Tuesday, July 15, 2008

Not all price increases are inflation

Although people might try to call them that. This article from AFP talks about price increases in the U.S. and declares that inflation has jumped 1.5%. The classic definition of inflation is too many dollars chasing too few goods. That doesn't fit what's happening in the United States. Prices aren't increasing because there are too many dollars in circulation, leading to prices increasing to keep pace with the inflated value that comes with that. Instead, it's due to trade, to the collapse of the housing and mortgage bubbles, leading into a general collapse of credit. Plus, the inherent weaknesses of the U.S. economy that had been concealed by the strength of the dollar have now been brought to the forefront. On that score, the voluntary hollowing out of the U.S. economy by U.S. corporations is coming back to haunt us, since the things that could strengthen the dollar have been moved off shore. So prices rise.

Raising interest rates will not make this go away, although a restoration of interest rates to something above a level that's ridiculous will no doubt help generally, in my non-professional opinion.

The presence of economic stagnation and 'inflation' in this time period leads me to question whether or not the "Stagflation" in the 1970s, that was the putative cause for the initial disassembling of the welfare state, was really due to a failure in the basic economic theory of the time. Keynesianism wasn't Marxism but it was much more liberal than the Monetarism, associated with Milton Friedman, that was proposed as the solution, and that in the U.S. and elsewhere was actually implemented as a solution.

If Stagflation is a myth then the invalidation of leftist economic policies during the 1970s recession is false as well.

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