When one thinks out loud or writes extemporaneously, one risks appearing the knave. But I will abandon my usual caution and pose a burning question to anyone and everyone:
Do you think The People are less discontented under an inflationary regime or a deflationary regime?To get the discussion going, I will put to you that under an inflationary regime the vast majority of the people suffer from Hamster Syndrome whereby they are running inside the wheel faster and faster but never getting anywhere, or worse from "Up the Down-Escalator Dilemma" (Do you remember the Chameleons?) where it feels like (or IS) almost impossible to make any headway in the direction one desires. This is because real wages are falling whether people consciously know it, and income inequality and Gini's are growing. On the other hand, unemployment IS [temporarily?!?] lower than it otherwise would be, which is a high-intensity diminishing of the downside to those that otherwise wouldn't be employed. In sum, most people feel worse off with low intensity, whereas a few people feel better off with high intensity.
Under a deflationary regime by comparison, I will put to you that the vast majority of people don't feel as worse-off as they would under an inflationary regime, since real wages tend to be more stable, and income inequality and Gini's tend towards diminishment making one feel less worse off(relatively speaking) - and importantly it is the relative that counts most in human behaviour with respect to contentedness. However, the downside is that unemployment tends to be higher than otherwise would prevail under an inflationary regime, and so a smaller minority percentage of the workforce feels [rightly] to be worse-off and feels so with a high intensity.
Let me say first off that none of my assertions have been researched or proved. Secondly, I am aware of some economists' arguments that, for purely behavioural reasons, mild inflation is deemed positive for economic growth. I have tended to accept these arguments, though they too are mere assertions, like mine. Thirdly, there ARE externalities under both regimes, and we cannot ignore them for they are integral to the feedback loop of happiness or less discontentedness (note: these are NOT the same thing) and future well-being. Lastly, IF this were - more or less - true, then does it mean we, as a society, are better-off in terms of GNH (Gross National Happiness) by choosing the less-inflationary route, and redistributing to cushion the downside of those unfortunate high-intensity displaced souls, than conferring a dull ache upon the majority?
One final thought: Might globalization have an unspoken role here? "Up the Down-Escalator Dilemma" is a reflection of global wage convergence, while inflation is the political way of attempting to fight or mask an otherwise unpleasant reality: if you want to go upstairs, you might have to expend some reasonable energy and take the steps...
(and if you haven't already, go take a trip back to 1983 (Modern English, The Alarm) and listen to The Chameleons)
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11 comments:
Listen girl, your thesis advisor isn't going to pay you a lot of mind til you define your terms a little better. That notwithstanding (and assuming that you're not comparing the Weimar Republic with an independent Newfoundland), inflationary bouts seem mostly to be temporary outbreaks of the belief that the seven deadly sins can be indulged in without penalty. This is probably an illusion. As to whether The People are happier would depend upon which point in the inevitable progression we are looking at. Typically, though, signs of discontent appear well in advance of the actual numbers.
In all regards, an excellent observation.
CB
Thanks Charles. It's a type of question that one can tackle from almost any angle, and trawl observations from ay disciplines. A more direct and applied variation might be: IS "Road Rage" more or less likely under an inflationary or deflationary regime?
I think the preference for inflationary regimes is based on the construct that lower income households (if they have any assets) tend to have relatively greater proportions of debt. In a deflationary environment that nominal debt creates a different hamster problem. Consider the US economy in the late 1800's when real estate prices(farmland) were falling. I think the spectre of populism (or more) scares politicians away from deflation as a policy. Still, it's a good question for today as the tug-of-war between inflation and deflation heats up (If a tug-of-war could heat up ?, maybe it's "The tug of war...)
Seems that you can have both, or differential price trends in the same stewpot. With uncontrollable commodity prices rising, and wages declining through inflation in the US, we can see what a hodgepodge we have. Wages will never rise because of globalization, and commodities will not soon decline because of non-US incomes rising.
General wage levels rising or falling used to be the great indicator within an economy. No longer.
I have for sometime agreed with you C, but the inflationary -- or any -- regime is not designed for the benefit of the people who suffer it, but merely for its own perpetuation.
The inflation treadmill, in effect, farms peoples' productivity on their lenders' behalf.
Inflation is the bastard son of politicians making promises that can't be kept and the pandering to the marginal voter, who cares about house prices and cannot do the division to calculate the wage:house ratio.
Cassandra,
Hailing from Latin America, I tend to think of inflation and deflation as being on a continuum that springs from too much debt:
At first: better inflation than unemployment;
Inflation feeds on itself, real wages get crunched, foreigners flee;
Hoarding, empty shelves, spiraling velocity, demonstrations, guerillas;
Then: better unemployment than inflation.
RCJ - the different levels of systemic gearing, and household leverage clearly affects the orientation.
That said, even with high gearing one cannot seemingly get off the treadmill as inflation creeps up, the cost of necessities seemingly runs ahead of incomes, so the benefit of diminishing real historical values of debt is offset by the necessity to assume more nominal debt to keep living.
T- Agreed on inflation as the emptiness and unrequitedness of political prmoises.
Old Vet - Nice to hear from you! You are so correct that the real world is more complex than my oh-so-simplistic question posed. Rising non-US incomes may, however, take a pause in the event of US train wreck and associated cascades. This is the bear-case for commodities.
David - I agree - though I view it as a pendulum - the similarity being that the more inflationa resulting from debt, the more deterministic the pendulum will swiong the other way, whether via the market or, in the extreme, massive revulsion and/or violent poilitical revolution.
If, by opposing inflationary and deflationary regimes,
you are referring to price rises or falls induced exclusively by monetary policy, and not exogenous factors, it is possible to make a few observations. In
contemporary societies, one person's savings is another person's debt. Of course, in rare cases an entire nation my be a net saver (Japan, Saudi Arabia) but in general savings within one sector of society are lent via intermediation to another. These opposites
have, at least at first glance, opposing interests,
particulary if the lending is long term fixed versus
short term variable. The long fixed borrower wants
inflation, the lender the opposite. Short term variable opposites should be indifferent, as rates
adjust to prevailing inflation, denying arbitrage
returns. In highly egalitarian societies, where the difference in number between savers and borrowers is small, and everyone belongs to both camps, there
ought to be indifference, at least from the point of view of wealth effects. In societies where there are
relatively few and very large savers, and many debtors, (high income inequality) the pressure from the wealth effect point of view should favor inflation.
There is another perspective to consider, however , in an inflationary/deflationary environment, and that is from the wage/income side. When prices
are rising, ceterus paribus, wages will follow, but with a lag. This lag produces lost imcome, just as when prices are falling, wages will follow, but also with a lag, producing a windfall.
It appears, to me at least, that the wealth effects
from inflation/deflation are pulling in the opposite direction from the incomes calculation. Which of the two is dominant, and the net happiness which results, would depend on the degree to which the former are greater or less than the latter.
Excellent post Cassandra!
I would say that "an inflationary regime" understates the reality of today. I'd argue instead that we're in a world of understated inflation, in which:
1) real wages don't keep up with real prices;
2) otherwise unsustainable government promises are met on paper, if not nearly enough to compensate for lost purchasing power (the "Shadow Stats theory");
3) Western debt-fueled consumption is subsidized by the gradual faster-than-estimated depreciation of said debt.
Workers are also nickel and dimed by lots of "fees" of society, which you could think of as *cultural taxes* rather than government taxes.
For example, a college degree.
Personally I thought that I always learned 100x as much reading on my own, on blogs like this, as I did in college. But I was still forced to buy this piece of paper -- a passport to the top quartile of society basically -- because... because it is just "expected." You have to do it to get anywhere in your career.
Luckily my parents were able to easily meet that burden. But people who can't pay the normative tax up front are "privileged" to have some percentage of their earnings creamed off for the next 30 years so they can say they went to college.
Furthermore, an inflationary regime results in lots of effectively wasteful economic activity, which will eventually be eliminated when deflation inevitably sets in. As you get more structural inflation, you get more workers who feel that their day job does not actually make anybody better off (eg many shades of marketing, consulting, etc etc). There is an inner conviction that they pointlessly shuffle paper all day to most effectively fool somebody into overpaying for a given service. As actual excess purchasing power further outstrips perceived purchasing power among the minority profiting from hidden structural inflation, more and more people on the other end, whose real purchasing power further and further lags notional purchasing power due to "non-core" inflation, also feel that their work becomes more and more fruitless. Hope that made sense.
Fundamentally though, an inflationary regime is the price China et al. pay for their own artificially devalued currencies. At some point, their store of dollars will devalue drastically, their own exports will concurrently become drastically less expensive, and their societies' (domestic currency denominated) debts will explode, while their societies' net assets (forex reserves) will lose value at the same time.
All so that they can maintain an illusion of higher competitiveness now.
'Damn it feels good to be American ...'
regards
E
I guess I think the level of gearing affects the distribution of pain, inflation hurts households and owners of capital (two treadmills) deflation crushes borrowers and helps lenders until the wheels come off...
If, as woland puts, we tie the inflation to the fiscal policy and not to the fact that more than a half of a world wakes up and says "I want some of that too, please", I'd say you didn't put in two things:
- debt. Inflation can eliminate debt (assuming your income goes up at least a bit in-line with the inflation). Deflation can turn small debt into big debt quickly.
- psychology. We like higher number more than lower numbers. People would rather that things inflated (assuming again their salary inflates at least a bit too), than accepting lower price of the assets they have, lower salary (even if not accepting it means redundancy) and at the same time higher liabilities - even though they can buy more for the same amount (or the same for a lower amount).
That though I think is a purely academic question as the inflation in these days has two drivers, domestic and external and they are inseparable. And not even the domestic (if we look at things like non-tradeable services, real estate etc.) can be controlled by the central banks, mostly because they relied on the external driver to keep it down, but one that turns around the domestic bit just can't cope. So the deflation that people keep talking might never show up - especially if some parts of the world will not decouple, and will now export inflation instead of deflation. The internal drivers might turn deflationary, but will the external do (or be only mildly inflationary)? So far, they didn't.
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