Isaac/Wray/Berglund & interest rates

["Gregoire de Nowell (ci-devant)" <GN842@xxxxxxxxxxxxxxxxx>]

I am somewhat surprised at the conversation concerning
interest rate inflation.  The following comments also
apply to PKT stuff I have read--I forget whether it is
Turgeon or Davidson or both--that the oil price hikes were
inflationary.

1.  I assume that the economy is characterized by oligopoly.
(cf. Joan Robinson, and Legge's posts)  Or, at a minimum,
that the cost pass-through ability of firms differs radically
at least partially as a function of differing demand curves.

2. I confess to being heavily influenced by Hilferding-Hobson
stagnationist models advanced early in this century; part of
what I am about to say is in the disucssion of Hobson posted
on PKT.

In essence, when a major oligopolistic entity raises prices
it increases revenue at the expense of firms that cannot
raise prices.  When the price of commuting as influenced
by gasoline goes up movie attendance, restaurant eating,
etc., should fall.  It may be that the price adjustment
in the competitive sector is lagged--move distribution
(least around these parts) is heavily concentrated and
so I would expect the movie industry to resist a decrease
in ticket prices; but even so, there should be a falloff
in revenue because of a decline in attendance.  So, using
a simplified model of the economy, if the oil cartel
raises prices we might ultimately expect layoffs among
industries with more horizontal demand curves (cf. the
relationship between airline travel and fuel prices).

If I have read Turgeon right in some instances the less
competitive industries may try to cover a fall off in
demand by raising prices to cover fixed per unit costs.
It seems logical that this might work in the auto industry,
what with its import quotas, etc., but I doubt that it
would work with McDonalds and Burger King (indeed,
they seem to get very competitive during economic
slowdowns).

What I'm getting at is that there may be massive and
unequal *shifts* in pricing strategies rather than
a simple inflation (or deflation) result.  Whether
price indices which are weighted on one set of
consumption patterns (pre-shock) can fully capture
these movements I don't know; but it would seem
to my rudimentary knowledge of things like the
Laspeyre's index that there is a price x quantity
element and I am unsure but what the stability
or even an increase of movie prices after an
oil shock might show up as "inflationary" even
if attendance was falling.  But I digress.

An increase in interest rates is analogous to
an oil shock.  An increased stream of rent is
directed to financial institutions at the expense
of other sectors of the economy.  While *some*
firms will build the interest rates into their
prices and pass them on, others will be
(and are notoriously) unable to do so.  The
building industry and housing are notorious
sacrificial lambs to the CPI, but they are surely
not alone.  It seems to me that these price
shocks would be inflationary in some instances
while exerting strong deflationary influences
(either on demand or on prices or both) in others,
and in the end they would be stagflationary.
Any tendency one way or the other (increases
or decreases in the CPI) ought to be more an
artifact of the construction of that particular
index rather than of price movements as a whole.

>From this perspective, the argument that raising
interest rates could be "good for the economy" is
as ludicrous as saying that cartelistic manipulation
of oil prices is "good for the economy."  What
is good for oil companies and good for banks
is not necessarily "good for the economy."   But
I do not see this purely in inflationary or
deflationary terms.  It is the organized (either
through cartels or regulations) sector of the
economy pillaging the less organized sector of
the economy, and I would argue that the focus on
price effects is interesting but probably
misguided, since it is the nature of such shocks
to produce *both* inflation and deflation.  Rather
what I would focus on is the rather naked display
of power inherent in such manipulations.

Greg Nowell

ps.  I know that no one here is arguing for higher
interest rates; but I think my central point is
that arguing "interest rate hikes are inflationary"
because theother side (the Greenspan/Treasury view)
is arguing that interest rate hikes are deflationary
(i.e. a way to control inflation) is accepting
to "play the game" as defined by the Greenspanians.
I would say this is a dog-chasing-its-tail process
and that the manipulation of the macroeconomy by
oligpolies (of which central banks are the King
of Kings).  Oligpolistic price hikes produce both
inflation and deflation.

gn