That's really not true. We have a non-binding minimum wage in this country. In other words, the realized minimum wage for a vast majority of people is far above the required minimum wage. This is because people demand enough money to pay for their current lifestyle. Granted, there is a bit of a lag as prices must go up before pay increases, but that lag is less than a year. The working class are more greatly affacted by unemployment than inflation.
I'm not saying that the FED doesn't interfere too much. I'm just saying that our system is designed to support massive growth while at the same time hopefully avoiding crashes associated with massive growth. American mentality leans in favor of growth at the risk of big corrections.
Just about the ONLY reason deflation would occur would be as a natural correction to prior financial excess... historically preceded by reckless inflationary expansion... and that's what the Fed is up to right now... as were the Japanese.
I think true inflation (and by that I mean take the median person according to average income in the US and look at the dollar weighted prices of the product and services they consume) is higher than the official 2% or so rate. I'm not sure how much higher, but some large components seem to be increasing faster than that including housing, education, medical insurance, and gas. Admittedly there are some important categories such as information, computers, and electronic computer goods that appear to have declining prices. I would personally guess true inflation is closer to 4% than 2%, though I have to admit I haven't formally or quantitatively measured this so it could be wildly off the mark. Some economists believe true inflation is less than official inflation, for example. In any case, I think inflation -- and changes in inflationary expectations -- are important in the following scenarios. If inflation is unusually high or unusually low (however you define that), it can alter consumer and business behavior. It can cause very massive shifts in asset allocation, for example from stocks into real estate and gold, or from long term bonds into short term bonds, etc, or vice versa. The true damage is not just major asset allocation changes that are related mostly to the money supply as opposed to the rest of the economy, but also it can create many inefficiencies that reduce productivity -- and that is where the true impact on real wages comes from. This includes first and foremost higher transaction costs. Whether wheelbarrows full of money in extreme cases, or simply having to spend more time due to second guessing overall prices and their effect on your micro-level transactions, these are addition costs that increase the time and thus cost involved in commerce, without any benefit. Also, under stable money, it is difficult for businesses to hide lower relative productivity, as the different prices they charge have more accurate levels of measurement. However, when overall prices are fluctuating wildly (inflation or deflation), businesses are vastly more able to hide inefficiencies and blame them so to speak on the overall price movements. This allows unproductive companies a far greater chance at surviving, which reduces productivity (and thus real wage growth) compared to a system in which inefficient companies go bankrupt and lose market share over time to more efficient companies (new and existing). Yet another very important effect, involves the attempt to directly introduce new money supply into reducing bond interest rates. This can have the effect over time of encouraging consumption at the expense of savings and investment, leading to imbalances. The reverse imbalances are possible in the other direction as well. In other words, the direct implications of changes in money supply are not quite so bad, it is the related consequences of higher transaction costs and more inefficiency that are the real culprits for reducing productivity and thus real wage growth.
Make that, "in favor of INFLATION at the risk of big corrections, and I'll agree with you." (What passes for "growth" is actually largely inflation... and eventually all of us will pay dearly for it.)
I'm not talking about growth in the stock market. I agree that most of the run up we've had during the past few years is actually due to inflation. I'm talking about growth of business. But it is hard to get a read on growth when it is measured in dollars that are affected by inflation.
On the topic of inflation subsituting for growth. I recently had a bunch of people cheering to me that the S&P was at tech bubble highs so we were due for a correction. When adjusted for inflation and wage increases, the S&P should go easily above 1600, up to around 1700, before we are at tech bubble euphoric status. People need to realize that we haven't even recovered from the last market crash in buying power terms. In fact, if we argue that last time we were relatively stable was 1991-1995 before the big tech runup, S&P at just over 1500 is completely justified in terms of inflated dollar value.
That's EXACTLY right. It's difficult to know about "growth" because it's measured by the price of finished goods and services (which include the inflation component). The economy could be totally flat... that is, we produced the same amount of widgets and services as last year, but when measured by PRICES (which include inflation of the money supply).. PLUS we accept the Gummint's "official statement of the inflation rate" [read, LIES], the US could easily be in a recession and almost nobody could tell. We could have produced .5% FEWER goods and services and officially be in recession, but APPEAR to be in "growth" measured by inflated prices. Almost nobody would know for sure. (Gummint probably knows, but they can be counted to LIE about it for their own benefit, as usual.)
I tend to lean toward the opinion that it is too hard to carry out an extreme conspiracy to the effect that the G-ment knows what real growth is but we don't. Do they have an agenda? Sure, they want to stay in expansion mode. Is it possible to fudge the numbers that dramatically without anyone noticing? Not really, although they can pad them a bit.