(B)(N) Extreme Economics – The Great Deflation

Dead Money

Essay. Money is “a medium of exchange” and “a store of value” which, forgive me, I won’t belabor, but it gets into trouble when the word “and” is replaced by the word “or” and then by the word “neither”.

For example, during The Great Hyperinflation of the 1920’s, a farmer with a dozen eggs was better-off exchanging them for the car that you’re driving than taking your money and buying a car later. Moreover, he was not going to sell his chicken to you for any price – you had to kill him and take it and then drive away fast – because his chicken was a steady source of an income which he’ll need to buy gas and oil later and although “money” was still a medium of exchange, it was not a store of value.

Similarly, during The Great Depression of the 1930’s, money was a store of value (just ask the people who bought and owned the farms in California) but not a medium of exchange because most of the people whose labor and product you might buy for mere pennies or exchange for groceries at the company store, seldom had any cash or money themselves to buy what you might have to sell.

Figure 1: Friedman-Phelps Talk About Money

The Great Money Printer of Our Age

It’s governments who are to blame for this uncertainty in the worth of money because they might print it for no reason that is good for us as in the first case of hyperinflation, or stop printing it to preserve the value of it for those who have it over those who don’t.

In the first case, the cause is war and in the second case, the solution is war and, as a consequence, the great money printer of our age, the United States of America, has been trying to straddle that fine line between war (cold or expeditionary or on terror or drugs, or something) and War in capital letters, so to speak, should all else fail to preserve the value of its money as both capital and in exchange.

Nor would we be overstating it to say that in both cases, the cause and the solution was war because in the first case, leading-up to the 1st World War, it was Britain which was struggling with the end of its empire and, effectively, The Great Deflation (Depression), and the World in the Second.

And we don’t lose anything to call The Great Hyperinflation “The Great Inflation” and The Great Depression “The Great Deflation” and what’s in between is called “Cash” which is money not working to produce an income.

The Great Deflation

Does a controlled increase in the rate of consumer price inflation (such as an increase in the Personal Consumption Expenditure Index (PCE) preferred by the Fed) promoted in some way such as, for example, by printing or releasing more of the currency into the currency float as cash (which could be done by the government paying its bills with new and unearned money or by decreasing the overnight rate for the regulatory banking capital perhaps to negative so that said hot money is working better outside the bank than in it) tend to promote lower rates of unemployment?

And so, again, to be fair, does a controlled increase in the rate of consumer price inflation tend to promote lower rates of unemployment?

That question has entertained economists and policy makers in government for decades since the second World War and they, for the most part, believed that the answer was yes (the Phillips Curve and its many amendments; please see Figure 1 above) and so they were surprised to learn that the answer was also no. Sometimes yes, sometimes no, doesn’t sound like a science to me.

On the other hand, if there are jobs available, workers will become available to take them and that’s an equation that governments don’t like because it seems to imply that they should do something to make jobs available rather than just to make money available and, after all, the latter is easy to get as long as there is somebody (the taxpayers) to pay for it.

So, I’m not going to worry about consumer price inflation as a pull for economic growth because that’s a worry of the wealthy who can see their money – their wealth or capital – eroding because prices are rising and labor (the help) is becoming more expensive and their income isn’t rising fast enough to keep-up with that.

In my view, an economy is “inflationary” if the “price of an income” is low and “deflationary” (and possibly in a recession or a depression) if the price of an income is high and the terms “low” and “high” can be felt as well as measured.

For example, if there are lots of jobs available and not enough people to fill them, the entry price of an income (to an income) is low, effectively zero, just take a job, and the economy is a growth economy.

On the other hand, if jobs are scarce then the economy could be in a recession (jobs are scarce and getting scarcer and there’s no incentive to increase wages or salaries for those people who have one) or a recession/depression (there aren’t enough jobs for the people wanting one) or there are jobs that need to be done but which are not being filled because they require skills which not enough people have, and in each of those cases, the “price of an income” is high because wages are low and there’s no reason to raise them for those who have a job and in the latter case (skills) employers seem to be expecting that you pay the cost of acquiring them and they will select who they hire.

On balance, government fiscal and monetary policy with respect to money (invested cash) have an uncertain and, therefore, no connection to productive employment or economic growth. That’s up to us and we can tell them what we want.

We want employers to want more employees than they have and you can get that by making sure that the price of an income is low.

Figure 2: The Price of an Income

For more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

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