If you ask someone in the mainstream economics profession a tabloid economist what causes inflation, they might respond, “Why it’s those evil central bankers manipulating interest rates, keeping them too low for too long so that the government can tax away savings while compelling rabid investors to lose controll of themselves and crash the economy with their greed.” And that seems to have been the mainstream belief about inflation – too many dollars chasing too few goods, the inflation tax, the added shoe-leather and menu costs tax on top – for just about as long as I’ve paid any attention to casual discussions about observed general rises in prices with average people, long before I knew better.

Now, though, I have a pretty good idea that the cause of inflation is much more complex than that, and, among other things, nearly the same things can be said for monetary deflation. If one takes out a loan when the expected inflation rate is rather stable at, say 3%, but it later drops to 1% along with trend NGDP, then it is a debt tax of 2%; and the more the deviation from the past stable trend, the higher the tax, assuming one doesn’t get caught up in price adjustments in other markets.

Here, now, I’ve already contrasted the tabloid economics spin with some little bit of reality, and there is still much more. But what I really want to point out is that Britmouse has new post talking about wages vs. productivity in the UK, and what might be expected from the BoE:

What do you expect to happen with a 2% inflation target, if productivity growth falls from 2% per annum to 0% per annum? You expect tight money. Nominal wage growth must be pushed down from 4% to 2%. If nominal wages are sticky you’ll need a nasty blast of unemployment to achieve this. But the labour market will adjust eventually to the new equilibrium.

And friends, this isn’t stuff that happens with a 2% inflation target only in the UK. It is the basic, in a nutshell, meaning of IT no matter where it is practiced.

I recently brought up a post by David Beckworth about why the Fed will raise rates this year that uses measures of productivity and expected nominal income survey data to make a case. I wish I had seen the Britmouse post before commenting because it astounds me that we could have a LFPR that is STILL historically low (never mind historically low inflation – very much below target) while productivity and nominal income expectations survey data juxtaposed is expected to have some material meaning as to what the Fed should do.

If the cause of inflation in its most basic sense is excess demand on top of saturated supply (I think, generally meaning not enough people to make the goods in demand), productivity measures do mean something in some context. The questions is, however: Which context?

Take a look at this working age population graph from one of my posts about a year ago where I pointed out a mysterious, very noticeable loss in population growth that occurred immediately prior to each recession. Where did they all go? I am certain that the recession periods in this graph did not start with these people being rounded up and shot in the head. Seriously.

Population16Plus

My point is that if they go somewhere when life becomes more economically difficult, they had to COME from somewhere before they could disappear.

Following this reasoning down the path, there are at least two lines of logic one could explore, maybe more. If they COME from somewhere, and demand creates its own supply, then assumed supply side constraints may not be so straight forward and temporary shifts in productivity may not mean nearly as much as many of us are lead to believe. It would also, assuming that supply and demand theory is even vaguely correct, have some impact on the speed of the rise of wages.

And, of course, I haven’t even explored the meaning of the recent surge in the current account deficit in all of this. We get the stuff we want when we want it – and the STUFF comes from somewhere too.

It isn’t at all clear to me that any kind of rate hike now, this year, or any time in the foreseeable future is justified.

Even more than that, on personal note, I object mightily to the tendency to highlight the importance of “controlling inflation” that we hear from the mainstream as if that means something beneficial for average people. It’s obvious that IT is not a construct of the classical meaning of liberalism, and it certainly isn’t something that is good for everyone or even most everyone given that the majority of the population are wage-earners.

Never mind immigration pushing wages down – the Fed, at least now, has adopted policies that hold that to be a main objective, intended primary policy effects that are hidden under reams of intellectual abuse of the public, and it should be seen as the most notorious and infamous for both. I say abolish the Fed in its current incarnation (or at least IT) and open the borders!

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