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The 'Wages-Fuel-Demand' Fallacy
Submitted by Alasdair Macleod via GoldMoney.com,
In recent months talking heads, disappointed with the lack of economic recovery, have turned their attention to wages. If only wages could grow, they say, there would be more demand for goods and services: without wage growth, economies will continue to stagnate.
It amounts to a non-specific call to stimulate aggregate demand by continuing with or even accelerating the expansion of money supply. The thinking is the same as that behind Bernanke's monetary distribution by helicopter. Unfortunately for these wishful-thinkers the disciplines of the markets cannot be bypassed. If you give everyone more money without a balancing increase in the supply of goods, there is no surer way of stimulating price inflation, collapsing a currency's purchasing power and losing all control of interest rates.
The underlying error is to fail to understand that economising individuals make things in order to be able to buy things. That is the order of events, earn it first and spend it second. No amount of monetary shenanigans can change this basic fact. Instead, expanding the quantity of money will always end up devaluing the wealth and earning-power of ordinary people, the same people that are being encouraged to spend, and destroying genuine economic activity in the process.
This is the reason monetary stimulation never works, except for a short period if and when the public are fooled by the process. Businesses – owned and managed by ordinary people - are not fooled by it any more: they are buying in their equity instead of investing in new production because they know that investing in production doesn't earn a return. This is the logical response by businesses to the destruction of their customers' wealth through currency debasement.
Let me sum up currency debasement with an aphorism:
"You print some money to rob the wealth of ordinary people...
to give to the banks to lend to business...
to make their products...
for customers to buy with money devalued by printing."
It is as ridiculous a circular proposition as perpetual motion, yet central banks never seem to question it. Monetary stimulus fails with every credit cycle when the destruction of wealth is exposed by rising prices. But in this credit cycle the deception was so obvious to the general public that it failed from the outset.
The last five years have seen all beliefs in the manageability of aggregate demand comprehensively demolished by experience. The unfortunate result of this failure is that central bankers now see no alternative to maintaining things as they are, because the financial system has become horribly over-geared and probably wouldn't survive the rise in interest rates a genuine economic recovery entails anyway. Price inflation would almost certainly rise well above the 2% target forcing central banks to raise interest rates, throwing bonds and stocks into a severe bear market, and imperilling government finances. The financial system is simply too highly geared to survive a credit-driven recovery.
Japan, which has accelerated monetary debasement of the yen at an unprecedented rate, finds itself in this trap. If anything, the pace of its economic deterioration is increasing. The explanation is simple and confirms the obvious: monetary debasement impoverishes ordinary people. Far from boosting the economy it is rapidly driving us into a global slump.
The solution is not higher wages.
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As an employer of some 300+ people I can say that wage increases these days, below the upper management level, are almost used almost totally to service existing debt. It will take awhile, a serious while, involving multiple wage increases to return to a situation where raises fuel new demand.
Quite right because most are under a mountain of debt created because their wages didn't keep up with growth in GDP or for that matter inflation!!
This was due to the operation of the free market. "Free" my a**e! It's been rigged for thrity years by "wealth creators". No one asked them whose wealth they were creating! Thirty years of fairy tales have resulted in true capitalism's collapse!!
To be fair, this is like it always was. Most people take decades to learn to be cost-effective and independent. For some, that lesson never comes, and they are forever stuck on the hamster-wheel of huge house, massive monthly bills, new cars, et cetera...
Almost no one seems to be aware that most money is not created by the state or central banks but by private banks.
3% of money exists as note and coin that the state does create.
97% is created at private banks on the basis of loans.
This money always just appearing out of nothing as it is typed into a keyboard at the bank on the basis of the loan.
The BoE on the subject of money ceation:
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf
Exactly....but unfortunately most that contribute here don't seem able to grasp that...
I read from this site, very often. This article is a complete disapointment. You have convoluted wages and money supply in order to make a case against higher wages. You know damn well that improving the economy will require deflation or higher wages. Inflation has always outpaced wages and will always lead to a slowing in demand as more products/services become unaffordable to the working joe. There are not enough 1%ers buying enough stuff to offset this. So how does the average joe start buying more? If you have a suggestion that doesn't involve either deflation or higher wages, we're all ears. You nor WallSt are going to take a haircut and allow for deflation, so wages are the only option left. I'm pretty sure the economy is going to tank once the new BRICS currency takes hold and people start dumping dollars; so I guess this is all irrelevant anyway. Still, I expected more from this site.
The 'Rising Minimum Wages-Fuel-Demand' Fallacy
There, fixed.
While I'm strongly against raising the minimum wage because it will make America less competitive and slow job growth, I concede the debate is destined to continue until it is raised. I hereby state without a doubt, the minimum wage will go up! Polls show a majority of Americans support this idea.
It is my feeling that many people believe the myth this will put more money into the consumers pocket and create economic growth. They fail to recognize it will also spark inflation while reducing opportunity. New twist and wrinkles are being added by the White House and supporters of this increase every week. Expanding the number of workers eligible for overtime pay is another attempt to push this along. Unfortunately much of the impact and pain will directly fall upon small business the real creator of jobs. More on this subject in the article below.
http://brucewilds.blogspot.com/2014/03/the-minimum-wage-will-go-up-right...