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Price Level Stability
In one of our previous books (Broken Capitalism: This Is How We Fix It), I wrote the following excerpts to debunk several destructive myths that are obliterating the purchasing power of virtually all humans in Western countries today. These excerpts (and that book in general) provide important context to understand Gini's monetary policies.
The Trojan Horse of Lower Prices. The lower prices created by neoliberal economic policies over the past 30-40 years is a Trojan Horse. This phenomenon is presented by Globalism 1.0 cheerleaders as a boon to humanity, but it contains a hidden poison that is gradually destroying everything that makes us human.[1] That means it is destroying humanity. If all you care about is buying the cheapest stuff, then Globalism 1.0 might seem like a logical way to configure Capitalism. But if you care about maximizing the total number of viable companies, jobs, and economic stability in every country to prevent a global humanitarian catastrophe, then collapsing price levels is a disease.
When Are Falling Prices Good or Bad? Some people think falling prices are always good, but that is not correct. These people ignore the Capital-Labor Duality. Prices can fall for three primary reasons: (1) productivity gains in domestic production and balanced global trade that are passed on to consumers in the form of lower prices; (2) monetary deflation; and (3) labor arbitrage with foreign sweatshop countries. Whether falling prices are good or bad depends on why they are falling; so let’s briefly look at each of these three sources of falling prices to determine which are bad or good for you, not some vaguely defined global society.
Falling Prices from Productivity Gains. If prices are falling because of productivity gains in domestic industries and balanced global trade, while income is distributed equitably throughout the global economy, then yes, falling prices are good. In this case, productivity gains are benefiting consumers with more purchasing power and workers and producers can earn an equitable share of the global income pie. However, all the data and evidence presented throughout this book confirms that productivity gains have certainly not been distributed equitably throughout the global economy; so this source of falling prices has benefited only a small fraction of humans on Earth today.
Falling Prices from Labor Arbitrage. If falling prices are the result of labor arbitrage while jobs and domestic income are being sucked into foreign sweatshops invariably controlled by Transnational Cannibals, then falling prices will only lead to a concentration of wealth and market power into the claws of fewer and fewer Transnational Cannibals. In this case, purchasing power for people with jobs may be increasing, but if the number of jobs is shrinking because they’re being sucked out of the country and the small- to medium-sized business community is collapsing, then an ever-larger population of economic refugees can’t afford the cheaper goods at any price.
Falling Prices from Monetary Deflation. Monetary deflation is a cyclical economic phenomenon caused by a reduction in the money supply, widespread debt liquidation, or severe economic shocks. All these events can reduce the velocity, supply, and demand for a nation’s currency, thereby pushing down prices of all goods and services throughout its economy. Deflation is good for savers, consumers, and some types of investors because it increases their purchasing power, but it’s bad for virtually all debtors because it increases the real cost of their debt, which is why debt-laden governments worldwide today are terrified by deflation. Thus, lower prices due to monetary deflation impact people differently depending on what situation they are in, but it’s a temporary, cyclical phenomenon, unlike collapsing price levels from labor arbitrage with foreign sweatshops.
The Subsistence Basket. Labor arbitrage with foreign sweatshops (controlled by Transnational Cannibals) collapses the price of domestic products that compete with imported products while domestic price inflation simultaneously increases the price of essential goods and services like food, housing, transportation, education, healthcare, energy, tele-communications, etc. I call these essential goods and services the “Subsistence Basket” because they are mandatory for anybody who must subsist or live in any modern society. The Subsistence Basket represents the largest overall portion of every household’s annual expense budget.
Is Your Purchasing Power Rising or Falling? In most industrialized nations, foreign imports represent a small fraction of each person’s Subsistence Basket. If the price of some imported goods falls while the price of nearly all the Subsistence Basket goods rises without a corresponding increase in real income, that means the population’s net purchasing power is falling along with their quality of life. This is what is happening in the U.S. and many Western countries today. In a country like the U.S. where market bubbles and market failures inflate the price of the domestic Subsistence Basket goods, how can any Globalism 1.0 cheerleader say that Americans are better off simply because they can buy some cheap imports, most of which they don’t even need?
Collapsing Price Levels Fuels Debt-Based Subsistence. Collapsing price levels creates an unsustainable imbalance between the real income of a population and the real expenses that the population must pay to stay alive. As a population’s real income falls or remains stagnant while the price of the Subsistence Basket rises, the population must go into debt simply to stay alive. This is exactly what has happened in the U.S. and many Western countries over the past 30-40 years, which is a nasty effect of Broken Capitalism.
When Price Levels Collapse, the Capital-Labor Duality Collapses. Prices within a domestic economy need to remain at a level that provides a high enough quality of life for domestic consumers (Labor) and producers (Capital) in each country. When domestic factories are destroyed because price levels have collapsed, domestic jobs are destroyed, the real wage rates of the remaining jobs are flat or falling because of monetary inflation and downward pressure from sweatshop countries, and the Subsistence Basket becomes ever-more expensive, what exactly do policymakers expect will happen? Do they think the Invisible Hand is going to magically wave an invisible wand to save the economy from collapse?
The Global Cock Fight. When prices decrease because of productivity gains associated to technology advancements, that is a virtue, but when slave labor and sweatshop conditions allow sweatshop countries to produce a widget five times less expensively than an American company, that is not a virtue. That is merely labor arbitrage exploited by Transnational Cannibals for the sake of profit without regard for the impact on their home country. It amounts to pitting humans from different countries against one another in a global cock fight. Only in the distorted world of Broken Capitalism and Transnational Cannibalism is cheap labor a virtue.
Lost Purchasing Power = Lost Quality of Life. A Chinese citizen’s purchasing power today is much higher in China than an American’s purchasing power in the U.S. In fact, China’s GDP surpassed U.S. GDP in terms of Purchasing Power Parity in 2011, which means China is wealthier than the U.S. in real terms. Chinese companies can sell cheap stuff and still rapidly increase the quality of their workers’ lives because the price levels for all goods and services throughout their society are still rationally connected to the incomes that Chinese citizens are earning.[2] In other words, China’s Subsistence Basket is much less expensive than it is in the U.S. because Chinese purchasing power has been rising while American purchasing power has been falling for generations.[3] Lost purchasing power is caused by short-sighted monetary policy, which creates embedded inflation, market bubbles, market failures, and all manner of economic and social maladies, all of which are diseases of Broken Capitalism.
The Pernicious Fantasy of Globally Equalized Price Levels. In addition to the destruction created by Transnational Cannibals in the banking system, the European Union economy is a mess today for the same reason that the global economy is a mess. Globalism 1.0 cheerleaders have grossly underestimated the complexity and impossibility of equalizing monetary policies between nations because they do not understand the impossibility of equalizing cultural values and traditions across nations. If you understand how monetary, fiscal, and public policies are deeply and emotionally interconnected to the unique cultural values and traditions within each country, then you can understand that the core Globalism 1.0 fantasy of globally equalized price levels will likely be the most significant contributing factor to the outbreak of World War III.
Price Levels Are a Byproduct of Each Country’s Cultural Values. Every country’s fiscal policy is driven by their unique cultural values and traditions, which determines how they prioritize the expenses within their national budgets. How they prioritize their expenses determines how they manage their money supply and monetary policy. Americans have different priorities than the French; Germans have different priorities than the Greeks; the Chinese have different priorities than the Swiss—every country has different cultural values and priorities than every other country. That means you can’t harmonize monetary policies between nations without harmonizing their fiscal policies, but you can’t harmonize their fiscal policies without equalizing their cultural values and traditions.
Forced Price Level Equalization Increases Tension and Conflict. Contrary to the so-called “peace dividend” that Globalism 1.0 cheerleaders often talk about, forced cultural and economic policy equalization is causing a dramatic escalation in tensions worldwide. Nobody wants their cultural values, traditions, economies, and political systems to be destroyed or molested by foreign powers. The only way the European Union and Globalism 1.0 could ever be sustainable is if the United Nations, backed by the U.S. Military, executed an ethnic cleansing campaign to equalize all the cultural values and traditions across the planet. Of course, that would lead to World War III and the likely extinction of the human race.
See also: Is Gini a Deflationary Currency?
Notes:
[1] The "Globalism 1.0" concept is explained in more detail in the Broken Capitalism book, but in general, it refers to neoliberal politicians, corporate executives and economists who have prioritized the profit motives of Transnational Cannibals over all other socioeconomic factors.
[2] Of course, Broken Capitalism is creeping into the Chinese economy, too, but it will take another couple decades or so for their homegrown Transnational Cannibals to cannibalize Chinese society. It’s unlikely that their economic policymakers will avoid the mistakes of U.S. policymakers unless they read this book and make the adjustments I’ve described herein. But for now, most of the price levels in the Chinese economy are far healthier and more rational than the price levels in the U.S. economy.
[3] To be precise, it has been falling since the Federal Reserve was spawned on Jekyll Island in 1913. I’ve written extensively about the Federal Reserve in my article, “How Does the Federal Reserve Really Work?”. You can also learn more from G. Edward Griffin’s great book, The Creature from Jekyll Island.
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