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The pure inflation idea

Jan 09 2014 07:12
*Edward Ingram
ACCORDING to my sources, pure inflation is a condition in which all incomes and all prices rise at the same pace.

It is an idealised world in which the value of money is allowed to fall at least until any surplus money in the economy is mopped up in higher prices, and higher incomes until conditions stabilise. If everything rises in price by the same percentage as incomes are rising, then money itself is falling in value at that same percentage rate per annum.

The reason why I like this idea is because in such conditions, spending patterns and wealth distributions do not alter. No one loses. Only inflation comes down when the surplus money has been mopped up.

That is in theory. And it overlooks the way that interest rates would be rising as the surplus money gets mopped up. Also, in practice some things always happen first: some people get pay rises before others, and some prices rise before others. So, disturbances will occur.

What really interests me, however, is that if we can get close to these conditions - and that is what my new savings and loans contracts actually allow as far as budgets and wealth preservation are concerned - then we can almost stop worrying about any condition in which too much money has been created.

The economy will sort itself out. It will simply mop up that surplus money. Very few jobs will be lost in the process of bringing inflation down.

While we cannot go all of the way to that happy condition because as the surplus money is mopped up interest rates will rise, we can get pretty close.

This is the inverse way of explaining what I have laid down as one of the main principles of good macro-economic design and management, in which I say that keeping the economy in balance (not disturbing spending patterns or wealth distribution artificially), is important to maintaining optimum employment and economic growth.

That is exactly what would happen if it were possible to have such a thing as pure inflation. So, we can use the concept of pure inflation as a benchmark.

Deviations from that benchmark in which some groups of prices and/or some groups of incomes are not rising at the same rate raises the question: Why? Is it because of some artificial distortion or some human intervention?

How important is this? Does it really hurt the economy if some things are not working in that way?

It certainly does. All of the essays that I have written for Fin24 have essentially been about how much this matters.

These imbalances coming out of fixed interest and mortgages as they currently operate, are the main reason why the central banks are unable to find a way to manage the economy well. These things are the reason why no one can make a safe and sensible financial life plan or (often) a safe business plan.

These are the things that create asset price bubbles in property and bonds. These are the things that, as a result of that, are obstructing the Federal Reserve and other central banks from releasing their grip on quantitative easing and allowing interest rates to rise.

They dare not allow interest rates to rise much, and they are scared of creating too much surplus money as this may lead to runaway inflation.

As I wrote in one of my first essays for Fin24, I was looking forward to explaining how these new financial services (savings and loans) could help in creating more policy options and getting economies onto a firmer footing.

Not only that, but we will all be able to enjoy a new era of financial stability for all of our personal and business plans. Our wealth and our pensions will not be at risk unless we choose to put them at risk in the hope of a better profit; and our mortgages and house prices will not bite us or crash.

Next week I will add some more detail about how quantitative easing can be brought to an end more quickly and in greater comfort if we put these new savings and loans in place.

After that, I would like to take a look at the Keynesian Stimulus debate. I will question whether a properly balanced economy actually needs such a stimulus at all.

 - Fin24

* Edward Ingram has a strong and growing support base. One American has started a petition asking President Barack Obama and/or his senate committees to look into these ideas.Ingram says: “Why not here in South Africa? The ideas are universal.”

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investments  |  economy

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