Bifurcated Monetary expansion and low inflation…
Low inflation continues to be a concern in Europe and the US, especially in Europe. Central bankers project that inflation will rise as the economy gets closer and closer to full employment. Yet, what is behind low inflation?
I refer to the work of Michael Pettis who is a professor of finance at Guanghua School of Management at Peking University in Beijing. He puts low inflation in China within the context of financial repression.
“…why is it that what seemed by most measures to be an extraordinary surge in money creation did not also result in significant wage and consumer price inflation?“
“The answer, I will argue, has to do with the nature of money growth in financially repressed economies. Because the Chinese financial system is so severely repressed, money growth in China cannot be compared to money growth in a market-based financial system. Monetary growth is effectively bifurcated and affects producers and consumers in very different ways.“
“What does it mean to say that monetary growth was bifurcated? By this all I mean is that nominal money growth showed up as different rates of money growth for different parts of the economy. More specifically the rate of monetary growth for producers exceeded the rate of monetary growth for consumers, and this becomes clear by measuring the monetary impact on different sectors within the economy of monetary expansion under financial repression.“
“Countries with significant financial repression can experience periods of rapid monetary expansion with results that do not conform to normal expectations precisely because of this bifurcation in the monetary impact of credit creation. On the production side of the economy it is easy to see in China over the past decade what looked like the consequence of rapid monetary expansion – rapid growth in credit, rising productive capacity, surging production of manufacturing goods, asset bubbles, etc.
“On the demand side of the economy, however, and especially considering household consumption, one gets a very different view – monetary expansion seemed to have been very subdued. Household consumption typically grew much more slowly than GDP and its share of GDP declined steadily. Consumer price inflation also tended to be low or moderate even in the face of what seemed like rapid monetary expansion.”
Financial repression is not recognized in the US. However, there is a monetary bifurcation related to labor share. And in China over the last 16 years, along with financial repression labor share fell in China by quite a lot. Andrew O’Connell pointed that out today. He cites that in Guangdong, labor share fell 20% over 10 years. Capital share would have risen 25% as a result. That is a large bifurcation in monetary potential.
As labor share falls in the US and Europe, is household consumption also being subdued by a bifurcation in monetary expansion? Yes… We see consumption by capital income rising fast, while consumption by labor income is extremely weak. (source) This is evidence of bifurcation.
US Nonfarm business sector Labor share fell from 109.6 in 2000 to currently 96.6. (source) That is a 12% point drop, which is comparable to how much labor share fell in some parts of China over the same time period. And if you assume an actual economic labor share drop from 75% to 66% (a 12% drop), capital share then rose from 25% to 34% (a 36% rise!!!).
What is behind low inflation? … Monetary expansion is bifurcated.
You might enjoy Heiner Flassbeck’s presentation at the recent Minsky conference. He passionately argues on the need for labor to garner a larger share of growth gains in the EU , particularly in Germany. You can find the audio and presentation links here :
Some of the speakers are on video , though not Flassbeck , here :
Thank you so much. I listen to Heiner F. every chance I get. He is great.
My feeling that Piketty is right about the best remedies for inequality – direct , steeply progressive taxes on income and wealth – is strengthened when I see people like Tyler Cowen arguing strenuously that it won’t work :
Look at Slide number 4 in Mr. Flassbeck’s powerpoint… I wrote about that back in November.
Yep , since 1980 it sure looks like your blue ULC line is an anchor on the red line , dragging it lower over time. Nice graph.
Would higher tax and investment be a solution to a declining labor share? Investment in alternate energies, medical research environmental.
It seems to be a sign of progress that we can do things more efficiently with our tools but it can create inequality. All that excess labor can then be channeled into other productive areas. It appears to be a great opportunity or threat.
“More specifically the rate of monetary growth for producers exceeded the rate of monetary growth for consumers”
Sorry to harp on but it seems so obvious that if the central bank directly interacts with all evenly then money enters evenly.
Levy Institute has a neat little 3-D model economy that lets you vary capitalists’ consumption , gov’t share of production , and gov’t security interest rates to see how they effect demand and supply. It requires the Wolfram Mathematica utility to run , but they have a link where you can download it for free , if needed :
Higher tax and govt investment is needed. If Piketty is right, higher progressive taxes will slow down the rise in capital share. Yet, I read a comment on twitter today that Piketty is calling for even more bolder action to stop inequality than higher taxes.
It was from Dean Baker… “to combat the upward redistribution of income Piketty fears, we need a vigorous anti-rent agenda against the wealthy” link to article…
I have not read the article.
I read the article. Well reasoned with good points as is usual.
Wow , even the folks ( Posen and Blanchflower ) at the Peterson Institute are worried about low wages :
“…To summarize our results, we find evidence of a statistically significant negative effect of inactivity on wages. These inactives exert additional downward pressure on wages over and above the unemployment rate itself, and other factors (such as the
fear of unemployment (Blanchflower, 1994)). This pattern holds across recent decades in the US data, and the relationship strengthens in recent years when variation in participation increases…”
“….wage inflation should be considered as the primary target of FOMC policy with respect to the employment stabilization side of the Fed’s dual mandate, at least for now….”
I don’t think of it as bifurcation. It’s more of a sequestration. It’s like those schemes where they pump CO2 emissions from power plants underground to the greenhouse gasses don’t contribute to global warming. You can pump any amount of money into the economy, but if it isn’t providing goods and services for anyone, it may as well not exist.
I agree in sorts with Kaleberg. I don’t think bifurcation is the correct term or image.
Our problem is that the financial sector has been allowed to become a generator of income of its self. That is, we have via policy changes morphed the economy such that finance is treated as a stand alone aspect of capital growth and thus wealth growth. It’s why one hears word such as “products” within banking now.
Part of what was in the past along with our aggressive income tax, capital tax, labor promotion etc was that banking was in service to the economy. Banking required a material (knowledge or hard goods) producer dominate economy to exist. We changed that, falling for the rhetoric suggesting banking via increasing the efficiency of money was the king pin to the economy.
An economy can exist without banking. Business, trade, consumption can exist without banking. But, banking truly can not exist thus stand on it’s own as a wealth generator without the producer aspect of the economy. All the holding of a bank are dependent on what the non banking sector of the economy does with the elements that the bank’s note represents.
This lopsided monetary expansion is not a bifurcation it is the expected results of a change we made starting in the late 70’s to the means by which we chose to make money. We chose to make money from money assuming the expenditure of physical labor was a consequence of the money making and not the source of money creation.
It is why the monster corps are little more than a form of a financial operation as in GMAC and GE Capital etc.
Thus Piketty is correct, rent seeking has to stop. Unfortunately until the reason is understood for rent seeking and there is willingness to undo what we have done to the structure of the economy, that is move the banks back to being what they truly are secondary to producer economy, there will be little success.
We literally have to build a new money making machine based on the original machine taking into consideration of the current life changes such as global warming/pollution, information tech, rising productivity do to labor saving progress and carbon energy exhaustion/pollution.
The current machine was new and built for this god awful concept of money first. There is no way to modify it and expect to solve income inequality.