitably express themselves as currency weakness and inflation. There are many differences in the US vs Argentina cases, of course. If Argentina ran its economy as the US has since 2001 the peso would again be in crisis. The US has a privileged position, but is losing it.

[don]

Re: You're not going to believe this: Inflation/deflation debate still alive?

I felt from the beginning that playing the military adventure card was to prop up the bonar, not seize the oil wells per se. The super-sized bases in-country, the deep water berthing and airbases in the Gulf, are all about just that. Playing the khaki card against Iran will be bonar decision-driven as well. The question is, does it still work and what are the fiscal implications in doing so. A major component in the inflation question, and one that separates the big boys from the Argentinians.

[jk]

Re: You're not going to believe this: Inflation/deflation debate still alive?

but are those wage increases increasingly financed from ever decreasing trade surpluses as subsidy-driven industries grind to a halt?

i think you raise the key question: whither chinese incomes? or, perhaps, wither chinese incomes? this in turn leads to: what will china do as the u.s. consumer economy goes into reverse? i would imagine that unemployment and food availability/affordability are the highest concerns of the chinese leadership. as exports to the oecd slow, how will the chinese react? they just bumped up the domestic oil/energy price, reducing subsidies, and presumably ratcheting down demand, while attacking domestic inflation. the schiff scenario is that they allow their currency to appreciate, so that the cost of globally traded goods like food and fuel is reduced, thus solving their inflation problem. this only works, however, if they can shift their economy toward domestic consumption. it is hard to see how they could quickly make such an adjustment, but the alternative is mass unemployment and social instability.