Here is me replying as me.

Phil, I think you are underestimating both the economic framework and how I’ve looked at the issue here.

Where you say:

“Matt: I will respond with something other than repeating a classical economic theory that fails with the real world situation you highlighted”

You are wrong about economics – we have discussed these issues in detail, and monetary policy is still the area where we have the most empirical success! Firstly, when it comes to China I have written about the currency manipulation heavily in the past – it is a mixture of excess savings in China due to both central management and their messed up population demographics, and subsidies for exporters.

As a result of this, during the first decade of the century, you had China essentially willing to pay for part of what they were selling us, and give us very low interest rates to do so. This is completely consistent with the “excess savings hypothesis” that Bernanke had talked about the entire time.

All the other countries you’ve mentioned have intervened more recently to reach an inflation target – the exact point I made in the post. Remember the combination of inflation outcomes and expectations and the nominal dollar tell us something very real about what is going on in the economy – it is this “third set” of factors that is all important. For example, if we have a cold and a runny nose, we don’t go to cut off our nose – it is a signal of the underlying problem.

Regarding your next points – you do realise that economists spend a lot of time analysing wages and inflation. In NZ, low skilled workers HAVE seen significant pay increases, and if “money printing was going to cause mass inflation” we would see it in the inflation expectations markets … which we don’t.

Also we do spend a long time looking at inflation indicies. For example, the CPI, RPI, and GDP deflator are completely different concepts measuring different things – CPI is a fixed bundle of goods, RPI is a different bundle including interest expenses, and the GDP deflator changes with the composition of consumption.

I completely agree – every economist completely agrees – that the price level is biased by technology change! But that is why we put in estimates of this change, use a positive inflation range instead of a zero point target, and use statistical techniques and filters to find real “inflation” (the comovement in prices – such to find the component that is unrelated to real changes in demand and supply).

“In the really long run Asian wages will increase but technology will replace much unskilled labour.”

This isn’t necessarily fact, but it actually sounds a lot like what I just wrote on last week.

http://www.tvhe.co.nz/2013/01/23/joining-in-on-the-robot-pileup/

I would note the point of this argument is to put forward a “reasonable interpretation” of what the other group has said about the issue, and the conversations you have had with them – the version of me in this comment doesn’t say very much, appears to have forgotten everything they’ve said in the past, and doesn’t make any of the obvious points about where the facts your narrative is relying on are a tad misleading.

If you disagree with economists because that is your counterfactual view of them, then I’m sorry I haven’t been more engaging. Hopefully I can do future posts that will be clearer.

NIM: China
has been suppressing its foreign currency prices for years in order to boost
exports at a an artificially low price.
It has achieved this by using its autocratic might to keep wages
suppressed and industrial credit freely available. America, Europe and Japan are busy printing
money to prop up their economies and/or inflate away the value of their
external debts built up in the boom times.
This has the effect of driving their government interest rates close to
zero. There are also doubts about the stability
of the Euro. International capital
owners look for places to put their capital where it can earn a real return. New Zealand is economically and provincially
stable and has proved on a long period that its Treasury bonds offer a 2% risk
premium that is mostly unjustified.

All of these
factors increase the amount of foreign currency that is moving to New Zealand. Simple Supply and demand bids up the price of
NZF:FXC. Slowly but steadily all that
excess capital in the country looks for risk free homes and the country is sold
to foreigners. All other things being equal an NZ business starts at a
disadvantage to his foreign competitor.
And all other things are very definitely not equal. New Zealand should attempt to sterilise the
impact of this foreign manipulation in order to compete on closer to a level
playing field. Switzerland has introduced
a currency floor and will print money if the rate goes below this floor.

Matt: I will
respond with something other than repeating a classical economic theory that
fails with the real world situation you highlighted….

NIM: The
inflation argument does not hold in the short term because austerity means
companies cannot increase prices and workers are scared to ask for a payrise in
case they lose their jobs. That has been great for overseas corporates
profitability. . NZ has not shared because its exchange rate is
artificially over valued.

Matt: …

NIM: For a
number of decades now the low skilled worker has not really had a pay rise
because their jobs have been replaced by cheaper Asian, Eastern European and
Central American workers. The welfare
net has seemed more comfortable than getting educated.

In the
longer term the impact of printing all that money may have an inflationary
impact. In the short term bank
de-leveraging, worker job fears and technology are having an offsetting impact.

There is
also a decent argument that the statistics are unable to keep up with the
complexity of the change around us. For
some years an august authority such as UK ONS has faithfully reported RPI at
0.8% p.a above CPI and GDP deflator. This
is not logically possible.

In the
really long run Asian wages will increase but technology will replace much
unskilled labour. It is apparent that the statistics are not really
good enough to keep up with the impact of the massive increases in energy
efficiency. A more appropriate measure
may be Globally Marketable Output. This report
is worth reading for the concept of GMO. I dont agree
with the conclusions but the theory and some of the ideas are pretty
interesting. The facts on energy from p64 are worth reading alone.

Matt:
hmmm. I need a cup of coffee and a bit
of time to digest that.

Indeed – that is the sort of issue I’m getting to when I state that we should ask “why”.

I like to start with “why” as it forces us to frame the issue and really look at it – then we can sit back, and look at what it all means.

What does “too high’ mean? When is any price “too high”?