Subj : Oligarchs and unemployment. To : ALL From : BOB KLAHN Date : Thu Apr 17 2014 02:16:12 Much of what is in this msg is from Paul Krugman's column, as I interpret it, and an IMF report. However, a fair amount is what I find to be true, and have been saying for years. Little or none is directly quoted from either of the articles. Well, another interesting column by Paul Krugman. http://tinyurl.com/pqt87aj I have often said some inflation is a normal aspect of a healthy economy. One reason for that is, in a healthy economy things change, and some of those things that change make wages for some jobs go higher than other jobs, higher than they were before. Some jobs lose demand. Some jobs gain demand, which causes their wages to rise. Some fields gain demand, which requires more resources which bids up those resources. However, if wages decline but debts don't the result is people can't pay their debts. This is not good for a healthy economy. Modest inflation serves as an adjustment factor for this, letting wages rise generally, but not in those fields where demand has fallen. Costs of resources can rise in general, or fall when they do, and the end result is the economy balances as the various factors play out their effects. If wages decline compared to those that go up, but do not decline in actual dollars, the ability to pay those debts does not decline, and debts get paid, which is good for a healthy economy. Since the changes tend to be moderate and long term, the end result tends to be a well run system. This effect of non-declining wages is what economist call "sticky" when talking to the general public. It means pretty much the same thing. However, when inflation falls to near zero, or even below, there is no moderating factor, and debt repayment becomes questionable. Since inflation tends to only fall to near or below zero in times of economic trouble, that means a lot of people not paying a lot of debt. Hello depression. Now, all of this is well known, and discussed freely by economists. What was different in Paul Krugman's recent column is an explanation of how understanding of the low inflation vs deflation loss has become news to the IMF. The International Monetary Fund is an international agency whose primary focus is a stable financial system. In the real world a stable system has meant preserving the status quo, where the rich remain rich and the poor remain poor. That's not their objective, but it has been a result. However, the IMF has begun to understand that the status quo has not been status quo, but has been shifting to higher income inequality. In studying this they have become informed of the problems because the inequality is becoming exceedingly bad. As a life long trouble shooter I long ago learned that, by putting a system at it's extremes you can work to find where the proper settings are to run the system. Since all systems not directly mechanically connected are dynamic to a certain extent, the idea is to find the best practical settings to stay within operational parameters. What the IMF has come to realize is what Henry Ford showed long ago, what has been seen over and over in economics, except by those who don't want to look. Income inequality is a drag on the system. While the "status quo" preachers claim the "job creators" need an incentive to creat jobs, they forget, the workers need an incentive to do the work. The self annointed John Galts of the world are not even close to capable of monitoring performance in enough detail to force workers to produce by threats. It works to a limited extent, but it always has holes that lead to reduced efficiency, to reduced profitability. The only way to truly develop a "work ethic" is to reward work. No one is going to work hard without a reward. The better and more direct the reward, the better the work ethic. Which is where income inequality serves as an indicator that the reward is not matching the effort. Remove the incentive and you remove the work ethic, you remove the profit. The IMF, which for years has been little more than a debt collector for big money, and a pusher for the drug of privatization, has finally come to realize this out of kilter system is failing. That is why the current world wide recession has lasted since 2008, and continues today. The market has dried up do to lack of customers, the workers are trapped in a system where there is nothing they can do to dig their way out. In New Tack, I.M.F. Aims at Income Inequality http://tinyurl.com/ob3jbqu Their answer is, raise the inflation rate. Currently average inflation is less than 2%. The world's banks and financial ministries and the IMF have made 2% inflation the limit for years. Before that the acceptable limit for the US Federal Reserve was 3%, and I was saying even then you don't toss a wrench into the system to bring it down if is has an excursion just a bit above that. However, that is what the Fed tended to do. Another point in Krugman's column is, the IMF report on this shows low inflation actually causes investors to hoard cash, rather than invest. Now I have seen, over the years, that the markets are more profitable when inflation is higher, less profitable when inflation is lower. I recognized that this was due to the fact that inflation was a result of a good economy, and that led to profitable markets. What I did not realize is, and Krugman pointed out, is that inflation is not only a result of a good economy, it is a contributing factor in creating one. Investor hoarding consists of putting the money into less productive, but safer, investments. When inflation is low that is a nice safe strategy, why risk your money when you have a lot and nothing to lose by sitting on it. However, higher inflation, even 3%, causes the investor's hoard to lose value if it's not working to produce products, and thus profits. So, one big reason investors are sitting on money now is, there is no market to draw them in, and no penalty for sitting it out. Of course, as long as investments are safe, and less productive, the markets stay stale as workers have less to spend. A nice closed loop entropy system. Only by putting workers back to work, which means higher wages and growing markets, will the investors gain a profit. With the penalty for not doing it being a loss of value of as much as 3% a year, that's a pretty good driver toward a more vigorous, and less unequal, economy. BOB KLAHN bob.klahn@sev.org http://home.toltbbs.com/bobklahn .... 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