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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