>I understand all of that and I appreciated Ed's effort but it seems to me
that
>there is a belief that money must become less valuable and stocks must go
up
>or the economy is stagnating or even dying. "Growth" seems to be attached
to
>life and the psychology of a working market. Sort of like "Esperanza" in
the
>Casino.
>
>But you guys and gals are the economists. Help a poor artist to
understand!
>How is
>it that my money is worth six time less than it was in the 1960s and my
salary
>has
>gone up 3 times and the market is supposed to be working for me?
Apologies Ray. You asked for the time and, as my wife would say, I built you
the clock, and not even one that told the time. But your question is not a
simple one, and I'm probably not the right person to answer it. However, I
have a little bit of time this afternoon so I will give it a shot.
In a stable, industrialized economy like Canada or the US, inflation
probably occurs because it is expected to. There is an indexation process at
work, one which operates both formally and informally. Wages rise to take
account of previous changes in prices, prices then rise to take account of
the increase in wages, and so on. The creeping effect is one of money
gradually losing its value as both incomes and prices rise. From time to
time this process is accelerated or retarded, depending on foreign
influences (e.g., the oil shocks of the 1970s), the state of the business
cycle, and government monetary and fiscal policy. But the system as a whole
is powerful enough to withstand being knocked very much off-balance.
Within the system, however, technological changes will make certain skills
obsolete, raw materials will become more or less abundant, and shifts in
demand may favour new products over old ones. This leads to changes in
relative prices. Opera may have been in great demand at one time, but people
now prefer peanut butter sandwiches. The income of the people who make those
sandwiches will go up faster than inflation; those working in opera may not
keep up. We are currently witnessing a relative rise in incomes (adjusted
for inflation) of people in the high-tech industry and a relative fall in
incomes of people in farming, for example.
That, from what little I remember of my economics, is how inflation is
supposed to occur in a mature industrial economy. But there are other kinds
of situations. When I was in Russia a few years ago, the value of the rouble
had nose-dived. I would have to go back to my notes which are on another
computer, but I believe that under the Soviet regime, the rouble was
artificially held at par with the dollar. Following the policy of "shock
therapy" (which seems to have killed rather than cured the patient), the
value of the rouble fell rapidly. In June, 1995, one US dollar would fetch
about 5,000 roubles. This is inflation at an enormous rate. People on
relatively fixed incomes found it disastrous. I recall people selling what
little was left of their possessions just to buy a bit of food.
Inflation of the latter kind is probably attributable to wrong-headed
government policy, or to policies which were OK under a certain set of
circumstances, but which could not work when times changed. When Russia
traded largely within the Communist Block, parity between the rouble and the
dollar didn't matter because there was little trade in dollars. When Russia
opened up to the West, and trade became denominated in dollars, the
artificiality of parity quickly became obvious.
As for the stock market, you are right, it's a casino. But it's influence
can be huge, a little like a ten foot tail wagging a one foot dog. The value
of a stock is supposed to reflect the present and potential earning power of
the company that issued the stock, but in the stock market its value is
determined largely by what investors believe other investors believe it will
be valued. Bubbles and crashes occur, creating wide swings in consumer and
investor confidence. I was reading an article in a Polish paper this morning
(dictionary in hand, of course) which argued that the Current US stock
bubble will last another 12 to 18 months, during which consumers, in a high
state of euphoria, will continue to spend money they don't have like crazy.
Then will come a crash and payback time. At a recent luncheon talk, the
Chief Economist of a leading Canadian brokerage said very much the same
thing, though I seem to recall that he was a little less optimistic about
how long it would take for the crash to come.
The foregoing is the simplest answer that I could think of to your question,
and it may even be wrong. I doubt very much that you will find it
satisfactory, but I wanted to avoid building another clock. Perhaps someone
else can take a stab at that.
Ed Weick
