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Wednesday, June 21, 2006

Comments

spencer

To really appreciate the difference all you have to do is look at
the difference in unit labor cost. In the 1970s they were rising at
near double digit levels and firms had no choice but to pass through every cost increase.

Now unit labor costs growth is significantly below the inflation rate
and firms can absorb higher oil and commodity prices and still sustain
good earnings growth.

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Blissex

«Now unit labor costs growth is significantly below the inflation rate and firms can absorb higher oil and commodity prices and still sustain good earnings growth.»

Well, the idea is that western workers are absorbing the costs of every adjustment, and the argument that the only inflation that matters is that in wages is rather popular.

However this argument misses a very important detail: wages in China and India are growing very fast, in many cases at 20-30% a year.

The ultra-loose monetary and fiscal policy in the USA and Japan should have resulted by all conventional thinking in a huge keynesian boom in prices and wages; and indeed this has happened, even if in China and India, and other countries as USA and Japanese companies have raised nearly free capital in their home markets and invested it everywhere but in those markets.

They have exported inflation and growth to those countries and imported deflation and stagnation to their home countries.

Now that China and India are effectively at capacity the flow will reverse...

Blissex

«Do folks think a case of 2.5 percent real growth and 3 percent inflation -- a likely scenario for the second quarter -- qualifies as stagflation?»

Oh, but what is ''inflation''? If one is talking about one of the popular indices like the CPI, then there is the argument that they have been comprehensively ''adjusted'' since the 1970s. One guy has started to recompute indices in the ''good old way'':

http://WWW.ShadowStats.org/

and his estimate is that if the CPI were calculated in the same way it was in the 70s it would be reported now as 7% and if unemployment was also calculated as it was in the 70s it would be reported now as 12%.

These figures, especially the latter, might explain why wages have been so weak and wage earners have been accepting a constant worsening of their terms of trade.

Blissex

«One guy has started to recompute indices in the ''good old way'':»

Ah I should have mentioned this enjoyable interview with him in which he avuncularly discusses the various ''problems'' with the indices and his like-for-like estimates:

http://WWW.Weedenco.com/welling/Downloads/2006/0804welling022106.pdf

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Arthur Eckart

Blissex, the link seems to be a conspiracy theory. The CPI isn't the only measure of inflation. There are also the PPI, GDP Chain Price Deflator, and the Personal Consumption Expenditures Chain Price Index, which is a component of the GDP Chain Price Deflator. So, those possible CPI discrepancies pointed out in the link don't measure up to other inflation benchmarks. Also, Japan fell into a Liquidity Trap and had to give away money, while the U.S. eased the Fed Funds Rate to 1% to avoid a Liquidity Trap, after 20 years of disinflation. Foreigners have been exporting deflation to the U.S., which offset accommodative U.S. monetary policy and expansionary U.S. fiscal policy. Also, U.S. productivity has been high, which the Keynesian Production Function shows puts downward pressure on inflation, ceteris paribus. Also, the U.S. terms of trade shows the value of U.S. exports is higher than the value of U.S. imports, although the volume of imports far exceed the volume of exports, which seems to indicate the U.S. is relatively stronger than the rest of the world, and the U.S. is the engine pulling the rest of the world's economies.

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This argument misses a very important detail: wages in China and India are growing very fast, in many cases at 20-30% a year. The ultra-loose monetary and fiscal policy in the USA and Japan should have resulted by all conventional thinking in a huge keynesian boom in prices and wages; and indeed this has happened.

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