It is not normal to want prices to rise and currencies to lose their purchasing power. We look at the advantages of stable currencies and prices.
Topics covered include:
- What’s more normal, an inflationary or deflationary mindset?
- Why it is more normal for prices to fall due to productivity increases
- How central banks seek to overcome productivity-induced deflation by increasing the money supply
- How inflation and ongoing currency debasement encourage debt, the financialization of housing, and keep unprofitable companies in business
- How gold, Bitcoin, stocks, real estate, and other assets help us overcome currency debasement
Show Notes
Is Japan finally becoming a “normal” economy?—The Financial Times
A Complete Guide to Understanding and Protecting Against Inflation—Money for the Rest of Us
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 475. It’s titled “Inflation’s Illusion: Debunking the Normalcy of Currency Debasement.”
A Normal Economy?
Last week, the Financial Times published in their Big Read section a lengthy article by Kana Inagaki and Leo Lewis titled “Is Japan Finally Becoming a “Normal” Economy?” They wrote “Now Japan central bankers and government officials say the country is at a historic inflection point and may finally become a normal economy.
Companies will be able to pass on increased costs to consumers in the form of higher prices, and workers will respond by demanding better pay.” They’re suggesting, and I have some other quotes from the article, from government and central bank officials, that normal is having inflation. Rising prices. Which means the value of the currency isn’t going as far. It’s being debased.
Prime Minister Fumio Kishida said “We have obtained a once-in-a-lifetime historic opportunity to exit from deflation”, deflation being falling prices. “We are going to make sure that a positive mindset that will see rising wages as the norm will be firmly established across the entire society.” That suggests deflation is bad, and an inflationary mindset, expecting inflation, wanting inflation, wanting prices to go up so that we can demand higher wages—that’s a good thing. Let’s see if that’s the case, in this episode.
Prices in Japan started rising in the spring of 2022. After the COVID pandemic and Russia’s invasion of Ukraine core inflation, excluding food, rose 2.8% for the year ending February 2024. Wages have also been going up. The country’s largest employers agreed to a 5.3% wage increase during the spring negotiations. The increase in inflation has helped the Japanese stock market. The Nikkei 225 stock index surpassed its previous peak from 34 years prior in February 2024. We discussed that in episode 468 of the podcast.
In March 2024 the Bank of Japan ended negative interest rates, a negative policy rate. It began that experiment back in 2007. We discussed that in our Insider’s Guide newsletter last month. And even I fell into that language trap. In the newsletter, I wrote, “The Bank of Japan is normalizing its monetary policy, because the Japanese economy is experiencing some modest inflation.”
I pointed out how central bank asset purchases can boost the money supply; if the federal government’s running a deficit, that can be inflationary.
A Deflationary Mindset
In the newsletter, I wrote, “Yet it’s taken eight years of negative interest rates and other unconventional monetary policies to overcome Japanese households’ and businesses’ deflationary mindsets.” Is a deflationary mindset a bad thing? “Clearly, we’re trying to overcome that” is what I wrote, and the officials wrote, too.
Tsutomu Watanabe, professor of economics at the University of Tokyo said “The virtuous cycle between rising wages and prices began to emerge, and the Bank of Japan started to raise interest rates. It’s not complete yet, but Japan is gradually heading towards a normal direction.”
Now, there are some impediments, as the Financial Times pointed out. They wrote, “One major concern is the deflationary mindset that has become entrenched in societies.” Watanabe said, “Among senior people receiving pensions, they may wish for inflation to go away because they feel that life was easier when prices did not go up.” We’ll see that life is actually a little easier when we don’t have to worry about inflation.
Watanabe continued “There is going to be a force of resistance. People fighting against inflation, not wanting an inflationary mindset.” As the broader mindset is starting to change, the number of people who don’t want things to change will be relatively large.
Bank of Japan governor, Kazuo Ueda, said in March “People should be living without being conscious of the Bank of Japan’s existence. We are now at a transition period where we might be able to shift to that kind of situation if things go well.”
Do you find yourself making investment decisions based on what the central bank is saying and doing? I don’t know to the extent that Japanese households did or not. They clearly have been comfortable with stable prices. Japan has not experienced outright deflation, falling prices. They’ve had very, very low inflation; about 0.8% per year over the past decade.
One more quote. Katahiro Yasukochi, who’s the chair the Japanese Association of Metal Machinery and Manufacturing Workers—about 390,000 workers that are employed by small and medium-sized businesses—says “We feel that we need to achieve a society where 2% inflation and 3% wage increases will always be achieved. This isn’t just about next year but over a long span of time, such as 5 or 10 years.” A 2% annual price inflation will double prices every 35 years. That’s considered normal. Many central banks around the world—that 2% inflation is their target.
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