Thursday, March 09, 2006

Part 13 - Hyperwage Theory: Hyperwage and the Theories of 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 13

Hyperwage Theory Part 13

Chapter 13: Hyperwage and the Theories of Inflation

The Hyperwage Theory’s greatest nemesis is the theory of hyperinflation. No, no, not because Hyperwage will result in hyperinflation but because the economists are brainwashed by their academic PhDs into automatically thinking that hyperinflation is a natural by-product of Hyperwage.

In fact, in the ten years that I conjured up the Hyperwage Theory, it was the theory of hyperinflation that caused me the greatest theoretical challenge.

How do you address this challenge: For every dollar increase in wages, there will be a two-dollar increase in prices.

But the promise of Hyperwage was too much for me to ignore just because of a problem called hyperinflation.

One day, while I was eating my lunch in a park bench fronting a lagoon of water lilies in the park below the tower of the investment bank that was giving me my daily bread, I asked myself the question: “I have always assumed that hyperinflation will happen. What if that assumption is wrong? Has anybody really analyzed hyperinflation from the viewpoint of Hyperwage?”

And so I did, and so I whipped out all the paradigms on the twilight zones of science and mathematics and applied the same paradigms on the economics of hyperinflation.

And voila, the one-man thinking machine of limited talents and unlimited imagination found an oasis of hope for Hyperwage in a regime of hyperinflationary terror.

Theories of inflation
Before I attempt to annihilate your unfounded fears of hyperinflation, let me give you a summary of inflation theories.

There is no single theory of inflation because it can be caused by different factors. In turn, for each factor there are several different theoretical explanations.

Demand-pull inflation. A demand-pull inflation occurs when there is ‘too much money chasing too few goods. Excessive growth in demand literally pulls prices up. This is the law of supply and demand.

Cost-push inflation. When costs increase very fast, companies have to increase their prices to maintain the same profit. This will cause inflation.

Quantity theory of money. This is monetary economics. Excessive growth in money supply may one of the causes of inflation.

Phillips curve. The Phillips Curve is a relationship between unemployment and inflation discovered by Professor A.W.Phillips for data from 1861-1957. In his curve, reducing unemployment causes inflation. But don’t swallow this theory hook, line, and sinker. because in the 1970s the curve did not hold true any more when the economy suffered from both unemployment and inflation. This is called stagflation.

Price expectations and inflation. The economists are a weird group. There are still debating about the definite link between people’s price expectations and the level of inflation. Isn’t this obvious? Example, the mere discussion of an additional VAT already sends prices upward. The Street Strategist calls this the psychology of taxation.

Wage-price spiral. A wage-price spiral happens when both cost-push and demand-pull inflation interact. Now, hear ye. This is the kind of hyperinflation that scares the economists when contemplating Hyperwage.

Did I tell you First World economies are inflation-centric? Yes, indeed, they are. But I also told you such inflation-centric economics should not be applied to the Third World. In fact, under Hyperwage, Third World economies should be purchasing-power-centric, not inflation-centric.

Costs of inflation
Used to be, unemployment was the economic objective of the governments. In the ‘80s, inflation has overtaken unemployment in importance.

Why? The costs of inflation were causing the governments of nations more problems. And their economists believed that controlling inflation will result in the so-called “full employment” as a natural consequence.

Anticipated inflation
Inflation has its costs. The costs will be lesser if the inflation is anticipated but greater if the costs are unanticipated.

If the consumers anticipate the inflation, then there is a built-in psychological cushion. The effect of inflation will be lesser due to this expectation. Their economic behavior already integrates this expectation.

The companies and businesses will raise their prices and this is called the “menu cost” of inflation.

On the other hand, the consumers will spend their money now instead of holding on to it in anticipation of inflation. This means they will go to the bank very often to withdraw. What will happen to their shoes because of all that walking? The leather will degrade. This type of costs are called the “shoe leather costs.” Believe me, the economists have a have a term of it. The shoe leather cost refers to the costs of more transactions which would have been unnecessary if people did not anticipate inflation.

Unanticipated inflation
The costs of inflation are more serious when the inflation is not anticipated. The wage levels will be distorted and there will be effect on prices. (Note: These are the economists’ viewpoint. Hyperwage views this phenomenon differently.)

Prices, according to the economists, will be unpredictable because the inflation is unanticipated.
Unpredictability causes inefficient allocation of resources.

In short, according to the economists, “The higher the level of inflation, the more difficult it is to predict. This will almost certainly lead to higher costs. The moral of this is: low inflation - good, high inflation - bad!”

An economist with the above conclusion above, and almost 100% of them think so, will never entertain Hyperwage. Much less, entertain Hyperwage as the most efficient, most effective, most direct way to address Third World poverty.

That’s why Hyperwage Theory gets a perfect score for originality and a controversial score for plausibility. But then again, of what use is the convoluted mind of the Street Strategist if he cannot lead you to abandon your old paradigms?

Hyperwage challenge
Previously, I gave you an assignment. What will be the effect on prices if the wages of the domestic helper rises from P2,000 month to P20,000 and the entry level of college graduates from P6,000 to P70,000.
Why don’t do this at home and fill in the blanks?

Hyperwage Price


100 KwH elec.



DVD Disc

29” Color TV

Nokia cell




Cell calls

Just think. Will the above commodities rise ten-fold? Hey, can you have gasoline more expensive than the USA? In fact, right now, our gasoline per liter is more expensive than in some US cities.

How about your Sony, or Nokia, or BMW or Toyota? Will there be a ten-fold increase in prices?
Our computers are more expensive than those in Singapore or Taiwan or in the US, so if we increase our minimum wage, will the prices of the above commodities increase ten-fold?

Let me ask you a simple question: If an Apple iPod resellers earns P1,000 profit margin out of a retail price of P20,000, how much is his profits from all his sales to all the domestic helpers?
Answer; Zero because the domestic helpers cannot afford iPod. After, all iPod in this country cost, more or less the same in California.

Now, let me give you the scenario, if the salary of the maids is P20,000, will he have new business from the maids? What will be his new selling price? What will be his new total profit?

Those of you who are still skeptical of Hyperwage, why are you not convinced? Is Hyperwage illogical? Or is it too logical for comfort?

European beauty
I wanted to reserve this for a later section but I keep on getting messages that the legislature will never approve such a P20,000 minimum wage because they will be the first to spend for the costs, after all they have 10 maids, drivers, boys, gardeners, and salesclerks of their businesses.
Simple solution: When the minimum wage is P20,000, the congressmen are already free to hire as domestic helpers the cousins of Anna Kournikova or some Eastern European poor girls who are willing to accept P20,000 per month. Hey, guys, you can have a creamy white European girl for a maid and mistress at the cost of the salary of a domestic helper. Now, pass that new minimum wage law.
That ladies and gentlemen is just an example of the much vaunted “non-economic benefits” of the Hyperwage Theory? Immoral but logical.

Oh, it never crossed your mind to have pretty European girls as maids? As I have declared before, the Hyperwage Theory is the Street Strategist’s greatest folly but also the best thought-out.
Anna Kournikova, if I can’t have you, can I have your poor rural cousins?

(Thads Bentulan, July 28, 2005)
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