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What is the relationship there? Pensions weren't yet privatised when this happened to pensioners in ex-communist states. Methinks this has more to do with the model of retirement funds as a pot of lifetime savings, whether private or state-run.

Well, yes, the point of retaining state control of the pensions is that you can index them, precisely because the state works on cash rather than accrual accounting.

Does that apply to basic food items and heating fuel?

Suppose you want to actively reduce your import dependency on fuel. This requires you to, in the aggregate, invest more in your housing stock and industrial plant than you would under a business-as-usual scenario. Both contractionary fiscal policy and contractionary interest rate policy will impair that investment. I suppose that in principle you might reconcile overall contractionary policy with greater targeted investment if you go all-out command economy in the relevant sectors, but as long as you want to retain a monetary economy with fungible money it's hard to see how that would work in practise.

Let me add a third problem I see with the inflation narrative: on the side of wealthy people. What inflation eats away at is the value of their assets. If they can decouple at least a good part of their income from asset prices and keep their assets (bee it gold or stocks in companies not going bust or means of production), then they don't loose anything physical, and the value of those assets will rebound in the next rally. I imagine this is not something that can't be countered with some nice taxes on wealth, but don't you agree that the rich don't automatically suffer the inflation route?

Inflation is not a tax on wealth, it's a tax on lazy money. So a rich person won't automatically suffer under inflation, and a poor person won't automatically gain.

More precisely, inflation is a tax on net creditors and those wage-earners and benefits claimants that are in a weaker political position than they were when their wages and benefits were originally instituted (due to the high downward rigidity of nominal wages and benefits). It is a subsidy to net debtors and employers who are in a stronger bargaining position than they used to be. That makes it a net loss for the financial sector, lazy money and weakly organised labour, and a net gain for the industrial sector and homeowners.

Devaluation or depreciation is a tax on imports and a subsidy for exports. Overall that translates to a net benefit for people associated with primary or manufacturing industries and a net loss for people associated with the financial or service sectors.

Contractionary interest rate policy is a tax on the future and a subsidy to the present. Homeowners and the industrial sector lose, because they are capital intensive; lazy money and the financial sector win because they are capital-extensive.

Contractionary fiscal policies are a tax on labour and the industrial sector, both of which are sensitive to the state of demand.

Further, economic activity is impaired by double-digit inflation rates, appreciation of the currency, contractionary interest rate policy and contractionary fiscal policy, and boosted by depreciation of the currency and expansionary interest rate and fiscal policy (note that there is no documented gain from further lowering inflation once you've eliminated the disruption caused by impairment of the ability of the currency to function as money).

As you will see, there is no perfect overlap between any of these groups and "the wealthy" or "the poor." But it is often possible to construct combinations that will favour the groups you want to favour. A combination of expansionary fiscal policy and moderate inflation favours labour and the industrial sector while it penalises the financial sector, lazy money and benefit claimants that lack adequate political power to defend the real value of their claims. Conversely, a combination of a strong currency, low inflation and contractionary interest rates favours lazy money and the financial sector, at the expense of homeowners, the industrial sector and overall economic performance (incidentally, I think that is as good an explanation as any for why this policy combination is so popular with The Serious People).

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Apr 13th, 2011 at 06:18:01 PM EST
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