This is in the nature of a question.
First off, this:-
http://www.housepricecrash.co.uk/graphs-average-house-price.php
It's the HPC graph on house prices adjusted for 'inflation'.
Now, inflation is a function of money, not prices. Price rises are the result of inflation not its cause.
The 'inflation' used to adjust the graph is official RPI.
But, (and I have not been able to check this) the money supply between 1975 and 2011 has exploded by many times more than we would be lead to believe by the RPI.
So, what may be happening is that capitalism is delivering deflation - more for less each day - whilst the government is delivering inflation - exponenetial growth in fiat money supply. RPI is one minus the other. But house prices are just a component in RPI and their price rise reflects the growth in money supply (as does the price of shares).
Any thoughts?
Friday, 21 January 2011
Question.
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18 comments:
While your point is valid, I think that normalising by RPI is the correct thing to do. Even if RPI is not equal to inflation.
What we care about is how affordable houses are, and that is going to be relative to the prices we pay for things, rather than the money supply. So, even if we could measure true inflation, I'm not sure using that as the normaliser would show us a meaningful chart.
Perhaps an even better normaliser would be average disposable income.
L, a lot of that increase in money supply is created by the banks (via house price bubbles) and not directly by the government 'printing money' (maybe it's half each?).
I'm with OP on this one. What would be interesting would be a graph of how many days the average worker would have to work to afford the average house against time. A bit like the one showing how many days in the year yo have to work before you've finished paying the Gov't its share and start earning money for yourself.
Perhaps it would be correct to say that the RPI was a measure of inflation, and only one of several such, rather than 'inflation' itself. I understand economists generally prefer the GDP deflator, which is the factor by which nominal GDP growth gets adjusted in order to arrive at real GDP growth (apologies for any egg-sucking instructions there).
I think you are in any case correct - traded goods and services are available in vastly greater quantities now than in the past and (most often) at lower real prices and higher quality. If housing had kept up, we would all be living in mansions with underfloor heating etc.!
The total amount of land is fixed, so even if the money supply does only grow in step with the amount of goods and services being traded, then the money supply to land ratio still increases.
L, having thought about this for a bit, the almost impossible part is distinguishing between flow of money and stock of money.
For sure, these M0, M1 etc figures go up every year, but they are to some extent 'made up figures', as all money in existence always nets of to £nil. Whereas things like prices in shops and nominal wages are much easier to measure, and even house prices/total mortgage debt outstanding still have some relevance to the way things are.
Well leave money aside then.
Just consider goods and services directly. They can increase in quantity , Land can not. There can be more dvd players but not be more land. The no of dvd players to land ratio can increase each year.
"capitalism is delivering deflation"
Yes, and a competitive market with innovation driving productivity will always do that. Think about the cost of high tech items. The quality of products goes up rapidly and the price falls even in nominal terms fairly continuously.
"Consensus" economics says that controlled overall inflation is a good thing because it encourages investment instead of hoarding of tokens. However - as we know only too well - often people invest their money in unproductive assets.
Deniro, for sure, the easiest way is to ignore absolute prices and just look at relative values, plucking figures out of the air:
1960, avg. weekly wage £10, cost of b/w TV £50, cost of house £1,000.
2010, avg. weekly wage £500, cost of portable TV £100, cost of house £200,000.
Expressed in 'weeks wages':
1960, TV = 5 weeks, one house = 200 weeks
2010, TV = 0.2 weeks, one house = 400 weeks.
BE, yup, and by 'unproductive assets' you mean primarily land (which is very much a productive asset, but it is not a new or enhanced asset).
Or put another way, they overinvest beyond the asset's intrinsic value. One might call it a "shortage premium"...
Any thoughts? Ooh. Where do I begin? Well, here's a couple.
Firstly I would disagree that inflation is purely a monetary phenomenon. I would say that it's actually best characterised as the ratio between the number of monetary tokens (real or virtual) in the economy and the amount of production in the economy. Hence inflation can be caused by an increase in the number of tokens or by a decrease in the amount of production. So in my opinion the collapse in Zimbabwean agricultural production was the main cause of the Zimbabwean hyperinflation, not the printing of money, although no doubt that did play some role.
When you look at inflation in these terms, you can see activities like government spending, making bank loans, closing businesses and factories, exporting goods and selling foreign exchange are all inflationary to some extent or other; activities like paying taxes, defaulting on loans (but not repaying them), expanding production, importing goods and buying foreign exchange on the other hand are deflationary.
This is one of the reasons that switching to a gold standard wouldn't prevent inflation or deflation. Sure, it would control the number of real monetary tokens in the economy but that's just the numerator in the inflation ratio. The denominator, production, would still be variable and declining production would still lead to inflation; collapsing production to hyperinflation, whether we were on the gold standard or not.
Secondly, as Mark pointed out, it's too simple to blame the government alone for growth in the money supply. The private sector plays a major part via the banks. Austrian and neoclassical economic theory both theorise that the amount of money created by banks can be controlled by the government via the money multiplier effect. However the Conservative government discovered in the early 1980s that practice didn't match that theory too well when they tried to put it into practice. Which is why it eventually had to turn to control of the banks by jacking up interest rates to cut off the public demand for bank loans. Research into banking practice since then has pretty well established that the money multiplier is an artefact, not something that can be used to control the banks.
So the banks create a lot of money in response to demand for loans. I don't know how it compares with that created by government deficit spending, so I'll go with Mark's guess that it's 50/50, although I suspect that the banks may create even more than HMG. In any case it's a pity that the theorists who run our economies still prefer their theories to reality.
I basically agree with your last couple of paragraphs except that I blame the government and the banks for the exponential growth and I would say that the true measure of inflation is fiat money supply divided by value of production (measured in equivalent bushels of wheat, 1960 GBPs, or whatever).
You've probably seen them before, but the graphs at http://blogs.thisismoney.co.uk/2010/04/house-prices-vs-average-earnings.html are interesting.
Thank you all very much for all your contributions. Most informative.
If by capitalism you mean all production in society I get you on deflation. More produced, more easily, with less waste. With no increase in the money, things must get cheaper under free conditions. By cheaper in the end we mean less labour was expended per unit of wealth.
If by fiat money you mean monopoly power. Land and money rents, causing inflation, I get you too. Some living off the labour of others. Unearned income. Quasi slavery. By more expensive we mean more labour was expended per unit of wealth. Things got harder to make breaking the fundamental economic law of nature.
Take one from the other and you have a factor relating the labour of the producer with the rent of the non producer. Earned versus unearned incomes.
Agree totally with Lola.This has never happened before .
Thank you DBCR. It an't intentional! Look, I'm a simple bloke. There's so much I don't understand. But, there are a few truths that seem to keep proving themselves to me.
1. When you get to meet them the Great and th Good mostly aren't.
2. Life isn't at all complicated. It's the G & the G deliberately making it so to profit from it at our expense.
3. Governments lie to you.
4. All 'princes' (i.e. including 'democratic' governments) have always resorted to clipping the coinage.
I really don't see that I am that different from most of my fellow men?
Derek
I was interested in your comments on the gold standard. I don't understand its advantages, could you identify them please so I'm clear?
On the topic, it would seem that fiat money is a more advanced labour saving device than what the gold standard offers? That is, by using it slightly more can be produced with the same effort. Let me know your thoughts.
Reason I ask is that both gs and fiat have become corrupted anyway regardless. So its not really the technical capability of one or the other that matters. Once again it is that the social system has not adapted to support the great advantage either give. And that the emergent monopoly power picks up the labour saved that by rights should go to others under free conditions if preserved.
This is just an idea to describe what seems like an inevitable law of nature is really government renegging on its obligations to protect the equal rights of all, as the power to produce increases.
Your thoughts?
Lola, totally!
This is not complex. Unravelling the corruption that deliberately obscures the simple observations that anyone can make is.
We must demand answers on this from the academies that educate us mostly.
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