Inflation and Deflation

Posted by PITHOCRATES - December 26th, 2011

Economics 101

When Demand is Greater than Supply there’s Inflation, when Supply is greater there is Deflation

Agriculture advances gave us food surpluses.  Food surpluses gave us a division of labor.  The division of labor gave us trade.  Money made that trade more efficient.  Religion and the Rule of Law allowed great gatherings of people to live and work together in urban settings.  Free trade let us maximize this economic output and elevated our standard of living.  Free labor sustained economic growth by increasing the number of people making economic exchanges.  Prices automated the process of assigning value and allocating scarce resources (that have alternative uses).  And provided incentive and competition.  The free movement of prices in our economy, then, is very important.  So important that we track extremes in these movements and give them special names.  Inflation.  And deflation.

When the economy is good we typically see prices increase.  Because the greater amount of economic activity is competing for the same scarce resources.  So businesses ‘bid’ up the price of these scarce resources.  To make sure they get what they need before someone else beats them to them.  This more intense competition for these resources causes their prices to rise.  We call this inflation.  Telling other suppliers that demand is greater than the current supply.  This encourages suppliers to bring more supplies to market.  And attracts others into the market.  As this happens the available supply of these scarce resources increases.  And approaches the level of demand.  Where prices then stabilize.

This is the free market correcting prices.  Prices were high because demand was greater than supply.  When supply caught up to demand they stopped rising.  And if supply continues to grow and exceeds demand they will start falling.  Because those scarce resources won’t be so scarce anymore.  Which happens when people bring too much supply to market.  Of course they have no way of knowing this.  Until the prices tell them so.  Falling prices, then, are a signal that supply has exceeded demand.  So suppliers scale back on what they bring to market.  We call this fall in prices deflation.  And when supply drops at or below demand the price correction is complete.  And prices stop falling.

When Government Interferes with Market Prices we can get Bubbles where both Prices and Supply are High

This price-correction deflation goes by another name.  Recession.  And we call this inflation/deflation cycle the business cycle.  Often referred to as a boom-bust cycle.  Times are good on the inflation side.  But not so good on the deflation side.  Because recessions aren’t fun.  Unless you like periods of high unemployment.  But it’s a natural and necessary part of the business cycle.  It’s how the free market corrects prices.  Allocates scarce resources that have alternative uses.  And provides incentive and competition.  Everything that makes free market capitalism function.  Providing the highest standard of living man has ever known.

But some in government like to tinker.  They think why not make the inflation part last longer?  And try to end the deflation part?  So they play with the tools at their disposal.  Monetary policy.  Fiscal policy.  And regulatory policy.  To stimulate demand beyond what the market is demanding.  To keep the good times rolling.  Where we live with permanent but ‘manageable’ inflation.  And avoid deflationary periods all together.  And recessions.  Sounds good.  In theory, at least.  But it rarely ends well when the government interferes with market prices.

When they interfere with market prices they give false information to those in the market.  Continued inflation means continued high prices.  Prices go even higher than they would have if left to market forces.  Indicating a high demand when there is none.  So suppliers rush in to meet this false demand.  Greatly increasing supply beyond demand.  Creating what we call a bubble.  Where both prices and supply are high.  An artificial creation.  And one that cannot last.  And when prices do correct they have a lot farther to fall.  As excess supply is sold off at discount prices.  And employers cut back and shed excess capacity.  Creating high levels of unemployment.  And a long and unpleasant recession until prices finally stabilize once again.  When supply once again matches demand.

The More we try to Eliminate the Deflationary Side of the Business Cycle the More Painful the Recession

Interestingly, government interference into the free market was to eliminate the business cycle.  Especially the unpleasant deflationary side of it.  But their actions only made the deflationary side far more painful.  Because it was their actions that created those inflationary bubbles.  Not the market.  Their actions only delayed the inevitable market correction.  It couldn’t stop it.  Nothing can.  The more they tried the bigger the bubbles they created.  And the bigger the bubble the bigger the correction.  And the more painful the recession.

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The IMF wants to Double their Resources to Bail Out the Eurozone

Posted by PITHOCRATES - December 25th, 2011

Week in Review

The IMF wants more of our money.  So they can help governments maintain their irresponsible ways (see IMF urges members to boost funding under 2010 plan by Lesley Wroughton posted 12/22/2011 on Reuters).

IMF chief Christine Lagarde on Thursday urged member countries to quickly sign off on an agreement last year to double IMF resources and give under-represented nations, such as China, greater voting power in the global lender.

The changes to members’ quotas, which determine how much each country contributes to the IMF and their voting shares, are critical as a euro zone debt crisis escalates and is set to slow global growth in 2012…

As of December 12, just 53 countries, holding 36 percent of total IMF quotas, had approved the increases. Approval by members holding about 70 percent of quotas is needed to implement the changes. Some countries require their legislatures to authorize the changes.

The measure still requires approval by the U.S. Congress, where Republicans are taking aim at any IMF move to bail out troubled euro zone countries, saying they don’t want American funds involved.

IMF resources?  You know what that means.  More of our money.  So they can give it to other people.  Like those in the Eurozone.  Where they won’t cut back on their government spending and live within their means.  Instead they want us to cut back on our spending.  So we can give them our tax dollars.

With only about half the votes they need to increase their spending (and our taxation), it doesn’t look good for the IMF right now.  You see, the problem is that it’s just not one country in need of assistance.  Right now governments all around the world are living beyond their means.  Even the United States has entered the fraternity of nations who irresponsibly live beyond their means.  Which makes it difficult to help pay for other nations.  Because we’ll just push ourselves closer to where they are now.  And once we do who will be there to bail out us?

Keynesian economists say no big deal.  Just print more money.  Which is what central banks are for.  But it was those central banks that created the crisis in the Eurozone in the first place.  And doing more of what gave you a problem is not likely to solve that problem.  No matter what the Keynesians say.

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Price Inflation has led to Wage Inflation in the Eastern Manufacturing Cities in China

Posted by PITHOCRATES - December 25th, 2011

Week in Review

Inflation has arrived in China.  Wages are going up.  Increasing the cost of their manufactured goods.  And the cost of living (see China province raises minimum wage by 23% posted 12/22/2011 on the BBC).

Sichuan province in southwest China has increased the minimum wage sharply to try and attract workers amid a rapidly rising cost of living.

Sichuan raised the minimum monthly wage by 23.4% starting on 1 January, state news agency Xinhua said on Thursday…

Severe labour shortages in Chinese cities have prompted wage rises in many provinces this year and last.

An example of the role prices play in supply and demand.  Life is good in the Eastern manufacturing cities.  So good that there is a lot of economic activity.  And prices are rising to allocate scarce resources that have alternative uses.  Even labor.  But inflation isn’t always good.  Higher prices eventually will lower sales as people can’t afford to buy as much as they once did.  And those cheap exports become not so cheap.  Which means those factories eventually will cut back on production.  As a recession settles in to readjust those prices.

Rising wages have prompted analysts to predict that China, previously known for its low cost of labour, could lose its edge as a manufacturing hub.

Manufacturers could look to countries such as Vietnam, Bangladesh and Cambodia where wages are still low.

However, Chinese authorities have been trying to boost domestic consumption and be less export dependent, and a rise in wages will encourage spending.

Before China it was Mexico.  Remember that great sucking sound as all those American jobs went to Mexico?  Mexico was chopping in high cotton for awhile.  Until they heard that great sucking sound as their jobs went to China.  And now China may hear it next.  As some of their jobs go to Vietnam, Bangladesh and Cambodia.  Who will lament one day the loss of their jobs to some other low-wage country.

This is economics.  And consumerism.  Consumers are always looking to get the most value for their money.  So manufacturers are always trying to undercut the competition to give these consumers what they want.  Good for consumers.  But not good for countries whose poor get a taste of the good life.  And don’t want to be poor anymore.  Thus raising the cost of production.  And eliminating their low-cost advantage.  At least for their export markets.

Eventually all emerging economies will be emerging no more.  And the low-cost advantage will not be attained the easy way.  With cheap labor.  For these once emerging economies will go to the next step in their economic development.  Capital investment in plant and equipment.  To lower their cost of production through economies of sales.  By doing more with less people.  With people leaving the low-skill assembly jobs in massive factories.  And instead design, build, run and maintain the equipment that replaces them at their old jobs.

Socialists and communists (as well as Big Labor) say this is a bad thing.  Replacing people with machines.  Even though they help to relieve chronic labor shortages that labor just can’t meet.  Lowering the cost of living for everyone.  And increasing the standard of living for everyone.  It’s happened everywhere through history.  And it now appears to be happening in China.  Which should ultimately be a good thing for the Chinese.  Especially for the masses who don’t live and work in the Eastern manufacturing cities.

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Mikhail Gorbachev whose watch the Soviet Union Collapsed under attacks Vladimir Putin, A Soviet Union Enthusiast

Posted by PITHOCRATES - December 25th, 2011

Week in Review

The last communist leader of the Soviet Union, Mikhail Gorbachev, is publicly criticizing a man he once supported.  Vladimir Putin.  Who is mocking Russian protestors.  In his quest to return to power.  Over the protests of those he mocks (see Mikhail Gorbachev ‘ashamed’ of Vladimir Putin by Andrew Osborn posted 12/23/2011 on The Telegraph).

In his strongest criticism of the Kremlin yet, the father of perestroika said he was shocked and disappointed by the glib way that Mr Putin had reacted to unprecedented anti-Kremlin protests in recent weeks.

“This is shameful. And embarrassing. I, for example, am ashamed,” he said of Mr Putin’s dismissive attitude after the prime minister sarcastically likened the protestors’ white ribbons to condoms.

“I feel tied to Putin in the sense that at first, when he came to power, I actively supported him everywhere, both here and abroad. And now look,” he said in an interview published in Novaya Gazeta, a liberal newspaper he part owns.

Strong criticisms, indeed.  Mikhail Gorbachev may have been the father of perestroika (a little restructuring of the Soviet economy and society to be a little more like that in the West) but he was still a communist.  What he wanted to do was what China did.  And China did what it did by learning the lessons of perestroika.  And why it destroyed the Soviet Communist Party.  A mistake the Chinese did not make.  At least, not yet.

It would appear that Vladimir Putin wants to do what China did.  He is just trying to restore the glory days of the Soviet Union.  A Soviet Union enthusiast.   When people were cowed and feared the police state and did not protest.  Like good little communists.  The kind that he oppressed and disciplined during his days in the Soviet security police.  The KGB.  Similar to the Nazi Gestapo.   So Putin knows a thing or two about Soviet communism.  Tyranny.  And oppression.  Which is perhaps why the Russian people are none too eager to see him return to power.  And return the Russian people back to the glory days of the Soviet Union.

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President Obama Represents only those Americans who can Help him to Reelection

Posted by PITHOCRATES - December 25th, 2011

Week in Review

President Obama gives up on white working-class voters.  He’d rather just represent poor minorities and the college-educated.  People he likes.  Unlike those white working-class voters.  Apparently (see Obama campaign abandons white working-class voters in favor of minorities and the educated by Daily Mail Reporter posted 11/28/2011 on Mail Online).

President Barack Obama’s 2012 re-election campaign will be the first in modern political history to abandon white working-class voters, strategists claim.

For decades, Democrats have been losing more and more blue collar whites. Their alienation helped lead to the massive Republican wave in 2010, when the GOP wooed 30 percent more of them than the Democrats could.

Democratic strategists say President Obama is focusing his attention, instead, on poor black and Hispanic voters and educated white professionals.

‘All pretense of trying to win a majority of the white working class has been effectively jettisoned in favor of cementing a center-left coalition made up, on the one hand, of voters who have gotten ahead on the basis of educational attainment… and a second, substantial constituency of lower-income voters who are disproportionately African-American and Hispanic,’ longtime political reporter Thomas B. Edsall wrote in an opinion piece in the New York Times.

‘The 2012 approach treats white voters without college degrees as an unattainable cohort,’ he writes later.

LBJ declared war on poverty in the Sixties.  He was going to meet it, fight it and destroy it with his Great Society.  He lost.  For President Obama’s key to reelection is LBJ’s failure.  Poor black and Hispanic voters.  Which means either throwing money at poverty doesn’t work.  Or Democrats keep poor people poor to help them win elections.

White working people are apparently too dumb to know what’s best for them.  Except those in unions.  Because they still vote Democrat.  Which either means white union workers are smarter than white nonunion workers.  Or that white union workers have another reason for voting Democrat.  Such as the political protection they get in exchange for all those union dues that make it into Democrat coffers.

College educated whites?  That means the young and dumb who are in college.  Who don’t know any better and vote Democrat because Democrats are cooler.  They like to party, do drugs and have consequence-free sex.  And the arrogant and condescending.  College professors.  Those in the media.  And crony capitalists.  Those who skate through life not so much on their ability.  But who they know.  And they know well their Democrat friends.  Who can send federal money their way in exchange for all those political contributions that make it into Democrat coffers.

So apparently Barack Obama represents those who can best help him to reelection.  And not all Americans.  Funny.  Because Obama said there were no blue states.  And no red states.  Just purple states.  Which you get when you mix red and blue.  Meaning that he was going to represent all people.  He has either since changed his mind.  Or he was lying.

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The Democrats Prove there is no such thing as a Social Security Trust Fund

Posted by PITHOCRATES - December 25th, 2011

Week in Review

So much for that Social Security trust fund (see The GOP’s payroll tax debacle by Charles Krauthammer posted 12/22/2011 on The Washington Post).

This is a $121 billion annual drain on the Treasury that makes a mockery of the Democrats’ reverence for the Social Security trust fund and its inviolability. Obama’s OMB director took Social Security completely off the table in debt-reduction talks under the pretense that Social Security is self-financing. This is pure fiction, because the Treasury supplies whatever shortfalls Social Security faces. But now, with the payroll tax holiday, the administration openly demonstrates bad faith — conceding with its actions that the payroll tax is, after all, interchangeable with other revenue and never actually sequestered to ensure future payments to retirees.

This is the real reason why the Democrats are so steadfast against privatizing Social Security.  They want that money.  Our contributions to our retirement.  And if we privatize it they can’t spend it.  And if we privatize and die our heirs get our unspent retirement money.  The government doesn’t get to keep it.

The Democrats also love Social Security to scare old people with.  By saying the Republicans want to take it away.  And yet here they are.  The only funding mechanism for Social Security, those payroll taxes, is going on holiday.  The Democrats are defunding Social Security for two months.  Now that means one of two things.  They don’t care about the money being there for our seniors.  Or this 2 month holiday doesn’t amount to much money to either the Social Security trust fund.  Or the economy.

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Merry Christmas

Posted by PITHOCRATES - December 25th, 2011

Joy to the world! the Lord is come;
Let earth receive her King;
Let every heart prepare Him room,
And heaven and nature sing,
And heaven and nature sing,
And heaven, and heaven and nature sing.

Hark! the herald angels sing
Glory to the new-born King!
Peace on earth and mercy mild,
God and sinners reconciled!
Joyful, all ye nations, rise,
Join the triumph of the skies;
With the angelic host proclaim
Christ is born in Bethlehem!
Hark! the herald angels sing
Glory to the new-born King!

Said the king to the people everywhere,
“Listen to what I say!
Pray for peace, people, everywhere,
Listen to what I say!
The Child, the Child sleeping in the night
He will bring us goodness and light,
He will bring us goodness and light.”

 

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The British and Argentineans are disputing the sovereignty of the Falkland Islands Again

Posted by PITHOCRATES - December 24th, 2011

Week in Review

The British are making cuts in military spending.  Could there be another Falklands War afoot?  Now that some perceive that they don’t have the strength or the reach they once had?  Perhaps (see Britain slams Argentina, vows to protect Falklands by Mohammed Abbas posted 12/23/2011 on Reuters).

Britain has controlled the South Atlantic islands, located about 300 miles off the eastern coast Argentina, since 1833. Its two-month war with Argentina in 1982 resulted in the deaths of 255 British and about 650 Argentine soldiers.

The British government says it will only agree to sovereignty talks if the territory’s 3,000 residents ask it to, and that the islanders want to remain British.

Argentine President Cristina Fernandez has rejected the argument as a display of “mediocrity bordering on stupidity” and earlier this year called Britain a “crass colonial power in decline” for refusing to hold talks over the islands, known as Las Malvinas in Spanish.

The residents of the Falkland Islands are British in pretty much every sense of the word.  They speak English.  Visiting British doctors provide their health care.  The Islands were uninhabited when the British first landed on them.  There have been other Europeans there but it’s been mostly British.  The 1982 Falklands War was more a diversion from floundering Argentine economic policies.  The people who live there are for all intents and purposes British.  And want to remain British.  So why are the Argentines so intent on making this British population Argentinean?

Diplomatic tensions over the islands have increased in recent years over offshore oil exploration.

Oh.  That’s why.  The money.  Some things never change.

This isn’t a colonial colony where a foreign power moved in and oppressed the local population.  Something all European nations have been guilty of.  Including Britain.  But these islands had no local population when the British moved in.  Any other people that did live there at one time or another were other colonial powers.  Yes the islands are close to Argentina geographically.  But they are closer to Britain in every other way.  And probably should stay British.  At least, if that’s what the local population wants.

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Gallop Poll says Big Government is the Threat, not Big Business

Posted by PITHOCRATES - December 24th, 2011

Week in Review

Apparently the people aren’t buying the lie anymore (see Gallup: Under Obama, Growing Percentage See Big Government as ‘Biggest Threat’ by Terence P. Jeffrey posted 12/18/2011 on cnsnews.com).

While President Barack Obama has focused his rhetoric in recent weeks on depicting a reckless Wall Street and insufficiently taxed “millionaires and billionaires” as threats to the American middle class, a newly released Gallup poll indicates that Americans apparently have been coming to a different conclusion during Obama’s presidency, with fewer people now seeing big business as the “biggest threat” to the country in the future and more seeing big government as the “biggest threat.”

The people see Big Government as the biggest threat.  Because it’s been the Obama policies that have been strangling the economic recovery.  So much so that there is no economic recovery.  Regulatory and tax policy are just so anti-business.  Obamacare being the big one.  Putting a hold on hiring and expansion across the board.  Because businesses just don’t know the full cost of compliance yet.

The Obama administration has made million Americans safe from the oppressive employment policies of businesses, though.  Simply by extending their unemployment.  As nice as that may be to some most of the American people would prefer gainful employment.  They dream of returning to the days when there was gainful employment.  And less government interfering with the economy.  Far less government.

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Kim Jong Il was as bad as Adolf Hitler when it came to Genocide and Famine

Posted by PITHOCRATES - December 24th, 2011

Week in Review

Adolf Hitler was a monster.  His Nazi regime was a killing machine.  But he was just one of many monsters (see Revealed: the gas chamber horror of North Korea’s gulag by Antony Barnett, The Observer, posted 1/31/2004 in the Guardian).

In the remote north-eastern corner of North Korea, close to the border of Russia and China, is Haengyong. Hidden away in the mountains, this remote town is home to Camp 22 – North Korea’s largest concentration camp, where thousands of men, women and children accused of political crimes are held.

Now, it is claimed, it is also where thousands die each year and where prison guards stamp on the necks of babies born to prisoners to kill them.

Over the past year harrowing first-hand testimonies from North Korean defectors have detailed execution and torture, and now chilling evidence has emerged that the walls of Camp 22 hide an even more evil secret: gas chambers where horrific chemical experiments are conducted on human beings.

You read that right.  Genocide.  In North Korea.  Not Nazi Germany.  Under the stewardship of Kim Jong Il.  The Dear Leader.  Not the Fuhrer.  Adolf Hitler.  Different men.  But the same contempt for humanity.

Of course, some have a different opinion of him.  After meeting him in person.  And spending time with him.  Like Madeleine Albright in the Clinton administration.  The administration that gave him the technology for intercontinental ballistic missile guidance systems.  She said he wasn’t peculiar.  He was intelligent.  Well-informed.  “I found him very much on top of his brief,” she said.

This about a man who brought North Korea down to her knees (see Kim Jong Il: Road to ruin by Nicholas Eberstadt posted 12/21/2011 on The Los Angeles Times).

He was also the first ruler of an urbanized, literate society to preside over a mass famine in peacetime: The Great North Korean Famine of the 1990s, which erupted shortly after his father’s death, is believed to have killed hundreds of thousands of his subjects, and perhaps more. (Outsiders cannot know the precise toll; that figure remains a state secret.)

Since the very late 1990s, when North Korea’s famine apparently subsided, the food situation in the country has remained desperately precarious: Resumption of famine has been forestalled only by humanitarian food aid, Western economic assistance and Chinese largesse. Thus Kim Jong Il also earned the lifetime achievement award for overseeing the first industrialized economy ever to lose the capacity to feed itself.

God help the North Koreans.  For their leaders surely aren’t.

Kim Jong Il is dead.  Now the North Koreans can suffer Kim Jong Un.  Considering what Kim Jong Il did after inheriting power from his dad, Kim Il Sung, their future doesn’t look any better.  For the young sons seem to want to outdo their dads in tyranny and oppression.

Sadly, Camp 22 will likely have a prosperous future under Kim Jong Un.  For all dictators have their camps.  Unless Kim Jong Un is a closet capitalist.  It’s unlikely.  For brutal dictators don’t hand off power to nice people.  But one can always hope.  And that’s about all the North Koreans have these days.  Besides genocide and famine.

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