Inflation and interest rates

Date:      15 April 14

By:           Frank Gue, B.Sc., MBA, P. Eng.,

                 2252 Joyce St.,

                 Burlington, ON Canada L7R 2B5

                 905 634 9538

To:            Editors, The Economist, London, UK

Re:           Inflation and interest rates, March 29


Dear Editors:


You view some inflation as a Good Thing and deflation an unqualified Bad Thing.


But: enterprises succeed partly because they reduce costs which, when properly accounted, reduces prices. Would you immediately label this as evidence of the dreaded deflation?


Note the astounding 97% fall in direct labor in agriculture in only half a century; or the millions-to-one drop in the cost of business computing, in even less time.  The cumulative effect should have been a wholesome, economically sound fall in the general price level for everything from pickles to automobiles.  Thus we have the paradox of a permanent  state of falling real costs amid rising prices.  Who or what agency has captured the difference?


One hint:  your own newspaper, long ago, defined inflation as the means governments use to transfer purchasing power from the citizens who earned it to the government that didn’t.


Another hint, also from your newspaper, is your

identifying, while failing to recognize or name them, of the large and growing NVA (No Value Added) and VS (Value Subtracting) elements in the economy such as the high frequency traders and financial-system gamers. 


Sadly, the costs of all these activities, good and bad, enter undifferentiated into the GDP, which causes one to be more than usually uneasy with GDP and growth thereof as reliable drivers of our economies.


Perhaps we have it backward.  Perhaps we should think of inflation as an unqualified Bad Thing, and perhaps rechristen deflation as PLR (Price Level Reduction), a Very Good Thing.





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