Monday, August 8, 2011

Vickrey: Cost-Push Inflation

Looking at Fifteen Fatal Fallacies of Financial Fundamentalism
Oh wow, I just got that: It's Five Fs
by William Vickrey (1996). Recommended by nanute. keep wages from initiating a "wage-price spiral." One never hears of a "rent-price spiral", or an "interest-price spiral," though these costs are also to be considered in the setting of prices. Indeed when the FRB raises interest rates in an attempt to ward off inflation, the increase in interest costs to merchants may well trigger a small price increase.

When the Fed raises interest rates to ward off inflation, the increase in interest costs may well trigger a price increase.


If only a small part of the spending we do makes use of credit, then there are only sporadic inflationary pressures resulting from the anti-inflation effort. But if a large part of the spending we do makes use of credit, then widespread and strong inflationary pressures result.

If we use credit only for growth, then the consequences of Fed actions affect only growth. But if we use credit for everything, then Fed decisions affect everything.

Robert V. Roosa, former vice president of the Federal Reserve Bank of New York and Under Secretary for Monetary Affairs at the U.S. Treasury, wrote in Fortune magazine (September 1971):

And yet another factor has been the undue reliance on restrictive monetary policy to limit demand, with the perverse result of making interest rates themselves a major cost-push force.

I'd say Vickrey understated the case.


nanute said...

And here's a snippet from #4:...The main difficulty with inflation, indeed, is not with the effects of inflation itself, but the unemployment produced by inappropriate attempts to control the inflation. Actually, unanticipated acceleration of inflation can reduce the real deficit relative to the nominal deficit by reducing the real value of the outstanding long-term debt. If a policy of limiting the nominal budget deficit is persisted in, this is likely to result in continued excessive unemployment due to reduction in effective demand. The answer is not to decrease the nominal deficit to check inflation by increased unemployment, but rather to increase the nominal deficit to maintain the real deficit, controlling inflation, if necessary, by direct means that do not involve increased unemployment.

Unfortunately, the most recent policy initiatives agreed to in the debt ceiling debate will most likely, increase unemployment.
We are so F'ng F'd. (x5) Thanks for the HT, I think.

Calgacus said...

Six :)

The Arthurian said...