Wednesday, September 10, 2014

Who Wants Inflation?

Today it occurred to me after a recent spate of posts regarding inflation, that something about housing and healthcare appear to be different from the rest of us. they "like" inflation? Okay that's a little sarcastic, betcha! Of course those special interests don't need to publicly "fess up", for it's not difficult to see where their demands only serve to dampen other existing demands in the marketplace. Still, their claims on the economy affect overall spending capacity. Growth is limited in part to their terms of definition, even as the rest of the economy is expected to remain on indeterminate hold.

In this context, one might say that real estate and healthcare interests not only "want" inflation, they'll continue to get it. But what a paradox this sets up for everyone else, as finance structures remain heavily weighted with these existing realities.

This post mostly serves as a way to wrap my head around some issues which have puzzled me for a while. Why should the positional advantages of these non tradable sectors continue to stand in the way of progress? To what degree will they continue to affect political realities regarding aggregate spending and the potential of income or wage targets? Only consider that Americans expect to continue to spend more on housing and healthcare as wages remain flat. How does this square with the future trajectory of consumption patterns, particularly as populations seek greater "person to robot" representation in an automated economy?

Governments continue to throttle back growth, in part because no one is in a position to implement needed changes in supply side structures which could lead to innovation and progress on more balanced and inclusive terms. Such implementation needs to take place across a wide spectrum. In the meantime, economists are realizing that further monetary printing has fewer advocates by the day. David Glasner noted in a recent post that economists have viewed inflation skeptically for quite some time. Err,"warm fuzzies" over a "reasonable" number? Oh well. Keynes favored price stabilization. While Ralph Hawtrey favored monetary stimulus as necessary to overcome deflation, he
favored a monetary regime aiming at stable money wages, a regime that over the long term would generate a gradually falling output price level.  
Yes, but...but...Glasner continues:
So I fail to see why anyone should be surprised that a pro-inflationary policy would be a tough sell even when unemployment is high. 
Small wonder that few want to use inflation to tend to unemployment when the correlation between monetary policy and employment gains is not strong enough, to begin with. However, this issue is not only problematic in the sense of a still declining labor force participation rate. It is also problematic for the idea of aggregate spending capacity at the very moment when wealth continues to be defined outside the perimeters of personal engagement in the marketplace. These supply side structures need to be closely reexamined, for they continue to place roadblocks in the way of future growth.

Only consider what Giles Wilkes wrote, as ramifications of the inflation debate started to sink in:
But just about every section of society can be brought to campaign against it.
And the title of his post gives a clue to the problem: Is weak demand a conspiracy of the scheming rich? This is a good way to think about the problem, for it's not a conspiracy, so much as a strong desire to simply keep things the way they are. Demand - while it is held back in monetary terms, is particularly held back in terms of the marketplace which special interests actually want.

This tight definition of marketplace conditions is impossible to maintain in the long run. Spillovers include everything from more homelessness and lower life expectancy to increased servitude and less societal trust. What's more, this tight hold on demand through supply side limitations, is proving increasingly impractical in the short run. The inflation which is held back by central bankers, remains in place in the sectors which have refused to free knowledge use for the masses or allow them to live on more innovative terms.

While healthcare and housing in their present incarnations continue to thrive, municipalities are increasingly stymied by their demands - both directly and indirectly through the needs of pensions and budgeting for retirement. As a result, local governments in the U.S. are finally becoming cannibalistic, to the point of allowing their police forces to confiscate money and property from their own citizens - particularly the poor - in an effort just to keep up with municipal bills. Many institutions struggle to maintain the payments on building structures of which no one has allowed substantial innovation for centuries.

Even as tradable goods continue on the trajectory which should generate a gradually falling price level over time, local economies have continued to move in the precise opposite direction with services and asset formations, as they have failed to incorporate either the wealth capacity or needs of the citizens in their midst. How can there be any hope of an income anchor to realistic production norms given these conditions? Economists of every stripe have been fooled by the needless runaway aspects of non tradable sectors. Hence today's cap on inflation continues to impart heavy damage to the productive capacity of economies everywhere.

Behind the resistance to inflation in aggregate, is especially the resistance to the new wealth capacity of the present. What's more, this is a capacity which now exists in the potential time value of citizens, the digital realm, and the innovative product that could generate living conditions within the affordability range of all who would be allowed to utilize these gains.

Indeed, were populations to embrace innovation and comprehensive knowledge use, inflation would not even be needed to keep progress on track and a nominal target would become a highly reasonable option. If non tradable goods were transformed, tracked and targeted alongside the capacity of tradable goods, a production norm would also be possible.

In the meantime, substantial "inflation" will continue to be needed indefinitely, as monetary policy is delivered to the profits of healthcare and housing through the cover of night inflation targeting. So long as these special interests get their way in keeping things the same, a cap on inflation only means fewer musical chairs, every time the music stops. Who wants "inflation" all to themselves, even if they have to decrease aggregate demand in order to reap the rewards? I think we know.

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