Consumer Price Inflation, Asset Inflation and Debt
Price and Asset Inflation and Debt
Price and Asset Inflation and Debt. Inflation has been an important topic among economists, for some time, since COVID-19 and the war in Ukraine conspired to force prices up around the world.
The discussion of consumer price inflation has become overly complicated. Various measures try to see through volatility caused by the erratic price movements of some components of the price index. There are measures that:
- Take out energy.
- Take out food and energy.
- Measure core inflation.
- Measure hardcore inflation.
- Focus on producer price inflation.
In the heat of an episode of inflation, it helps to look at these different data to make sense of what is going on with prices. To strike a balance with the right policy settings.
In most places around the world, and certainly in Australia, the peak period of inflation appears to be behind us. There is always the chance of a rebound, but right now inflation using most of the measures above has been receding.
Asset Price Inflation
A type of inflation that is materially different from the various measures mentioned above relates to the price of assets.
The fundamental problem with asset price inflation is that it can lead to asset price deflation, which can hurt an economy. This was the problem that afflicted Japan in the late 80’s and the consequences are still reverberating around its economy.
In 1988, they estimated the grounds of the Imperial Palace in Tokyo to be worth more than the entire real estate value of the state of California. We will never know if that is correct because they did not sell the palace. The story shows how much of an asset bubble occurred in Japan during this period.
Countries with Problems
Following the collapse of the Japanese asset price bubble that peaked at around 1988, Japan experienced what is called a lost decade. It was the second biggest economy in the world and was closing in on the US economy in terms of GDP. Now it is in a distant third place at about a quarter of the size of the US economy and a third of the Chinese one.
If these rankings appear to be on the move once more, it will be the collapse of asset prices that will be the cause. Rather than consumer prices, as with Argentina in the middle of last century.
China is on the knife edge of falling into a deflationary spiral caused by a collapse in real estate prices. It has many differences between Japan, but in some important ways, it has similarities which are a cause for concern.
One of those is an ageing population. The proportion of Japan’s population that is over the age of 65 is nearly 29%.
Although China has a much lower proportion of this age cohort, estimates this year show that its population has fallen. In the space of about 5 years from 2017, the number of children per woman fell from 1.3. to .9.
There is a rocket under the trajectory at which China’s population is ageing.
Another similarity is the lack of immigration into the two countries.
In China, the proportion of foreign-born residents is less than .1%. In Japan, the number is 2.29%.
To put this in perspective, in the US it is about 13.6% and in Australia, it is around 30%.
When you compare the China, Japan situation with the US, and Australia, we can see two unique problems.
Asset prices in China and Japan do not have the underpinnings that support US and Australia.
More People Can Be Better
Demographic circumstances in the US and Australia have supported asset prices in housing. It has done this through the mechanism of excessive demand. Supply is struggling to keep pace with the need for accommodation. Therefore, accommodation is so expensive in these countries.
The immigration debate in Australia has been at fever pitch for some time. Many economists, most notably Judith Sloan, who writes in The Australian, argue that immigration is out of control and needs to be reined in.
Very high levels of immigration have caused property prices to surge in Australia. But we have left ourselves with little choice.
Our low productivity requires a high level of immigration to keep our economy growing. If we had to choose between the demographic changes occurring in China and Japan or in Australia and the US, the sensible choice is to have our immigration rate.
World Population is Peaking
With the population of the developed world hitting a peak, we are approaching a time when we will compete for immigrants to help maintain our prosperity. It is worth keeping in mind that an educated population that follows democratic rules is where the real wealth is to be found.
Until we get our act together and embrace economic reform, we would commit self-harm if we were to curtail the flow of immigrants into this country.
Economic reform is becoming more urgent. We are in a race against a Ponzi scheme of immigration leading to property price increases. That could easily lead to our own version of a deflationary spiral.
The need for economic reform has become greater since Covid. One of its enduring legacies is to saddle our country with a historically high level of public debt to match our enduring high level of private debt.
Increased combined public and private debt has depleted an important buffer. The remaining ones are a high level of immigration and a long transitory period of consumer price inflation. The latter has allowed us to reload our monetary canon to help us battle chronic disinflation and the threat of deflation.
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