Falling into deflation or stagflation has always been one of the greatest fear for politicians, economists and enterprises. A negative inflation rate theoretically means less money is available, in turn that means less credit and everybody knows what that means in a debt-dependent world like ours. Also deflation is correlated with lower prices, which people tend to associate with depressed economic growth. Whether one agrees with this affirmation or not, during last year's credit crunch it made some sense to be fearing deflation and its consequences, thus no one worried about currency devaluation and general credit easiness to avoid it all costs.
Now, after the crunch is mostly forgotten and credit channels work again as normal, it begins to look like a flagrant excuse to keep interest rates at all-time lows and to support the worrying commodities rally.
Strangely, some economists are still asking for a moderately higher inflation as a way to increase competitivity and as a way to cut salaries inadvertently (you cannot lower them without complaints, but you can make them effectively lower by increasing inflation) to boost employment. Everybody knows how to raise inflation, what is difficult is controlling its raise. Raising inflation when official levels are well under 4% would no be a problem by itself, the issue here is that official inflation levels are all wrong.
Lately there has been a trend worldwide to report inflation levels without taking into account energy prices and usually without house rent prices too. In some other cases these goods/services are included, but heavily under-weighted anyway. What a greatly biased way to report inflation! Let's take all the things that have risen in price out of the goods basket...
This is a blatant, open-faced lie, and governments must be assuming their people are all stupid if they think someone will believe their numbers even though reality is totally different.... Let us have a look at the european goods basket used to measure inflation. I will be using only Europe data on this article but I think it can be mostly extrapolated to the US situation.
European inflation engineering
Starting with the european data, we have 9.7% in recreation and culture; 9.4% in restaurants and hotels, 8.5% in miscellaneous goods and services (whatever they are) and 7.1% in household maintenance, that sums 34,7% of the total budget for non-essential goods and services! Quick note: non-essential usually means flexible demand and consequently more stable prices. Meanwhile, food and beverages account for 15.6%, this same percentage is also applied to the sum of housing and all utilities costs. Transport is more adequately weighted at 15.2% though.
With these unbelievable baskets here are the resulting inflation charts for the biggest economies in Europe, for the eurozone as a whole and for the European Union. We can see a well-baked 3%
What can be the reasoning to weight all energy costs plus food consumption lower than non-essential things? Go out in the street and ask the first person you come across if they feel this weighting is accurate or if the burden they must bear from housing and ever-rising food prices is higher than the stated 31.2% of the budget. If governments were honest the housing, energy and food baskets should account for more than 60% of the total. Let us take a look at the same chart but this time only for energy prices:
As you can see the 2008 spike in fuel prices is clearly represented in the inflation charts, but the actual price spike is not that clearly seen, not reaching 4% for Europe with the exceptions of Spain and the UK which are at unbelievable (both but for different reasons) 6% and 0.5% levels respectively.
If we take a quick look at the transport-only chart we have 5% inflation for almost all Europe, with Spain clearly 'in the lead' as usual, this time with a 9%...
After looking at all these charts one can clearly see the reason for the unreal good/services basket weighting, if the European Union did a realistic weighting we would be probably talking about an inflation level dangerously near 6%. How is that for a contained inflation? The European Union is lying, with real inflation levels that high the first move to take would be to slowly but steadily rise interest rates. But doing that would harm the weak (mostly artificial) recovery we are living in.
The European Union is all-in with this lying strategy to continue with their economic stimulus plan, but it is a risky bet. They are hoping that keeping interest rates low will help the economy grow fast enough to compensate for the inflation easiness this situation creates. If the economy was to grow at the needed pace, unemployment would go down on the long term but the effect this would have on inflation is not clear. More demand for a given product can mean more interest in its obtention/fabrication, which can make prices go down; but if the primary goods which it comes from are limited it can also mean higher commodity prices and that would be the last thing the economy growth needs now, further commodity price rises.
We reach a Malthus-based crossroad here, do we still have room for improvement? Can we have another industrial revolution to compensate for sky-high energy and food prices? Or should we begin to learn that we will not be able to afford what we can afford now, that we have lived far above the worlds' possibilities?
Thinking clearly one can see that at the evolutionary point we are now an industrial revolution is not likely to happen, at least not in the next 10 years... This means the only way to prove Malthus was wrong is to improve efficiency and competitiveness in every single process in every single sector of our economies. Drop the inefficient sectors completely if needed.
Lately there has been a trend worldwide to report inflation levels without taking into account energy prices and usually without house rent prices too. In some other cases these goods/services are included, but heavily under-weighted anyway. What a greatly biased way to report inflation! Let's take all the things that have risen in price out of the goods basket...
This is a blatant, open-faced lie, and governments must be assuming their people are all stupid if they think someone will believe their numbers even though reality is totally different.... Let us have a look at the european goods basket used to measure inflation. I will be using only Europe data on this article but I think it can be mostly extrapolated to the US situation.
European inflation engineering
Starting with the european data, we have 9.7% in recreation and culture; 9.4% in restaurants and hotels, 8.5% in miscellaneous goods and services (whatever they are) and 7.1% in household maintenance, that sums 34,7% of the total budget for non-essential goods and services! Quick note: non-essential usually means flexible demand and consequently more stable prices. Meanwhile, food and beverages account for 15.6%, this same percentage is also applied to the sum of housing and all utilities costs. Transport is more adequately weighted at 15.2% though.
With these unbelievable baskets here are the resulting inflation charts for the biggest economies in Europe, for the eurozone as a whole and for the European Union. We can see a well-baked 3%
 |
| Credit: Eurostat |
What can be the reasoning to weight all energy costs plus food consumption lower than non-essential things? Go out in the street and ask the first person you come across if they feel this weighting is accurate or if the burden they must bear from housing and ever-rising food prices is higher than the stated 31.2% of the budget. If governments were honest the housing, energy and food baskets should account for more than 60% of the total. Let us take a look at the same chart but this time only for energy prices:
 |
| Credit: Eurostat |
If we take a quick look at the transport-only chart we have 5% inflation for almost all Europe, with Spain clearly 'in the lead' as usual, this time with a 9%...
 |
| Credit: Eurostat |
A reason to lie
If we were to combine the real inflation level with the latest unemployment data the situation would be even more critical, that is why governments think it is better to shut up and keep going with their interests. They are lying and they will keep lying, because if they were to tell the truth maybe they should begin to worry about the birth of unhappy civil movements like the ones seen all across the African-Mediterranean countries and the Middle-East. Let me clarify, the situation is very different in Europe than in those countries, and the size of the problem is different too, but the underlying reasons to be unhappy is the same...
A way to go
The European Union is all-in with this lying strategy to continue with their economic stimulus plan, but it is a risky bet. They are hoping that keeping interest rates low will help the economy grow fast enough to compensate for the inflation easiness this situation creates. If the economy was to grow at the needed pace, unemployment would go down on the long term but the effect this would have on inflation is not clear. More demand for a given product can mean more interest in its obtention/fabrication, which can make prices go down; but if the primary goods which it comes from are limited it can also mean higher commodity prices and that would be the last thing the economy growth needs now, further commodity price rises.
We reach a Malthus-based crossroad here, do we still have room for improvement? Can we have another industrial revolution to compensate for sky-high energy and food prices? Or should we begin to learn that we will not be able to afford what we can afford now, that we have lived far above the worlds' possibilities?
Thinking clearly one can see that at the evolutionary point we are now an industrial revolution is not likely to happen, at least not in the next 10 years... This means the only way to prove Malthus was wrong is to improve efficiency and competitiveness in every single process in every single sector of our economies. Drop the inefficient sectors completely if needed.
Germany is already in the right track to prove this solution. Its economy is growing at a good pace, and at the same time their inflation levels are under the eurozone average on all the above charts, which makes for a stable near-future that will help Germany grow further. Competitiveness is the only way to go.
No comments:
Post a Comment