Comments on: Re-thinking That â€˜70â€™s Inflation Show

By: Ben Emons

Ben Emons — Sat, 21 Jun 2008 13:25:42 +0000

Real productivity growth in the US has recently risen with broad money growth (M2 measure) now at 6.3% (vs 7.1% a year ago). With absence of widespread pattern bargaining by labor unions (except in the entertainment industry) the ingredients for a stagflation scenario are not blended the right way like they were in the 1970s. The Fed has chosen a growth risk mandate by assuring that a debt deflation spiral resulting from “de-leveraging” bank balance sheets will be avoided. The risk of asset deflation (as caused by mass accumulation of debt by the US consumer) is very high if one simply look at the average % change in nation wide delinquincy rates and foreclosure rates. Investment and commercial banks (including credit unions and community banks) are constrained in capital and have tightened credit in the economy. If the Fed would reverse its policy to tightening it would risk further tightening of credit in the economy which will lead to a debt deflation spiral, not a wage-price spiral. It is in my opinion that at this point the risk for possible deflation outweighs the risk of inflation let alone stagflation.

By: JH

JH — Thu, 19 Jun 2008 21:49:55 +0000

I think the poltical dimension of the current inflation situation is evolving and potentially “up for grabs.”

There is growing unrest in many workplaces for either a 4-day week or more telecommuting options. Given that top managers are making so many times more than their workers, they will not likley give in because their consumption patterns are impervious to $4.50 per gallon gasoline. With little or no union presence in the US workplace and a rising unemployment rate, I’m not sure how willing workers will be to press their demands, but discontent is on the rise. I’m not sure how any Republican or Democratic policy will placate this anger, but I imagine the outcome of the inflation and housing crisis will likely be diminished economic standards and a continued political morass.

By: Andreas Botsch

Andreas Botsch — Wed, 18 Jun 2008 14:54:07 +0000

Well done, Tom. Looking at the US from across the Atlantic, I hope that these new textbooks will (a) be written and (b) be translated and sold in Europe.
Milton Friedman is still very much alive here and the ECB has annnounced a preemptive strike for July against “secondary round effects” of the oil and food price shocks, i.e. against inflationary expectations. This is meant to give a strong signal to the unions in Europe: let the price shock feed through the economy without increasing the wages of your members, we won’t accept a wage-price spiral. There is, however, not the faintest indicator of European wage hikes spuring inflation. Inflation is now steadily beyond and above the 2 per cent target, but as is the case of the US this is coming from energy and food. Yes, this inflation is different from that of the 1970’s. Increasing interest rates in this sort of situation will not lower import prices but kill European growth . The ECB still has not learnt the lesson that you are so eloquently describing in your article.
Workers and their unions in Europe have always fought for a more integrated social Europe. The Brussels consensus of neo-liberal European politics has turned against workers and unions. Sadly enough, the sole institution that stands for true European economic integration is acting against Europe’s potential. High time that a turning tide in the US reaches European coasts!

By: David

David — Wed, 18 Jun 2008 03:24:29 +0000

Bernenke knows full well that the Friedman theory of inflation is bogus, but he is trying very hard to not disturb the class-based Friedman doctrine while he walks this tightrope of raging inflation and falling employment/stagnant wages. His stance is calibrated to split the difference between a sagging economy and inflation that he knows is much worse than the rigged inflation metrics indicate in the hope that some miracle will bail him out. If there is not a significant upswing in US economy he will try to “hold”, but will likely have to “cut” again. These last two posts are just excellent, Mr Palley. Thanks.

By: Ron Calitri

Ron Calitri — Tue, 17 Jun 2008 21:05:49 +0000

Actually, at the New School 1980s we had a slightly different explanation for the “spiral.” The “action” in the prices change process was felt to have originate on the profit side rather than with wages, as the result of increasingly imperfect competition. Wages, as we now know, have been more or less frozen since the 1970s, so were neither important then nor are they important now. The preponderance of action (after the first oil price shock) was by increasing market segment imperfections then, whose preponderence holds, and who are now able to maintain market corners now, after the second shock. The mechanisms of the two episodes seem quite similar in spirit.

By: Gegner

Gegner — Tue, 17 Jun 2008 07:38:36 +0000

Since the ‘mechanism’ whereby labor adjusts wages to prices is ‘broken’, we have the seeds of revolution.

Or worse, social collapse…such as we are witnessing today.

Civil order is only maintained when the public believes their interests are being protected.

Once the public perceives that it’s interests have been abandoned, civil order breaks down…

Allowing the IB’s to dump billions of dollars worth of toxic paper onto the taxpayer’s back is viewed as a betrayal of trust.

The subsequent ‘destruction’ of the dollars purchasing power is confirmation of that betrayal.

When the people who do society’s ‘heavy lifting’ have to choose between food and filling their gas tank so they can report to work…the ‘end’ of civil order is close at hand.

By: MN

MN — Tue, 17 Jun 2008 01:38:37 +0000

The nature of todayÂ´s inflation is indeed different. Steve Roach wrote last week on FT about AsiaÂ´s new export: stagflation. WouldnÂ´t Asia be the place to look for a wage-price spiral this time around? ArenÂ´t wages growing fast in China? IsnÂ´t China “ground zero” of the fast money supply growth of an “extended dollar zone”?