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Inflation
It is insidious, and it is a major factor in the debasement of the values of all currencies. Thus it deserves it’s own “full attention” --- an article of it’s own, in order to determine whether it can be “tamed,” eradicated or at it’s best or worst --- kept within the bounds of very minor “effect.” Without a doubt the two major perpetrators of the “origins of inflation” are RESERVE BANKS and GOVERNMENTS. It begins there, and they are the only two places that can control many, if not all of it’s detrimental effects. The one controls interest rates and the money supply, while the other controls taxation and all laws that rule commerce and society. Perhaps the best way to study it’s origins and it’s effect, and thereafter to determine what we can do to mitigate it’s effect, is to study a “hypothetical” society, a “Shangri-La” where it may not exist. From that point one can see all the many factors that together have established this phenomenon, as they are implemented. And what we can do in an attempt to tame it. Our chosen “Shangri-La” is a small isolated island. The population of this island is several hundred people. They are economically self-sufficient. They neither import, nor export. Some raise cattle, while others raise sheep and pigs. Turkeys, ducks and fowls provide their egg and poultry requirements. Some folk fish, while others tend “market gardens” as do others who farm wheat and fruit products. On the “services” side people cut hair, tend to the sick and elderly etc. The economy runs and exists on a barter system. So teachers and other service providers are given vouchers to “trade” or exchange for other services or commodities. Those who fish or produce other foods, may either exchange their food for one or more services, for other commodities, or for vouchers which they in turn would use as and when needed. Thus perhaps, one could view those vouchers as being a concept of money, because some sort of “value” was attached to these in order to determine it’s worth where it applied to different commodities or services. However, having said that, there was still a differentiation of “value” to a particular service, defining the difference of service value between say “medical practice” and “plumbing.” Where or if when a “committee” supplied a service or services, vouchers had to be surrended in exchange for these. Thus it could be construed, as the first signs of “taxation” were it to have occurred. Let us pause here at this point and examine the situation. While the barter and voucher remained “static" no change to the “exchange rate” of the barter or voucher), several factors exist. There can be no inflation. Everyone receives the same “value” as a constant for either their defined labour or their produce or product. In other words, as there is no change to value, there cannot be inflation; if a fisherman were to request a change in the barter value of his catch, inflation would result. Instead of a particular fish previously valued at 10 eggs or a small chicken or 2 pounds of tomatoes, a request is made for 12 eggs, 2.5 pounds of tomatoes and a larger chicken etc. However, there were several remedies to this. One either bought less of that particular fish, or less of all that person’s fish catch, or others went fishing and “sold” their catch at a lower price. So the first lessons one learns when costs rise, is to either do with less of the product or service, do without--- or look for a competitive product or service. Here we see that there are a number of options to counteract “inflation.” This works when dealing with an individual, a “business” or a series of a particular business. More difficult, is dealing with “unionism.” Thus if several teachers band together to demand more vouchers; or all the fishermen band together and simultaneously demand more for their catch. What then? It is at this point that “government” enters into the equation. There’s really nothing to stop government from enacting legislation to counteract either the influence or effectiveness of union activity, or to institute a rigid “wage value” structure to any or all product or services. While this tactic may be construed as “price control,” it may not necessarily be the case, depending how and when applied. What is lost to those who practice “union fanaticism” --- is that it is in the end “self-defeating.” Isolated cost increases could be “seasonal” and readjust in time if left alone, or be of such a trivial nature that within an expanding economy, is little felt. However, where a body of people orchestrates the demand in concert, the result to everyone can be profound. A concerted change to the “value of income” has an irresistible “domino” or ripple effect. It cannot do otherwise. In order to pay the teachers, the cost of tuition has to rise, either as a direct charge to the parents of the children, or as an increase in taxation to all the people. In either case, the cost in educating the teacher’s own children rises as well. So too would there be a demand from all those who produce goods or services in order for them to cope with the increase of either education or the increased cost of fish, or both. Thus we see the importance of keeping prices and costs as reasonably stable as it is possible to be done. There is a remedy to the desire to increase one’s wealth. We all need to increase our wealth over a period of time, in order to enable us to “retire” one day. Thus investment in the form of savings, applied in many ways; forms ---- or should form the media by which we could all accumulate wealth and retire in moderate to good “circumstance.” The mantra that “ people will pay more” for any product or service to cover the increases demanded, asked for, or applied as a greed for higher “profit,” is in the end self – defeating. If we were to go back in time say 60 years, people lived comfortably on a 30th of what they need to earn today, and by the time of retirement, the accumulated wealth has to cope with the inflationary factor of say 2% per year, so what was saved in year one after 40 years has suffered an 80% loss in purchasing power, and that which was set aside 20 years ago, will have lost 40% of it’s ”value” in purchasing power. Thus there has to be a balance to how high taxation can rise. However, if we are to continually demand more services, we should expect less available to us as both savings and “disposable income.” For it is the savings we need to increase our wealth, and it is “the national economy” that requires our disposable income to not only supply our personal needs, but create jobs for our growing families, and in turn save our own job or occupation as well. Thus on that island, as more children were born and required an education, the charge for education could be used to either add to some teachers’ income, or used to employ one or more teachers. What is being said is that “time” should – or would provide for the desire for more income. Another point has to be made, which relates to the differences in “value” between one teacher and another. Those who are qualified to teach many subjects are surely worth more than those who can only teach one or two subjects; as is a teacher who may be able to teach several languages, as against only one. Or capable of teaching the same subject to six levels of “grades” than to two or three. It is these differentials that are often lost to “unionism.” Remuneration has to originate from some source. Someone has to “make it” in order to “pay it.” It is perhaps time to now leave our little island and relate inflation to “the here and now.” First of all there are two different types of inflation. One could be defined as “temporary” and the other as “permanent.” To an extent, some or most of temporary inflation either adjusts itself over time, or its impact can be negated, combated or even defeated, given the “WILL” to do so. Generally speaking, it is the “time factor” that determines the harm done to currency values or purchasing power. So let us examine “temporary inflation.” Agricultural produce would be an excellent one to start with. They encompass such a variety of foodstuff, and are subject to so many forces that determine both supply and quality, to the extent that prices are never stable or static. For whatever reason that they be in short supply, we can either do without, do with less or “shop elsewhere.” The law of “supply and demand” is often given as both the reason for and defense of inflation. Other than the formation of a “cartel” controlling total world supply of a particular produce, we have the means to ignore those that adjust themselves over time as either supply satisfies demand or we do with less or without; in which case competition would kick in eventually. Given the “will,” we can also deal with cartels eventually. While one may argue that the price of food should be considered as part of the inflation equation, we disagree. All food is “seasonal” in nature, so prices will vary, and adjust over time, and if of a protracted nature domestically; supplies are always available from overseas suppliers. Take clothing as the next to be studied. Here we are examining something that stems from “production.” The cost content of one or more fabrics, as well as labour production costs. We will ignore “overhead,” for it applies to everything. Here again we have the same means of combating inflation (a rise in price). Do without, buy less, or buy a similar cheaper product, or purchase elsewhere. In order not to be repetitive, where the same “argument” or solution applies, we are going to in future use the term “ the same criteria applies.” Where the manufacturer attempts to contain inflation at “source,” he may have to look for other suppliers of his raw material, change its content, or the style of the product. Wage costs are the major problem; especially if having to deal with unionized labour costs. If direct labour costs cannot be altered, mechanization may be an alternative or a solution. In which case “labour” should understand that job loss could occur. Here as well, that dreaded term “outsourcing” could eventually result as a desperate means of survival. So here we see that in certain circumstances, outsourcing is maybe the only alternative available to business. One cannot stress how important it is for unionized labour to “get the message.” The very survival of your members as well as that of your organization requires that you WELL RETHINK labour practice and labour belligerence. Apart from these remarks, the general population within any economy, may have the last word on this subject, “by taking their business elsewhere.” How then do we deal with higher wage desires or demands? If we were to take it to the extreme, and buy cheaper imported product in place of what is available or made locally, we may be damaging our own economy and as an end result, ourselves as well. We have reached the stage where, in order to contain or diminish the damage done to the value of currencies, that we propose a number of perhaps controversial proposals. However, where this is done, we will spend a great deal of time in both explaining our reasons or reasoning in defense of our proposals. In doing this, we may also have to switch or digress from time –to – time in order to get our point across. At this point, it is important to note that this article was started a few days before the end of September in the year 2004. Yesterday the price of a barrel of oil hit $50 according to the newspaper headlines. So this is an opportune point at which to start with possible controversy. “TIMES ARE DIFFICULT” is an apt description of the “here and now.” The world still mired with relatively stagnant economies. Barely making any headway out of the recent recession. Other than China and perhaps India as well, most countries are struggling to create new jobs to re-employ those who lost previous jobs, let alone provide new ones for those exiting schools and universities and technicons. Many factors presently hold sway within most of the world’s economies. Interest rates during the past several years PUSHED DOWN into negative territory by the world’s Reserve Banks. The recent rate in the largest and strongest economy, (U.S.A.) at 1% and that of the second largest or strongest (Japan) at ZERO %. To this one has to add tax cuts generated by most of the rest of the world’s stronger economies. At this point one has to make an emphatic statement: Recessions do not “just happen --- or take place”. They occur because someone and/or many of us MAKE THEM HAPPEN. People are responsible for these, either by their ACTIONS or INACTION to events. It is quite possible for there never to be recessions or a “depression,” if we only conducted our policies, our politics and our economics differently. Debt and interest rates have a vital bearing as these both are vital factors that spawn recessions and depressions, which in turn spawn inflation, which then sets in motion a “centrifuge” of perpetual motion. To understand this, we have to go back in time. So we go back to oil at $50 per barrel. There was a time when oil prices were fairly stable. Ranging from $18 to $25 per barrel. OPEC “engineered” a fairly stable price range by continually altering supplies to counteract excessive price fluctuations above and below this range. They had been taught an abject lesson when prices were “manipulated” by so-called “outside forces” that forced prices down to $8 and $10 per barrel. So by the same token that $10 per barrel is unrealistic, so too would $40 and $50 a barrel be. These present high prices have nothing to do with inflation, but are driven by oil traders, scare tactics, excessive imbalance of demand, and the situation imposed by conflicts in Iraq, Nigeria and elsewhere; coupled to hurricanes and tornados raging over sea drilling platforms. While it is true that present high prices are fuelling inflation worldwide, they are never the less of a temporary nature. That is unless we, in our “wisdom” by our action or inaction establish a high price as the new “norm.” Where should the price of oil be? The answer to that rhetorical question is --- “around $25 per barrel.” Or thereabouts! We wrote about three to four years ago in an article titled “Globalization” where we advocated that exact price. Opec as well as all other suppliers would have certainly been satisfied with that price, were it to have been established as A FIRM FIXED PRICE. In other words, we were advocating PRICE CONTROL! If we go back to the period at the end of the last World War, a new car could be bought in the United States for $1300 to $1400,depending on the model. Fifty-eight years later, the same car can be purchased in the U.S. for $12,500. Thus the price of cars has increased 9.6 fold over 58 years. It possibly should or could have gone far higher, if one thought in terms of an average 2% inflation rate, compounding annually. However, fierce competition, together with mechanization, automation and labour productivity played their part during this period of time. Going back 57 years to 1947, a barrel of oil cost $2.77 per barrel, and if we use the same criteria of a 9.6 fold increase, it should today cost $2.77 x 9.6 = $26.59 per barrel. So at $25 per barrel, the price of oil was certainly reasonable. Had we wanted oil to be less than $25, then we should have vigorously combated overall inflation all these years. In 1946 (going back 58 years), the price of a gallon of gasoline at the pump in the United States was 21 U.S. cents. When it hit $2 per gallon at an oil price of $46, it had risen just 9.5 fold at the pump, practically an identical percentage type increase, as was the case with the price of cars. We made this very point of a stable fixed price for oil at $25 per barrel in the article on “Globalization” written about four years ago. THE ONLY WAY TO FIGHT INFLATION IS TO HAVE FIXED STABLE PRICES. In that article we advocated fixed prices for the top 300 essential exported products, commodities and minerals. We will return to this at a later stage again, as we would now like to focus on the two perhaps most important components of inflation, being DEBT and INTEREST RATES. These as well are at the same time responsible for recessions and depressions. INTEREST RATES: How important are they? They are possibly the linchpin to all else! But before we can pursue this point, one has to establish what the “NORM” should be for interest rates. What do we consider as “normal” interest rates. Rather a difficult question to reply to. For in a country that for years has suffered rates of say from 15 to 20%, they would be happy to define “normal” as perhaps 10%. Whereas another who has enjoyed rates ranging from 5 to 10% may consider 6 to 7% as being their “norm.” Unless we can establish a universal “norm,” as an average for the major trading nations, we are never destined to conquer inflation. Perhaps a guide might be say 2.5% above an average annual growth in GDP. So if over a 5year time span, average growth in GDP is determined as being 2.5%, then the Federal Bank rate would locate at say 5%, with prime rate at banks at around 6 to 6.5%. However, if the prime purpose of setting an interest rate is to kill inflation, and then hold it down to become a minor factor, then the base rate as a standard worldwide should be “that differential” between the rate of inflation and the “NORM” set at the Reserve Banks. Thus the prime determinant should perhaps be stated as “the desired wealth growth factor.” In other words, if inflation is held to an average annual 1%, then the wealth growth factor would be 4% above the inflation rate. If at 1.5% then Bank Rate at 5.5% If inflation can be driven down to say .6% (a total inflation of 3% over 5 years), the battle will have been won, and Bank Rate would remain at say 4.5%. At an average inflation rate of say .75% per year, the same total rate of inflation of 3% will have been reduced to a time span of four years, and the Bank Rate “equilibrium could be established at 5%. What we are driving at, is that if inflation can be driven down below 1% and the Bank Rate set at a rate that everyone can “live with” ---- the economy will thrive. And then it is the economic growth that will create personal wealth and at the same time take care of job creation. In other words, the G.D.P. will take care of everything. This then provides the basis for pension growth and pension sustainability and personal wealth growth which DOES NOT REQUIRE constant wage and salary increases to replace the erosion in currency value. Genuine savings as being the difference in inflation cost and earnings derived from investment become meaningful. Less debt creation is required, and the investment climate with stable interest will hold down excessive unrealistic stock share prices and thus diminish risk factors. All this in turn, diminishes some of the major factors that start recessions and depressions. One has to understand that the request or demand for wage or salary increases stems primarily from increases in the cost of goods and services. We are not talking here of the isolated request that stems from differentials that may exist or are perceived to exist between types of service given or “seniority” perceptions. We mean a perceptible increase in “the cost of living.” A difference to everyone’s standard of living. By and large, it boils down to a marked rise in the base cost of commodities and an added cost of any related “service charge.” This then generates the request for higher incomes to recover these extra costs. Surely if we are able to control the increase cost of essential commodities, the desire for increases in wages and salaries will be diminished, thus keeping inflation down to minor proportions. As previously mentioned, food costs in general terms are ignored. However, that is not to say that SPECIFIC FOODS should be ignored. In other words, coffee, which may be the only – or stable exportable commodity of several countries, could be added to the list. In other words, one looks at those entities that are exports, in preference to what the domestic price is. In other words, coffee and sugar, cotton etc. would have a fixed International Price, irrespective of their domestic prices. Thus International Trade and the desire to implement “Globalization” can mature. In order to “trade” we have to have the ability to pay for them, and to have this, one has to ensure that reasonable stable prices exist. This is NOT PRICE CONTROL --- but PRICE STABILITY! Changes to all these prices can be made every 3/5 years by review and consensus. We have strayed away from interest rates, so let us return to them. We are not advocating that every economy establish identical interest rates, but if a formula that relates to holding down domestic inflation works in a particular economy, then let that system be used. Society today cannot exist without the formation of debt. And it is interest rates that define THE COST OF DEBT. They exist as “Siamese Twins” --- “joined at the hip.” Interest rates determine what debt will cost a borrower, and interest rates determine what income the lender receives for his investment. Unfortunately Reserve Banks and Government do not treat interest rates with the concern it deserves. In other words, it is used as “a last resort” to accomplish a DESIRED EFFECT when it was possibly too late to be effective. Debt: While the manipulation of interest rates by Reserve Banks have a direct influence in the creation of massive debt, we will deal with debt when discussing the responsibility of government in relation to their blame for inflation. At the very beginning of this article we stated that the prime culprits for inflation were Reserve Banks and Governments. So it is perhaps time to substantiate these remarks. At the same time we will examine their role in the creation of recessions and depressions. Reserve Banks set basic interest rates. From these base rates, all other rates eventually are formulated. This is not to say that others do not have the right to choose otherwise, but that would be the exception. The philosophy underlying, or underpinning the setting of interest rates by Reserve Banks, is that the rates they set keep economies in “equilibrium.” That these rate settings are the effective instrument in containing inflation. We wish it were so. The basic problem is “the reaction time” in which this takes place. It has always been a factor of “closing the stable door, long after the horse has bolted.” An excellent example was the recent recession. For a number of years the economies of the major trading nations were overheating. This was not “a hidden factor.” Far from it! Stocks and stock markets were way overpriced and overvalued. Too much money was chasing too few stocks and all manner of “crazy” investment formula were allowed to proliferate. Government was equally to blame, but we will get back to that factor shortly. What the Banks should have advocated to Government was that laws should be enacted in order to slow the economy down by suggesting various effective means of containment. This also will be discussed when dealing with the responsibility of governments. If Reserve Banks wish to keep economies “ in equilibrium” by manipulating interest rates, then the time ‘to say so --- and do so,” should be done way before it becomes --- too little ---- too late. Invariably, delayed action ends in --- OVER-REACTION! Had there been early continued vociferous warnings, followed by continuous action in raising interest rates, followed by government action to slow the economy down, the recent recession would NEVER HAVE HAPPENED!To confound this issue the “Banks” went about lowering interest rates too late and far too drastically, in order to stimulate all the world’s moribund economies. Not only that, but all these “actions” and “inactions” relating to playing with interest rates, created the formation of immense debt; both to government, companies and people. While it did result in containing inflation, the increases in debt killed millions of jobs worldwide, and played havoc with the savings and wealth of the world’s peoples! There are other “bye-products” to this resultant debt creation. As interest rates are now rising to “so call” contain inflation, the debt created will now be impacted by this factor, and thus have a similar effect; in creating bankruptcy, consequent job loss, inadequate job creation and the impoverishment of wealth. Apart from all this, it creates havoc with currency values, both as domestic “purchasing power” as it does to currency “cross- reference” values. All this massive debt creation results as well as both “balance-of-payment” differentials as it does as well to government deficits. WHAT A PRICE TO PAY FOR INTEREST RATE MANIPULATION!! How effective are the manipulation of interest rates in job creation and the consequent strengthening of economies? In our opinion --- MINOR! The primary objective is to create “cheap money!” For in reality, the cheaper it becomes to borrow money, the quicker it loses its purchasing power. In effect, it also has a propensity to inflate prices, in releasing a flood of money into the consumer market. While the “theory” may have a basis in “anticipation of a desired effect or event,” it may well not do so in practical terms. There are no guarantees as to where and how these monies will be spent. For example, if spent on imported products or services, it creates a balance of payment problem to government, and if unwisely invested into stock markets, pushes prices up to unrealistic levels, with the possibility of later wealth loss. A final point that possibly should be made, is that rate manipulation by Reserve banks should always be held within a narrow band, no larger than a 5% spread from the “point of equilibrium. In other words, if the point of equilibrium were set at 5%, then upper limit margin would be 7.5% and the lower limit margin at 2.5%. The essence of this movement is “timeliness and moderation.” Perhaps it is now time to turn our attention to government responsibility for inflation, recession etc. It is difficult to decide who is MORE TO BLAME for inflation, recessions and depression, between Reserve banks and governments. While Reserve Bank function is far less detailed than that of government, the IMPACT created is at times greater, for they control both the money supply and the setting of interest rates. And it is these two factors that as well control the value of the currency, both domestically as well as Internationally. However, government sets the laws that control everything that encompasses an economy And it is either these laws, or even the absence of essential law that in the end may have the greater impact on inflation, recession etc. Not only these, but one might want to add that even existing laws are either flawed, inept or badly applied or neglected. Where to start, is maybe the problem. Perhaps taxation may be as good a point as any other. Followed by budgets. TAXATION: Taxation is “a necessary evil.” We doubt that anyone would deny that any economy of any country --- no matter how small, could today exist without it. Perhaps with one exception; a small island “Shangri-La” where everyone does “his or her own thing” on a barter basis. Very few, if any --- exist today. Thus taxation is “a means of payment.” Perhaps if said another way, the “cost or charge for a means of service.” We try to use our choice of words wisely, in order to impart the meaning of what we are trying to enunciate. We will repeat those last few words, “A CHARGE FOR A MEANS OF SERVICE.” In other words, no mention of “a profit margin.” Thus we expect some means of accuracy in determining the costs of the services that the “state” or government renders to its citizens. Added to this corollary, is the expectation that there will be no wasteful spending of taxation. We have emphasized just one word of that last sentence – the word “wasteful.” IT IS FULL OF MEANING!” Thus it is not only the volume of taxation applied that is important, but the uses to which they are put as well. In other words, if intelligently applied it has the propensity to slow down or keep inflation within minor bounds. This is not simple or easy to do, but the point will be made as to how this can be accomplished. All budgets specify where expenditures are to be made and the cost value that will apply to each sector. In other words “so much” to education and “so much” to health etc. Where increased expenditures are to be made, these are usually specified. This is especially so if cost changes have either occurred or is expected to occur. If additional infrastructure is to be provided, (more schools and/or more hospitals) this would be stated, in which case we would understand that more teachers and more health care personnel would be needed to staff these facilities. Thus if additional facilities and staffing are required (an increase in services), we would perhaps not quibble with an increase in tax charges. But we may want to question that if extra facilities are needed, it surely denotes either an increase in population (thus an increase in taxpayers) or a lack that previously existed and not timeously attended to. In other words, the increase in taxation has to be questioned and answered to. Within all changes to service charges, there is probably a wage cost factor involved. It is at this point that we are again to become controversial. In other words “at loggerheads with unions.” Surely when it comes to the “civil service” (or “Public Service”) --- personnel employed at municipal, provincial or “state” or federal level, that “grades of expertise” be established to determine wage or salary payments and increments. A wage factor level for each grade and years of service requirements within grades, and established means of moving to higher-grade payment positions, which would also take efficiency and seniority into consideration. This is not said in order to UNDERPAY PERSONNEL, but to contain disruptive union action, and to reward those who deserve to be rewarded. Not a blanket increase TO ALL --- irrespective of “deserve.” Having said this, genuine certified national inflation figures will not deny increases to all. In other words, say the total inflation over the previous three years was determined to have been 3% --- then everyone would get wage or salary increases. Union and non-union people across the entire nation. By the same token, we would all expect that “next year’s budgets” would go up a like amount. At this point we must emphasize that we are not advocating the INDEXING of wages to “inflation / cost of living,” merely recompensing the workforce for having FAILED to contain inflation. It is for this SPECIFIC reason that we state a 3 / 4 /5 year gap before recompense is enacted. This is to give government the time period perhaps needed to contain inflationary factors. However, there is a corollary to all this. Where budgets exist that encompass taxation in ANY FORM (municipal. provincial etc.) all waste should be fully examined and RECTIFIED in order to determine how much less than the proposed 3% shall apply to any tax increase. We admit that it is well nigh impossible to exactly balance taxation to budget requirement, yet if and when taxation has supplied a budgetary surplus, this should be set aside as a “reserve or contingency fund” in order to compensate for future budgets that may suffer a shortfall for any particular reason. This would mitigate the inflationary factor of unnecessary or untimely increases in taxation. If this is not done, government soon finds ways to “spend” these excess funds --- more often than not --- unwisely! The NECESSARY requirement of additional funding for specific sectors within a budget should be left to the NATURAL GROWTH of taxation derived from the growth in the economy, which in consequence will provide higher tax income. Before moving on to budgets, we feel that “rolling back” taxation should be commented upon. The lowering or “return of tax” to taxpayers in order to generate increase in consumer expenditures. To stimulate a moribund economy attempting to recover from a recession. Lowering the tax rate, eliminating specific taxes or returning a percentage of private or company paid tax generates the question ---- “were we being overtaxed?” this is by no means a facetious remark, because the rhetorical question requires a rhetorical reply. In other words, were we to assume that we had been overtaxed --- then the expectation is surely that we can expect a long respite from further taxation? If this is not the case, then we should understand that this is only of a temporary nature. We will not only be expected to return these monies “one day” (higher taxes) but will be required to pay further taxes to compensate for the both the repayment of government debt created which was used to replace what was returned to taxpayers (or forgiven taxation), but as well have to cover the interest charges on those government bonds or debt instruments. Government debt, created for whatever reason, is inflationary, a drag on the economy, and an added burden on taxpayers. If this added debt has been generated specifically to repay or replace taxation, for the purpose of generating consumer activity, then it may not have the desired effect to the extent required. A final point on this aspect. There is no guarantee that the money derived will be spent in the desired manner. If spent on imported goods --- it does not generate local production and thus does not generate the creation of jobs. An added problem in this respect is the formation of “balance of payments” imbalance, requiring the formation of massive new debt, and the consequent diminution of the value of the currency --- and thus its purchasing power. If invested into the stock market, it drives up stock prices without having in any way increased their “value.” Additionally there is no consequent increase in both job creation and the “consumption of goods or services.” Perhaps the greatest crime that can be “laid at the door” of government in relation to both inflation and the loss in the purchasing power of the currency, is that of any and all laws that govern the economy. OR THE ABSENCE OF NECESSARY LAWS! The problems in this respect are so wide and so varied, that this aspect alone would require an essay of its own --- at least as long as this article has been up to this point. We will try to be as brief as possible, yet with each statement made it does require an explanation to bolster our statement or “argument.” So let us start with stock markets. It took a major series of massive frauds perpetrated by companies worldwide to alert governments to the fact that there was little or no protection to investors who had invested their lifesavings into the stock market. Hundreds and hundreds of billions of “dollars” ---“pounds” --- “Euro” etc. have been lost to both individual wealth and “economic wealth “ of nations. Coupled to this was the realization that both company law and commercial law, including that WHICH CONTROLLED THE CONDUCT OF AUDITING was both lacking in existence, substance and effect and control. One has to add to all this, the non-existence and / or effective law to control the manner in which stock markets themselves operate. While much was promised to be rectified --- little has been accomplished. The justice system seems incapable of handling that which has reached the courts, and it is but the “tip of the iceberg” that has either been identified or attended to. MUCH, MUCH MORE NEEDS TO BE DONE. Let us enumerate a number of laws that either need to exist; be changed or “policed” with due diligence. Company laws are some of these. So too are those that govern the conduct of accountants and auditing. The conduct of stockbrokers, financial advisors and so-called “analysts.” Banks in the manner in which they promote: "initial public offerings”. That applies as well to all financial institutions. All of these factors have a bearing on inflation, wealth loss and diminution of the purchasing power of the currency. And finally --- all of these trigger recessions! Labour laws need revision and addition. We have written a separate article on trade unions, so will not repeat the many things that are “found wanting” both in law and in conduct in this area. The basic prime factor to all inflation IS THE INCREASED COST IN LABOUR. So surely laws to control and inhibit the excessive rise in salary and wage costs are relevant to controlling inflation. 95% of the grievances, benefits and all else that promote labour strife and strike, can be written into law thus obviating tangible loss to economies. For example, what seems to be lost to some of the workforce, is that if the “norm” for a “working week” is said to be 40 hours of labour, and they are working a 38Hr. or 35Hr week, they in reality are being PAID FOR 40 HOURS --- YET WORKING LESS! So in reality, in this case --- where does “overtime” start? Laws that govern government or “parliaments” themselves need revision. Corruption and cronyism is rife. Waste of tax “dollars” is endemic. Even the rules or laws that govern the conduct or scope of Reserve Banks may need to be re-examined. So too that of the conduct of the International Monetary Fund, The World Bank and the World Trade Organization. They are all guilty in their own way in creating inflation and generating recession. One of the greatest causes of inflation and the loss of the purchasing power of currencies is the indiscriminate use of currency speculation. There is basically little or no earthly reason for currency speculation, but there is an inherent necessity to protect currency values, specifically so when dealing with the purchase of one currency for another internationally. The domestic value of a domestic currency is the concern of that particular country and it is their duty to protect it. On an International scale where cross values of currencies exist, there is “a free for all” in existence allowing anyone to destroy or diminish the currency value of any country. They call it “MARKET FORCES!” This state of affairs makes a mockery of any attempt to contain inflation, both to an individual economy as it does as well to all economies. Why is currency speculation required? Surely fixed rates are more desirable, altered periodically by necessity and / or consensus. If not rigidly fixed, then allowed to fluctuate within a narrow band as a cushion to specific incidence or occurrence. The exchange of currencies is needed for a few identifiable purposes or “reason.” For travel, the payment of international debt, commercial or otherwise, and LEGITIMATE INVESTMENT. That perhaps covers everything. If it is desirable to protect all currencies (their value to each other), then the “speculative aspect” needs to be prohibited. Total control of these functions should rest within the purview of RESERVE BANKS, and rigidly controlled. The foreign currency requirement would move from the BANK or from the TREASURY to commercial banks, at which point the responsibility would rest to control distribution for those purposes already enunciated. Valid documentation would pass from the commercial banks to the Treasury to validate these transactions. By having centralized control, all speculation is done away with. So too is money laundering and tax evasion. A final point is the story of ONE MAN and his Hedge Fund Investment company who “took on” THE BANK OF ENGLAND, and single-handedly won the contest! His name was George Soros, who (we think it was in 1997) hedged the British Pound and forced the BANK OF ENGLAND to devalue the Pound, the SECOND STRONGEST currency in the world at that time. A major proportion of the wealth of 95% of the world’s population is invested within Pension Funds. Either by way of private investment, company pension schemes or that provided by government to its citizens, paid for from taxation. Today, at this moment in time --- October in the year 2004, possibly 70% of pension funds are “under funded.” In order for pension funds to “exist” --- be around to continue to pay out pensions to their members on retirement, valid or positive interest rates have to exist and be in continuous existence. Diminishing interest rates are a NO --- NO for pension funds, whose minimum requirements could be within the realm of a continuous 8% --- preferably even higher to within the 10 / 11% area. Fifty or more years ago it was that and more, when funds were primarily invested within Real Estate. So high dividend returns in solid protected stock investments are a must. The use of the word “protected” defines the effective laws needed to control stock markets and the intrinsic value of stock. While on this subject, we make the remark that all dividends and all interest derived from bonds be tax exempt. At the same time sales taxes and capital gains taxes should not exist. We will get back to this aspect of wealth protection shortly. On retirement, the bulk of the required income for retirees is either derived from pensions and / or investments. The blanket word to cover these is called “savings.” To a large extent, by this stage their contributions by way of income taxation is vastly diminished or non-existent. If this were not so, then the social assistance given would be way down. The greater the individual wealth growth of the population, the less is the requirement for social assistance, as it is for taxation as well. The greater the wealth of the citizens, the lesser the need for the government to provide by way of taxation. So everyone scores! Taxation should be derived from individual salary or wage income and from company profits. Blanket use of a “sales tax” should be avoided at all cost. It is THE CONSUMER who creates the economy; nurture’s the economy and provides its growth and its job creation. And the greater the individual wealth of the consumer --- the greater the GDP. It is for this reason as well that bond rates of AAA rated companies be at least in the 6 / 6.5% range or better for those who either have to live on this income, as well as enhancement to their wealth creation. That is the minimum interest requirement if inflation is averaging and held at around 1%, so one should expect at least a 5% margin above inflation; especially so for those in retirement. There are three main elements to income. One is the need by government for the payment of taxes. Another is the requirement of the economy for consumer spending in order to keep the economy “healthy”, provide growth and consequent job creation. And finally to provide for savings to enhance wealth, for investment and retirement pensions. Any excess of “spending” within one factor --- affects the other two, so there has to be a balance or equilibrium maintained. Any spending outside the borders of the “State” affects all three elements. We have now used the term “WEALTH CREATION” on a number of occasions, and have combined this with the “request” that distinct taxes be done away with. The enhancement of individual wealth is of such major importance that it has to be continuously emphasized. Let examine a few facts in this regard. The wealthier we all are, the greater the possibility that all tax returns to government will be “naturally enhanced”--- thus not leading to further new tax requirement. Secondly, the wealthier that the citizens be, the less the need for social assistance, thus again lowering the tax requirement. Another aspect is the wealth available to add to consumer activity, which in turn enhances company profits, again enhancing company tax payments. And finally, the growth in the economy creates the necessary jobs --- which in turn provides the government with further taxpayers! Say that what has now been said, is still less than what is needed to cover the entire essential budgetary requirement. There would still be no need for specific sales taxes and capital gains tax, because there are further alternatives. And governments ALREADY USE these alternatives. We are referring to specific taxes added to products “at source.” Often called SIN TAXES. Either taxed at the manufacturing stage or the “import” stage, such as cigarettes, liquor and perhaps on luxury goods such as jewelry or exotic cars. In other words, the criteria kicks in of “do with less --- do without --- or buy a competitive product.” If we are to seriously attempt to tame inflation, eradicate it or keep it within the bounds of minor effect, we have to get serious about it --- and make a serious effort in this regard. There are perhaps just two more subjects we have to examine, before we bring this article to a close. They are in a sense “interwoven”, in that the one influences the other. The one is the anomaly that economies seem to be recovering without the creation of new jobs, and the other is the so-called evidence of this by alluding to the increases shown in company profits. What is the reality? In order to examine if this is indeed the case, we have to introduce one vital ingredient into the mix, which is “OUTSOURCING!” First of all, not ALL the businesses, companies or manufacturers are making more or better profits. It is not “across the board” within any economy. In fact it is VERY - VERY SPECIFIC. And for “good reason.” To a large extent the emphasis on those two words “good reason” are said and meant as a DERISIVE REMARK in many respects. So let us examine this further. Many businesses are doing well because commodity prices are way up. So in fact they are profiting from excessive inflation, paid for by the populace. So those who deal with commodities, mine minerals, transport these, sell and / or export these, are doing exceedingly well. So too presently, are those who are dealing in oil and gas production and sales and their transportation. Additionally, due to excessive demand, and present shortage through adverse climatic factors, those who deal in a number of agricultural products such as sugar, coffee and crops such as cotton where crops are down due to floods, gales, cyclones etc. However, with a few other exceptions, the rest of the economy is struggling. This state of affairs is universal with the only exceptions being some of the economies referred to as being members of the “Oceania,” the “ASEAN”group of nations, specifically China and India. This brings us to those companies, and those economies that are either “outsourcing” production to members of that group and / or have established production plants in those localities. These are all high production / low cost countries, so in consequence their output is re-introduced to various domestic economies, with the resultant increase in company profits. However, sad to say --- at tremendous cost to domestic job loss and consequent erosion of individual wealth creation and the enhancement of the domestic economy. These then are the factors or the “ingredients of the so-called “jobless growth to economies. In other parts of an economy where sinking profit margins may have already shown up, the lowering of company tax rates, affording only some temporary relief masks this. Transportation profits are being balanced by the increased costs of transporting goods (the price of oil and gas), thus both fuelling the cost of transporting ALL goods and thus increasing the inflation of all goods domestically. Eventually rising interest rates impacting on debt will hamper or temper any fragile growth in economies as it attempts to contain rising inflation. This is then an emphatic statement on our behalf as of Mid Oct. 2004. THE ECONOMIES ARE NOT RECOVERING --- FOR IF IT WERE SO --- THEN WHY THOSE MASSIVE BALANCE OF TRADE DEFICITS! If it were not for the increasing debt creation and debt overhang, rising interest rates would have little impact on economies. The greatest economic expansion in economies and the creation of personal wealth was during the years 1992 to the year 2000. Yet it was during this period that the Federal Reserve Bank Rate in the world’s biggest and strongest economy (the United States), stood at 6% and 6.5%, with Prime Rate at 9%, yet did little to inhibit economic and wealth growth. So interest rates in that area, neither create inflation, nor does it inhibit growth in economies and personal wealth. This then bolsters our comment that INTEREST RATE EQUILIBRIUM should be within these parameters. Earlier on we brought up the subject of “fixed prices of exported commodities and products.” We then clarified this by stating that in reality it was to provide STABLE PRICES to certain universal export commodities and product. If we are to enhance the wealth of all nations that rely on exports to create their wealth and stability, yet at the same time contain inflation, then surely stable prices are vitally important. We are not going to pursue this further, as it has previously been raised in several others of our articles besides Globalization; as well as in a portion dealing with world trade enlargement midway through our article titled “CHOICES.” It was here as well that we used the term that “free trade” is altered to the words “regulated trade” said towards the end of that article. So too is it mentioned at the end of the article titled ‘THE ILLUSION OF WEALTH.” POINTS TO PONDER : There is a distinct difference between “temporary inflation” and “fixed inflation.” We have the means mentioned many times here, in coping with temporary inflation; for after all --- it is but TEMPORARY. It is the FIXED INFLATION that concerns us most, because this or these, are entirely in the hands of governments, both local and international and there is little we as individuals can do to combat it. The average pension income within the Military in the United States is presently $1782 per month. If we are to presume that pension payouts represent 75% of final salary, then the related income will have been $2376 ; and if at 80% then it would have been $2227. So let us presume the higher salary of $2376 with a pension payout of 75% for the $1782 figure. We have investigated the present average income in the U.S. and have come up with $29,235 for woman and $38,275 for men. So let work on the higher figure. If we go back to the year 1946 in the United States, the average annual income was said to be $3,150. Thus in comparing an income of $38,275 today, the increase over 58 years has been 12.15 fold. Income statistics given per “household” or per “individual” do not state “age,” so we are left to ponder at what age factor that “those averages” kick in. For this exercise, we are going to “arbitrate – or guess” an age of a 35 year old. Thus if that person were due to retire at 65 (in 30 yrs. Time), what would he have to expect as his end salary; from which point at say 80% of which would be their expected pension income. If 58 Years represents a 12.15 fold increase, then the next 30 yrs. would require a 6.28 fold increase. The income expectation is thus $38,275 x 6.28 resulting in an income expectation of $240,367. To compound the issue, the pension expectation at 80% would require a figure of $192,293. This perhaps clearly demonstrates the stark reality of inflation if we do not make a serious effort to bring it down to MAXIMUM of 1%. A final emphasis on this point. It is today estimated that well over 50% of pension funds are under-funded which adds to the gravity of these figures. So let us look at two series of alternatives. If we are to presume that the average inflation rate over the past 58 years was 2.5% --- then a drop NOW to 1% alters expected income requirement in 30 years time to $96,146 and a pension of $76,917. If inflation averaged 3% then these requirements are 1/3rd of those stated. Thus incomes at $80,122 and a pension of $64,097. SO ONE SEES HOW IMPORTANT IT IS TO CONTAIN INFLATION!! ARE WE WHISPERING INTO A HOWLING GALE UNHEARD --- UNSEEN --- UNCARING. WHAT DOES THE FUTURE HOLD.
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The
subject – matter of inflation appears in several articles on this website.
Among many other factors, it’s root causes lie within debt, interest rates,
governance; the value of money, trade unionism and many others as well.