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September 18, 2013



Inflation is not a function of aggregate demand! Inflation is a monetary phenomena. There has been one reason that all the money printing over the last 30 years has not caused soaring consumer price inflation, and that is that the value of money declined only slightly more than the value of the commodities it was being exchanged against.

The evidence of that is to look at what happened to the prices of all those things that were not actually produced commodities, and whose values, therefore were not slashed. In other words look at what happened to asset prices. Whether you look, at shares, bonds, property or any similar asset class their prices have gone through the roof!

But, the basis of the fall in commodity values was a dramatic rise in productivity brought about by new technology, and the shift of large amounts of manufacturing production to China and other low wage economies. Now, both productivity growth is slowing, China is facing ever rising prices for inputs as a result of the growth of the last 15 years, and Chinese workers wages are rising sharply - in some case up to 50% p.a.

Imported Chinese manufactures still undercut domestically produced goods, but the prices of those goods is moving sharply higher. So, all the money printing that occurred over the last 30 years, and was sucked into blowing up those asset price bubbles, will now increasingly feed consumer price inflation.

That's another reason that interest rates will rise sharply. Who will want to hold a 10 Year Gilt paying 3%, when inflation is running at 5 or 6%?

A slowdown might cause a short run drop in prices to clear excesses, but lower demand does not cause lower market value for commodities. Those of us who experienced the stagflation of the 1970's and early 80's can well attest to that fact.

In fact, as economic activity falls, prices can often rise more, because unit production costs rise, which providing there is sufficient liquidity simply gets monetised into higher prices.


What a great blog! - I've greatly enjoyed catching up a bit after a break. Thank you.

Noticed one small error (probably of the theory rather than Chris) in the post about Gareth Bath earlier this month.

"* Bale is, in a sense a (near) monopoly, and monopolies charge a price above marginal product."

1. All companies do and must charge a price above marginal product, or they would have no incentive to produce.

More interestingly:

2. Monopolies under perfect competition can't charge anymore than multipolies. Under this (obviously incoherent) theory the marginal market demand sets the price. A new unit produced by the monopoly is no different to a new unit produced by anyone else.

Think about it for two seconds.

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