Tuesday, December 2, 2008

Consumer Price Index & Inflation

There are basically two kinds of goods. Those needed by the consumer - food, clothes, leisure, health, etc. and those needed by the producer - factories, companies, brands, patents, buildings and assets... And there is some stuff used by both - semi durable goods used for production, like cars, computers, etc

Most central banks act when they see a rise in the level of Consumer Good prices (CPI), they also generally act against any rise in the general wage level as it may lead to inflation and further increases in the CPI.

But rarely do Central banks act when they see a rise in the general level of producing good prices, and it is clear that all asset prices have risen recently, including housing and stocks.

They also do not act to buffer a general rise in company profit levels, although it usually leads to further increases in producing good prices.

Why are central banks and economists so happy when production good prices rise relative to consuming good prices ? Could it be that the political power resides with big business?

Of course. It also goes some way to explain why the bail out of big business is the "preferred" path is addressing the current financial crisis.

Pity really, as putting money into real wages and investing in broad scale community resources and infrastructure would more rapidly fill the debt bubble with real economic demand and big business would be better off in the long term.

Fixing the Current Financial Problems

The theory runs that you can boost global demand by offering more credit - or increasing debt. And economists argue that the world needs the growth in total demand to absorb the productivity gains in Asia.

So let us look at schemes by which domestic demand can be boosted - offering increasing levels of credit/debt or alternatively - boosting social spending via domestic government programs; direct financing of government deficits by domestic central banks; and increasing the minimum wage and increasing other family incomes.

These last three increase inflation, but inflation is a debt reducing factor and in the current climate may be healthy.

The other side of the coin though is that the debt bubble has been politically encouraged because it boosts investment profits, and the political power assumed by this profit flow has meant that real wages have stagnated, more low and middle class wage earners owe more money to asset holders, and more small asset holders owe more money to big asset holders and their intermediaries.

A real and democratic solution would be to raise real family incomes and real wages, even creating jobs in stressed areas - but that requires an elected government facing off criticism from big business and economic think tanks, who actually know this action will solve the problem but are loath to admit it, preferring to offer the bail out of big business as the only solution.

Its a pity, but the political power lies with those who a) profited by the debt bubble, and b) look like profiting from the "solution"