Home > Uncategorized > Where does inflation hide?

Where does inflation hide?

from Herman Daly

The talking heads on the media explain the recent fall in the stock market as follows:

A fall in unemployment leads to a tight labor market and the prospect of wage increases; wage increase leads to threat of inflation; which leads the Fed to likely raise interest rates; which would lead to less borrowing, and to less investment in stocks, and consequently to an expected fall in stock prices. Therefore investors (speculators) rush to sell before the expected fall in stock prices happens, bringing about the very fall expected. So the implicit conclusion is that rising wages of the bottom 90% are bad for “the economy”, while an increase in the unearned incomes (lightly taxed capital gains) of the top 10% is good for “the economy”. The financial news readers of the corporate media avoid making that grotesque conclusion explicit, but it is implicit in their explanation.

A wage increase, in addition to cutting into profits, is considered inflationary, and that leads the Fed to raise interest rates and choke off the new money feeding the stock market boom and related growth euphoria. But higher interest rates serve other functions, most notably to keep capital from being wasted on uneconomic projects that are financially lucrative only at zero or negative interest rates. Furthermore, positive interest rates reward savers, provide for retirement and emergencies, and even reduce the inflationary effect of consumer spending. 

As long as officially measured inflation is low the Fed can keep on pushing money into the economy to finance the asset boom. But why, with so much added money has there apparently been so little measured inflation? In truth there has been a lot of inflation, but it has simply not been measured by the Consumer Price Index (CPI). Why is that? Because the new money is borrowed into existence by investors who use it mainly to buy existing assets (stocks, bonds, real estate, art, crypto-currencies, etc.) . The price of assets goes up; we have asset price inflation, but asset prices are not part of the CPI and go uncounted. Inflation occurs in asset prices rather that in consumer goods prices, leading to boom and bust cycles.

Also some inflationary pressure spills into the goods markets, but does not register directly as a price increase and thus goes uncounted. Examples are numerous. At the supermarket the price stays the same while the box of raisins gets smaller, the block of cheese shrinks, the cup of yogurt is less full, the self-checkout line becomes the only option, etc. Air fares may not go up, but seat space declines, “miles” become ever more difficult to redeem, and quality of service becomes aggressively bad. Everywhere customer service declines as recorded “answers” replace real people (“your call is important to us—please stay on the line”). Our premier newspaper, the NYT, may not raise its price but it repeats the identical articles over and over after day and in various sections of the same edition. The price to watch network TV is to endure the commercials, which keep getting longer and louder. In sum, quantitative easing has resulted in unmeasured inflation, mainly in the asset market, but also in the consumer goods market.

Economists at the Fed are not stupid – they know this. Why then do they not correctly measure inflation and stop quantitative easing and the resulting zero (or even negative) interest rates? Because increase of asset prices benefits the asset owners, the rich, while the smaller rise in the undercounted CPI hurts mainly the poor. Also, under our fractional reserve banking system new money (interest-bearing private debt) must be loaned into existence, and banks lend to those with collateral, those at the top. In a sovereign money system the new money (non interest-bearing public debt) could be spent by the Treasury into the economy at the bottom to finance public goods and real production and employment (for an explanation of sovereign money, see Positive Money. Giving private banks the right to create money, as does our fractional reserve system (that no one ever voted for), is a giant subsidy to the private banking sector. Incidentally, the Fed is owned by these member banks who profit from excessive money creation, even though it is supposed to act independently in the public interest.

See article on original site.

  1. February 22, 2018 at 1:03 am

    As I’ve seen hinted but not spelt out – ‘inflation’ measures don’t count (properly) house prices etc. Thanks.

    • February 23, 2018 at 12:46 am

      About two decades ago, I argued in my Master’s thesis that the government’s calculations of ‘The Inflation Rate’ hid some very important information re: inflation that all economists should really care about and want to measure: the variance of inflation rates across different income groups.

      It is indeed possible for one income group to experience robust, accelerating inflation at the same time that another income group is experiencing dis-inflation, or even deflation. Even a cursory review of the historical data shows that this is precisely what has happened in America since Congress began in the 1980’s to throw free money at all rich people through successive reductions in their income tax obligations.

      This very important economic reality has been hidden from view by government estimates of “the overall rate of inflation” which intentionally exclude changes in asset prices from their calculations. Changes in assets prices are treated as a special sort of economic phenomenon that has nothing at all to do with inflation, but is an important indicator of the health of the entire economy.

      Whether this misrepresentation of inflation is intentional, as Herman Daly and I both suspect, or simply the result of the mind-blowing ignorance of generations of theoretical economists, it is an analytical failure that can be rather easily corrected by compiling and publishing a spectrum of inflation rates which spans the entire hierarchy if disposable incomes.

      This would be derived, of course, through the identification of “market baskets” which rationally apply to the members of particular income brackets. How do they spend most/all of their disposable income?

      Money that rich people spend on financial and real assets would have to be included in market baskets of rich people, properly weighted to account for the percentage of their income that they apply to those purchases.

      The result would be a spectrum of inflation rates which would provide policy-makers with some important information re: the consequences of their fiscal policy options.

      One revelation: the asset bubbles we’ve seen over the past four decades are actually entirely attributable to the income tax cuts that rich people have been given over that period. If you want to prevent asset bubbles, or at least moderate them, then stop cutting the taxes of rich people, or maybe even raise them once prices in asset markets start to accelerate.

      Publishing a spectrum of inflation rates would force economists and policy-makers to ask: why should we, or shouldn’t we, recommend a fiscal policy that will grant one income group a higher rate of inflation than other groups? What real economy consequences can we point to that would justify such a policy?

      Ultimately, I suppose, we have Irving Fisher and his references to “The Price Level” for popularizing the specious notion that Inflation is a mysterious effect within the economy which spreads out evenly over the entire economy like a mist. Nothing of the sort is remotely true.

      Note to government economists at the BLS: publishing an “average” inflation rate which hides the variance of inflation rates across income groups is an analytical failure—and intellectual sin—that economists as a clan should feel profoundly embarrassed about…

      • February 23, 2018 at 12:11 pm

        I totally agree with James on the logical need for seeing the variance of inflaction rates. Re Geoff’s comment about house prices, I sold my then house in 1988 for around £100,000 and in 2012 it sold again for around £500,000, which is a lot more than twice as much (the consumer price inflation shown of James’s graph during the same period. Over the same period my pension has kept up with the CPI, but what has happened to other people’s incomes has been not only that a lot have moved downward and a relatively few moved upward, but that work has become more intermittent so that the average incomes for the groups (and particularly the lowest group with a large amount of unemployment and defrauding of pensioners and care workers) is considerably less than might be thought by extrapolating from average wage levels.

        Getting something done about this is another matter, when government is dominated by self-serving financiers whose political philosophy is Machiavellian laissez-faire. Whatever government says to satisfy its supporters, it actually does nothing which would would require it to do anything for real.

        Jeff’s arguments below don’t seem to fit the case of existing assets like second hand houses, these not including the imagined future values of fraudulent “financial assets”. Also, it is easier to raise prices or licence patents and sell broadcast entertainment than to produce more goods.

        I agree with Garrett, this shouldn’t a problem for old men like Herman Daly (good for him) and most of us. Unfortunately it is. Mathivananpalraj and Vic make observations I can agree with; I don’t think Larry is right about how things are done now. Governments commit their people to bonds and enable banks to create money at interest so that people can buy them, thereby adding to the so-called National Debt. I’ll respond well below here to Craig, after his February 22, 2018 at 8:31 pm.

      • February 24, 2018 at 12:06 am

        Interesting James, thanks. Is there a paper or article somewhere?

        On economists being embarrassed: clearly immune.

      • February 24, 2018 at 3:15 am

        Interesting James, thanks. Is there a paper or article somewhere?

        Currently, the best elaboration of my argument on the Internet can be found in a rather lengthy essay I posted on my website entitled: Why Rich People Should Insist On A Full-Employment Economy It includes an expansive analysis of the phenomenon of inflation, which is of course one of the major concerns rich people worry about whenever they hear someone call for the elimination of all unemployment. A more narrowly focused article on the phenomenon of inflation is not yet ready for publication.

  2. February 22, 2018 at 1:18 am

    “Inflation occurs in asset prices rather that in consumer goods prices, leading to boom and bust cycles.”

    More to the point, “Inflation” that includes asset and price inflation is a bad logical category. It is impossible to have both large amounts of consumer price inflation and asset price inflation because consumer price inflation implies that sellers raise prices rather than just making and selling a greater quantity, and making a greater quantity would mean that dollars flowing into assets would be targeted toward increasing capacity rather than prices.

    ” but does not register directly as a price increase and thus goes uncounted.”

    I thought that the “basket of goods” methodology was supposed to directly account for this.

    • February 22, 2018 at 1:26 am

      My example above may not have been clear. If extra consumer dollars are going into price increases rather than quantity increases it proves that capacity is constrained. If extra asset dollars are going into price increases rather then into new physical capital that can increase capacity it proves that capacity is not constrained. Additional dollars for both consumption and production would go into quantity increases until the increase on one side was “used up” leaving only the other side to go into price increases. There are a few examples of non-increasable goods but these are just temporary until the market shifts (eg. shortage of oil drives sales of solar panels).

  3. Craig
    February 22, 2018 at 2:03 am

    The pulled three ways from the middle while private finance dominates every other business model and 98% of the general populace clap trap we call macro-economics doesn’t just need tweaking or even a new theory, it requires a new paradigm to replace the current one which is debt only. Macro-economists are generally so far abstracted from the day to day operations of the economy that they fail to see significant points where monetary policy applied could have strikingly positive effects for all agents both individual and commercial. An example of this is missing the fact that consumer inflation and even asset inflation for mortgages is terminally expressed at the point of retail sale. Hence a monetary policy of a 50% discount to consumers at that point that was rebated back to the merchant giving it would immediately double everyone’s purchasing power, integrate what is currently considered impossible, i.e. implementing price deflation into profit making systems and as a kicker break up the monopolistic paradigm of debt only that private finance has so long and so mysteriously enjoyed in what is supposed to be a competitive free market system. The new monetary and economic paradigm is Monetary Gifting. A new paradigm is a single concept like Agriculture or Helio-Centrism that is in some significant way an oppositional concept to the current paradigm, resolves long standing and seemingly unresolvable problems, becomes the new primary concept that every agent in the body of knowledge or area of human endeavor adapts to….and not the other way around. This is historical fact.

    Of course even new paradigms require additional and aligned regulations and this would be true with Monetary Gifting as well, but again, a new paradigm’s striking and undeniable progression has always carried the day. When was the last time an economist or politician on either side of the aisle crafted a policy that immediately doubled your purchasing power and not only eliminated inflation but implemented price deflation painlessly and beneficially into the system? Fast answer: Never.

    Recognizing a new paradigm is an incredibly clarifying, focusing and uniting personal and systemic event and makes aligning policy and regulation with it a straight forward rational process, but if you don’t recognize the paradigm first you can do a lot of figure-figure-figure on matters,suggest all manner of theory or policy that aligns with it somewhat but doesn’t have the full effect of seeing the paradigm and also does not discover the new insight that enables the expression of it throughout the new pattern. A new discovery or insight is another signature of new paradigms. It’s like discovering the growing season and animal husbandry or the telescope and the ellipse.


  4. February 22, 2018 at 2:30 am

    “Economists at the Fed are not stupid – they know this. Why then do they not correctly measure inflation and stop quantitative easing and the resulting zero (or even negative) interest rates? Because increase of asset prices benefits the asset owners, the rich, while the smaller rise in the undercounted CPI hurts mainly the poor.”

    Thank you,

    Diplomacy! Herman Daly elder statesman. Even so; this is a youthful cutting edge challenge.

    And a tad dangerous without followup relating accelerating evolution and cosmic expansion.

    What will happen when oligarchs that control every election realize Cosmos is out of control?

  5. February 22, 2018 at 5:09 am

    ‘Economists at the Fed are not stupid’- When nobody wants to invest at a time there is no demand the best time pass is gambling. In gambling some are losers and some are gainers. The losers are less confident and more careful while the gainers are less careful and more confident the next day. However, the less careful and more confident tend to celebrate their victory.

  6. February 22, 2018 at 5:25 am


    The CPI and the PPI were pretty consistent from WWI to about 1980, and diverge sharply after that.

  7. February 22, 2018 at 5:59 am

    And yet we have a sovereign money system now. New money can be spent by the Treasury into the economy at the bottom to finance public goods and real production and employment now. Simply capping bank lending without adequate regulation could mean that speculation continues and lending for productive purposes to small business curtailed because the banks find it the least profitable. Spending and regulation is called for; changing to a 100% reserve system in itself will change little.

  8. Craig
    February 22, 2018 at 5:14 pm

    If you don’t perceive at the level of paradigm you can theorize for ever and not see either the singular concept to base and align all policy and regulation on, or the new pattern that they all fit into. There’s nothing wrong with theorizing of course, but it’s such a much more simple rational process….after you perceive the paradigm.

    Paradigm perception is the systemic equivalent of awareness….of awareness, i.e. consciousness itself. This is not new age BS it’s simply thorough going integrative thinking. Again, once you know the new paradigm you see its aligned policies, regulations and structural necessities so much more clearly and definitively, and then all you need to do is gen up the mass movement necessary to herd the entire political apparatus toward its sanity and beneficial effects.

    I agree with theorists and reformers like Michael Hudson, Steve Keen and MMT. Now let’s recognize the paradigm that unifies their thinking and get it implemented….with post haste.

    • February 22, 2018 at 5:38 pm

      Well yes, Craig; so what do you make of what I keep trying to say? What I see deficient in your arguments is any mention of the form of payback for the giving. It certainly shouldn’t be tit for tat, as the monetarists now demand.

      • Craig
        February 22, 2018 at 8:31 pm

        The pay back is every cent of the retail merchant’s discount/gift to the consumer so that they are made whole on their overheads and margins of profit. The new paradigm is Direct and Reciprocal Monetary Gifting. It is distributed by mandating the central bank to do so or another monetary authority specifically mandated to do the same. That is not the indirect, abstract, flawed and elitist financial nonsense of monetarism. It is the new paradigm of Direct and Reciprocal Monetary Gifting. Any other questions? I’ll be happy to address them.

        Steve Keen correctly identifies the fact that modern economies are demand constrained and in disequilibrium. But he didn’t see that we can create what I refer to as “the higher disequilibrium” by cogniting on the fact that retail sale is the terminal expression point for inflation and utilize the digital nature of the pricing and money systems and implement a discount/rebate policy that breaks up Finance’s virtual monopoly on credit creation and is of a high enough percentage that no enterprise can game it or resist opting into it.

        Michael Hudson correctly rails against Finance as parasitical. The fact that one agrees to buy a home from a home building corporation for $200k…and then POST that retail sale you have to go to a bank and add on a note that increases your costs by a factor of 3 or 4….exposes finance as an exterior parasite that has been problematic for at least the last 5000 years as David Graeber has written about. It is the sheerest of folly that private finance with its monopoly paradigm of Debt ONLY can be stabilized. Public control of Finance of course has its own problems….unless its policies are directly and reciprocally beneficial to both the individual and enterprise….like the 50% retail discount/rebate which is the virtual expression of the new paradigm and a public monetary authority which does not allow libertine financialized speculation.

        MMT has the system mechanics of money creation correctly defined. What they don’t see is the above discovery of the power of monetary policy linked directly to retail sale so that price deflation is painlessly and beneficially integrated into profit making systems. They also do not see the actual greatest insight of MMT which is that with the primacy of the new paradigm, i.e. DIRECT CREATION and distribution of credit/money….the government can fund itself without the need for income taxes. Instead they punt on politics and mistakenly advocate for a job guarantee only as the way to increase demand which is completely old paradigm while dismissing the aligned policy of a directly distributed universal dividend which paired with the discount/rebate policy immediately ends poverty. (Of course as an adjunct and aligned policy a job guarantee could be a part of new paradigm thinking for anyone who is having problems with finding purpose in addition to or without employment.)

        The paradigm level of thinking. It clarifies, focuses and unites the best reforms.

  9. February 23, 2018 at 6:01 pm

    So, Craig, you’ve not answered my question (“what do you make of what I keep trying to say?), but you have responded to my critique of your own argument (no “mention of the form of payback for the giving”) while missing point of it. (Is the form of the payback money, credit or direct replacement of stock?). You also apparently misunderstand the nature of paradigms.

    If “it is distributed by mandating the central bank to do so or another monetary authority specifically mandated to do the same”, that makes the payback sound like money, which still relies on the existing value paradigm of gold-equivalence, not a new one, even if as in MMT government rather than banks create the money. I agree with you on linking policy to retail sale and on what the MMT theorists are NOT seeing, but you are not seeing what I’m saying about credit, and the difference between a definition, a policy and a paradigm.

    Let me spell out in my way your “new paradigm [of] Direct and Reciprocal Monetary Gifting”.
    Nobody makes any money. I have a credit card with a credit limit sufficient to cover whatever eventualities are likely to arise, and if necessary I can get that raised. I don’t have any money.
    When I buy something I receive an item of stock and become indebted to society for its price. The retailer has two similar credit cards, and has become indebted in his business account for the price of his stock. When he pays his takings into his business account the debt is written off, so when he restocks he is using new credit. The debt in his personal account is written off because he has performed the public service of distributing goods. The debt in my personal account is written off by my employers (or inspectors) acknowledging whatever public service I have done, including studying diligently, caring for myself, others and/or our neighbourhood, living decently (as in not drunk or drugged) and on the whole frugally, i.e. reasonably economically.

    What I don’t see is that as a paradigm of economics. Ontology is about defining things in terms of what they do (rather than what they look like), so a thing is what it does, and a paradigm is a working example of what type of thing that is. The retail transaction is a paradigm not of economics but of exchange, which is but one component of economics.

    The things exchanged have their own paradigms: money as a token of wealth already possessed or of credit sought; goods as static things or active services. Economics is a complex system inextricably involving exchange of physical energy and goods, and us as biological entites performing the different functions of consumption, production, distribution, [re]development and coordination [control of timings]. The paradigms for these have been (and still are in some people’s minds) weights balanced by gravity, classic market forces, the predator-prey relationship Polanyi showed to be behind laissez-faire naturalism, the neo-classical trickle-down theory derived from Maxwell’s physics of the dispersion of broadcast or thermodynamic energy, and for the few who have come to see money in terms of flows rather than particle densities, something like an electrical power distribution network, with main cables branching down into domestic ones.

    What I am now suggesting is it being a complex communication system, i.e. a [fibre] internet or railway-like sub-system of information channels directing information and transporting goods between language-using people (and now machinery) performing different roles. The carrier signals in this are still subject to the laws of physics, but it is the meanings of the messages, not incoming forces, which enable us to direct our own stored energies and coordinate our actions. This economic subsystem draws its inputs from the world’s underlying biological and physical subsystem, ultimately recycling energy in the inaccessible forms referred to as “entropy”. What has gone wrong with it has been the complete failure of economists to study how information systems, control and sustainable recyling work.

    Which brings us to the issue of policy. Whose policy? Is it advice enabling us to coordinate our actions, or enforcement by a powerful group of persons of their priorities at the expense of everyone else? This is where I am in total agreement with your retail focus, Craig: only we can decide what we need from among what is available, but governments should be advising on what needs to be made available and what put right, given the state of our world. The danger in this is it being interpreted by predators as “the market knows best”, engineering situations in which there always a few vulnerable consumers to pick off. In government their policy since the reconquest of Britain during the Glorious Revolution has been to engineer marketing by writing into law fraudulent definitions of law, democracy, personality, ownership and money. Truth needs to be built into a constitution agreed to and alterable only by all the people, for we have seen that whatever good a government can do its successor can undo.

    • Craig
      February 23, 2018 at 8:52 pm

      “So, Craig, you’ve not answered my question (“what do you make of what I keep trying to say?”

      With all due respect, and I DO respect your prodigious intellect, I think much of what you say is erudite irrelevance by comparison to the clarity and focus that is and that results from genuine paradigm CHANGE perception. I can identify with the problem. Trying to integrate thinking on temporal matters while carrying the burden of simultaneously needing to communicate the necessity of a new paradigm whose nomenclature is identical with traditionally religious thinking is very difficult and problematic especially when science ONLY is the current paradigm for intellectual inquiry.

      Money, debt and banks are the essential economic factors that neo-classical economics confuses/ignores. The paradigm of monetary Gifting breaks up the monopolistically contradictory and dominating paradigm of Debt ONLY that private banking/finance currently and problematically enjoys, and if finance/banking as a public utility was thoroughly based upon and focusedly aligned with policy and regulations reflecting Gifting and the natural philosophical concept and ethic-zeitgeist of grace from which the concept of Gifting is derived….then the trinity of factors at the beginning of this paragraph could become part of a thirdness greater oneness that is the signature of Wisdom, grace and paradigm change.

      • February 24, 2018 at 11:02 am

        I am distressed to find that my fairly detailed response to this has not been posted: must have closed down mistaking the comment panel for the comments, I can only suppose. The key points I can remember are that I don’t have a “prodigious intellect”, I’ve just been around for a long time; that I’ve got not only both religious and scientific backgrounds but also had the type of mystical “conversion” or “gestalt” experiences Craig has referred to, and perhaps most significantly, that I’ve also got a decent dictionary. From which I glean that a parable is an illustrative story and a paradigm a working example – not of a particular class of things but of a particular type of things.

        Saying this has led me to an new insight discussing scientific methods and models with Geoff Davies and Ken Zimmerman. As it follows on here, let me suggest the difference between a Humean model and a Baconian one is equivalent to the difference between a parable and a paradigm. I’m thinking of an illustrative model steam locomotive carved out of coal and a working model which, however simple, shows the principle of how steam engines actually work.

  10. March 9, 2018 at 3:06 pm

    M1 velocity is 1/2 of what it was in 2008. Via MV=PQ, that’s where inflation is hiding.

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