19 July 2013

Day 241: Will Inflation be a Problem with Providing a Living Income Guaranteed?

infeco ‘Inflation’ is one of those big posh words that people like to use when they want to show off that they’re “in the know” of economics and money mechanics. You hear it on the news, tv, the internet and when you listen to other people talk about it, it never really becomes clear ‘what it is’ or ‘why it is so important’. But you won’t ask about it because you don’t want to appear like you’re “not in the know”. It’s kind of like the story of The Emperor's New Clothes, where only ‘smart people can see’ the clothes and where everyone pretends that they can see his wonderful clothes while he’s actually walking around in his undies (or naked depending on your source )… It’s just something everyone has agreed upon has ‘great importance’ but no-one really knows the “how’s” and “what’s” and no-one questions it.

So is inflation really this ‘big’ and ‘complicated’ concept that only our economists are in the know about? Not really. I mean, one of the first things you will learn when getting to the topic of inflation is that there is very little known about the exact causes of inflation and how good or bad it is for the economy. Most of the time, the concept will be used to suite the authors ideological standpoint and so you get a lot of conflicting answers to the same question.

So what is inflation? Inflation (because no-one really knows how it works) has been given a very simple and broad definition – so that you can’t really ‘go wrong’ with it:

Inflation simply refers to the continuous increase of prices in an economy. So - two points are important to note: if prices go up and then remain stable for a while, we don't refer to it as inflation, as inflation only applies to a continuous increase in prices. Secondly - if the price of petrol keeps rising, but all other prices remain somewhat stable, we're also not dealing with inflation, because in the case of inflation all prices keep rising.” 

This is taken from one of our previous blogs we made which was on the topic of Inflation, so if you want to read up about it you can do so here: Day 64: Inflation - Part 1 (also read the comments).

So you see, inflation is nothing scary or complicated, it’s just prices of all things going up and up over time. When the ‘issue’ of inflation is brought up, it’s not so much the rising of the prices that is an issue – but the wages that lag behind. Because what happens is that you used to be able to buy say a thousand breads with your monthly salary, and with the prices going up and your wage remaining the same – you can now suddenly only buy 800 breads. So here, you have a problem because your purchasing power has been diminished. Because obviously so long as you keep the variables on either side of your equation in proportion – you won’t have a problem and you’ll be able to buy just as much. It’s only when one variable goes up and the other one stays the same or lowers – that you get a problem in your proportions. What happens then is that people will start buying a lot and hogging things because they fear the future prices which will be higher, but then within this increase in consumption place the products in ‘higher demand’ and thus up the prices again – so it becomes a self-fulfilling prophecy to the point where you get hyperinflation.

So with putting into place a Living Income Guaranteed to ensure everyone’s Living and placing in a Minimum Wage amounting to double the LIG – yes, your prices will go up and so yes, that could be considered ‘inflation’. But remember that inflation in itself a neutral manifestation – meaning, it just is what it is as pricing going up. It doesn’t mean anything else. It only starts meaning something else when we fail to adjust ourselves where nominal wages remain the same while real wages go down. So yes, there will be inflation but it won’t be a problem from the perspective that your prices are directly linked and interconnected to your wages where at all times your Living is Guaranteed and thus your wages / living income will adjust to the prices to make sure everyone is able to live decently and vice versa where your prices will adjust to ensure that you get a decent wage. Here one must also consider that we will have Bureaus of Standards in place managing Quality Assurance and Control where there will be a move from obsolescence and disposability to quality and durability – which means that you will have to buy less.

So from that perspective – the whole “inflation” horror story will become something of the past as it simply won’t be able to affect anyone to the point where it does damage, as your wages and prices are no longer separate bodies but closely connected and intertwined. You will thus at all times, be protected.

Another point where inflation becomes a problem is when it is linked to a growing money supply without a matching growth in economic activity. So when the government for instance decides to finance its debt simply by printing money – you suddenly have an increase in your money supply which makes money ‘worth less’ (because ‘scarcity’ makes things ‘more valuable’ and so the opposite happens). Because this money came out of nowhere without originating or being connected to any form economic activity of real value such as labor and production – your system / equation gets thrown out of balance and all these money born out of ‘no value’ in turn has the effect devaluing / tainting all other money already present.

This type of situations will not be occurring within a Living Income Guaranteed as proposed by the Equal Life Foundation, as you will be able to discern for yourself from our previous blog on banking: Day 240: A Bank for the People, as banking/financing will always be directly related to actual activity, actual growth and actual value – and will thus not be able to throw the system out of balance.

Also check out Will the Living Income Guaranteed cause Inflation?, to get a new perspective on Inflation and to see and realize how inflation it its traditional use of the word has become a distraction of the actual Inflation taking place in our lives and in the economy – where inflation is an actual problem.

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  1. Cool, I had wanted to ask about this as it is the main argument I see thrown around and I have not understood it, but I was unsure if it had been addressed so thanks for posting and linking to other posts.

    What is weird to me, and maybe it is a lack of understanding, is: don't we set our prices? I mean that's not just some magical entity that exists into itself. We create our economies, so can't we control and adjust these things to meet the needs of the people the system is in place, supposedly, to support? Like people act like 'inflation' or other things are like laws of physics or something, the tragic consequence of which is poverty and inequality, as if there is no solution, "that's just the way it is, oh well, too bad, at least I'm doing ok."

  2. There is a lot in economics as how it currently exists that we can 'set up' the way we want it to, if we make the decision to do so. The problem though is that throughout history all these little 'short-cuts' have been implemented which are basically like 'cheats'. An example for instance was the creation of fractional reserve banking. It happened as a 'cheat' -- but when it was discovered, it was already too late, it had already taken on a life of its own and the whole economy was now dependent on this cheat / lie of creating money out of nothing. So we've been keeping that cheat going since then. This is just one example, but there are many such loopholes/shortcuts within economics where people simply wanted to make a 'quick buck' and 'make the system work for them', and then within doing so disrupted the whole balance of the system where it each time matches less and less of what actually goes on in the world and takes up a life of its own. So because of all these cheats, there are points in the system where things happen that we have "no control" over so to speak, which is only because we've accepted and allowed these cracks in the system where there is zero-accountability which accumulated over time. So the point would be to go back and fix all those points where we made short cuts, thinking it was 'no biggie' and turned into monsters -- and to re-align our system of economics to how physical reality moves and not trying to cheat it.

  3. Inflation isn't just a weird thing that happens over time.

    Inflation is an increase in the money supply (which you have mentioned but in a different context)

    Rising prices are a result of this increase, they are not 'inflation' itself per se.

    Inflation is the value of your money becoming less, as there is more of it, yet there are the same amount of goods and services that it covers.

    I fear that to get better harmony in an economy you will need to re-introduce a commodity as money (like gold or silver historically) and change laws such as a CEO's fiduciary responsibility.

    1. For perspective on your comment - please read: "Transforming Currency into Money with Living Income Guaranteed": http://economistjourneytolife.blogspot.com/2013/08/day-244-transforming-currency-into.html

  4. They changed the meaning on inflation once Nixon got off the gold standard. It used to be the expansion of the money supply. If you look at old dictionaries it would state that. But now the modern dictionary states that inflation is 'rising prices'.

    I believe they changed this because governments don't want to be held responsible because they control the money supply, so when prices go up, they would be to blame. But now since its just 'rising prices'..,. they are not on the hook and can blame businesses for being greedy and rising prices. Plus governments can now easily tax without directly taxing the individual but rather by printing money and using inflation as a tax to promise more hand outs for the citizens and thus getting reelected.

    Currency is just a way to divvy up what is already produced into the economy. Say there are 10 breads in the economy and 10 dollars in the economy. So effectively 1 dollar can buy 1 bread. Now if you add money into the economy like this basic guaranteed income will do.. say you add 20 dollars and there are still 10 breads. Now it will cost 2 dollars for a bread. I would even argue that there would be less bread available because once you give the people an incentive not to work there would be less production and prices will go up even more.

    In ending I would also like to say one important fact that people tend to dismiss about inflation. Companies naturally get more efficient overtime and produce more goods with less labour.. effectively making goods less expensive and better made. When people see 0% inflation.. It is not really 0%. Because the inflation number doesn't take into account the effectiveness that a free market creates in lowering the cost of labor and and that better our lives. Prices should be coming down overtime. In the late 1800's and early 1900's there was deflation and that was arguably the most economic robust time in history.