(09-11-2012, 05:36 PM)Jester Wrote: Except that wage increases are negotiated with inflation in mind, and that inflation has been mild and predictable since the Volcker shock. That's what the whole theory of rational expectations is about - inflation only matters if you can't see it coming. Otherwise, it's no more relevant than multiplying the numerator and denominator by the same number - it changes nothing.Well, but that is not what I'm trying to point out. Our monetary system does not allow deflation -- the fed manipulates the economy to keep the CPI consistent. So, while the price of manufactured goods decreases, yes, something else needs to increase to remove that benefit. Often, that means devaluing the currency. The natural trade off for high productivity would be lower prices, and yes, we see some of it due to many factors (e.g. cost of off shore labor, robotics, etc.). I'm suggesting that Government gets in the way in trying to control for a predictable 3% inflation rate. This causes distortions, that accumulate and eventually adjust, often catastrophically.
And, here is a further discussion of the "Luddite Fallacy" at the Economist.