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The wages in the Baltics were indeed very stagnant till now. Hence, many people immigrated, especially youth.

But the relation between wages and inflations seems to be too straight to be true - just when the wages started to raise, inflation kicks in. It may look that the Baltic states are more ruthless to regular folks than Bernanke's rate cuts. What does the asset inflation then mean? Does it accumulate wide inflation in the future, or does not play a role at all?

by das monde on Thu Oct 11th, 2007 at 04:34:24 AM EST
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The relationship between wages and inflation is used as a propaganda tool to ensure that real wages don't grow and so that growth is captured at the top.

We have met the enemy, and it is us — Pogo
by Migeru (migeru at eurotrib dot com) on Thu Oct 11th, 2007 at 04:38:36 AM EST
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Yes, but it is also a real and inevitable effect.
by Colman (colman at eurotrib.com) on Thu Oct 11th, 2007 at 04:59:15 AM EST
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Not if owners take a dividend cut instead of automatically passing wage rises on to consumers.

If that happened (as if...) wage rises would count as growth - more spending, on more goods and services, and possibly more small scale investment too.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Oct 11th, 2007 at 05:21:02 AM EST
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But that is assuming the owners, i.e., stockholders, expect their Return on Investment to be in the form of cash.  Currently the expectation is ROI will be received in the form of a rising stock price.  


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Thu Oct 11th, 2007 at 07:09:28 AM EST
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A rising stock price is useless if you can't cash it in and spend it on something. So there's an implication that it's still - effectively - equivalent to real cash. (Otherwise, what would be the point?)

Of course what's happened is that the capital and physical economies have decoupled more and more, so it's possible for ROI to circulate indefinitely between different schemes, becoming bigger and bigger and never actually being spent on anything tangible.

The mythology calls this growth and seems to consider it a good thing.

I think it's inflationary because at best its leeching value out of the physical economy, and at worst it's just a big Ponzi-shaped pile of IOUs.

You can of course still cash ou, but only if you do it before the pile collapses - which is useful for anyone who gets there ahead of the rush, but not so useful for the Bigger Fools who are a little slow.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Oct 11th, 2007 at 07:53:03 AM EST
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A rising stock price is better than cash because it isn't a taxable event and yet can be monetarized, e.g., when used as collateral for for a loan.  If you're a bank a rising stock price is a capital asset contributing to your reserves.  And there's lots of other financial shenanigans that can be pulled - derivatives immediately spring to mind.

None of this has anything to do with actually producing something.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Thu Oct 11th, 2007 at 08:35:31 AM EST
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This partly explains the asset bubble.

We have met the enemy, and it is us — Pogo
by Migeru (migeru at eurotrib dot com) on Thu Oct 11th, 2007 at 08:45:00 AM EST
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Is wage rise slower or faster than inflation?
by Colman (colman at eurotrib.com) on Thu Oct 11th, 2007 at 04:58:39 AM EST
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I do not know wages' rise numerically, though the common wisdom is that entrepreneurs are "forced" to raise wages because of "vanishing" qualified workers. Before this summer, the average monthly wage in Lithuania was something like 600 euro, or even less possibly.

But more generally: if inflation is caused by greater capacity and willingness of regular folks to spend more, there should be some time lag before all elasticities work out new price distributions "forced" by greater spending power of consumers. Yet, why does inflation kicks in so suddenly? Even more, if consumers get greater spending power, they won't necessarily increase demand of the basic basket of goods - in the modern world, extra income is massively put into "investments". I don't make a sense of why consumer demand should raise so dramatically when wages rise, but not dramatically at all when they are burning their loans.

But I see the following simple explanation. When entrepreneurs are "forced" to raise wages, they still want to protect the same profits. They might even wish to keep their monetary share from the business bounty, tending to leave employers with still marginal share. The same profit level (or relative share) could be possibly kept by raising prices! It's elementary observation: consumers do not set prices in the modern market, the enterprising side sets prices. A consumer has only the power to buy or not to buy a product for a new price. Whatever elasticities are, inflation statistics do not even register new consumer demand - they register only raising prices.

So apparently, the mechanics of greater wages on inflation is that entrepreneurs tend to seek the same profit (or relative share) even when they have to raise wages. This inclination is especially strong after a long period of cheap worker force. In the textbook economics, consumers would punish enterprisers that raise prices out of proportion to marginal demand. But in the real world, they do not have much choice in limited time. The whole elasticity theory flies out of the window at times of strong inflation. The basic inflation psychology is not that consumers have urgency to spend more, but that entrepreneurs cannot "afford" to keep the same prices.

by das monde on Fri Oct 12th, 2007 at 03:55:05 AM EST
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