tag:blogger.com,1999:blog-1814467024485189561.post5754447825299483504..comments2024-03-28T00:54:02.951-07:00Comments on Euronomist<br>: A (Small) Treatise on InflationEuronomisthttp://www.blogger.com/profile/09172739717345263308noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-1814467024485189561.post-7242729920129716952013-06-12T01:29:52.294-07:002013-06-12T01:29:52.294-07:00It does not matter whether costs are falling. Let&...It does not matter whether costs are falling. Let's say you are the middle man. You buy at 10, and at the time of selling the price is 9. It does not really matter if costs have fallen by that time since you have already paid the price for it. If I buy a good at 10 and tomorrow it is going to worth 9 what difference does it make to me, the person who produced it today if I can make the same good for 8.5 today? I still have an inventory worth of 10 and that represents a loss to me. It does not really matter whether it is a finished good or not. I either produce now and face a loss tomorrow or I postpone production indefinitely. Even if the profit margin is positive if it is severely shrunk then the incentive to produce is lowered. When we have inflation, the expectation of greater profits margins is shared.<br /><br />Profits are high but inflation is not moving neither upwards nor stabilizing. I 'll refer you to Frances's <a href="http://coppolacomment.blogspot.com/2013/05/inflation-deflation-and-qe.html" rel="nofollow">post</a>. The first graph, derived from FT Alphaville depicts the current inflation trend in the US. Besides, let us not forget that there are frictions in the markets. Corporations need to have sustainable higher profits for employees to request higher wages. Having 2-3 quarters of high profits when the economy is not fully recovered does not really count. That is why people cannot effectively bargain at the time.<br /><br />In addition you mention that unemployment should be low enough. What lowers unemployment: basically demand for labour which is directly linked with demand for goods and services. What causes a decrease in unemployment? Expectations that inflation will be "high" over the next periods.<br /><br />Shortage of deposits is different than shortage of money. And do not forget that loans can (and do) create deposits.<br /><br />"The price level will depend on the rate of future effective demand/consumption relative to the increased productive capacity that is derived from past investment". You are making the point that future consumption is not affected by current consumption, which is wrong. It is precisely because future consumption is affected by the current one which makes expectations have some effect. Relative and aggregate changes are always mixed up that's what makes it interesting!<br /><br />I got the point on interest rates from Keynes to be honest, although I do not know where Werner got his! The argument is the same though yes.<br /><br />On population: this is exactly the point. If propensity is the same as now then reduced population means less demand. Propensity to consume has to follow an upwards trend if population is falling or demand has to be supported through increased spending/money supply (here is where helicopter drops would be worthwhile).Euronomisthttps://www.blogger.com/profile/09172739717345263308noreply@blogger.comtag:blogger.com,1999:blog-1814467024485189561.post-80285051061737264902013-06-12T00:50:07.496-07:002013-06-12T00:50:07.496-07:00Yes that is one of the points although it should b...Yes that is one of the points although it should be specified that this may be countered off by increased government spending and increases in the money supply. Nevertheless, how much further down the road these increases can take us is, to me at least, unknown.<br /><br />It is a political response. However, the response is increasing money supply to a degree much higher than the increase in goods/services. Unless we are talking about a natural disaster, it is relatively difficult for productivity to fall at a point where it produces a 50% per month inflation rate (without the assistance of the money stock that is). In contrast, money supply can be manipulated with more ease. If you combine the two, the outcome could be disastrousEuronomisthttps://www.blogger.com/profile/09172739717345263308noreply@blogger.comtag:blogger.com,1999:blog-1814467024485189561.post-91958188190793860282013-06-11T09:48:00.725-07:002013-06-11T09:48:00.725-07:00One last point dealing with population growth.
Th...One last point dealing with population growth.<br /><br />The demand driven side of the price level would depend on the future global populations propensity and ability to consume relative to the current population. If the population declines or slows, an increase in consumption per person could off set this. Furthermore, given global inequality, there are plenty of members of the global population whose consumption habits could be elevated to make up for potential shortfalls in demand. <br /><br />I think it more likely that despite this, global supply will outstrip global demand. That is a great problem to have as long as we create a monetary and financial system that allows for this to happen. Rafael Barbierihttps://www.blogger.com/profile/01578692617118123417noreply@blogger.comtag:blogger.com,1999:blog-1814467024485189561.post-55728875128406342792013-06-11T08:42:37.770-07:002013-06-11T08:42:37.770-07:00"Now, imagine if someone told you that we wou..."Now, imagine if someone told you that we would have deflation in the economy, meaning that if you buy the good at €10 you would have to sell it at €9 or less because money would be scarcer and each unit of money would be worth more."<br /><br />Yes, this would be a loss in that moment in time. However, it would depend on the rate of change of input costs vs. rate of change in price. If input costs are declining faster than price, at some point a positive profit margin will occur which incentives selling.<br /><br />Also, it depends on why this person is buying a good in the first place. Is this good a finished good? If that is the case, even during times of aggregate price inflation, buyers purchase finish goods in order to use them temporarily only to sell them later at a lower price. I think your example conflates trading in finished goods across time with the incentives to conduct production for profit. <br /><br />Furthermore, if aggregate prices are declining where profit margins are falling but still positive, businesses can always expand quantity by winning market share. This would not be viable in a macro sense. <br /><br />"When experiencing inflation, workers see their employers receive higher profits and thus have the incentive to bargain for higher wages."<br /><br />Disagree and we have proof in the US at that moment that this is not the case. Corporate profits are at near all time highs and yet real wages or labor share of gdp are falling. Workers can demand higher wages when there is greater demand for their services. Workers broadly can only demand increases when unemployment is low enough where they can realistically leave their current employer for another job if their wage demands are not met. <br /><br />"Thus, when demand is on the rise, it will be more difficult for supply to keep up with it thus making prices rise (this, of course, depends on how fast demand in growing and how fast the economy can adapt to growing demand)."<br /><br />This depends on the change in technology/innovation in production especially when considering the efficient use of resources. Perhaps some resources will no longer be needed at some point in the future for all when know. <br /><br /><br />"It is infeasible to distinguish what causes prices to increase and by what extent, yet the reduction in prices can be focused just on lower demand or a deliberate shortage of money in the economy. As the latter is not a case which has taken place anywhere, and is doubtful that it will ever appear, focus should be shifted to the first case."<br /><br />Lower demand and the shortage of deposits are not mutually exclusive considering lower aggregate demand can be caused by a shortage of means of trade aka deposits/money.<br /><br />"In addition, what is also increased is consumption and inflation in the future. When investment is higher, it means that unemployment will fall and income will rise. This, as we have seen before, means that the level of prices will rise in the periods to come. Thus, although inflation is not currently increased by expectations, future inflation is. "<br /><br />Again this depends. If investment is higher, this would suggest that at some point in the future productive capacity will be higher. Therefore the price level will depend on the rate of future effective demand/consumption relative to the increased productive capacity that is derived from past investment. <br /><br />Overall, I think the post is effective, but at time mixes relative vs aggregate changes in demand, supply, and price. This makes it difficult to discuss the effects of declining overall prices where relative prices are changing by different degrees.<br /><br />"They fluctuate because the business cycle fluctuates and not because of manipulation. "<br /><br />This is an important point to make. Richard Werner does a great job of explaining the central bank reaction function, interest rates, and the business cycle. He makes the same point as you did here I believe. <br /><br />http://www.youtube.com/watch?v=qfX_rNOeTXwRafael Barbierihttps://www.blogger.com/profile/01578692617118123417noreply@blogger.comtag:blogger.com,1999:blog-1814467024485189561.post-15300868022059324522013-06-11T03:53:52.442-07:002013-06-11T03:53:52.442-07:00If I understand your argument correctly, you are i...If I understand your argument correctly, you are in effect saying that falling birth rates means that inflation over the longer term is not only not the risk we have been led to believe that it is, it is nigh on impossible. If the long-term trend is deflation because there are simply fewer people to absorb production, that carries serious implications for economic growth in the future.<br /><br />I disagree with you that hyperinflation is a monetary phenomenon one, by the way. It's primarily a political response to a seriously adverse productivity shock. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.com