Headline inflation statistics are mostly meaningless junk. They capture lots of statistical oddity, and much less economic reality. Clueless economists today often flap around trying to make the case that low headline inflation proves (beyond a shadow of a doubt) that present-day money-printing exercises are not excessive. Of course, that’s another argument for another article.
The point is that markets (and prices) are not determined so much by the supply of, and demand for money, but by the supply of and demand for goods and services. This means that money-printing exercises to address inflation or deflation are usually pretty futile in addressing the wants and needs of a society, and therefore pricing phenomena. As I have shown in the past, hyperinflation is triggered by the unavailability of goods and services, not the over-availability of money. The money printing usually starts post-hoc, because society and governments have lost control of everything else, and money printing is a swift and easy last resort.
Western nations have experienced peculiar pricing phenomena in the last ten years.
From the BBC:
These figures are for the UK, but other Western nations have experienced a similar predicament. Essentially, goods and services whose supply has increased as a result of increased East Asian productivity, cheap labour, and economies of scale (clothes, consumer electronics, etc) have dropped in price, whereas goods and services whose supply has remained relatively static (particularly energy, and products connected to energy) have risen in price. Of course there are also oddities such as transport insurance in the graph above; every market has fundamentals of its own, and quirks like government intervention into the manner in which a service is delivered can drastically shift prices in services.
What the focus on money supply (i.e. the notion that pumping QE money at money-lenders so they can lend more will somehow fix the economy) really demonstrates is the powerlessness of Western governments (especially America) to control the supply of energy, and save Western industries from being undercut by cheaper East Asian competition. It is (quite literally) throwing money at a problem, hoping that someone will innovate or strategise the West out of its present debt-fuelled malaise.
Of course, eventually, the soaring price of energy will make alternative energy generation (solar, etc) more economically viable than hydrocarbons. Eventually, food costs will be rebalanced by new and more efficient food production sources (subsidies distort markets and prevent them from compensating as quickly as the market desires, but that’s another story). But eventually (as John Maynard Keynes put it) we are all dead.
Western governments should have invested heavily in better energy and food infrastructure a long time ago, to keep the costs down for consumers. No need to raise taxes; simply divert the vast quantities of money that go to needless foreign wars to food and fuel security.
All the while, monetary authorities print and print to cancel out the deflationary effects of mass-Chinese production, while costs on energy and food continue to squeeze Western consumers, particularly the elderly and disabled who live on fixed incomes. Commentators spew worthless rubbish about monetary solutions, when really the problem is food and fuel infrastructure and availability.
And much of this is brushed under the rug, because headline inflation rates are low-to-moderate. Of course, you can’t brush reality under the rug. Eventually even those with jobs have so little disposable income that they get furious, and do something about their predicament. It looks like that process has already begun.
azizonomics 
I am no expert. But the notion that western governments serve the broad mass of the electorate just does not correspond to reality. They serve money power, and this is one of the reasons for the huge promotion of Democracy as a form of government, it enables money power to control governments. It works ok for a time, but the inner contradictions become too big and they lead to complete breakdown. The financial elites obviously do not want to destroy their own wealth if they can help it, but they can only save the system if they decide to change the system radically, I see little signs of this happening and governments simply dance to their tunes. Governments should have been saving in boom times, and using these for when the bust comes. They did not do this because they thought boom and bust had been banished forever and that they could expand government services forever. How foolish.
This post-Keynesian Gordon Brown “we abolished boom and bust” nonsense is extremely dangerous and did a tremendous amount of damage to both Britain and the world.
Big finance and the global power elite are destroying their own power with their mistakes, arrogance and worship of pre-Kantian “pure rationality” (Richard Dawkins, etc)
Question for you Aziz,
In regards to the recapitalization of US banks a few years ago, under what terms was this money distributed? Wasn’t a lot of the money that was loaned to US banks repaid to the US Government? It’s not like this was free money given out, right? However, the real concern was how the US Government came up with the money to recapitalize the bank (printing money, I assume).
I have four big problems with bank recapitalisation/ financial-sector stimulus:
1/ It sustains failed business models, which is contrary to any notion of capitalism.
2/ It sustains the careers of bad executives and managers (moral hazard).
3/ In many cases, and especially in a near-zero-interest-rate environment, it is very much like free money being given out (TALF, QE, etc) (more moral hazard).
4/ It was funded by borrowing — some of it has been paid back in the short term, much of it is long term, and has increased net national indebtedness, effectively using the taxes of future workers as collateral against saving bad banks.
Has there been any research in the deflation of professional services of information repositories: Lawyers & Accountants?
The cost of these are quite a drag on the economy, and with the advent of the computer and the internet, many people can make decisions before consulting. As a result their fees come under pressure.
Thus in a service based economy, you can see increases in real productivity; the result being a real increase in GDP.
So deflation in real goods like mass produced items from China, and deflation in services is a real possibility in increasing Real GDP in a Service based economy, as Cheaper Imports equals a reduced drag on GDP numbers.
However if Government sectors increase, and these require bigger budgets, then the Real GDP of a nation can decline, because the Government is not as efficient as the private sector.
Governments say that people demand services, so they must tax. Voters vote for the Politician who promises services, but this tax must come from somewhere. Can Australia and America become like Greece?
Pingback: Populism & the Fed « azizonomics
Hi!
Re-twit you post: to my @rznfpeiu twitter
Pingback: Why the Federal Reserve is not Taking Rising Prices Seriously | American Principles Project