Sunday, March 12, 2006

Part 12 - Hyperwage Theory: I Love Inflation


Table of Contents

Part 2
Part 3
Part 4
Part 5
Part 6
Part 7
Part 8
Part 9
Part 10

Part 12
Part 13
Part 14
Part 15
Part 16
Part 17
Part 18
Part 19
Part 20

Part 22
Part 23
Part 24
Part 25
Part 26
Part 27
Part 28
Part 29
Part 30
Part 32
Part 33

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The Misadventures of the Street Strategist Vol 1 to 13


Hyperwage Theory Part 12
(July 21, 2005)

Chapter 12: I Love

The Hyperwage Theory is the greatest folly of the Street Strategist. However, it is also his best thought-out and fully developed intellectual adventure subject to the limitations that the Street Strategist is a one-man thinking machine with limited talents and unlimited imagination.

Yes, it is my best thought-out folly, after all, I have thought about this theory for the last ten years.

It is not so much as the conclusions of the Hyperwage Theory that makes it exciting as the exercise of harnessing separate intellectual thoughts from different disciplines into an integrated paradigm in order to provide a fresh perspective to the otherwise dreary world of economics.

The secret of the Hyperwage Theory is the principle that price modifies behavior. Its beauty is its elegant handling of non-economic issues. No other economic theory handles non-economic issues such as petty corruption, inefficiency, population control, or brain drain as well as the Hyperwage Theory. And I’m going to prove that. Don’t worry.

Proving two points
By this time, you should have been convinced of the economic and especially the non-economic benefits of the Hyperwage Theory, even if I have not fully discussed these benefits yet. You should be able to extrapolate.

In fact, I’ve met a few people who realized the impact of the theory five minutes into my discourse. They were able to follow the ramifications of the theory on their own at the speed of thought.

On the other hand, I have met people who cannot or do not appreciate the theory even after I repeated it to them. And I think you know this type of people. Yes, you are right, they are the ones who are knowledgeable on basic economic theory but are unwilling to get out of their brainwashed fixations. A little knowledge is a dangerous thing; drink deep or taste not the Pierian spring.

Yet, more knowledge is even more dangerous, and that’s why the Street Strategist is dangerous.

If you are one of those who are slow to ride on the learning curve of the Hyperwage Theory, I think you want me to prove first that Hyperwage Theory can be reconciled with ordinary modern economic theory.
Yes, I am responding to that call, and with my current discussion on hyperinflation, I’ve taken the first step of reconciliation. And I’m going to prove that Hyperwage fits within the framework of ordinary economic theory.

Second, you want me to prove that the benefits of Hyperwage, both economic and non-economic benefits, are better than the status quo, and worth the possible transitional disruption brought about by any implementation of Hyperwage. Actually, I don’t need to prove these benefits, because if you can’t see them at this juncture, I don’t think you’ll ever see them at all. You’ve got to be a hopeless case to require proof of the second point.

Remember, Hyperwage is a comprehensive yet a single-stroke solution, therefore, easier to implement and with comprehensive results.

On the other hand, our anti-poverty efforts such as job fairs, socialized housing, micro-finance, livelihood programs, and labor migration will never approach the comprehensiveness of Hyperwage as they merely bring about pockets of success affecting a few people. These programs have had a hundred years of failure.

Why do you refuse to see that the First World countries implemented a high-minimum wage policy to protect its poorest workers and in so doing strengthened the latter’s purchasing power resulting in domestic consumption resulting in increases in the Gross National Income (GNI) via the Keynesian multiplier?

The secret of the First World is high wages, are you going to ignore that, all because you think that if we will adopt this there will be hyperinflation?

Open minds
Okay, then let’s tackle inflation. But before that I would like to set up your frame of mind. In Part 11, I opened up your minds to the possibility that general rules are always subject to exceptions.
We discussed the special theory of relativity where we found out that the speed of light is constant even if you are traveling at the same speed. This is a view incompatible with Newton’s laws of motions.
I even had fun with the 0/0 question I posed last time. I realized many grownups do not know the answer. Under the rule that any number divided by itself is unity, then 0/0=1.

However, there is another rule that anything divided by zero is infinite (or tends towards infinity), thus 0/0= ∞.
Thus, is 0/0= 1 or is 0/0 = ∞?

Yes, the correct answer is neither unity nor infinity. The ratio 0/0 is indeterminate, it could either be zero or infinity, you have no way of knowing. Unity, infinity, indeterminacy. Three completely different ideas.

Another example. The factorial of 5 = 5! = 5 x 4 x 3 x 2 x 1. What is the factorial of 1? The answer is 1. Now, what is the factorial of zero? Well, 0!=1. Why is that? That’s by definition. Again, an exception to the rule.

What is my point? My background in science and mathematics has opened my mind to the possibility that a different set of rules applies to special cases. Translating this mindset to economics, I am open to the possibility that a tremendous increase in wages does not necessarily result into hyperinflation.

I view hyperinflation as a twilight zone of economics where concepts such as Philips curves or Laffer curves do not apply.

Given this frame of mind, I was astonished at the things I discovered.

I love inflation
Yes, that’s a confession; a very wild confession. I love inflation.

I warned you, the Street Strategist has a convoluted mind.

In fact, I have wanted to write about my love for inflation several years ago but never had the opportunity to do so.

How could a free thinker as perspicacious as the Street Strategist ever think of loving inflation? That should be the ultimate in economic ignorance, right?

Alright, let me share my ideas about inflation.

Although inflation is a historical datum I deem it as a leading indicator. In economics, a leading indicator is a statistical datum that indicates the future trend because the economic agents do something today in anticipation of tomorrow.

Here’s how I view the process. When inflation hits high, there is an implication that the businessmen are raising prices because they think that the consumers can still afford them. Therefore, there is some kind of economic optimism. We will disregard price elasticity for the moment under the assumption of ceteris paribus (all others being constant). Until such time when the consumers can no longer afford, the prices will keep on going higher and higher.

When the businessmen think that the economy will become weaker and the people cannot afford non-essential items the former will start lowering their selling prices. Thus, lowering of prices due to such consideration illustrates economic pessimism.

Of course, lowering of prices due to oversupply in the world market, or obsolescence is another issue.

By the way, I don’t really mean that because inflation in Third World countries are higher than First World inflation rates, that Third World economies are better off. All I’m saying is that it indicates more of economic optimism on the part of the businessmen. But to complete my exposition, please bear with me.

But the greatest reason why I love inflation is that I hate deflation. The implied economic optimism ushered in by inflation is a minor consideration on my part as to why I love inflation.

Actually, it is my hatred of deflation that plays a crucial role in my appreciation of inflation.
Have you ever lived in an economy that has experienced deflation? Boy, it’s scary. The experience is similar to a tropical person complaining of the heat wave until he lives in the coldness of snow. You can escape from the heat from you cannot escape from the cold.

What happens in a deflation? Let’s follow a scenario.

The working parents, expecting they are about to lose their jobs anytime due to a fragile economy, do not spend on unnecessary items such as sports shoes. Before their pessimism, they bought two pairs every year. Now, they don’t buy at all. Multiply this non-buying activity thought the entire economy.

The shoe stores will have lower sales. Having lower sales, the store owners lower their prices and retrench some employees. The retrenched employees don’t buy shoes anymore, hence still lower sales.
The retained employees fearing for their jobs, don’t buy shoes and other products as well.

Having lower sales, and lower volume of demand, the store owners do not place orders with the shoe manufacturers. With less orders, the shipping and logistics companies will have lower cargos to deliver.

The latter’s business will similarly face the same problem of reduced income.

Since the storeowners nationwide have slower business, they don’t travel anymore, thus affecting the travel industry.

The shoe manufacturers having lower orders from their retailers, in turn will retrench employees. The retrenched employees don’t buy shoes. The remaining employees fearing for their jobs, don’t buy shoes and other non-essential items.

The fabric and rubber suppliers to the manufacturers will have depressed sales too.

In short, due to pessimism, there is no domestic consumption, which will depress prices resulting in deflation. The deflation brings about retrenchment, and more pessimism, and so the economy goes downward in a negative spiral.

This is not a mere speculative scenario guys. I have lived in an economy which has experienced a deflation. Everywhere was a “closing sale” or “inventory sale” zone. And yet, nobody was buying because they feared the future and therefore saved their money for the rainy days.

The more they saved for the rainy days, the more the rain came.

As I repeated many times before, savings could be detrimental to the economy if the savings is not put in circulation.

Can you imagine the philosophy I have just shared with you? The more you save for the rainy days, the more the rainy days will come.

So now, let me ask you: Do you prefer deflation or inflation?
Ah, the lesser of two evils.

I love inflation. Quod erat demonstrandum.

Don’t you love it when the Street Strategist overturns your economic knowledge into something more logical than you thought it was? I mean, loving inflation now seems more logical than you thought it was. I warned you: You will never look at economics the same way again.

Enough. We will tackle hyperinflation in the next part. Of what use is a one-dollar increase in wages if it results in a two-dollar increase in prices?

But before I discuss hyperinflation, give this a thought. Look at all the assets you have, anything you own, especially the high value ones.

If the minimum wage of the domestic helper rises from P2,000 to P20,000, or ten-fold, will those assets also rise by ten-fold? Your computers, your TVs, your stereos, your cement, and everything, think about them. Where were they manufactured and what are the prices of these goods in the First World countries?

And then think about your domestic helper. If she has P20,000 how many stores and how many products will benefit from this purchasing power? Will there be deflation? No? Will there be inflation yes, and I welcome it.

Think about this. Make a matrix, a table of comparison of prices before Hyperwage and after Hyperwage. Will your HP Compaq Tablet PC currently worth P100,000 rise ten-fold to P1 million?

Or will it be lower because many people can now afford to buy them? Higher volume, lower price. Think, go ahead, think. Think of all the products you see in the world. Will oil prices rise ten-fold? Cars? Nokia? Aircons?

In the meantime, let me get back to our original question. How could a free thinker as perspicacious as the Street Strategist ever think of loving inflation? That should be the ultimate in economic intelligence.
(Thads Bentulan, July 21, 2005)
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1 comment:

Anonymous said...

The deflation scenario is contrived and unrealistic. "People have money to spend, but they don't want to spend it, so prices go down". If prices go down, things will get cheaper and it will entice people to spend... deflation will be reversed.

People will always have needs and wants and cannot be so "fearful of the future" that they will refuse to spend the money that they have...

Besides everyone seems to have forgotten the utterly common sense idea that purchasing power increases as prices go down, so DEFLATION INCREASES PURCHASING POWER.