Certainly, the basic economic understanding of imbalances in supply and demand causing changes in pricing where prices are allowed to float free, or changes in availability where they are not, is well established and reasonable. However, at the macro scale, inflation has as much to do with consumer and business expectations and confidence, not only in the direction of the economy but in the reliability of its de facto managers, government, the financial community, business leaders and labor leaders. As a result, inflation can move in vexingly unexpected ways, jumping or staying high during downturns (e.g.: stagflation again), of remain surprisingly low during boom periods. This is due to the reality that inflation is ultimately more of a reflection of the perceived value of the currency measures (dollars, pounds, etc.) than of the perceived health of the economy. A dollar is a dollar, today, tomorrow and yesterday. However, what that dollar can buy, that is, what it is worth in useful goods and services, changes as people gain or lose confidence that when they receive that dollar in exchange they will be able to turn around and exchange it with someone else for something of comparable value to them with what they gave up to get it in the first place. The fear of excessive inflation becoming extreme or “hyper,” is the real fear that the economy will lose confidence in its standard measure of exchange value, its currency. When that happens, economic activity must reach agreement on new measures of value in exchange, a process that inevitably leads to massive economic disruptions and disparities typically followed by equally serious social and political disruptions. The converse effect is also serious, deflation. Deflation is not a sale on goods and services. At its heart it is a loss of confidence in the willingness of anyone to make an exchange at any value, a fear that demand has collapsed or will collapse to the point that you “cannot give it away.” An example was very briefly given recently by the collapse of oil futures to negative numbers. Producers were literally, if briefly, willing to pay customers to take oil off of their hands. Deflation is not problematic in its own right. It is of serious concern because it represents an environment where there is no confidence a market for goods and services can be maintained, at least in the near term. If that happens, businesses do not simply reduce output, they close completely. Restarting those businesses at some future date is a costly, time consuming and highly uncertain process. It may never happen, at least to the same degree. Advances in the understanding and application of monetary policy have undoubtedly had a significant impact on the management of price fluctuations because they have significantly improved the capabilities and reaction time of the managers of the economy to address potential shifts in confidence. The current economic crisis, however, is as unique in regard to its impact on pricing as it is to employment and other factors.
∴ PROGNOSIS
41
Made with FlippingBook - Online catalogs