What is inflation?

[Thomasio]

I'm not sure whether it has been discussed in here, I'm not even sure whether it's true, but I've seen a German professor of economics who stated, inflation is the increase in wages minus the increase in productivity, regardless of any other factor.

 

If productivity falls or increases less than wages, there's inflation.

If productivity increases more than wages or wages fall, there's deflation.

 

Governments can influence this by increasing or decreasing social services, hiring or firing state employees, because an increase in social services is equal to an increase in average wages, same as state employees coming from unemployment increase average wages.

 

Banks can temporary influence it by giving more or less credit to working people, because giving credit is equal to temporary increased income, only with the downside, once the credit money is used up, income is reduced below original level due to interest.

 

After I heard this, I've looked up some data, of evolution of productivity and wages in different countries and there really is a high correlation between wages minus productivity and inflation.

Best example is Japan, where increasing productivity upon stagnant wages have resulted in 20 consecutive years of depression.

Through tons of QE and consumer credit they tried anything they could think of, except of increasing wages, which led them by now to a point where even increased wages wouldn't get them out of it anymore, because people would use increased wages to pay off their debt rather than spending it.

 

This would mean, the way out of financial crisis is not QE, but increasing wages and the longer you wait with the increase, the more you flood the market with credit, the harder crisis will hit, once you reach the limits of credit banks are willing to give to consumers.

 

The libertarian free competition where loads of unemployed competition presses down wages is the worst possible thing one could do, not only during crisis, but in general, because it would always lead into eternal deflation and depression.

 

Of course, increased wages might lead to more unemployment, but that's another story.

If the total amount of available workforce exceeds the total amount of available jobs, there will be unemployment and lower wages won't change that, only reducing working hours per worker and reducing retirement age will achieve that.

Of course, if increased wages cause unemployment, this would decrease average wages again and you'd still end up with stagnant average wages, so either the theory is wrong and increased wages don't cause unemployment, or at least not as much, or there is no way out.

 

What's your view on this?

[green banana]

Can you provide a link to the article?

[Frosty]

My understanding of inflation (which might be completely wrong) is simply that it's the increase in the amount of currency in circulation, caused by the printing of more money with fiat currencies, or in the case of gold backed currency the increase in gold supply.

 

This has the knock on effect that each unit of currency devalues slightly which hurts the value of all savings and assets held in those currencies and drives down the value of wages. It also causes the inflation of the price of goods, while the value remains the same the number of units of currency required to buy the same product/service goes up.

[TheRobin]

Afaik there are different definitions of "inflation" depending on what school of economics you're looking at. The austrians simply define Inflation as an increase in money supply. Other schools define it as a decrease in purchasing power of money. A drop in purchasing power comes, when money decreases in value more so than products around them. So in theory, using that definition, you can print money like mad, as long as prices of consumer goods prices decrease equally you don't get Inflation.

 

I don't quite understand how productivity is measured in your example (i.e. what exactly is defined as productivity), but I guess that might be what the defintion exaplins, as if you increase productiviy (i.e. you produce more but at the same cost, or produce the same at lower cost) then you can sell cheaper as a result, even if there's a drop in purchasing power, practically you can still buy the same amount of stuff as before

 

Also I want to add, the problem isn't competition for labour. That's just an effect of advanced statism, where it's increasingly more risky/difficult to set up a company than it is to simply work for someone else. So that's the main reason why there are more unemplyed workers looking for jobs, than entrepreneurs looking for workers. In a truly free market, the employer/employee ration would naturally balance itself into creating the least amount of unemployed on either side.

Also you're saying that there's already unemplyoment so riseing wages wont' change that. This is completely ignoring the amount of employment. Raising wages (if done coercively) always leads to more unemployment, regardless of how much there already is.  So that's not the answer to anything.

[gausian]

This video helped me understaning inflation and how the current economic system works.

I hope it can help.

[Thomasio]

Not sure if I can explain all that, after all I'm not one of those so called experts, I'm just trying to do additional research when I hear or read something I didn't know.

Most times it turns out to be false, people just post a bunch of junk on the web, even in this case, this German professor is a Keynesian, where I disagree with a lot of other things he says.

If you want the link, it's a German website, so it's all in German, but here it is:

http://www.flassbeck-economics.de/

 

I've picked up just this one thing from what he says, so let me answer @TheRobin first.

Productivity is the cost per piece.

If you can produce the same amount of stuff with less labor or at lower wages, that increases productivity, if you replace a worker by a machine, where maintaining the machine costs less than paying the worker, that increases productivity.

In consequence that means you have to sell each piece you produce at a lower price, because the total amount of money available in the population hasn't increased and that's deflation, because products become cheaper.

 

Obviously I didn´t just pick up the info and believed it, but it made sense, so I went for research and I found countless examples.

 

Best example as mentioned above, Japan has flooded the market with incredible amounts of cash, yet they have had deflation for 20 years and there's no end in sight.

Germany has increased wages near precisely as much as productivity, real wages have been absolutely flat for the last 15 years and they have near precisely zero inflation, regardless of the fact they piled up 2 trillion state debt and flooded the banks with it in 2009.

France has in these same 15 years increased wages by about 2% more per year than their productivity increased, so they ended up with 2% inflation per year.

Most states in southern Europe have increased their wages 5-10% faster than productivity and they had 5-10% inflation, which is why they cannot compete on the European market anymore.

As soon as Greece got in trouble, their market collapsed, loads of people lost their jobs, wages dropped, pensions and social services were cut, but productivity hasn't changed, therefore, even though Greece has increased their national debt from initially 50 trillion to over 300 trillion today, they went into deflation and depression and all prices in Greece fell by about 30%.

 

If an increase in money supply would have any kind of influence on inflation, at least Japan should have seen gigantic inflation rates in the last 20 years, yet they have seen nothing but deflation and depression.

As far as I know there are plenty of self nominated experts, who have continually predicted hyper inflation to come out of QE, yet, since all this money didn't go into higher wages or social services, but it all went into the banks, inflation didn't happen.

So I find it likely to be true, that inflation depends in the relation between productivity and wages.

 

@gausian

I knew that video before, that's a different topic.

Governments cut taxes for the rich and compensate the missing funds for social services, by cutting these services, or through increased taxes for the poor or through piling up state debt.

That's just adding some extra lowering to lower wages, meaning it speeds up poverty.

That will ultimately collapse, as soon as so many people have lost their jobs or pay less taxes upon lower wages, that they cannot produce enough to pay the interest on the national debt anymore.

But if the theory of inflation coming from productivity and wages is right, we will see no sign of inflation up to the very end of this and so far I haven´t seen any kind of sign contradicting this.

[webdever]

Inflation is an increase in the money supply. 

 

After I heard this, I've looked up some data, of evolution of productivity and wages in different countries and there really is a high correlation between wages minus productivity and inflation.

 

 

Of course, if the supply of currency increases, the value of money relative to productivity/wealth goes down and wages will increase...

 

https://mises.org/library/where-inflation

[Thomasio]

... , if the supply of currency increases, the value of money relative to productivity/wealth goes down and wages will increase...

 

In that case, would you care to explain, how Japan increased their supply of currency in the last 20 years, while inflation remained near zero?

 

This table shows the evolution of real wages in the last 20 years.

http://www.flassbeck-economics.de/wp-content/uploads/2014/12/Abb3-Reallohn1.jpg

This one shows money supply in Japan

http://upload.wikimedia.org/wikipedia/commons/6/62/Money_supply_of_japan.gif

An this one shows inflation in Japan

http://www.surlytrader.com/wp-content/uploads/2011/11/Inflation-Japan-Vs-United-States.jpg

 

Upon THIS data, you really thing it's likely that money supply rules inflation?

It looks more like the opposite.

[shirgall]

In that case, would you care to explain, how Japan increased their supply of currency in the last 20 years, while inflation remained near zero?

 

This table shows the evolution of real wages in the last 20 years.

http://www.flassbeck-economics.de/wp-content/uploads/2014/12/Abb3-Reallohn1.jpg

This one shows money supply in Japan

http://upload.wikimedia.org/wikipedia/commons/6/62/Money_supply_of_japan.gif

An this one shows inflation in Japan

http://www.surlytrader.com/wp-content/uploads/2011/11/Inflation-Japan-Vs-United-States.jpg

 

Upon THIS data, you really thing it's likely that money supply rules inflation?

It looks more like the opposite.

 

Money supply is not just how much is printed, but also how much is lent, as most lending is on reserve. The money supply can shrink when loans are called in and reserves are covered.

[Thomasio]

I wouldn't call the Japanese national debt a covered loan, even after 20 years their debt is still growing.

Also on start of this Japanese deflation there wasn't much to cover.

 

Would you call US national debt and/or US consumer debt anywhere near covered or being covered?

How come the US is doubling their debt every few years, nearly all poor consumers have maxed out their credit cards, but there is no 20% per year inflation in the US?

[green banana]

I think there are two simple explanations for Thomasio's question. The printing of money can paradoxically cause Deflation. Western and Japanese banks have a traditionally very low reserve to back up their operations, in case something goes wrong. When the Japanese and Western housing market crashed in the early 90s, respectively 2008, the banks were about to collapse. To prevent that, the Japanese and the Western governments did Quantitavie Easing to save them. While they were kept alive, they need the stimulus just to keep operating. This is why QE does not enter the market and that is why the velocity of money goes down. This has a deflationary effect, since this money would have been spent more productively instead of saving bancrupt banks. 

The other explanation is closely connected. In addition to the FED and its equivalent agencies in other countries, other actors, such as banks can create money too, by loaning it into existence. Since the crash, the requirements for doing so have been become more serious, plus,  the near 0% rate makes it not viable for the banks to create money, when they can have it by asking for it.

[utopian]

Inflation may refer to several different mechanics, but basically inflation can be explained in the following example.

 

You create a money supply to represent 100 loaves of bread, by creating 100 paper dollars. Each loaf is worth one dollar. This "economy" is stable at a set rate of 1 dollar per 1 loaf.

 

Now, if you maintain that 100 loaves of bread, but you print 100 more dollars, you now have 200 dollars to represent 100 loaves of bread. That means each dollar is now only worth half of a loaf of bread. This is inflation, and can be used as a mechanic of thievery if you trade away your dollars at an assumed value of 1 dollar for 1 loaf of bread, and later make it so that the dollars you gave away are now only worth half a loaf of bread.

 

This is only half the equation, however. Lets say you do not print any more dollars, and maintain that 100 dollars. If you eat 50 loaves of bread, those dollars now also represent half a loaf of bread, thereby making it possible to inflate a currency without ever printing more of it.  

[Thomasio]

Good example, at least for my point.

 

You print $100 for 100 loaves of bread and you give everyone $1 so he can buy a loaf.

Then you take 10% tax on all sales and the baker takes 10% for his profit, meaning the baker pays back in wages $80.

Next month you print another $100 and give it to the baker.

 

How much can the baker get for his bread next time?

He still bakes 100 loaves, but the total amount of money among the population is $80, so either he can sell only 80 loaves, or he has to sell it for $0.80 a piece.

That's DEFLATION, regardless how much money you give to the baker, the price of goods DEcreases.

You can print 1000 trillion, a loaf of bread would still cost $0.80, unless you give the poor people a share of the printed money which ist precisely what QE does NOT do.

[shirgall]

I wouldn't call the Japanese national debt a covered loan, even after 20 years their debt is still growing.

Also on start of this Japanese deflation there wasn't much to cover.

 

Would you call US national debt and/or US consumer debt anywhere near covered or being covered?

How come the US is doubling their debt every few years, nearly all poor consumers have maxed out their credit cards, but there is no 20% per year inflation in the US?

 

If you are referring to my post, I was only calling the reserve covered, which is only 5% of the loans. This is why money supply increases when banks lend money.

[Thomasio]

Yes @shirgall money supply increases, but as long as this increase remains in the banks or among the rich, the only prices increasing are shares of stock, real estate and other forms of investment.

The price of bread and any other kind of all day items for poor people would still decrease, because the poor who don´t get a share of the loans have less money to spend.

 

Since the sum of all day items 250 million Americans consume is BY FAR greater than any amount of anything else that matters for inflation, the overall remains a deflation.

The producers will not increase production, just the opposite, since they can sell less and less the more people become poor, they will take their spare money, they volunteer in taking loans at zero interest, but just to speculate at the stock market.

They will decrease production, fire people and speed up the overall deflation while money supply increases exponentially.

[labmath2]

When people talk about the rich investing their money, thereby making everyone better off, i always wonder who is borrowing the money and how they pay back with interest without decreasing money in circulation? This definition of deflation seems to be based on the idea that money is always being sucked out of the system by the rich unless wages go up.

[shirgall]

Student loans, mortgages, and car loans are no small chunk of change, but, yes, the banks settling up at the end of the day for the reserves to be covered is the real game of thrones.

[green banana]

i always wonder who is borrowing the money and how they pay back with interest without decreasing money in circulation?

 

When your stock shares go up in value, does the Fed have to print money to make up for it? There is a difference between money that the Government issues and book money.

 

Student loans, mortgages, and car loans are no small chunk of change, but, yes, the banks settling up at the end of the day for the reserves to be covered is the real game of thrones.

 

In the case of mortgages and car loans, the house and your ride belong to the bank and serves as a security. Covering it is easy in theory. You can't default on student loans which is also some sort of security.

[shirgall]

When your stock shares go up in value, does the Fed have to print money to make up for it? There is a difference between money that the Government issues and book money.

 

In the case of mortgages and car loans, the house and your ride belong to the bank and serves as a security. Covering it is easy in theory. You can't default on student loans which is also some sort of security.

 

Yes, but the supposed dollar value of my house doubled in less than 10 years, and then dropped a third in less than 4 years. I don't think that kind of volatility was due to the improvements I made on the house. Student loans could be defaulted on until recently, and many are backed by the full faith and credit of the United States.

 

The bottom line, though, is that inflation is a wealth tax on the middle class, the upper class have many ways to protect themselves from inflation, and the poor have more debt that benefits from inflation and less dollar wealth that is hurt by it.