Monday, November 29, 2010

US Government Wants Inflation; China Fights US Policy

I have been baffled about why we have not experienced more inflation resulting from the federal Reserve's monetizing debt. More money supply chasing the same goods and services always results in inflation. Why not now? John Lott explains in his piece on the Fox News site:
So where did all that new money go? Many blame businesses for hoarding cash. Obama recently said: “corporate profits are doing just fine. [But] they're holding onto a whole bunch of cash -- they're kind of sitting on it.”

But that isn’t happening. Companies don't just keep huge piles of cash lying around. Even if they aren't spending the money, they are putting it in the bank or they buy bonds. In either case the money is recirculated to others, not hoarded. Companies are indeed wary of starting projects and with all the uncertainty they face. And who can blame them? Yet, they are not the ones making the money disappear.

It turns out that the culprit is not so close to home. China is trying to keep the U.S. dollar more valuable than the Chinese currency, the Yuan. That sounds counter-intuitive, but a more valuable dollar means that it is relatively cheap for Americans to buy Chinese products – and that helps Chinese manufacturers’ sales.
This time around, inflation is a deliberate government strategy to increase employment In a time of high unemployment, should naturally go down in a free market increasing employment. That is, the workers as suppliers of labor services must reduce their prices (wages), because the supply of labor exceeds demand at current prices. As the price of labor falls, more supply gets absorbed, increasing employment, albeit at lower wages.

But, we do not have a free market. Unions in particular (because they have the power) resist the lowering of wages. So the government seeks to increase inflation to lower real wages and thus increase employment. That is a doomed strategy. Unions and government workers will then demand higher "cost of living" increases to compensate for the inflation. Wages outside government and the unions will fall. Maybe that is part of the strategy, too. If the only stable wages are union wages, workers will be encouraged to join unions, making unions that much more powerful, while blaming the employers, a typical depression era strategy.

Thus, the unions benefit while the inflation strategy fails to solve the unemployment problems.

Bad government policy, thy name is Obama ... and Bernacke.

No comments: