Price Evolution Readings
Occasionally, a drastic change in price level can exert an enormous power to transform our economic reality. This series contemplates what drives such a change in price dynamics.
Oligopoly Price Cycle:
From Oligopoly to Deterrence Game
Transformation in Suppliers' Profit Strategies
The commodity price cycle is not an exception in manifesting paradoxical behaviours of human economic endeavours. This article illustrates an example of oligopoly’s collusion price and how supplier behaviour shapes the paradoxical commodity price cycle.
An oligopoly’s self-interest in creating a high collusion price fosters a new problem—the expansion of new competitors, which leads to a contradictory consequence: its own strategic price destruction. This series of events reveals another paradoxical human economic endeavour. In brief, oligopoly pricing is ephemeral and might even be self-destructive, if not managed well and with vigilance.
This article introduces a case of crude oil. (Click to Article 2-1 Oligopoly Price Cycle)
Deflation increases the purchasing power of money, while inflation reduces it. In other words, deflation invokes the risk-free power from money; hyperinflation degenerates money into a highly risky asset. Deflation or inflation can change our psychology about money.
Under the modern fiat money regime, deflation is deemed an absolute villain, while inflation is deemed moderately acceptable. This series explores deflation under the modern fiat money system.
A sustained change in price level in either direction—inflation or deflation—can be caused by several factors: monetary, demand, supply, or a combination of all three.
Deflation used to be a part of the regular economic cycle in the late 19th century United Kingdom (UK) under its gold standard regime. During that century, deflation and inflation alternated as if they cancelled each other out to maintain the equilibrium rate near 0% in the long run. During the 20th century, as the world gradually shifted into a fiat money regime, deflation disappeared from the UK. (Click to 3-1 Deflation Introduction)
Why is deflation an absolute villain under modern fiat currency? In order to respond to this inquiry, we need to understand the constraint of modern fiat money, the zero-boundary of interest rate.
The current fiat money system creates an economic division between money deposited in a bank account, which is registered, and money hoarded at home, which is unregistered and untraceable. Negative savings rates could induce savers to withdraw their deposits and hoard them at home in order to avoid charges arising from negative interest rate policies. This would be disastrous for banks, as they rely on savers’ deposits to fund their lending business. In principle, modern fiat money sets the lower boundary at zero rate for interest rates on general transactions on the street. While central bankers can introduce negative interest rates into policy rates, which has enforceability among regulated banks, the private sector has to ensure that the majority of interest rates used for daily transactions, especially savings rates, remain positive. Consequently, a deflation that could demand a negative interest rate is an absolute villain. In brief, the structure of modern fiat money is asymmetric. Under modern fiat money, savings rates can be set to the sky toward the upside and constrained at zero toward the down side. Nevertheless, policy rates can go negative as an exception because of their enforceability on regulated banks through reserve accounts in the central banks.
In order to enable the central bank to enforce negative interest rates in a broader area in the economy, a monetary reform would be necessary to make money traceable universally, therefore, registered. One solution is emerging in the modern digitalised world: encrypted digital currency that could enable the central bank to uniformly apply interest rates negative or positive. But, are they prepared to do so? (Click to Article 3-2: Zero Boundary of Nominal Interest Rates)
In our modern time, where money is fiat and floating currencies, the central bank, in principle, can print money infinitely. In this setting, central banks appear to be able to inflate price levels at will. In other words, deflation appears unlikely to be a monetary phenomenon. Apart from monetary causes, what could cause deflation? Do we encounter any parallels to historical deflation events in the past?
This article undertakes a heuristic inquiry into the causes of deflation with reference to the historical case of deflation during 1874-97. During this period, there were prominent events among major contemporary economies, including international monetary convergence toward the gold standard, technological convergences, and the development of a foreign labour market. This article summarizes those historical facts to address whether any parallel can be drawn to our contemporary deflationary pressure. (Click to: Historical Anecdote of Deflation in UK 1874-97)
Innovation by itself is deflationary. It reduces per-unit production costs and lowers sales price levels. Besides that, what impact could innovation have on the economy? Is it positive or negative? This article addresses the uncertainties surrounding the economic consequences of innovation.
Under an orthodox macroeconomic synthesis, innovation is expected to yield benign supply-driven deflation, which leads to an increase in production output. However, if innovation destroys a significant amount of legacy jobs on a net basis, it could impair demand. Consequently, benign supply-driven deflation transforms to malign demand-driven deflation. Overall as a net effect, its macroeconomic consequence could be contractionary. Therefore, the economic consequences of innovation remain uncertain.
Jarvis addresses a modern case of destructive economic impact of innovation; Stiglitz and Greenwald address a revisionary view of the Great Depression that innovation might have caused the price destruction; and Broadberry outlines the historical cost-destruction impact of 19th century innovation.
The recent innovative transformation has yielded a positive impact: it promoted a customized, decentralized method of conducting businesses. Network externalities incorporated by modern innovative systems now make it easier and cheaper for locally based, small-scale entrepreneurs with customized products to expand their market access to a wider geographical area without having a large hierarchical organization. This is a new ecosystem. This is an already-happening new paradigm. (Click to Article 3-4: Deflationary Innovation)
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