A Few Notes on Deflation/Inflation

A Few Notes on Deflation/Inflation by Charles Hugh Smith for Of Two Minds

The consensus is that asset inflation is unstoppable and forever. History begs to differ.

Not unsurprisingly, people want a binary option: do we get deflation or inflation? Unfortunately, reality is messy.

Broadly speaking, globalization is deflationary as capital seeks the lowest cost labor, parts and materials, the least stringent environmental standards and the most corrupt governance to maximize profits by any means available (in this case, exploitation and corruption).

Wages lose purchasing power as every labor force competes with the cheapest available pool of global labor, and domestic companies must lower prices or face obliteration by the global corporations.

Broadly speaking, financialization is inflationary as the costs of services increase as financialization enables monopolies and cartels to dominate entire sectors. Once they control the sector, they increase prices while lowering quality to maximize profits by any means available (in this case, monopoly, cartels and political corruption). As the profits gush in, corporate monopolies and cartels can “invest in corruption” by using a sliver of their profits to buy political favors and protection.

Financialization lowers the cost of credit to corporations and financiers, giving the largest entities an unmatchable competitive advantage: they can borrow immense sums at near-zero cost and use this money (or newly issued stock) to buy competitors, insuring their monopoly won’t be challenged by either regulations (since politicos and bureaucrats have been bought off) or competitors (all bought out with “free money”.)

While many hold that inflation is always a monetary phenomenon, real-world scarcities are also inflationary. If you were waiting in a long line at a gas station in 1973, hoping to get a tank of gas at only double the price of a month earlier, you’ll know that scarcity is absolutely marvelous at sending price soaring regardless of what’s happening with the money supply.

So inflation can be driven by either or both monetary and scarcity dynamics.

Enter the pandemic. Needless to say, restrictions in travel and gatherings are deflationary in travel-leisure-dining sectors as airlines lower prices to compete for a shrinking pool of passengers and surviving restaurants suppress prices to attract scarce customers.

As millions of workers lose their jobs and depend on unemployment, the insecurity of future income weighs on overall consumption.

Lowering the cost of credit does little for these sectors while rocket-boosting speculation and financialization. The monetary “solution” to deflation is always the same: lower interest rates to zero and flood the financial sector with unlimited liquidity. The resulting stock market bubble and corporate orgy of borrowing and stock issuance are predictable results of unfettered, near-infinite financialization.

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