by deejayoh » Wed Jul 16, 2008 9:36 am
The most common definition I see for inflation is a generalized increase in prices - which includes both goods and wages. If I recall correctly from my econ classes, it is typically associated with increases in the money supply.
So what is happening today? We have a situation where prices are going up on a limited set of goods, but wages are flat to down. In the seventies you had CPI going up at 2 digit rate and wages matching it. Remember Wage and Price controls in the 70's? It was both! And the price of housing - the biggest item on consumer budgets? Falling at unprecedented rates. It doesn't seem to be a "generalized increased in prices" at all. So the argument that you should buy a house because you'll be able to pay back your mortgage in inflated dollars just doesn't hold water when your wages aren't increasing. If you want to paint the extreme case of this, consider a real estate agent buying property. Are their wages are going up? (hint: they're paid based on a straight percentage of a deflating asset class, and volumes are down)
And what is happening to money supply? Is it increasing? Based on what I've read, I don't think so. The fed has tried - through the discount rate - to increase lending which in turn increases money supply. But it hasn't worked. No one is lending anything. They are too scared. So velocity of money has dropped which decreases the money supply. Does it offset the hundreds of billions the Fed has dropped in through the alphabet soup programs? I don't know. But the mere fact that the fed is dropping all this money into the system says they must be worried about velocity.
But back to prices and inflation. IMO, prices are rising for two reasons:
1) foreign goods are getting more expensive because of the fall in the value of our currency. This is not inflation. You want lower prices? Buy domestic goods. Can't find them? Sorry. The fact that we don't happen to make anything any more is the result of years of our eroding competitive advantage - but it's not sudden inflation.
2) increased demand relative to supply of commodities. Again, this is not inflation. It's basic economics. Demand increases, while supply stays flat. Prices increase. These commodities are going into all sorts of stuff you buy and driving prices up. But again, not inflation.
All this doesn't add up to inflation to me. It adds up to paying the piper for years of mismanagement with the net result that we're all going to feel a lot poorer. When I see high interest rates, and wages rising _i'll believe we are in an inflationary spiral. But right now it seems like a convenient distraction when the reality is were pretty screwed.