(09-11-2012, 06:26 PM)kandrathe Wrote: 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.
I don't understand what you're accusing the Fed of doing. They create *nominal* inflation, not real inflation (AKA poverty). The *real* cost of manufactured goods (and almost everything else) decreases. Those are two totally different things. Nothing has to "increase to remove that benefit" - I don't know why that would be true, nor do I know what goal they would be pursuing in doing that. They try to avoid *nominal* deflation, because debt deflation is just about the worst thing that can happen to a country. Nobody wants another great depression. This is all straight out of Milton Friedman (and Anna Schwartz.)
Regardless, once again, in a world of rational expectations, the only people hurt by predictable, moderate inflation are people who are keeping cash in their mattress, or their piggy bank. Everyone else will bake inflation into their contracts (the bank's interest rate, their wage contracts, their sovereign bonds, their mortgages, everything), and the impact of monetary policy will, in the long run, be zero.
Nor does this singling out of the Fed make much sense to me. Every country, not just the US, is experiencing the same productivity gains, the same technological change, and yet, is not on the US dollar, and is not affected by Fed policy.
For instance, Switzerland has seen the same gains in manufacturing productivity, but the Swiss Franc is pretty much Ron Paul's ultimate fantasy, a currency backed by limitless vaults of gold. Whatever the Fed is doing to the US, Switzerland is definitely not. But is Switzerland seeing a completely different economic transformation than the US? Not really. Is their economy so different, being free of such "distortions"? No. A few sectors (banking) do better with a very strong, stable currency, and others (manufacturing) do slightly worse, but in the end, everyone adapts.
As for The Economist, what they are saying makes no sense to me. There were no massive technological changes from 2007 to 2012. We are not living in a radically different society from five years ago, when employment was fine. What changed is the crisis, which has nothing to do with automation, or any other such thing - the Luddite Fallacy is still fallacious. It has to do with widespread demand shortfall caused by massive credit de-leveraging. Everything we see today follows from that - high unemployment, tight credit, high prices for both gold and (safe) sovereign bonds. Any talk of "machines becoming workers" is pure science fiction. Even if I'm wrong, and by 2025 human labour is obsolete, I'm dead certain the 2008-2012 crisis has absolutely nothing to do with robot butlers taking our jobs.
-Jester