Is the way central banks view inflation simply wrong?

Discussion in 'Economics' started by morganist, Oct 14, 2012.

  1. Seems the only inflation Bernanke considers worth of consideration is the 70's type of a "wages and prices spiral".

    We're likely to NEVER have that again... low wages from 3rd world countries will always be competition going forward. However, we're likely to have many of the things we buy run rampant with inflation thanks to the money pump.

  2. Do you see my point though that there is more than one force that impacts inflation and that the observed relationship between inflation and interest rates has led to one way of thinking that may be false.

    Also the main factor will be foreign goods and the ability to purchase them due to the impact money supply has on exchange rates?
  3. Exactly the assumption from the 70's was the inflation that the excess money created was as a result of too much money chasing too few goods. It could be possible to argue the increase in money could have led to a decreased currency value impacting the ability to purchase goods from abroad pushing prices up creating inflation.

    Do you see why the true mechanism that created inflation could have been misinterpreted and a false assumption about money supply levels and the relationship it has was inflation was created?

    Could it be argued the relationship seen with interest rates and inflation is in actual fact the relationship between money supply and exchange rates and not too much money chasing too few goods in the domestic economy. If that is the case the idea that a certain level of money supply will be able to control inflation is completely wrong.
  4. IMO, Inflation is related to the increase/decrease in money value compared to the ratio of real goods and services of the economy. Many people (including me) use terms that are not precisely defined and so understanding each other's points is more difficult. Economists encourage this confusion as they work their "magic".

    The FED controls USD money supply (the base currency) but an issue is that WORLD currencies to WORLD output is now the key issue (IMO) since Aug 15, 1971.

    Inflation/deflation can also be hidden in currency exchanges as well if you follow my thinking. I believe that the three main currencies ratios are controlled to attempt to set world inflation but it is not working well. Someone must lose - all politicians and countries can't win in the current scenario

    You are likely aware of the Triffin Dilemma - an issue arising from all this. IMO, the FED can't be successful controlling a basket of currencies (even as a base currency) when differing political agendas affect currency inter-relationships.

    The salient issue of trouble in 2008 was actually the backup of world trade when the international exchange system was close to collapse because of unknowable counterparty international payment risk. All the other factors come from this trouble in rebalancing payment for world trade IMO.
  5. Yes ... dead wrong and they know it. Probably fairer to say the way they report on inflation to the public is misleading because they know the reality all to well.
  6. vicirek


    Low interest rates equals inflation meaning that there is oversupply of money - money is cheap. Inflation is now. Everybody is looking at it and not many see it. When Central Banks start talking about rising inflation the inflationary phase is over and it is too late for an average saver - they lost portion of their savings, retirement fund etc. already. The trick is to keep people confused what it really means to be able to inflate as long as possible.
  7. Exactly right. Just look at this site as an example. We've had hundreds of threads discussing inflation and yet there is no consensus on what constitutes "inflation". Even worse, nobody can agree on the manner in which it is currently measured or "should be measured".

    Before we even get thru that part of the discussion, there is also that nagging problem of what "type of inflation" the Fed is concerned with..i.e. one of the above posts mentioned "wage inflation" vs consumer goods inflation, etc...Rightfully, he argued that wage inflation is probably dead (although not in the public sector (different topic)). Since so many of the Fed apologists on here only concern themselves with wage inflation, they seem non-plussed when food, energy, healthcare, tuition, etc make double digit gains YOY for several years running.
  8. Relative labor cost is another factor. When a country has over-priced labor relative to their world compared productivity, higher unemployment rates are sure to follow eventually. COLA clauses are attempt to build in inflation in wage and ignore the basic cause - over paid labor.

    As unskilled labor becomes cheaper partly due to smarter robotic workers (no COLA) and overseas production, and the army of unskilled grows due to poor teaching quality, there are more poor. However, in a consumer economy, an increase in the poor leads to less purchasing and relative GDP, leads to more unemployed, leads to ....

    I have heard that an invisible hand will simply re-adjust to employ workers in a new area. But not if there is no consumer demand. I guess the plan is to employ everyone in the government eventually. Shades of 1984!
  9. vicirek


    This is exactly what confuses people - price of goods, price of labor, interest rates etc. Inflation concept is simple. Too simple and therefore scary for policy makers and they go great lengths to confuse everybody. Many buy into convoluted concepts created by "economists".

    Inflation is stealing by creating money out of thin air (economy not expanding, stagnant) and paying with this diluted currency for goods, services and past obligations that were priced at different monetary base. Another words money creation outpaces economic output and savings rate by wide margin. It is strictly monetary concept and not economic. Economy just reacts to it.

    By the way inflationary money is causing economic decline because banks benefit first from this money flow and will not go and risk easy money that fell on their lap in real economy. They got it for storing and distributing government deficit (bonds) and from Ben with no effort just for having brass sign that says Bank which adds legitimacy to worthless paper called treasury bill.
    #10     Oct 15, 2012