Saturday, February 17, 2018

Repeat until its fact

Not so fast: Inflation may take a while to stir

It is -so- often repeated that low unemployment, over-heating, causes inflation. Clearly though this is rubbish, no company can pay more in real terms than the real output of the worker without going bust. What low unemployment shows up is too much lending (i.e. new money credit expansion) when there aren't enough workers. As in, wage inflation is a monetary phenomenon, too much money, and -not- a low unemployment phenomenon. Wage inflation is the revelation of a balls up by the central banks with too loose monetary conditions and takes 4 years too put the toothpaste back in.

Posted by stillthinking @ 08:08 PM (3 views)
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3 thoughts on “Repeat until its fact

  • @stillthinking

    “As in, wage inflation is a monetary phenomenon, too much money, and -not- a low unemployment phenomenon. Wage inflation is the revelation of a balls up by the central banks with too loose monetary conditions and takes 4 years too put the toothpaste back in.”

    I offer an example of wage inflation that has little to do with monetary policy:
    No more low cost: East Europe goes up in the world

    What worries me is that we have had high inflation – just not in things that are fairly represented in indices such as property prices.
    The Mystery Of The “Missing Inflation” Solved, And Why The US Housing Crisis Is About To Get Much Worse

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  • Think over 650 items in inflation basket but some housing inflation is excluded as are other things

    I believe we have had big bouts of inflation

    Does anyone know how many items and numbers included in basket in previous decades as I believe only essentials should be included?

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  • Take a look at monetary measures M2 and M3 in the UK, for inflationay indicators.

    Notice the steep increase in the rate of expansion in the mid 2000s (most of that inflation went into house prices), and the steep expansion after the 2008 crisis due to QE (this caused some rather uncomfortable consumer price increases of nearly 5% until about 2012 (I remember oil and fuel prices being particularly uncomfortable).

    From about 2010 to 2016 both these measures bounced along sideways, with consumer prices dropping off after 2012 (particularly with oil prices falling).

    Since 2016 the increase in the rate of M2 and M3 has begun to pick up again, and the uptick in consumer prices has appeared to follow these increases.

    I’m pretty sure the consumer price numbers I’m looking at do not include housing, which skews the numbers lower than they otherwise would be.

    Given where we are in the credit cycle I would say there’s possibly another year or so (at most) before we hit another crisis point. What the monetary and fiscal response from the government and BOE will be this time round, is anyone’s guess.

    I’m erring on the side of more of the same (now the money printing genie is out the bottle and governments think they can get away with it) i.e. a bigger program of monetary expansion (because the bubble in asset prices is even higher with even greater debts under pinning it), with some rather uncomfortable increases in consumer prices to follow (I’m guessing nearer 10% this time).

    The US price increases could well be worse (bearing in mind they are the reserve currency and some of their inflation gets exported along with price increases), monetary expansion has not stopped in the US, and hit an inflection point in about 2010, with M2 nearly doubling in 8 years.

    N.B. If you want to see what a hyperinflation looks like, take a look at monetary measures for Venezuela and look at the exponential curve in monetary growth (inflation has always been high in Venezuela, but the money supply can be observed doubling every 4 years from 1999, then every 2 years from about 2003, then doubling every year from about 2006, then every six months, and so on, i.e. the doubling time halving as the government lost control both fiscally and monetarily).

    For anyone that thinks Chavez had nothing to do with Venezuela’s economic woes, with it solely down to a drop in oil prices, or the mismanagement of Maduro, it’s simply not true, because the government in Venezuela appear to really have lost control of money supply from about 2006 onward (after which oil prices increased significantly, including 2010-2012, where oil was over $100 dollars a barrel. That is to say even during period from 2010 to 2012 where oil prices were over $100 dollars a barrel, and which Venezuela should have been able to take advantage of, their economy, according to monetary expansion data, was deeply entrenched in crisis).

    Finally, Keep an eye out for similar patterns in the UK in terms of the monetary supply data.

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