mitchell
Crash Test Dummy
[MISC] The Service of Inflation
[MISC] The Service of Inflation
--------------------------------------------------------------------------------
LINK: www.fiendbear.com/guestpg3.htm
The Service of Inflation
25th April 2001 Sean Corrigan sean@capitalinsight.co.uk
We haven't had any Crusoe economics for a while, so you'll have to indulge
us.
There are two men on an otherwise deserted island, a farmer and a herder.
They meet regularly and exchange wheat for cheese. Each sets some portion
aside (he saves) and as a result one or both, or a newcomer to the island
can now be supported during the time it takes to make a plough or build a
pen, or some other capital good, enhancing productivity and so increasing
the wealth of all. Note the ratio of producers to total workers is 100%.
This is standard stuff so far.
Now, however, a doctor is washed up on the island and the herdsman swims
away. The doctor extracts a bad tooth for the farmer and gets some wheat in
payment. The doctor may well now decide to save, but the farmer cannot - he
has consumed the full portion of the service done to him. Ratio of goods
producers to workers 50% and potential savings have dropped off also.
Next, the farmer, missing the cheese which his new teeth will allow him to
enjoy even more, swims away, too, and is replaced by a barber. The doctor
treats the barber who in turn shaves the doctor. No savings can be made at
all and the ratio of goods producers to workers is zero.
Thus we can see that the more service sector workers in the mix (strictly
those providing services to consumers), the less savings can be made.
Now, yes, the farmer may consult a weatherman, an agricultural scientist,
even an accountant and his productivity may be enhanced - all the associated
costs hopefully being reflected in the final sale price of his output - so
not all service jobs are consumptive, but there must come a point when this
is the case.
In extremis, take the town of Abilene, c 1890, out on the cattle trail.
There is a sheriff, a doctor, a liveryman, a barber, an undertaker, a piano
player and a dance hall girl (!). None of these produce, or directly enhance
production (certainly not the last three!!!). They can save their earnings
(and dance hall girls always have a poke of gold dollars tucked in their
garters in the best Westerns), but those on the other side of the exchange
cannot do likewise - you can't decide to have only half a burial, keep a few
stanzas of song for later or interrupt coitus short of satisfaction (unless
her husband bursts into the room).
Hence, net consumption must be higher and net saving less. Hence, capital
accumulation must be lower and wealth creation must be slowed, or at least
diluted.
Looking at US data, from 1961-1991, there was if anything a negative
correlation between the savings rate and the goods workers/service workers
ratio (a symptom of the shortening of the domestic productive structure),
though the relationship consistently weakened and in the last ten years,
1991-2001, it finally reversed, becoming high (r-squared 0.75) and positive.
So, the relative increase in service workers has coincided with a collapse
in the savings rate in this last cycle.
Between 1939 and 1964, there were 7 goods workers for every 10 service
workers on average, but since 1989 this has fallen to only 1 for every 4.
The ratio of dollars earned in the goods sector to total earned payroll
income has consequently fallen by 30% from the 1969-89 average to that for
1992-2001. Similar statistics vis-à-vis savings can be derived from these
figures also.
Somewhere in here, then, we must have crossed a watershed, whereby too much
money is now spent on the gratification of personal whims and not enough on
the facilitation of production - too many people have switched from
designing mining pumps to wining and dining pimps.
Perhaps coincidentally, perhaps part of a cause-effect cycle, the log of
dollar purchasing power is very tightly correlated with this ongoing
relative transfer of human resources from goods to services. Though the
coefficients vary, decadal r-squareds range from 0.81 to 0.98 in each ten
years in the last 50.
So the interplay between the secular shift in work practices, the decrease
in native capital accumulation and the ongoing intervention to depress the
cost (and consequently the value) of money may have reached the point of no
return.
The accompanying trend has been to fuel all this consumption with consumer
credit - a channeling of obligations greatly improved by the process of
securitization which subverts the normal cautionary practices higher up the
chain by allowing companies to book a receivable, an asset able to act as
collateral for a loan, upfront, and then to pass the buck of ultimate
resolution of the transaction rapidly on elsewhere down the chain, until it
ends up with the unsolicited credit card application form stuffed in Joe Q
Public's mailbox, or the drawdown actively promoted against his inflated
home equity.
Putting this all together, we can begin to see that our trusty - if
somewhat Spartan - prescription of encouraging saving and allowing
liquidation (with the central authority acting only to isolate the infected
beasts while they await the cull), as a means of restoring health to an
economy running feverishly hot, is replete with problems caused by the
particular ontology of this episode.
Saving now means not passing receivables up the chain, so saving means more,
not less, strains on the diseased structure of payment and delivery, on a
scale way beyond the cyclical. Saving means not incurring new debt to keep
the global Ponzi scheme in operation. Saving means banks and non-banks
financial corporations, fallen prey to gigantism and delusions of
invulnerability, cannot make the income from increased volumes of new,
unimpaired debt offset and pay down old, distressed loans.
Thus, saving does not just act as a necessary purgative to manufacturers who
have become bloated on their own diet of artificially cheap credit, but it
also exposes the fact that much of that teeming biomass of symbionts and
commensalists in the service sector has become parasitic, if not actively
pathogenic - that long exposure to the mutagens infusing from the
hyperactive financial system has led them to harm their productive hosts, to
feast on their own tomorrows.
What is the route out of this dilemma? You can bet the only one under
consideration is the only one ever taken in the long, sorry history of booms
and overspending - the expropriation of private creditors. In today's world
that means inflation.
It is not guaranteed to work, of course, but the symptoms that it had begun
to take hold would be pretty much the exact chain of events we have seen so
far; a back up in long yields, a decline in credit spreads despite record
default rates, a steepening of the yield curve, a renewed enthusiasm for the
most speculative equity groups (US Internet indices are up nearly 50% since
Tech's most recent bottom on April 4th), signs of life in commodity prices.
The Fed's greatest fear is that money and credit begins to contract
independently of its own tenuous influence on the system and that we get an
accelerating feedback between the retrenchment in business and shrinkage in
the financial sector. That requires a deflationary mindset, a heartfelt
desire to rein in and pay back, but this is highly unlikely to occur if
people feel the money they hoard will be worth appreciably less tomorrow.
Then, their natural response will be to maintain and even increase nominal
debt levels and to buy goods and services up front as a store of value -
maybe even a few SUVs, Bob!
To Greenspan and his acolytes therefore, rather than chastening them, the
outbreak of articles and analyses from the Street belatedly talking up the
inflationary potential of their policies this past week or so might actually
be viewed with relief and even with satisfaction.
It might be thought that the elevated external indebtedness would impose a
restraint on this, that, to strangle a metaphor, the foreign lenders' horse
will bolt when it realizes the door to stable prices is closed. But again,
there is a long, dishonorable tradition here, even if this might prove a
latter day equivalent of Britain's devastating repudiation of the gold
exchange standard in 1931.
Remember, a lower Dollar is a form of relaxation in itself and since few
lesser nations will allow their currencies to lurch higher without a fight,
the infection can be transmitted rapidly. In a world where USD-based
indebtedness is a problem, such a decline would anyway largely be seen as a
blessing - can you imagine Argentina complaining?
Further, in a world where nearly 80% of foreign official reserves are held
in Dollars, other central banks will be hijacked into a Prisoner's Dilemma
of expanding their domestic credit to mop up any surplus dumped on the free
market, binding them even more tightly into the Greenback's orbit. If the
initial move is to send US debt markets into a spin, dragging others' down
alongside them, this would be just one more reason for lowering the cost of
money elsewhere - even in a so-far reluctant Europe.
It might come as a shock and Greenspan himself is unlikely to give
expression to it - not even in his usual obfuscatory manner - but just maybe
'Sideshow Bob' McTeer's increasingly frequent appearances on the stump,
telling us to spend more and overtly pointing out the suspension of the
supposed pursuit of price stability, have the full, official sanction of his
master.
Fair use for educational/research purposes only!
[MISC] The Service of Inflation
--------------------------------------------------------------------------------
LINK: www.fiendbear.com/guestpg3.htm
The Service of Inflation
25th April 2001 Sean Corrigan sean@capitalinsight.co.uk
We haven't had any Crusoe economics for a while, so you'll have to indulge
us.
There are two men on an otherwise deserted island, a farmer and a herder.
They meet regularly and exchange wheat for cheese. Each sets some portion
aside (he saves) and as a result one or both, or a newcomer to the island
can now be supported during the time it takes to make a plough or build a
pen, or some other capital good, enhancing productivity and so increasing
the wealth of all. Note the ratio of producers to total workers is 100%.
This is standard stuff so far.
Now, however, a doctor is washed up on the island and the herdsman swims
away. The doctor extracts a bad tooth for the farmer and gets some wheat in
payment. The doctor may well now decide to save, but the farmer cannot - he
has consumed the full portion of the service done to him. Ratio of goods
producers to workers 50% and potential savings have dropped off also.
Next, the farmer, missing the cheese which his new teeth will allow him to
enjoy even more, swims away, too, and is replaced by a barber. The doctor
treats the barber who in turn shaves the doctor. No savings can be made at
all and the ratio of goods producers to workers is zero.
Thus we can see that the more service sector workers in the mix (strictly
those providing services to consumers), the less savings can be made.
Now, yes, the farmer may consult a weatherman, an agricultural scientist,
even an accountant and his productivity may be enhanced - all the associated
costs hopefully being reflected in the final sale price of his output - so
not all service jobs are consumptive, but there must come a point when this
is the case.
In extremis, take the town of Abilene, c 1890, out on the cattle trail.
There is a sheriff, a doctor, a liveryman, a barber, an undertaker, a piano
player and a dance hall girl (!). None of these produce, or directly enhance
production (certainly not the last three!!!). They can save their earnings
(and dance hall girls always have a poke of gold dollars tucked in their
garters in the best Westerns), but those on the other side of the exchange
cannot do likewise - you can't decide to have only half a burial, keep a few
stanzas of song for later or interrupt coitus short of satisfaction (unless
her husband bursts into the room).
Hence, net consumption must be higher and net saving less. Hence, capital
accumulation must be lower and wealth creation must be slowed, or at least
diluted.
Looking at US data, from 1961-1991, there was if anything a negative
correlation between the savings rate and the goods workers/service workers
ratio (a symptom of the shortening of the domestic productive structure),
though the relationship consistently weakened and in the last ten years,
1991-2001, it finally reversed, becoming high (r-squared 0.75) and positive.
So, the relative increase in service workers has coincided with a collapse
in the savings rate in this last cycle.
Between 1939 and 1964, there were 7 goods workers for every 10 service
workers on average, but since 1989 this has fallen to only 1 for every 4.
The ratio of dollars earned in the goods sector to total earned payroll
income has consequently fallen by 30% from the 1969-89 average to that for
1992-2001. Similar statistics vis-à-vis savings can be derived from these
figures also.
Somewhere in here, then, we must have crossed a watershed, whereby too much
money is now spent on the gratification of personal whims and not enough on
the facilitation of production - too many people have switched from
designing mining pumps to wining and dining pimps.
Perhaps coincidentally, perhaps part of a cause-effect cycle, the log of
dollar purchasing power is very tightly correlated with this ongoing
relative transfer of human resources from goods to services. Though the
coefficients vary, decadal r-squareds range from 0.81 to 0.98 in each ten
years in the last 50.
So the interplay between the secular shift in work practices, the decrease
in native capital accumulation and the ongoing intervention to depress the
cost (and consequently the value) of money may have reached the point of no
return.
The accompanying trend has been to fuel all this consumption with consumer
credit - a channeling of obligations greatly improved by the process of
securitization which subverts the normal cautionary practices higher up the
chain by allowing companies to book a receivable, an asset able to act as
collateral for a loan, upfront, and then to pass the buck of ultimate
resolution of the transaction rapidly on elsewhere down the chain, until it
ends up with the unsolicited credit card application form stuffed in Joe Q
Public's mailbox, or the drawdown actively promoted against his inflated
home equity.
Putting this all together, we can begin to see that our trusty - if
somewhat Spartan - prescription of encouraging saving and allowing
liquidation (with the central authority acting only to isolate the infected
beasts while they await the cull), as a means of restoring health to an
economy running feverishly hot, is replete with problems caused by the
particular ontology of this episode.
Saving now means not passing receivables up the chain, so saving means more,
not less, strains on the diseased structure of payment and delivery, on a
scale way beyond the cyclical. Saving means not incurring new debt to keep
the global Ponzi scheme in operation. Saving means banks and non-banks
financial corporations, fallen prey to gigantism and delusions of
invulnerability, cannot make the income from increased volumes of new,
unimpaired debt offset and pay down old, distressed loans.
Thus, saving does not just act as a necessary purgative to manufacturers who
have become bloated on their own diet of artificially cheap credit, but it
also exposes the fact that much of that teeming biomass of symbionts and
commensalists in the service sector has become parasitic, if not actively
pathogenic - that long exposure to the mutagens infusing from the
hyperactive financial system has led them to harm their productive hosts, to
feast on their own tomorrows.
What is the route out of this dilemma? You can bet the only one under
consideration is the only one ever taken in the long, sorry history of booms
and overspending - the expropriation of private creditors. In today's world
that means inflation.
It is not guaranteed to work, of course, but the symptoms that it had begun
to take hold would be pretty much the exact chain of events we have seen so
far; a back up in long yields, a decline in credit spreads despite record
default rates, a steepening of the yield curve, a renewed enthusiasm for the
most speculative equity groups (US Internet indices are up nearly 50% since
Tech's most recent bottom on April 4th), signs of life in commodity prices.
The Fed's greatest fear is that money and credit begins to contract
independently of its own tenuous influence on the system and that we get an
accelerating feedback between the retrenchment in business and shrinkage in
the financial sector. That requires a deflationary mindset, a heartfelt
desire to rein in and pay back, but this is highly unlikely to occur if
people feel the money they hoard will be worth appreciably less tomorrow.
Then, their natural response will be to maintain and even increase nominal
debt levels and to buy goods and services up front as a store of value -
maybe even a few SUVs, Bob!
To Greenspan and his acolytes therefore, rather than chastening them, the
outbreak of articles and analyses from the Street belatedly talking up the
inflationary potential of their policies this past week or so might actually
be viewed with relief and even with satisfaction.
It might be thought that the elevated external indebtedness would impose a
restraint on this, that, to strangle a metaphor, the foreign lenders' horse
will bolt when it realizes the door to stable prices is closed. But again,
there is a long, dishonorable tradition here, even if this might prove a
latter day equivalent of Britain's devastating repudiation of the gold
exchange standard in 1931.
Remember, a lower Dollar is a form of relaxation in itself and since few
lesser nations will allow their currencies to lurch higher without a fight,
the infection can be transmitted rapidly. In a world where USD-based
indebtedness is a problem, such a decline would anyway largely be seen as a
blessing - can you imagine Argentina complaining?
Further, in a world where nearly 80% of foreign official reserves are held
in Dollars, other central banks will be hijacked into a Prisoner's Dilemma
of expanding their domestic credit to mop up any surplus dumped on the free
market, binding them even more tightly into the Greenback's orbit. If the
initial move is to send US debt markets into a spin, dragging others' down
alongside them, this would be just one more reason for lowering the cost of
money elsewhere - even in a so-far reluctant Europe.
It might come as a shock and Greenspan himself is unlikely to give
expression to it - not even in his usual obfuscatory manner - but just maybe
'Sideshow Bob' McTeer's increasingly frequent appearances on the stump,
telling us to spend more and overtly pointing out the suspension of the
supposed pursuit of price stability, have the full, official sanction of his
master.
Fair use for educational/research purposes only!