Is the way central banks view inflation simply wrong?

[morganist]

Quote from vicirek:

This is exactly what confuses people - price of goods, price of labor, interest rates etc. Inflation concept is simple. Too simple and therefore scary for policy makers and they go great lengths to confuse everybody. Many buy into convoluted concepts created by "economists".

Inflation is stealing by creating money out of thin air (economy not expanding, stagnant) and paying with this diluted currency for goods, services and past obligations that were priced at different monetary base. Another words money creation outpaces economic output and savings rate by wide margin. It is strictly monetary concept and not economic. Economy just reacts to it.

By the way inflationary money is causing economic decline because banks benefit first from this money flow and will not go and risk easy money that fell on their lap in real economy. They got it for storing and distributing government deficit (bonds) and from Ben with no effort just for having brass sign that says Bank which adds legitimacy to worthless paper called treasury bill.

Yes but when you put all of the factors together does it not work out that what ever the level of inflation is in the domestic nation for whatever reason the ability to buy goods globally is more important due to the size of the market. Thus the currency value will be the main, not the only factor, which creates inflation. What I am really trying to say is the current view of inflation has led to a misunderstanding of what QE will do. If I am right that the real impact of interest rate cuts is currency alterations then the impact of QE rather than maintain the level of money needed for prices will in fact create inflation.

 

[vicirek]

Quote from morganist:

Yes but when you put all of the factors together does it not work out that what ever the level of inflation is in the domestic nation for whatever reason the ability to buy goods globally is more important due to the size of the market. Thus the currency value will be the main, not the only factor, which creates inflation. What I am really trying to say is the current view of inflation has led to a misunderstanding of what QE will do. If I am right that the real impact of interest rate cuts is currency alterations then the impact of QE rather than maintain the level of money needed for prices will in fact create inflation.

QE is inflation and this is the purpose why it is implemented. Part of it is the ability of global economy to absorb this level of currency and debt creation because USD is global reserve currency. Economic effects of inflation are muted domestically due to demographics and growing economies in the sphere of influence (neocolonial or modern colonial) of the US. Unfortunately it is based on ability of political maneuvering (corruption) and military power. One misstep or failure on military front will cause this house of cards to unravel like former Great Britain Empire. The US inherited that empire and so far so good. Keep your fingers crossed.

 

[denner]

Quote from StarDust9182:

Relative labor cost is another factor. When a country has over-priced labor relative to their world compared productivity, higher unemployment rates are sure to follow eventually. COLA clauses are attempt to build in inflation in wage and ignore the basic cause - over paid labor.

As unskilled labor becomes cheaper partly due to smarter robotic workers (no COLA) and overseas production, and the army of unskilled grows due to poor teaching quality, there are more poor. However, in a consumer economy, an increase in the poor leads to less purchasing and relative GDP, leads to more unemployed, leads to ....

I have heard that an invisible hand will simply re-adjust to employ workers in a new area. But not if there is no consumer demand. I guess the plan is to employ everyone in the government eventually. Shades of 1984!

I completely agree. I have first hand experience with "wage arbitrage" and many freelancers can testify to just how competitive this force has been and will continue to be. Third world countries with the skillset to complete projects in a variety of fields will do the work at sometimes 10% of the cost if a project is bid to Western economies.

It's also why so many of us get irate when we see just how completely out of touch the public sector is...Teachers marching around, striking, demanding full benefits, defined benefit plans, healthcare for life, etc, etc...Meanwhile, most of these kids would be better off just watching videos from an assortment of online educational vendors and saving the states billions of unfunded pension liabilities.

Obviously, as you stated above, it's a vicious circle. Lower wages, less consumption, less tax revenue, further erosion of state budgets, etc, etc...But at the same time, what we have now is a bi-furcated economy where the private sector eats the losses, pays for the subsidies via ZIRP and loss of interest income, absorbs property tax increases as further subsidy of the public sector, etc, etc...

Meanwhile, globalization ensures that many businesses will either outsource contractor's or simple re-locate entire divisions to avoid the excessive regulation and/or taxation of their end user economies.

 

[denner]

Quote from vicirek:

This is exactly what confuses people - price of goods, price of labor, interest rates etc. Inflation concept is simple. Too simple and therefore scary for policy makers and they go great lengths to confuse everybody. Many buy into convoluted concepts created by "economists".

Inflation is stealing by creating money out of thin air (economy not expanding, stagnant) and paying with this diluted currency for goods, services and past obligations that were priced at different monetary base. Another words money creation outpaces economic output and savings rate by wide margin. It is strictly monetary concept and not economic. Economy just reacts to it.

By the way inflationary money is causing economic decline because banks benefit first from this money flow and will not go and risk easy money that fell on their lap in real economy. They got it for storing and distributing government deficit (bonds) and from Ben with no effort just for having brass sign that says Bank which adds legitimacy to worthless paper called treasury bill.

We're on the same page. It's further compounded since the artificial stimulus creates gigantic misallocation of capital and/or investment. Investors simply front-run whatever "asset class du jour" the central planners telegraph that they will "assist". So money simply pours into some sector against all the headwinds of the REAL economy. Prices are bid up, people who have little to no exposure to asset "reflation" are forced to pay up, even while the REAL economy is contracting.

Inevitably, quantitative easing becomes a neverending requirement. As consumer prices levitate due to incessant financial speculation, the cost of living increases, standard of living decreases and further subsidy is required. How many more times will ZIRP be extended? How would the economy handle even 3% rates or 5% rates? We all know the answer to that question.

 

[morganist]

Quote from denner:

We're on the same page. It's further compounded since the artificial stimulus creates gigantic misallocation of capital and/or investment. Investors simply front-run whatever "asset class du jour" the central planners telegraph that they will "assist". So money simply pours into some sector against all the headwinds of the REAL economy. Prices are bid up, people who have little to no exposure to asset "reflation" are forced to pay up, even while the REAL economy is contracting.

Inevitably, quantitative easing becomes a neverending requirement. As consumer prices levitate due to incessant financial speculation, the cost of living increases, standard of living decreases and further subsidy is required. How many more times will ZIRP be extended? How would the economy handle even 3% rates or 5% rates? We all know the answer to that question.

Yes the more QE the less fair society becomes and ironically the more powerful a useless government becomes. If QE continues the people with the money and the power will be the central bankers who ruined the economy.

 

[vicirek]

Quote from morganist:

Yes the more QE the less fair society becomes and ironically the more powerful a useless government becomes. If QE continues the people with the money and the power will be the central bankers who ruined the economy.

That is the purpose - transfer and accumulation of wealth by all means possible.

 

[morganist]

Quote from vicirek:

That is the purpose - transfer and accumulation of wealth by all means possible.

You mean it is planned by the government?

 

[vicirek]

Quote from morganist:

You mean it is planned by the government?

No. It is just the nature of economic cycles. Certainly big money controls and influences policies and it cannot be separated from politics. I do not think it is planned. It is more consequence of point of no return. Any incremental bond issued beyond that point cannot be possibly paid back and takes all previously issued bonds with it. The money to cover part of this damage has to come from somewhere and this tectonic shift creates opportunities to transfer and accumulate wealth by those closest to the flows of money.

 

[StarDust9182]

Quote from morganist:

Yes the more QE the less fair society becomes and ironically the more powerful a useless government becomes. If QE continues the people with the money and the power will be the central bankers who ruined the economy.

Yes ... and the more useless a powerful government becomes. However, the FED and the government are pretty much hand in glove. The banks want a wasteful spending borrowing entity as a reason to borrow. And the government wants more money and a reason to tax more.

Your comment got me to look up the definition of QE. Talk about 1984 double speak.

Quantitative - Relating to, measuring, or measured by the quantity of something.

vs

Qualitative - Relating to, measuring, or measured by the quality of something rather than its quantity: "a qualitative change in the curriculum".

Easing - Make (something unpleasant, painful, or intense) less serious or severe. Exactly what is it that they are easing in our case?

One definition: QE - A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity.

Another potential definition - Q = Don't fix the problem but continue on with the same thing that caused the trouble and E = cuz its easy for us to do without political interference

WTF? doublespeak.

 

[StarDust9182]

Quote from vicirek:

..... Any incremental bond issued beyond that point cannot be possibly paid back and takes all previously issued bonds with it. The money to cover part of this damage has to come from somewhere and this tectonic shift creates opportunities to transfer and accumulate wealth by those closest to the flows of money.

I believe that interest causes this in a fractional reserve banking system. Everything is theoretically reversible except the interest charged. Interest is a general tax on assets payable to banks for their profit. Unlike the government taxation, it taxes the weak and bankrupt more and the rich less. It's very comparable to a market tax we call slippage and commissions.

Banking is a spread business but a spread in what (valuable commodity in demand) exactly? High interest rates guarantee system failure given time as more and more capital concentrates in fewer and fewer hands as the business cycles decides the winners and losers.