[FoRK] Is Inflation really at 10%?
Bill Stoddard <
bill at wstoddard.com
> on >
Wed Dec 6 08:32:57 PST 2006
Simon Wistow wrote:
> Read this, don't know enough economics to comment on it, thought I'd
> throw it open to discussion.
> I mean money's /kind of/ like religion ... :)
Not everyone has the same definition of inflation. And most people
don't know that their definition of inflation is not the only definition
If you are really interested in the topic, dig into Mish blog archives:
Also Check out John Mauldin's "Outside the Box" article (link not
handy, google it). The part I post here is directly relevant to your
Volume 2 - Issue 46
August 7, 2006
The Invisible Hand's
by Louis-Vincent Gave
*3- The Third Piece of the Puzzle: Discontinuous Inflation*
The ever-optimists in us want to believe that, for any given problem,
the market, when left alone, will typically find a solution. The good
news is that the birth of the platform company model, and the trend
whereas Western companies say "we take the profits, you can have the
jobs" has been so recent, and yet so powerful at the same time, that
most governments have not had a chance to react to it (yet?). The market
has been left free to do what it does best: adjust to new realities.
Assuming that we are right in our statement above that "the rich keep on
getting richer". Then it follows that whatever the rich buy should be
going up in price much more rapidly than what poorer people buy (for
there will be more competition for the goods/services that rich people
buy). Incidentally, this has been one of the longest running themes of
GaveKal Research (Charles first started grumbling in 1999 that "it has
never been so expensive to be rich"!).
As Anatole wrote last summer: "At its simplest, therefore, the
disagreement over "true" inflation simply reflects people's tendency to
focus on prices that are rising and forget about the ones that are going
down. But the extent and persistence of the divergence between service
and goods prices in the past decade also suggests a less obvious and
more important story in three parts.
The first part of this story relates to China's entry into the global
economy. By becoming the workshop of the world, China has pushed down
the prices of all mass-produced manufactured goods. The virtually
limitless supply of cheap labour and capital in China, and the chronic
mis-allocations of capital will ensure that manufactured goods continue
to get cheaper, not only in Britain but around the world.
But the relentless downward pressure on manufactured prices from China
has resulted in a second effect which is less widely understood, even
among economists: cheap imports from China have actually pushed up the
prices of many goods and services which the Chinese cannot or do not
produce - either because they lack the resources (for example, oil) or
the legal infrastructure (financial ser vices) or simply because some
things cannot be traded (for example, housing, healthcare and education).
People who see China purely as a source of downward pressure on prices
forget that overall inflation in any economy is essentially determined
by the availability of money. If monetary policy is successfully run (as
it is in Britain) to produce an overall inflation rate of 2%, while the
prices of manufactured goods are persistently falling by 3 or 4%, prices
elsewhere in the economy must rise faster to maintain the 2% average
In this sense *the ever-cheaper consumer goods from China have created
more leeway for other prices in the world economy to go up.* This effect
has been particularly visible in the prices of goods and services which
the Chinese are ravenously consuming but cannot produce themselves - for
example oil, financial services and luxury property around the world.
Which brings us to the third, and most surprising, part of the inflation
story. As the prices of financial *services and luxury goods are driven
persistently higher, service-producing countries such as Britain get
richer relative to countries which specialize in manufacturing*. And
within Britain, the rich, who tend to work in high-end service
industries which are relatively unaffected by competition from Asia, get
richer, while the poor, who tend to work in industries more exposed to
cheap-labour competition, get relatively poorer. For the lucky bankers,
lawyers and, yes, even economic analysts, who are benefiting from this
seismic change in the structure of the global economy, there is,
however, a sting in the tail. While we are getting richer, the high-end
services, most obviously housing, travel and private education - on
which many of us spend a disproportionate share of our incomes are
becoming more expensive, because of the very same global trends which
are making us relatively rich.
That is why, even as inflation remains almost nonexistent, the talk in
London's bars and restaurants is of galloping prices. As Charles has
claimed for years, being rich has never been so expensive. And *staying
rich is going to get more exorbitant by the day*."
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