We can inflate as long as we innovate

[blazespinnaker]

http://blogs.cfr.org/setser/

I've been following Setser's blog, and his fact based approach is something I consider to always be the superior analysis of our economic times.

One of the things I've taken away from his blog, has always been that we can continue our inflationary monetary policies if, and only if, we reduce our costs.

Our costs of materials, our costs of energy and our cost of labour.

Perhaps the price of gold will go up (not a bad bet now that the world is clamoring for SDRs based somewhat on gold), and perhaps the price of some things that aren't lowering in price (for example, luxury hotels in France) will go up, but I think in most cases everything is getting cheaper - on a real basis, if not a nominal one.

The world central banks can keep doing this. They can keep printing money, but only as long as we are squeezing out efficiencies that make it sense for them to do so. When that comes to a close, for example when Chinese labour prices start to rise, then our ability to inflate slows down.

What could happen? Well, we could innovate more in the area of energy and robotics. These areas could start to bring prices down again. When that happens, we face two choices, print more money or allow for deflation to occur.

Deflation just ends up with people sitting on their money and not investing. After all, it's risk free. Your money is increasing in value! Why bother investing.

So, we inflate a little bit. It's the ante for playing in the poker game of life. If there was no ante, nobody would ever bet, and we'd never take calculated risks on critical innovations.

So, the only option is to print more money. There are two ways we can do this.. we can either spread the money out via direct government stimulus or through credit. Nobody believes in government stimulus on a constant basis (maybe just the odd short term burst), not even the majority of the democrat party. Governments are lousy investors over the long haul.

So we spread the money out via the banks. Not great, of course (nothing ever is), but they have this whole ROI approach to things so they're not such a bad choice.

Unfortunately, as the world gets so suddenly wealthy (the rise of China), we have all this money we don't know what to do with. Not even the banks. Or haven't figured it out yet. So.. we pushed it all into real estate, because it really had nowhere else to go after the dot com bust. Of course, that only made sense up to a point. All that velocity came flooding back as we decided we didn't like that approach and decided it really wasn't going anywhere.

And as the money comes flooding back ... deflation start to set in. Which is just great, if you ask me. It is my opinion, that deflation is a sign of a healthy economy that simply bringing back its wealth so it can re decide what to spend it's money on

Obama has a pretty good plan. Energy, health care, and education. These are good places to spend money. And that's what he's doing with a large chunk of all that world wealth.

The only time we have to start really worrying will be when inflation starts to creep in. If it comes roaring back, we pretty much know we are in trouble. This really is the key question. Bernanke thinks he can just soak it all up to keep inflation away. If he's right, then all the doomers are wrong.

If he's wrong, though, and we go back to 70's style stagflation. Well, then things will become truly miserable. Stagflation is basically a sign that we have to reduce our standard of living. There is no other choice.

[GRG55]

Re: We can inflate as long as we innovate

http://blogs.cfr.org/setser/

I've been following Setser's blog, and his fact based approach is something I consider to always be the superior analysis of our economic times.

One of the things I've taken away from his blog, has always been that we can continue our inflationary monetary policies if, and only if, we reduce our costs.

Our costs of materials, our costs of energy and our cost of labour.

Perhaps the price of gold will go up (not a bad bet now that the world is clamoring for SDRs based somewhat on gold), and perhaps the price of some things that aren't lowering in price (for example, luxury hotels in France) will go up, but I think in most cases everything is getting cheaper - on a real basis, if not a nominal one.

The world central banks can keep doing this. They can keep printing money, but only as long as we are squeezing out efficiencies that make it sense for them to do so. When that comes to a close, for example when Chinese labour prices start to rise, then our ability to inflate slows down.

What could happen? Well, we could innovate more in the area of energy and robotics. These areas could start to bring prices down again. When that happens, we face two choices, print more money or allow for deflation to occur.

Deflation just ends up with people sitting on their money and not investing. After all, it's risk free. Your money is increasing in value! Why bother investing.

So, we inflate a little bit. It's the ante for playing in the poker game of life. If there was no ante, nobody would ever bet, and we'd never take calculated risks on critical innovations.

So, the only option is to print more money. There are two ways we can do this.. we can either spread the money out via direct government stimulus or through credit. Nobody believes in government stimulus on a constant basis (maybe just the odd short term burst), not even the majority of the democrat party. Governments are lousy investors over the long haul.

So we spread the money out via the banks. Not great, of course (nothing ever is), but they have this whole ROI approach to things so they're not such a bad choice.

Unfortunately, as the world gets so suddenly wealthy (the rise of China), we have all this money we don't know what to do with. Not even the banks. Or haven't figured it out yet. So.. we pushed it all into real estate, because it really had nowhere else to go after the dot com bust. Of course, that only made sense up to a point. All that velocity came flooding back as we decided we didn't like that approach and decided it really wasn't going anywhere.

And as the money comes flooding back ... deflation start to set in. Which is just great, if you ask me. It is my opinion, that deflation is a sign of a healthy economy that simply bringing back its wealth so it can re decide what to spend it's money on

Obama has a pretty good plan. Energy, health care, and education. These are good places to spend money. And that's what he's doing with a large chunk of all that world wealth.

The only time we have to start really worrying will be when inflation starts to creep in. If it comes roaring back, we pretty much know we are in trouble. This really is the key question. Bernanke thinks he can just soak it all up to keep inflation away. If he's right, then all the doomers are wrong.

If he's wrong, though, and we go back to 70's style stagflation. Well, then things will become truly miserable. Stagflation is basically a sign that we have to reduce our standard of living. There is no other choice.

First, should any of us expect Bernanke to say anything else [regardless of what he really thinks about his chances of controlling future inflation]?

Second, given the track record of the Fed, going back many years, why should any of us believe him?

[c1ue]

Re: We can inflate as long as we innovate

I'm not sure how robotic production is a short term benefit given that we have a short term overcapacity in world production.

Secondly I don't see how our inflationary policies can be avoided given that they are due to spending more than income.

Even if robotic production were to magically appear (and be manufactured/placed/setup), the effect is solely to increase 'income'...but eventually overspending can overcome that as well.

Perhaps instead of a plasma TV in every home, it is a hover car.

The only way to fix the present problem is to destroy the debt; the only way to avoid this problem again in the future is to ensure spending and income don't get out of line again and/or prevent artificially cheap debt.

[vinoveri]

Re: We can inflate as long as we innovate

Hudson may be right that all economic systems have some form of central planning, but I submit they all have deficiencies and our current one of, among other things, allowing governments together with banks to "decide" who will get capital and at what price and in conjunction debase real savings is so obviously a form of injustice and tyranny.

my numbering of the extracts

....
1. Deflation just ends up with people sitting on their money and not investing. After all, it's risk free. Your money is increasing in value! Why bother investing.

2. So, we inflate a little bit. It's the ante for playing in the poker game of life. If there was no ante, nobody would ever bet, and we'd never take calculated risks on critical innovations.

3. So, the only option is to print more money. There are two ways we can do this.. we can either spread the money out via direct government stimulus or through credit. Nobody believes in government stimulus on a constant basis (maybe just the odd short term burst), not even the majority of the democrat party. Governments are lousy investors over the long haul.

So we spread the money out via the banks. Not great, of course (nothing ever is), but they have this whole ROI approach to things so they're not such a bad choice.

4. Unfortunately, as the world gets so suddenly wealthy (the rise of China), we have all this money we don't know what to do with. Not even the banks. Or haven't figured it out yet. So.. we pushed it all into real estate, because it really had nowhere else to go after the dot com bust. Of course, that only made sense up to a point. All that velocity came flooding back as we decided we didn't like that approach and decided it really wasn't going anywhere.

....
5. Obama has a pretty good plan. Energy, health care, and education. These are good places to spend money. And that's what he's doing with a large chunk of all that world wealth.
....

1. it's called freedom - and I disagree that folks will hoard to the extent of creating some "deflation spiral" that will destroy the economy (see 2)
2. why should I or anyone be forced to play at the table; you seem to take it as a self evident truth the the gov should dictate to us what we should do with our $. I submit it is in our nature to innovate and take risks. People refrain from taking risks when they cannot reasonably quantify those risk - e.g., b/c the gov keeps changing the rules in midstream and artificially setting prices, e.g., of capital.

3. The banks and the ROI thing, WTF? Oh if you mean private the gains and socialiaze the losses, then I would agree - this is what we've just witnessed isn't it. What's been shown is that individuals have their own self interest at heart (and there's nothing wrong with that!). You may put your faith in men, but I think history has shown that Lord Acton was correct about power ...

4. This is a Greenspan's talking point and obfuscating nonsense. "Don't blame us for providing cheap money - it was the Chinese and world savings glut." If it had been "real" capital and not just cheap fiat money, the wealth generated would have been real vs fictitious as we saw with the dot com and real estate implosions.

5. Government central planning leads to vast misallocation and inefficiencies and even though some good may come about, this does not justify the expense and bureaucratic waste - and come on man look around you:
Energy - DOE created 30 years ago and what's it done for us?
Health Care - best in world - perhaps overpriced due to gov subsidies - but great b/c private
Education - uh ... maybe through another $10T at this and create NEA II and another library of politically correct tripe and that will solve all:p - yes we "educate", the problem is half the stuff taught is not "knowledge". Need I mention the ludicrous price of college, thanks again to the feds who give grants and loans to keep driving tuition up.

[flintlock]

Re: We can inflate as long as we innovate

I'm not so sure technology is the answer here. At least not technology for technology's sake. Not with high unemployment. Any technology that cuts labor costs also lowers wages and creates unemployment. We've seen the true cost of this during the last 20 years. Working class people no longer make enough to truly support themselves, not by a long shot. So they get sick, hit retirement, whatever, and need government entitlements to make up the difference. More and more will go on the dole as these "efficiencies" increase to the point that the necessary taxes will destroy any benefits to the economy. Unemployment will be the real crisis of the future. What jobs technology doesn't destroy, outsourcing to other countries will. Globalism is a race to the bottom for the US. We give away any competitive advantages we have, and for what, cheap TVs and low cost landscaping?

Whatever technology gives on one hand, it can take away with the other. This has been going on since the dawn of the industrial revolution. Our politicians have been dealing with it by mortgaging the future. Running massive deficits, to be paid for many years down the road. Now we are reaching the point of critical mass where that won't work anymore.

Energy is one place I still see room for real net gain. But I think we are to the point now where technology in general is bringing diminishing returns in terms of net gain to society. Besides energy, I don't see a lot of room for any real substantial gains.

[WildspitzE]

Re: We can inflate as long as we innovate

I'm not so sure technology is the answer here. At least not technology for technology's sake. Not with high unemployment. Any technology that cuts labor costs also lowers wages and creates unemployment. We've seen the true cost of this during the last 20 years. Working class people no longer make enough to truly support themselves, not by a long shot. So they get sick, hit retirement, whatever, and need government entitlements to make up the difference. More and more will go on the dole as these "efficiencies" increase to the point that the necessary taxes will destroy any benefits to the economy. Unemployment will be the real crisis of the future. What jobs technology doesn't destroy, outsourcing to other countries will. Globalism is a race to the bottom for the US. We give away any competitive advantages we have, and for what, cheap TVs and low cost landscaping?

Whatever technology gives on one hand, it can take away with the other. This has been going on since the dawn of the industrial revolution. Our politicians have been dealing with it by mortgaging the future. Running massive deficits, to be paid for many years down the road. Now we are reaching the point of critical mass where that won't work anymore.

Energy is one place I still see room for real net gain. But I think we are to the point now where technology in general is bringing diminishing returns in terms of net gain to society. Besides energy, I don't see a lot of room for any real substantial gains.

Start here...
http://jim.com/econ/chap07p1.html

[WildspitzE]

Re: We can inflate as long as we innovate

First, should any of us expect Bernanke to say anything else [regardless of what he really thinks about his chances of controlling future inflation]?

Second, given the track record of the Fed, going back many years, why should any of us believe him?

Werd.

This is all easier said than done too...

If he thinks that he is going to simply sell assets to reduce the monetary base, to whom is he going to sell them to?

What assets is he going to sell (especially as he now owns more and more toxic assets)?

Treasuries? And risk pushing the government's borrowing rates to the sky and the rest of the economy into another recession? (two recession scenario is likely as the Fed deals with this btw)

With the treasury in a US$2T/yr hole, are they going to be able to immediately "soak" up anything? I don't think so either.

The only other thing I can think of off the bat is that he can start paying interest to the banks again (as the rate is basically now zero), so that the banks shore up the base and not let it flow into M1, etc. This poses problems too, as he needs to come up with the money from somewhere.

He is between a rock and a hard place IMO. I haven't thought it all through, and I may be missing the international angle (swap lines, other cbs, etc)...

As I wrote the above, re: international angle (given the CB cartel), I think that perhaps he expects to sell treasuries as he coordinates with other CBs so that such buy Treasuries to keep rates low. Ah, gotta love foreign "goodwill"...

[flintlock]

Re: We can inflate as long as we innovate

Start here...
http://jim.com/econ/chap07p1.html

Comparing 18th century economics to the modern economy is a stretch. Nobody is questioning the value of technology. Technology in the 18th century greatly benefited almost everyone and it continued to well into the 20th century. My point is we are at a point of diminishing returns, where technology has outpaced the need for it to a large degree. Fewer and fewer innovations have any real value besides being novelty items. The gadget of the week. Meanwhile, pressing issues like becoming energy self sufficient get shoved aside. Our reliance on technology to be our savior rather than real production of real assets of real value is leaving us behind the rest of the world. The invention of the steam engine changed the world. The iphone, though really cool, not so much. The FIRE economy preached that we could just sit back and collect rent on property and never have to be productive again. Some expect technology to be the next FIRE I guess.

My point is that its just a fantasy to think we can make nothing, produce nothing, and just sit around with .00001% of our society reinventing the wheel every year and expect that to replace millions of manufacturing/ productive jobs. Even the valuable technology we continue to come up with rarely benefits the average American because as many jobs as possible are outsourced as soon as possible. Technology is no longer an American monopoly. At least in the past, what we invented, we manufactured. That no longer applies. It will benefit only a very few in most cases.

There ain't no free lunch here. We aren't going to invent our way out of this mess. And we aren't going to inflate our way out either. Well we will, but not without some seriously nasty effects. The US has a screwed up system where good jobs are shrinking in number, yet we import more immigrants and then shunt off the unemployed citizens into more entitlement programs. They call that "lowering employment costs" when all it really does is lower the cost for business and transfer it right on the shoulders of the US taxpayers. Major difference between this system and what happened in the 18th and 19th centuries. Back then the system ensured that either the jobs displaced by technology were replaced by other jobs or people starved. There was no huge welfare state to shift the burden to.

[medved]

Re: We can inflate as long as we innovate

I'm not so sure technology is the answer here. At least not technology for technology's sake. Not with high unemployment. Any technology that cuts labor costs also lowers wages and creates unemployment. We've seen the true cost of this during the last 20 years. Working class people no longer make enough to truly support themselves, not by a long shot. So they get sick, hit retirement, whatever, and need government entitlements to make up the difference. More and more will go on the dole as these "efficiencies" increase to the point that the necessary taxes will destroy any benefits to the economy. Unemployment will be the real crisis of the future. What jobs technology doesn't destroy, outsourcing to other countries will. Globalism is a race to the bottom for the US. We give away any competitive advantages we have, and for what, cheap TVs and low cost landscaping?

Correct. The modern “globalism” has nothing to do with the free market. It is just a tool for the corporate crooks to avoid the free market. By the same token politicians use it to avoid accountability. As soon as the issue becomes “global” the voters have no say on it, they are too stupid to make global decisions. So all kinds of crooks like to make everything and anything to be “global”.

Technology or not, living standards in the developed countries will drop. There is huge supply of manufacturing workforce out there (Eastern Europe, China, India, Southeast Asia, Latin America). Yes, most of it is still primitive, US workers are better trained on average, and the US has better infrastructure etc. But, even if you remove 90% of the workforce mentioned above as non-qualified, the qualified rest of it creates serious competition for the US workers. I know of enough cases (including my personal engineering experience) to confirm this trend.

We do need reasonable trade barriers. I do not have enough understanding of this issue, and cannot possibly predict, how these barriers will work, but they are necessary.