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The Us Government Will Not Choose Deflation


Methinkshe
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Sorry if this article has already been linked - I've been off-line for a couple of weeks so would have missed it if it has. It's quite a long article but well worth a read.

The US Government Will Not Choose Deflation

Here are the opening and closing few paragraphs.

The US Government Will Not Choose Deflation

Submitted by Rich Toscano and John Simon on January 7, 2009 - 4:47pm.

The modern-day monetary system employed in the United States is based on currency that can be created at the bureaucratic touch of a button. In charge of that button is a group of people with a firmly entrenched belief that deflation is the worst of all possible monetary outcomes.

We believe that this state of affairs is simply incompatible with the existence of the type of protracted "deflationary spiral" about which it has become all the rage to worry. Deflation is a choice in the current monetary regime, and it is a choice that our government simply cannot make.

Before we explain our reasoning, let's deal with the definitional problem inherent in this topic. The word "deflation" is used by some people to describe a generalized decline in prices. To others, the word describes a decline in the money supply. The word "inflation" correspondingly refers to an increase in prices or an increase in the money supply, depending on whom you ask.

This dual definition has caused a lot of confusion in the inflation-deflation debate. We don't particularly care which is the "right" definition, but we do think it's important to understand that these are two separate (though related) phenomena. Where necessary, this article will specify which type of inflation or deflation is being discussed. (If no specification is made, then we are referring to both types -- this is a reasonable shortcut given that changes in the money supply are a major causal factor in price changes).

We believe that the current monetary system, political climate, and prevailing analytical framework are incompatible with a prolonged period of either monetary or price deflation. Our thinking is based on two fundamental premises:

That the monetary and fiscal powers that be are extremely motivated to prevent a lengthy deflation.

That they are entirely capable of doing so.

The Government Can Inflate

Let's begin with the second premise first. It should be pretty much beyond argument that in a pure fiat money regime, a sufficiently motivated government can always cause monetary inflation. And a sufficient amount of monetary inflation can always be depended upon to cause price inflation.

To use an example that is extreme to the point of absurdity, but that illustrates our assertion, imagine if the government sent every household in the United States a check for $10 million, with the proceeds to be supplied by the creation of new money by the Federal Reserve. This would by definition be monetary inflation, as the supply of money in the economy would skyrocket. And there is just no doubt that this vast increase in money held by the public would cause rampant price inflation as each household rushed out to spend its newly acquired dollars. It wouldn't matter whether the economy was in recession, or whether the banking system was deleveraging, or pretty much anything else for that matter. Inflation would follow.

.....................(Refer to above link for main body of article)..................

Conclusion

We in the United States have been dumping our dollars into the world for years and we continue to do so. We owe a staggering amount of foreign debt denominated in dollars and we are gearing up to borrow even more. Our legislators and the stewards of our currency are rabidly hostile to deflation -- they are hostile, in other words, to the idea of the dollar gaining purchasing power. They have shown via word and deed that they will do whatever it takes to prevent deflation from taking hold. When deflation is viewed as even a remote possibility, there are effectively no limits to the amount of money the government can create nor to what they can do with that newly minted money.

Under these circumstances, we just don't believe that the dollar is going to gain purchasing power in any sustainable way. The current deflationary storm could continue for a while yet, but the longer it goes on, the more violent and severe its reversal is likely to be.

Deflation is a choice within the current monetary regime. It is a choice that our government has shown it will not make. There are serious long-term risks inherent in our dysfunctional monetary system, to be sure -- but deflation isn't one of them.

Edited to add link - sorry, missed it out of original post.

Edited by Methinkshe
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I agree.

However they will probably try to fill in the deflationary hole with just enough money to top it up to the brim and not cause inflation. I've no idea how tricky that is. But given that the hole already has money flowing in and out of it at rates that might change my guess is that its tricky. My guess is they will turn the money taps on a bit more than needed.

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I agree.

However they will probably try to fill in the deflationary hole with just enough money to top it up to the brim and not cause inflation. I've no idea how tricky that is. But given that the hole already has money flowing in and out of it at rates that might change my guess is that its tricky. My guess is they will turn the money taps on a bit more than needed.

:lol:

the problem is - there is no shortage of money. The moment that inflation starts coming back [edit: is perceived as inevitable], there's going to be a tsunami of the stuff. There is no middle ground.

The only question is when is the optimal time to get out of fiat and into something tangible. You might do a bit better than now, or you might do a lot worse, so why take the risk?

Edited by mattyboy1973
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:lol:

the problem is - there is no shortage of money. The moment that inflation starts coming back [edit: is perceived as inevitable], there's going to be a tsunami of the stuff. There is no middle ground.

The only question is when is the optimal time to get out of fiat and into something tangible. You might do a bit better than now, or you might do a lot worse, so why take the risk?

At that point you would hope they would start to destroy money. However you can bet that won't happen.

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Deflation is a choice within the current monetary regime. It is a choice that our government has shown it will not make. There are serious long-term risks inherent in our dysfunctional monetary system, to be sure -- but deflation isn't one of them.

But they are going to need to do something pretty dramatic to prevent it. Either helicopter money or increase the National debt...

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Deflation is a choice within the current monetary regime. It is a choice that our government has shown it will not make. There are serious long-term risks inherent in our dysfunctional monetary system, to be sure -- but deflation isn't one of them.

But they are going to need to do something pretty dramatic to prevent it. Either helicopter money or increase the National debt...

You've hit the nail on the head - people talk about a lack of borrowers, but the govt is the the borrower of last resort, and its stepping up to the plate!

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:lol:

the problem is - there is no shortage of money. The moment that inflation starts coming back [edit: is perceived as inevitable], there's going to be a tsunami of the stuff. There is no middle ground.

The only question is when is the optimal time to get out of fiat and into something tangible. You might do a bit better than now, or you might do a lot worse, so why take the risk?

Thats correct. They will err on the side of inflation.

I wish I had a billion Zimbabwe dollars for every time I've said that on here. By now I'd be a multi-trillionaire (or in sterling I'd have a fiver, no make that three quid, no fifty pence, no... etc).

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Thats correct. They will err on the side of inflation.

I wish I had a billion Zimbabwe dollars for every time I've said that on here. By now I'd be a multi-trillionaire (or in sterling I'd have a fiver, no make that three quid, no fifty pence, no... etc).

With respect, I don't think its a question of them 'erring' on the side of inflation. When they achieve inflation - and they will, ultiamtely, and the article in the original case makes a very good and rational case for why - then velocity of money will increase dramatically. There is almost zero chance of the achieving any kind of moderate outcome to this, and I know which way I think it will end.

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:lol:

the problem is - there is no shortage of money. The moment that inflation starts coming back [edit: is perceived as inevitable], there's going to be a tsunami of the stuff. There is no middle ground.

The only question is when is the optimal time to get out of fiat and into something tangible. You might do a bit better than now, or you might do a lot worse, so why take the risk?

I only started reading this site a couple of months back - but one of the main things I have taken from it is the risk to my savings should inflation take hold.

Lets say I didn't have enough savings for a mortgage deposit but was convince inflation was about to get hold. Would it be sensible to use my savings to buy a range of shares in "safe" companies. My theory being those share prices would generally rise as more money was made available in the economy at the new rate of inflation, thereby preventing erosion of my savings?

Or are there other assets I should look to invest in? Not keen on gold, but would consider foreign currency.

Edited by Jie Bie
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With respect, I don't think its a question of them 'erring' on the side of inflation. When they achieve inflation - and they will, ultiamtely, and the article in the original case makes a very good and rational case for why - then velocity of money will increase dramatically. There is almost zero chance of the achieving any kind of moderate outcome to this, and I know which way I think it will end.

From what I can tell, we need cumulative inflation of around 100% to restore 'Normal' debt levels. As proud posessor of a large mortgage I fully approve of this, as long as my wages mostly keep up (those of you who have prudently STRed may post abuse here). But the question is, when do I take out a fixed rate loan for a new car.. after all, the correct response to hyperinflation is to borrow as much as possible just as it takes off and use it to buy things.

Personally, given the choice between even weimar-style hyperinflation and sustained deflation, inflatrion is the lesser evil. The reason being that hyperinflation has an end point where things get so bad that the government is forced to introduce a new asset-backed currency - and when this happens, all previous debt has been effectively cancelled (which is how Germany managed to clear it's debts from WWI and hence borrow enough to re-arm for WWII). Yet fixed assets - buildings, industrial plant, educated people, etc - remain.

Deflation, on the other hand, can grind on relentlessly with no logical end point, especially if starting debt levels are high.

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By way of balance, here is one of KD's Tickers on hyperinflation and why he is rabidly against the possibility.

On "Hyperinflation"

Let's put this to rest right here and now.

"Hyperinflation", or even "Serious Inflation" (similar to what we had in the 1970s) is impossible without a means to transmit the rise in prices into wages.

In today's United States that simply cannot happen for two reasons:

The union representation of workers has been eviscerated due to their own idiocy over the previous thirty years. In effect, they have no power to impact economic or labor policy - no matter what Gettlefinger thinks.

Outsourcing of work to China, India, Mexico and other nations makes wage demands impossible for American workers to enforce. Such demands simply result in the loss of the job to overseas workers.

As a consequence a hyper-inflationary or even seriously-inflationary spiral is impossible to sustain.

Think about your associates, people who you know in the middle class.

Now consider that a 10% inflation rate (moderately bad "serious inflation" ala 1970s) goes on for four years.

This raises the cost of living for everyone by 46%.

How many people who you know are saving 46% of their income? How many will survive a 46% increase in their cost of living?

Such an outcome will result in half or more of America becoming immediately homeless, hungry, and as a consequence out of work. It will as a consequence crash GDP by 50% or more immediately which in turn will crash income tax receipts by a like amount at both state and federal levels.

This will in turn crash prices, but at that point it's too late as now the price crash in turn destroys what remains of the business community and further crashes tax receipts, while at the same time foreign bond investors throw up their hands and say "screw you!", cutting off all foreign capital inflows to the government.

Down that road lies immediate insurrection - that is, the violent overthrow of the government. You are delusional if you think the military could stop such a thing - 150 million Americans, maybe even 200 million of the 300 million in our population? Not a prayer in hell, even if all the Americans had was pitchforks, torches and a gallon of gasoline, and they don't - they have firearms, and lots of them. Even the Chinese, who are (by demonstrated act) willing to roll tanks over their own people would have no chance against 100 million of their citizens if hunger ever trumps fear.

This didn't happen in the 1970s because we had vastly more union work representation and they were able to force wages to keep pace for the average working man. While the pinch was bad (I grew up in it and remember it vividly) society never degenerated because the self-reinforcing crash of production, jobs and tax income never happened, and as a consequence the sort of mass-unemployment, disenfranchisement and loss of essential human needs did not come about.

Today the average working man works for WalMart or some other non-union shop and has no wage pricing power; ergo, there is absolutely no way to prevent the implosion from initiating.

The government must not engage in any sort of policy that could lead to this outcome. Absolute protection at the top levels of government must be put in place to prevent it, because if this occurs then everything - absolutely everything - that we know and love about America disappears.

This is where the Peter Schiffs and McHughs are wrong in their hyperinflation thesis and their "defensive" measures to try to do something about it (or worse, McHugh's belief that not only is this inevitable but that the government should intentionally cause it through something like a "money drop" to households.)

They are wrong because if this outcome occurs there will be no United States of America, your gold will be confiscated and/or rendered worthless by executive fiat, and at approximately the same time an angry marauding mob consisting of half the population of the country will literally loot and burn everything to the ground.

Vengence inevitably follows when justice is denied for a long enough or in an egregious enough fashion. We have seen this with Rodney King and now with the apparent BART assasination of a suspect in Oakland, and that was one man who was abused at the hands of government. Make the abuse half the population and there is a zero chance that civil and political order is maintained.

Pray that our nation's leaders aren't stupid enough to set in motion such a course of action either by accident or under the foolish belief that they can "keep the outcome under control".

Time is running out to demand and obtain justice folks. America's clock is literally ticking towards zero.

And here's a link to the discussion that followed this Ticker.

On Hyperinflation in forum [Ticker]

I'm in the camp that believes that government will not allow prolonged deflation and will use any means possible to reflate and likely tip us into high if not hyper-inflation, and when I say "any means" that could include, say, emergency powers to prevent publication of certain statistics, moving any "goalpost" necessary in order to achieve a desired outcome; anything, in fact.

Having said that, I also have great respect for KD's analyses..........

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By way of balance, here is one of KD's Tickers on hyperinflation and why he is rabidly against the possibility.

On "Hyperinflation"

Let's put this to rest right here and now.

"Hyperinflation", or even "Serious Inflation" (similar to what we had in the 1970s) is impossible without a means to transmit the rise in prices into wages.

In today's United States that simply cannot happen for two reasons:

The union representation of workers has been eviscerated due to their own idiocy over the previous thirty years. In effect, they have no power to impact economic or labor policy - no matter what Gettlefinger thinks.

Outsourcing of work to China, India, Mexico and other nations makes wage demands impossible for American workers to enforce. Such demands simply result in the loss of the job to overseas workers.

As a consequence a hyper-inflationary or even seriously-inflationary spiral is impossible to sustain.

Think about your associates, people who you know in the middle class.

Now consider that a 10% inflation rate (moderately bad "serious inflation" ala 1970s) goes on for four years.

This raises the cost of living for everyone by 46%.

How many people who you know are saving 46% of their income? How many will survive a 46% increase in their cost of living?

Such an outcome will result in half or more of America becoming immediately homeless, hungry, and as a consequence out of work. It will as a consequence crash GDP by 50% or more immediately which in turn will crash income tax receipts by a like amount at both state and federal levels.

This will in turn crash prices, but at that point it's too late as now the price crash in turn destroys what remains of the business community and further crashes tax receipts, while at the same time foreign bond investors throw up their hands and say "screw you!", cutting off all foreign capital inflows to the government.

Down that road lies immediate insurrection - that is, the violent overthrow of the government. You are delusional if you think the military could stop such a thing - 150 million Americans, maybe even 200 million of the 300 million in our population? Not a prayer in hell, even if all the Americans had was pitchforks, torches and a gallon of gasoline, and they don't - they have firearms, and lots of them. Even the Chinese, who are (by demonstrated act) willing to roll tanks over their own people would have no chance against 100 million of their citizens if hunger ever trumps fear.

This didn't happen in the 1970s because we had vastly more union work representation and they were able to force wages to keep pace for the average working man. While the pinch was bad (I grew up in it and remember it vividly) society never degenerated because the self-reinforcing crash of production, jobs and tax income never happened, and as a consequence the sort of mass-unemployment, disenfranchisement and loss of essential human needs did not come about.

Today the average working man works for WalMart or some other non-union shop and has no wage pricing power; ergo, there is absolutely no way to prevent the implosion from initiating.

The government must not engage in any sort of policy that could lead to this outcome. Absolute protection at the top levels of government must be put in place to prevent it, because if this occurs then everything - absolutely everything - that we know and love about America disappears.

This is where the Peter Schiffs and McHughs are wrong in their hyperinflation thesis and their "defensive" measures to try to do something about it (or worse, McHugh's belief that not only is this inevitable but that the government should intentionally cause it through something like a "money drop" to households.)

They are wrong because if this outcome occurs there will be no United States of America, your gold will be confiscated and/or rendered worthless by executive fiat, and at approximately the same time an angry marauding mob consisting of half the population of the country will literally loot and burn everything to the ground.

Vengence inevitably follows when justice is denied for a long enough or in an egregious enough fashion. We have seen this with Rodney King and now with the apparent BART assasination of a suspect in Oakland, and that was one man who was abused at the hands of government. Make the abuse half the population and there is a zero chance that civil and political order is maintained.

Pray that our nation's leaders aren't stupid enough to set in motion such a course of action either by accident or under the foolish belief that they can "keep the outcome under control".

Time is running out to demand and obtain justice folks. America's clock is literally ticking towards zero.

And here's a link to the discussion that followed this Ticker.

On Hyperinflation in forum [Ticker]

I'm in the camp that believes that government will not allow prolonged deflation and will use any means possible to reflate and likely tip us into high if not hyper-inflation, and when I say "any means" that could include, say, emergency powers to prevent publication of certain statistics, moving any "goalpost" necessary in order to achieve a desired outcome; anything, in fact.

Having said that, I also have great respect for KD's analyses..........

but what does KD think will happen if deflation takes hold? Point one I think is that you have to remember that wages are prices - they will rise with inflation, there is no reason to think otherwise. If inflation kicks in, companies are getting more for their goods, ergo they can afford to pay their staff more. Its nonsense to suggest otherwise.

let's imagine a similar thought experiment for sustained deflation in a country massively in debt both personally and at the state/federal levels, think it through. Banks going under? that hasn't even started yet. Personal bankruptcies, State, federal, muni insolvencies - the outcome would be far, far worse.

The first article you posted made a lot more sense to me - they want to inflate, the must inflate, they can inflate and they will inflate.

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By way of balance, here is one of KD's Tickers on hyperinflation and why he is rabidly against the possibility.

On "Hyperinflation"

Let's put this to rest right here and now.

"Hyperinflation", or even "Serious Inflation" (similar to what we had in the 1970s) is impossible without a means to transmit the brise in prices into wages.

In today's United States that simply cannot happen for two reasons:

The union representation of workers has been eviscerated due to their own idiocy over the previous thirty years. In effect, they have no power to impact economic or labor policy - no matter what Gettlefinger thinks.

Outsourcing of work to China, India, Mexico and other nations makes wage demands impossible for American workers to enforce. Such demands simply result in the loss of the job to overseas workers.

As a consequence a hyper-inflationary or even seriously-inflationary spiral is impossible to sustain.

I'm in the camp that believes that government will not allow prolonged deflation and will use any means possible to reflate and likely tip us into high if not hyper-inflation, and when I say "any means" that could include, say, emergency powers to prevent publication of certain statistics, moving any "goalpost" necessary in order to achieve a desired outcome; anything, in fact.

Having said that, I also have great respect for KD's analyses..........

I have no doubt they want inflation, maybe they even want high inflation as a way to quickly reduce the comparatively high levels of debt. But to me wage inflation is the key. As much as I think of ways in which wage inflation could take off in our globalised economy, protectionism seems the only possible way. A return to protectionism means eventually a lowering of our living standards as more of your income would be spent buying the british made equivalent of imported tat, hence lower disposable income for luxuries/holidays. This would be as unpopular as wages not keeping up with general inflation, and would eventually lead to a breakdown in order, rioting etc. This is obviously not an outcome that's wanted and is as equally unwanted as deflation.

There may be room for a short blast of high inflation without the corresponsing wage inflation (i.e. 7% RPI for 2 years with wage inflation 3-4%) wouldn't affect living standards too much, it would cut out some of the luxuries and wastage we have (wasted food, clothes thrown away for no reason, new tele bought not because the old one is broken, but because you want a new one). Again though, this doesn't increase our ability enough to repay our massive debts with the corresponding wage inflation, maybe some import restrictions may help boost our wages, but once you start down that road, a trade war is the only result.

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I have no doubt they want inflation, maybe they even want high inflation as a way to quickly reduce the comparatively high levels of debt. But to me wage inflation is the key. As much as I think of ways in which wage inflation could take off in our globalised economy, protectionism seems the only possible way. A return to protectionism means eventually a lowering of our living standards as more of your income would be spent buying the british made equivalent of imported tat, hence lower disposable income for luxuries/holidays. This would be as unpopular as wages not keeping up with general inflation, and would eventually lead to a breakdown in order, rioting etc. This is obviously not an outcome that's wanted and is as equally unwanted as deflation.

There may be room for a short blast of high inflation without the corresponsing wage inflation (i.e. 7% RPI for 2 years with wage inflation 3-4%) wouldn't affect living standards too much, it would cut out some of the luxuries and wastage we have (wasted food, clothes thrown away for no reason, new tele bought not because the old one is broken, but because you want a new one). Again though, this doesn't increase our ability enough to repay our massive debts with the corresponding wage inflation, maybe some import restrictions may help boost our wages, but once you start down that road, a trade war is the only result.

the other possibility - given the unlikely event that monetary inflation seeps into the price of everything except labour - is that our standard of living drops, perhaps by a lot. By this I mean we can afford to buy less, not necessarily that life will be significantly worse. This possibility also seems to be discounted by KD. Does he really think the Americans would revolt because they couldn't afford imported electronics any more? What will they do once they seize the white house?

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but what does KD think will happen if deflation takes hold? Point one I think is that you have to remember that wages are prices - they will rise with inflation, there is no reason to think otherwise. If inflation kicks in, companies are getting more for their goods, ergo they can afford to pay their staff more. Its nonsense to suggest otherwise.

let's imagine a similar thought experiment for sustained deflation in a country massively in debt both personally and at the state/federal levels, think it through. Banks going under? that hasn't even started yet. Personal bankruptcies, State, federal, muni insolvencies - the outcome would be far, far worse.

The first article you posted made a lot more sense to me - they want to inflate, the must inflate, they can inflate and they will inflate.

You make a good point - wages ARE prices - the price of labour. To continue that thought, if wages don't spark inflation, what does? I believe it is a loss of confidence in the currency that occurs BEFORE the price of labour begins to chase the price of commodities. In other words inflation is the symptom of loss of confidence in the currency and not the cause of it. Thereafter it becomes a self-feeding spiral as cash is dumped increasingly fast in favour of hard assets, which causes an acceleration in the velocity of money and upward pressure on the price of hard assets.

So what sparks off the loss of confidence that produces this tipping point? A belief that it is better to buy today since tomorrow the commodity will be more expensive. This, in turn, could be set off when, for instance, it dawns on Joe Public that the recent devaluation in sterling will make imported goods much more expensive. That could occur quite early in 2009. And as the original article proposes, shortage of cash due to deflationary pressures does not equate to NO cash to purchase necessities. Thus even those who do not have surplus cash could spark inflation through loss of confidence in the currency by purchasing sooner, rather than later, those necessities.

It is interesting to note that time is an important factor in hyperinflationary events. As the loss of confidence in a currency grows so people offload cash faster in a self-feeding spiral that accelerates until money loses value by the second and must therefore be spent immediately. But this acceleration starts with just pulling forward the purchase of, say, imported white goods because Joe Public worked out that in six months time they would cost more. Then such pulling forward of purchases could extend to imported foods with a long shelf-life. At the beginning of the inflationary spiral the time differentials in terms of when a purchase would have been made versus when it is made due to fear of rising prices of imports would be imperceptible and unmeasurable since no-one apart from the individual making the purchase would know by how many months, weeks, days, the purchase had been brought forward. However, as this pulling forward of purchases gathers exponents (people) and momentum, the time differential decreases and the effects are magnified - a bit like the formation of a vortex. So inflation could very much start on the fringes and be sparked by J6P as he seeks to convert the value of his labour into essential goods at the best possible exchange rate relative to his understanding of the future price of these goods - especially imports which is where the behaviour will first be manifest since it is there that price rised due to the devauation of sterling will be first and most keenly noticed by J6P.

So it would start on the fringes but could quickly move central stage.

Sorry if this sounds a bit muddled - I'm trying to reach for something that I only half grasp and which I am finding hard to articulate. Nor am I putting this forward as definitive; I am simply testing opinions.

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the other possibility - given the unlikely event that monetary inflation seeps into the price of everything except labour - is that our standard of living drops, perhaps by a lot. By this I mean we can afford to buy less, not necessarily that life will be significantly worse.

Rising prices does mean rising wages. If one company puts it's price up, it opens an opporturnity for another company to enter the market and compete with it at the lower price. Unless you have a shortage of labour (which we don't - in fact we're going to have the opposite a growing surplus) prices won't automatically rise by the same ratio. Rising input costs for a company also leads to reduction in profit margins, as you tend to lag putting your prices up to avoid losing customers, again lower profits does not easily transmute into higher wages.

Eventually wages will have to rise as people's relative income and standard of living decreases to a level that you're not prepared to work anymore for, then the business owner will take a view on whether they can raising wages or just call it a day. Rising prices make it very hard to budget and predict future growth, people will tend to not start new ventures because of the uncertainty.

This possibility also seems to be discounted by KD. Does he really think the Americans would revolt because they couldn't afford imported electronics any more? What will they do once they seize the white house?

It's a bit more than just imported electronics, the whole balance of your spending would change. If you think back to the 70's 80's, most televisions were rented because they were the equivalent on 2 months wages to buy. People had 1 holiday a year, most sepnding went on food and clothes. A return towards this would make the government in charge very unpopular and not re-electable. Riots and civil disturbances always seem to happen when you get localised high unemployment or a lower standard of living. I do agree though if the mob ever made it to the white house they wouldn't know what to do next. I think the key here though is whether the army sympathises or supports the cause. Politicians only have power all the time the army supports them.

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the other possibility - given the unlikely event that monetary inflation seeps into the price of everything except labour - is that our standard of living drops, perhaps by a lot. By this I mean we can afford to buy less, not necessarily that life will be significantly worse. This possibility also seems to be discounted by KD. Does he really think the Americans would revolt because they couldn't afford imported electronics any more? What will they do once they seize the white house?

There is almost an equation here - wages don't have to completely keep up with inflation is a significant chunk of take home pay is used to service debt. As long as the differential between net pay and debt service increases at the inflation rate, people will see a constant standard of living even as their relative wages decline. This will also be noticable outside of the country. For instance, if my mortgage was written off, I could take a 30% real terms pay cut and still be better off.

Of course, those without large debts will get stomped.

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If you think back to the 70's 80's, most televisions were rented because they were the equivalent on 2 months wages to buy. People had 1 holiday a year, most sepnding went on food and clothes. A return towards this would make the government in charge very unpopular and not re-electable.

That jogged my memory. I remember my aunt used to rent a radio in the early 70's :lol:

Had a contract that had been ongoing since the early 60s. Think it was from Radio Rentals or Granada.

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Rising prices does mean rising wages. If one company puts it's price up, it opens an opporturnity for another company to enter the market and compete with it at the lower price. Unless you have a shortage of labour (which we don't - in fact we're going to have the opposite a growing surplus) prices won't automatically rise by the same ratio. Rising input costs for a company also leads to reduction in profit margins, as you tend to lag putting your prices up to avoid losing customers, again lower profits does not easily transmute into higher wages.

Eventually wages will have to rise as people's relative income and standard of living decreases to a level that you're not prepared to work anymore for, then the business owner will take a view on whether they can raising wages or just call it a day. Rising prices make it very hard to budget and predict future growth, people will tend to not start new ventures because of the uncertainty.

It's a bit more than just imported electronics, the whole balance of your spending would change. If you think back to the 70's 80's, most televisions were rented because they were the equivalent on 2 months wages to buy. People had 1 holiday a year, most sepnding went on food and clothes. A return towards this would make the government in charge very unpopular and not re-electable. Riots and civil disturbances always seem to happen when you get localised high unemployment or a lower standard of living. I do agree though if the mob ever made it to the white house they wouldn't know what to do next. I think the key here though is whether the army sympathises or supports the cause. Politicians only have power all the time the army supports them.

Exactly - we have come a long way and have a long way to fall in some respects, but you could also see that as a big buffer between todays standard of living and outright starvation. People are extremely adaptable, and accommodate to new situations more quickly and completely than people tend to believe (even and perhaps especially of themselves). There have been many studies on this at the extreme end of the scale - eg becoming paraplegic etc. At the end of the day we will adapt to a lower standard of living if that is what happens, and just get on with it - despite the what the naysayers will have you believe. Where you will see unrest is if we go hungry - civilisation is 3 square meals from anarchy and all that. The real cause of civil upset if perceived inequalities in society, especially when they are in your face, so if you come out of what is about to unfold rather well, you may want to keep it to yourself.

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I quite often notice comments that state that because of weak unionisation wage inflation cant happen anymore.

But with Ben Bernanke revving up his helicopter rotors I don't think we need to rely on the unions. If he tries to reflate then money will flood out to be available to go into wage packets.

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Exactly - we have come a long way and have a long way to fall in some respects, but you could also see that as a big buffer between todays standard of living and outright starvation. People are extremely adaptable, and accommodate to new situations more quickly and completely than people tend to believe (even and perhaps especially of themselves).

I don't know what effect this may be generational. My parent's generation made do, they had seen rationing, the last phases of the war etc, these will make do and mend, my generation having seen the 70's as a kid could go back to that level, with protest, but not backs to the wall style riots. There's a whole new generation growing up (80's onwards) that have only ever seen cheap imports and a high and wasteful standard of living, and it's these that I see the problems coming from.

The real cause of civil upset if perceived inequalities in society, especially when they are in your face, so if you come out of what is about to unfold rather well, you may want to keep it to yourself.

I can't disagree with this. It's how the inequalities arise that are about to be tested, if living standards start falling some areas will no doubt fall faster than others.

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I quite often notice comments that state that because of weak unionisation wage inflation cant happen anymore.

But with Ben Bernanke revving up his helicopter rotors I don't think we need to rely on the unions. If he tries to reflate then money will flood out to be available to go into wage packets.

Agreed.

But what I'm trying to explore is the idea that inflation is sparked BEFORE wages begin to rise. Wage rises are an effect of inflation, not the cause of it.

Therefore, I'm looking elsewhere for the first signs of inflation and I think it will be manifested in the bringing forward of the purchase of imported goods. At the moment there is surplus stock and retailers are trying to offload inventories causing price falls. However, once these have been purged from the system, the demand for imported goods will not evaporate entirely although it will decrease. And new imported stock will be a lot more expensive because of the devaluation of sterling.

I wonder, for instance, whether the summer holidays could be the trigger that alerts J6P firsthand to the effects of the fall in the value of sterling. Sometimes such events are not truly understood until the effects are personally felt in the pocket. When J6P takes his annual holiday to Benidorm, he is going to be badly hurt in his pocket when he tries to buy his lager and chips in Euros. At that point there could be a mass awakening to the potential effects of a devalued pound which could motivate J6P to bring forward certain essential purchases (say, a replacement washing machine or refrigerator which will still be considered essentials in our culture for at least the first few years of a financial crisis) as tomorrow they will be more expensive. This is the first sign of a reversal of the current trendto delay purchases because tomorrow they will be cheaper.

It is this bringing forward of purchases that will ignite inflation since it will cause an upsurge in demand and thus a relative shortage of goods which will cause a rise in prices to add to the price rises caused by devaluation of sterling. The combined price rises will cause more people to bring forward purchases thus reinforcing the spiral.

And only then will wage rises kick in.....

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