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(an email exchange)

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>   
>   On Wed, Aug 6, 2008 at 12:25 AM, Prof. P. Arestis wrote:
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>   Dear Warren,
>   
>   Just received the piece below. The situation over here is getting
>   worse but pretty much as expected.
>   
>   Recession signalled by key indicators of British economy
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>   
>   Best wishes, Philip
>   

Dear Philip,

Yes, seems tight fiscal has finally taken its toll and is now reversing the ugly way – falling revenues and rising transfer payments.

Without support from government deficit spending, consumer debt increases sufficient to support modest growth are unsustainable.

And with a foreign monopolist setting crude oil prices ‘inflation’ will persist until there is a large enough supply response,

It’s the BoE’s choice which to respond to, though ironically changing interest rates is for the most part ceremonial.

All the best,
Warren


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4 Responses

  1. If I have followed the logic of this discussion board.

    A country such as Australia which has run a small gov surplus for many years has undermined its own credit structure and, as a consequence, required the private sector to source its spending desires from increasing borrowings. The longevity of this surplus is because of the foriegn sector desire to save $AUD financial assets and a bouyant terms of trade?

    Current inflation fears in most countries are a manifestation of the energy markets allocating by price. Any interest rate response by central banks will simply alter potfolio positions and impact on the real economy through the cost channels of economic agents. But, rate increases this will not dampen price increases in the economy in any meaningful way. The concept of “inflation” used on this board is where wages become indexed to a constant rate of change of prices, all else are markets allocating by price?

    Have I finally got it?
    Thanks for all the contributors to this fascinating board.

  2. agreed on australia.

    the foreign sector accumulating $A financial assets shows up as a trade deficit which improves their real terms of trade, but also lowers domestic ‘savings’ of $a financial assets.

    domestic consumption/standard of living has been sustained by increasing the rate of new consumer debt as you state.

    seems the domestic sector has maybe reached it’s debt service limits and is slowing, even as export income continues to increase.

    I don’t follow that economy closely, but seems that given the low population and the high level of resources overly tight fiscal policy has resulted in relatively high unemployment (and underemployment) and therefore a much lower than expected standard of living.

    Regarding your inflation analysis, yes, but ‘inflation’ can persist and accelerate even with wages lagging.

    There are numerous examples of very high ‘inflations’ around the world where wages were not the driving force. Instead, sufficiently high govt. deficit spending both drives up domestic prices and also drives the currency down which increases import and export prices. When faced with rising import prices, govt. attempts to sustain domestic demand with govt. ‘handouts’ of all sorts tend to cause other domestic prices to ‘catch up’ to the cost of imports, particularly food and energy.

    Thanks!

    warren

  3. Thanks for your reply Mr Mosler, some follow up questions.

    So, to confirm, “inflation” as defined on this board would be caused in two possible ways:
    A: By price fluctuations of a major traded goods sector such as the energy/food complex, finding its way into the cost structure of economic agents, and,
    B: Generous gov deficit spending.
    All else tend to flow from these causes?

    Is (B) similar in respect to Friedmans famous quote, “inflation is always and everywhere a monetary phenomenon”?

    With respect to (A), energy importers then face a political choice of, letting the deficit increase to sustain demand and lead to possible higher prices via the channels you have indicated above. Or, tightening fiscal policy which would have the reverse effect, at least until GDP becomes to weak. Either way increased imported energy prices can’t be solved domesticaly, new supply has to solve this problem therefore a period of sustained high prices would be here to stay?

    My reading of “Full Employment and Price Stabiliy”, indicates that given the above, the energy importer would still suffer from “inflation” but without the underemployment as, “Only one price, the ELR wage, has been used to define the currency. All other prices result as the forces of supply and demand settle on nominal prices that reflect a value relative to the ELR wage and continuous full employment.”?

    Thanks
    Paul

  4. So, to confirm, “inflation” as defined on this board

    ****i say it this way- the price level is a function of prices paid by govt when it spends (and/or collateral demanded when it lends when applicable)

    would be caused in two possible ways:
    A: By price fluctuations of a major traded goods sector such as the energy/food complex, finding its way into the cost structure of economic agents,

    ****yes, this is roughly the process that drives cpi, helped by institutional structure that passes price increases through to the rest of the economy as well. this includes govt giving cpi pay raises, not changing it’s volumes of consumption when faces with higher prices, etc.

    so there’s a combination of cost push price pressures and demand from govt spending

    and,
    B: Generous gov deficit spending.

    ****yes, all else equal, govt spending the way it’s done currently adds to demand and supports prices, either keeps prices from falling or pushes prices up depending on the general state of demand.

    All else tend to flow from these causes?

    ****note that deficit spending to build the panama canal reduced cost and put downward pressure on the price level. the same spending to blow up the canal would put upward pressure on prices. so the type of spending matters as well. it also matters whether govt gets it’s bid hit or lifts offers when it spends. the latter can drive prices up, the former only prevents them from falling.

    Is (B) similar in respect to Friedmans famous quote, “inflation is always and everywhere a monetary phenomenon”?

    ****that says nothing as without ‘money’ there are no prices and no inflation. but what it has come to mean is tht at money supply, whatever that means, has something to do with inflation. problem is, they never found an aggregate that ‘worked’ and was useful for this purpose. in fact, the one conclusion that can be drawn is that inflation causes some of their selected aggregates to increase, not vice versa.

    the reason is that the aggregates they look at are sctually the ‘open interest’ for the currency- loans create deposits, etc. so it’s like thinking the open interest in a futures contract causes prices to go up or down.

    the operative aggregate is net financial assets which are the direct result of fiscal policy. but if they recognized that it would elevate the importance of fiscal policy and dismiss what they now call monetary policy.

    the other thing they forget is the currency is a simply monopoly with the govt prices setter whether it likes it or not.

    With respect to (A), energy importers then face a political choice of, letting the deficit increase to sustain demand and lead to possible higher prices via the channels you have indicated above.

    ***yes

    Or, tightening fiscal policy which would have the reverse effect, at least until GDP becomes to weak.

    ***yes.

    Either way increased imported energy prices can’t be solved domesticaly,

    ***right, only domestic nominal prices. question is, do they/inflation matter? most studies say no, but the electorate hates inflation more than they hate unemployment, so policiticans have to respect that or lose their jobs.

    new supply has to solve this problem therefore a period of sustained high prices would be here to stay?

    ***yes, unless the saudis decide to lower them, providing demand doesn’t increase to use up all of their excess capacity, in which case prices go up until less is used.

    My reading of “Full Employment and Price Stabiliy”, indicates that given the above, the energy importer would still suffer from “inflation” but without the underemployment as, “Only one price, the ELR wage, has been used to define the currency. All other prices result as the forces of supply and demand settle on nominal prices that reflect a value relative to the ELR wage and continuous full employment.”?

    ***exactly.

    good post!

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