[OPE-L:3871] Re: The Causes of Inflation

rakesh bhandar (djones@uclink.berkeley.edu)
Sat, 21 Dec 1996 18:50:41 -0800 (PST)

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1. While the volcano of inflation is not dormant, it is spewing forth at a
"reduced rate." And this seems to be in need of explanation, as much as the
persistence of inflation. In The Indebted Society James Medoff argues that
the Fed has kept a tighter reign on monetary policy in recent years in
order to be able to inject great liquidity into the system in the likely
future case of another massive stock market crash. Medoff argues that the
Fed has mastered monetary economics but needs to learn more about labor

2. Thurow also raises the possibility that to the extent that fiscal and
monetary stimulus can no longer be counted on to be successful or even
during downturns in the business cycle, firms will now have to reduce
prices to maintain market share and this will serve to extinguish the
volcano of inflation.

3. Yes, I did mean to point to Boskin's claim that inflation rate is
calculated in such a way that its severity is overestimated (and I will
have to get back to Alejandro on the specifics of Boskin's criticism of the
Bureau of Labor Statistics calculation of the inflation rate and what
implications this charge of overestimation has for the struggle over
cost-of-living adjusments); moreover, I wanted to suggest that Boskin's now
infamous argument that consumers could and indeed had safely shifted to
cheaper products (broccoli instead of asparagus) and cheaper stores
(K-Mart, instead of Neiman-Marcus) is only one of the reasons he gives for
the overestimation for the severity of inflation. For example, Boskin also
claims that price increases may reflect not inflation but real quality
improvements or even what are really new products.

4. I also posed the question of how high *real* interest rates were given
the lower (but still active) inflation maintained by the Fed. I believe
that Alain Lipietz once argued that high real interest rates now functioned
as deflations once did--wiping out "uncompetitive" capital and abetting the
centralization process. But I have not yet read *The Enchanted World*, so
let me note that I *think* Lipietz advances this provocative argument in
this book and ask what others think of the idea.

5. I am also unclear as to whether centralization implies upward pressure
on the value composition of capital. I would think the devaluations of
constant capital, which result from bankruptcies, serve to lower the value
composition of capital. In this regard, it would be interesting to study
the process of the global centralization of capital.

All the best,