packer16 wrote: ↑
Mon Jul 23, 2018 5:35 am
Inflation is caused by shortages & deflation by surpluses. War, famine & epidemic creates shortages of food, goods & people thus inflation. Technological advancement is very deflationary & since the entire world has now for the most part embraced a market based system these advances can be distributed around the world. Inflation in a given country is based upon that countries market basket of goods & services. So in developed countries you have more finished goods with value-added components much higher than the commodities that are inputs. Since technology has reduced the costs associated with these value-added services (including sales & distribution), there has been downward pressure on prices in goods and services in developed countries. Free trade has distributed these low prices around the world. In some emerging markets (Turkey, India & Brazil) the market basket includes more commodity & less value added goods (also there is relatively less trade in places with protected markets to transmit lower prices) so there inflation is more driven by commodity prices versus technology deflation.
The only other time a similar situation has occurred is in the 19th century between the Napoleonic Wars and WWI. You had relative peace & the three horseman (war, famine & epidemic) were not for the most part present versus the previous 200 years. At that time, there was a gold standard so there was no offsetting the deflation that was happening with goods and services except with new gold discoveries. Now you have monetary policy to offset these declines. IMO the monetary policy did not create inflation but prevented deflation. Going forward the same forces that created deflation are still here so I do not see a change in the situation of inflation.
Where the central banks have influence, short-term interest rates, have already increased to almost the point of inversion. Given this I do not see the central banks causing an inverted yield curve so I would expect a stoppage of increases unless the long end of the curve increases. The 30 year has had a hard time increasing above 3%. IMO this has to do with excess capital looking for a place to be invested. So until a capital destroying event occurs from one of the three horseman, I do not see the excess capital being destroyed. Since the fruits of the technology advancement are being realized via equities I am more optimistic about the ERP remaining in the 4 to 6% range versus the lower range predicted by others. Just my 2 cents.
The cause of inflation is demand for goods and services above the economy's ability to produce them. Then, suppliers, and eventually wage earners, get market power to raise their prices.
Monetary policy kicks in here, too, because MP can be used (and is used, by modern Central Banks) to set an overall level of inflation which is permitted.
I agree that there were forces of internationalization in trade in the 1990s and 2000s that lowered inflation risks - huge amounts of production outsourced to low cost countries.
I think that process has probably come to an end, at least on that scale. We have the prospect of renewed trade barriers & tariff wars, and we have Chinese demographics and urbanization - there's not a huge new labour force to mobilize from agriculture into industry.
There are other countries like Vietnam, Philippines, India, Pakistan, Bangladesh, Indonesia that may fill the low cost labour gap. However they lack China's infrastructural and political advantages (VIetnam probably the best favoured, India Pakistan Bangladesh the worst).
Services are much less liable to deflation-- in particular healthcare services. Although healthcare tourism is probably one of the stories of the next 25 years, it's still going to be hard to export a lot of service industry work.
Japan is the interesting case where the asset bubble was so large, and the demographics 20 years ahead of the rest of the developed world, that they seem to be locked into a deflationary cycle. There were some signs of this in the Eurozone but for the moment have backed off.
AI & robotics have as yet unknowable effects on the demand for labour of all types. But somebody still has to help us to go to the bathroom as we age. Raw materials shortages might still drive those prices up.