The real ways to fight and defeat inflation
Labour is in the fight of its life over inflation. And so are the vast majority of New Zealanders. Labour is right to focus on this and extending subsidies for petrol (and public transport) is essential to this fight as our society is organised around road transport. (Due to poor strategic vision by — anti train — anti green solution, conservative neo-liberal governments).
To fight inflation we need to understand it. The Reserve Bank and neo-liberal commentators are calling the current inflation as demand driven from high wages and too much fiscal stimulation during covid, and low interest rates encouraging too much demand. So to them it’s all about demand. Yes, Covid and Ukraine war were involved but as external factors lets talk about them separately.
So what is demand; ‘the problem’.
- Because most people in New Zealand are not wealthy, the vast majority of demand is for basic needs and essentials. Even middle class people are not that wealthy. So demand is not about luxuries.
- But also, demand is the driver of the economy. Demand is what circulates the money supply and stimulates business activity and the supply of goods and services, which is about meeting people’s needs and some wants. Demand is what tells an economy what to produce. It is an essential part of the economy.
Demand doesn’t look like a problem. If demand is a problem then this indicates there is something structurally flawed in how a neo-liberal economy is organised
Even when we qualify the word demand to ‘excessive demand’ it still doesn’t make sense; the vast majority of New Zealanders are largely buying essentials. So what is ‘excessive’ about that? Are they buying too much bread and milk? Perhaps cake is cheaper?
The reducing of inflation by crushing demand with interest rate rises is a brute blunt instrument that falls heaviest on the ordinary people. Because if a business has its interest costs rise it can claim the interest cost to reduce their tax (so all people subsidise the businesses interest costs) and what isn’t subsidised the business can factor the higher cost into their prices; creating inflation. So the burden of controlling inflation largely falls onto ordinary people, and the neo-liberal economy is designed this way
But thinking about demand in a tiny bit more in depth; what else creates ‘demand’.
- Many business facilitate demand/sales by supplying finance (and clip the ticket on that as well). Financing helps keep prices high because the supplier/ business doesn’t need to worry so much about their product being affordable. The financing will make it seem affordable.
- Advertising encourages demand.
- Sales encourage demand. ‘Two for one’ deals. Helps keep the price high for one item and soaks up demand so your competitors have less demand available. Or ‘second item half price’ (this is about pushing up the price involved in a sale. Or keeping the illusion of a bargain when both items were initially priced quite high).
- Marketing practises that involve ‘erratic pricing’ that helps create fake scarcity create demand. People come to the shop see a high price, then a few weeks later it is on sale. ‘OH, I must get in before the sale ends’. The sale is the scarcity and it is erratic and not predictable so you can’t just wait to buy as you don’t know when or how much that future sale is. Almost all of the time the initial price is a gross overstatement and the sale just brings the price to something more realistic.
These sales and market practises are not about bringing prices down or fighting inflation. These practises are just normal everyday business price setting practise to maximise profit. They are all designed to keep prices high on every sale.
All this is about encouraging demand and all this is allowed to continue during periods of high inflation. So the Reserve Bank trying to suppress demand to control inflation is working against the forces of supply as controlled by business. But the bank only looks at the demand side, the ordinary people, and making them poorer.
Perhaps we could try supply side fixes during a defined ‘period of high inflation’?
- No radio or TV advertising. (private media will panic — but that can de dealt with. A media merger would help).
- No ‘sales’ allowed. E.g. no ‘two for one’ deals , etc. No fuel discount if you spend huge amounts in the supermarket. Just a price on a product with a stable price that matched what was charged before the defined period of high inflation. Develop a customer complaint process to enforce this.
- Rules on limiting finance when making purchases? A minimum of 50% deposit? I can see some business just referring customers to finance companies so it becomes a third part; so how about saying all loans in the defined ‘period of high inflation’ can only be issued with a Reserve Bank specified loan rate for the full repayment term of the loan. Financiers would have to really seriously consider the risks of making such loans.
These would all be relatively easy to police. Would they work to control inflation? I say yes.
In part because I can’t begin to describe how terrifying these ideas would be to a large business. Because they would actually become accountable for some of the costs and social impacts within the economy of inflation. They would actually have an incentive not to raise prices, or they might push themselves into a defined ‘period of high inflation’. (Currently for a business there is no real down side to raising prices. It’s all blamed on government, and government will bail out the poor so higher prices are accepted. That gives the opportunity to squeeze the middle class).
The fact is; inflation is not something a customer creates by making a purchase. The fact is, inflation is the act of a business person making a conscious choice to raise the price they charge for a good or service.
All the current discussion about inflation conveniently ignores this central fact because neo-liberals don’t want that part of the inflation pricing process focused on. Neo-liberals have twisted our understanding of the economy to focus on inflation as if it just happens when government has too lax a money supply. It is deemed irrelevant that government is usually spending money to make the economy work better so people get the essentials. (Sure, at times there is poor spending; let’s discuss/fix that).
But inflation in a neo-liberal economy is in part because large businesses see demand as people having money and therefore they can raise prices as the simplest way to maximise profit to get some of that money. And this can happen regardless of how much business paid for their goods initially.
We can actually see this process in the excess profits many large business around the world are currently making (New Zealand is globally networked into this). Large businesses charged higher prices on the expectation of inflation not because higher costs had actually hit them; therefore with low cost and high prices they had record high profits. Large businesses created inflation on the expectation of inflation.
And inflation works for them not only economically in terms of profits but also politically because it makes it harder for governments to undertake popular measures to support people. If its harder to make changes then voters will see less positive reasons to vote for progressive policies. i.e. they can’t be delivered. And so they are more able to be distracted by side issues; like race and three waters. And this political status quo does not then threaten the neo-liberal economic environment that helps some businesses maximise profits.
Inflation is manufactured more by neo-liberal profit maximisation practises than by the so-called forces of demand.
In addition to my above suggested anti-inflation initiatives; many of the essential services in the economy need to be taken out of private sector control because our neo-liberal economy is not working to deliver affordability. And whenever the government tries subsidies to keep down costs the private sector uses that to raise prices and maximise profits.
New Zealand history shows the Liberals and then the Labour party had to deal with a dysfunctional economy (poverty was everywhere) and they did this by creating government agencies to deliver many essential goods and services the private sector could not deliver cost effectively/affordably. Everybody benefited because costs came down, providing more discretionary spending so new business could arise and fund expansion because of it.
We are at this point again. Government can:
- Contract with The Warehouse to create a new supermarket selling essentials at just above cost price. They owners should go along with this as its people come in the door. Money vouchers(?) for beneficiaries to spend in this supermarket, could help bring down costs in other supermarkets
- Get a government Kiwisaver scheme with low fees. Use the money to fund infrastructure, green projects.
- Bring public transport back into public hands, if local people vote for it.
- Get a government energy company back. And use the power of govt to compete with other providers to push their prices down
- Expand Kiwibank to hold most domestic mortgages at low reserve bank rates. (Thus making the other banks do their job at working to carry risk investing in exports, innovation and productivity).
- etc
But there are also other ways to tackle inflation. And I will talk about that later.
20% deposit on all consumer lending.
That will suck demand out of the economy overnight.
There needs to be sound money AND an increase in production. There is insufficient supply of certain goods (e.g. oil/gas), but the collapsing currency causes all prices to rise.
The unpayable debt must be liquidated somehow also — the Fed printed such extreme amounts of currency to bail out these bad loans, i.e. to inflate away the debt.
What is inflation? It is an over-issuance of paper currency, according to the classical definition.
Because paper currency is simply a claim upon hard money (bullion reserves at the central bank, such as gold), printing more currency without increasing reserves is a devaluation. Each note can be exchanged for less of the reserve, and therefore it buys fewer goods.
When we measure the value of goods priced in hard money (e.g. gold), it becomes clear what is going on. The true price of virtually all commodities, including all the finished goods, are close to all time lows — improved technology causes the cost of goods to naturally fall over time.
Priced in dollars, it appears these goods have exploded in cost over the years — but in fact the opposite is true, and it is the paper currencies which have collapsed in value.
Inflation acts as a wealth transfer to the rich, because wages rarely keep up with the increase in the supply of currency. The dollar value of wages appears to be increasing, but when priced in hard money, wages have drastically crashed since the early 1970s.
The unions should be calling for sound money, and demanding that award rates return to the real all time highs, but they still fail to even understand the problem.
[Because paper currency is simply a claim upon hard money (bullion reserves at the central bank, such as gold), printing more currency without increasing reserves is a devaluation. Each note can be exchanged for less of the reserve, and therefore it buys fewer goods.]
Paper currency is one of the two forms in which money is held. The other form in which money is held is the demand deposit at a bank. People acquire money, in general, when they earn income, the latter coming from the production and sale of goods and services. Their earnings reflect the value of what they produce. The aggregate amount of income earned by a community in a given period is, in theory, equal to the amount of money in circulation during that period multiplied by the number of times each dollar changes hands during that period – generally known as the “velocity” of money. Inflation could be better defined as “too much income chasing too few goods.”
“Too much income” can come about in various ways: government deficits, consumer credit, injections form overseas, investment that puts pressure on resources, being just some of them. However, too much money does not always lead to price increases. It may lead to reductions in velocity.
Non productive payments such as interest, rent, and welfare don’t alter aggregate income since they merely transfer income from one person to another. the same applies to profits, whether re-invested or distributed to shareholders.
Correct, inflation is excess paper currency which has entered the circulation channels — the velocity determines if it will circulate.
Strictly speaking, only bullion is ‘money proper’, because it is both a store of value and a universal medium of exchange — allowing it to be a measure of value (rather than solely to set a scale of prices).
As J.P. Morgan famously stated, terms like ‘fiat money’ and ‘commercial bank money’ are really describing types of credit — they are still only a promise to pay.
As you point out, private banks can create ‘chequebook currency’ (demand deposits) through lending. Modern fractional-reserve banking creates this credit without waiting to take in new deposits, thereby expanding the supply of paper currency.
I would describe ‘the excess income’ simply as credit, and the ‘credit notes’ as a type of paper currency — credit is based on production, but banks/firms can extend various notes of credit far beyond this (claims on future production).
This is how credit crises can occur, as people begin defaulting on their “promises to pay”, and everyone flees out of paper assets, demanding hard money instead.
To all intents it is the increase in purchasing power that matters, and this is determined by incomes. Actual notes and coins are only a tiny part of the country’s purchasing power. Gold no longer seems to have a monetary role, though it may make a comeback at some point in the future.
Hi Gary, no it’s not 1 April. You must be a little confused, hopefully not permanently. Have you heard the one about neo-liberal economics being really effective and efficient at organising an economy? It’s hilarious if you like dark humour.
In my experience many trades rely on the margin on the materials supplied as the bonus income for their work, it is an easy way to make their labor charge look reasonable while not letting the customer know their true margin. A brief outline is that there is a retail price, trade price & trade less xx% for high-spend customers. It is common knowledge that anyone purchasing large amounts of a product is able to negotiate better terms & even many internet sites offer discounts for bulk purchases.
While I see why you want to establish lowest-cost prices & accept that the various discount deals are set from a high price so that the retailer still gets the margin required (you only need to look at the price for damaged or clearance products to see that the cost price is significantly below any shop price) almost every business relies on making a margin on the products it sells so I don’t think it will ever happen.