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Friday, 20 September 2013

Inflation ceases to be a concern for wage earners under Daily Indexing


Inflation ceases to be a concern for wage earners under Daily Indexing


"extorres Says:


Nicolaas Smith,
Let me start by framing my response with a statement of respect for your proposal. It seems soundly powerful despite its impressive simplicity. I am again forced to readjust my understanding of it by your reply, which was top notch. Thanks to you, and Gustavo Franco.
It seems clearer now that this proposal is highly focused in method as in purpose, and perhaps I was expecting irrelevant ramifications. If I understand correctly, the Daily Indexing proposal does not seek to correct hyperinflation, only some of its economic effects, until other steps are taken to correct the hyperinflation, itself. This takes me down three different paths of discussion.
1) From the perspective of wage earners, this proposal would adjust their income daily such that inflation ceases to be a concern of theirs, at least as far as their income’s value. This would also be true for most businesses and I dare say anyone whose income is processed through an accounting system. From the perspective of non earners, earners of the informal economy, and anyone whose income is not processed through an accounting system, the price of everything around them increases more quickly and in a worse manner than before. My comment regarding non earners made reference to these folk. If they are receiving income from social programs, clearly their income is indexed by the accounting systems running the social programs.
By the way, I have to bring up again the salaries going down issue. Yes, they “would maintain their constant purchasing power (real value) over time”, but their numerical value would go down if the currency starts becoming stronger with respect to the dollar.
Also by the way, I am not convinced with the reply regarding seigniorage. There is no such thing as a free lunch. The amount of profit from seigniorage would be arithmetically reduced at the end of the day by the amount of adjustment resulting from the daily indexation. The greater the sum of differences in income from daily indexation, the greater the loss for those profiting from seigniorage, unless they make up for it with greater printing, which only worsens the situation for the poor. I think the cause and effect is incorrect: it’s not seigniorage’s profits that are reduced when hyperinflation is lowered; it’s hyperinflation that is lowered when seigniorage is reduced.
Back to the main argument, it seems to me that, without an accompanying belt tightening by the government (e.g., reducing government expenses, attracting foreign investment, increasing reserves), this idea worsens inequality. Would you agree with this, or am I missing something?
2) Given our political reality and the urgency and importance of an election process coming up, I am filtering proposals by those meeting two criteria, leaving all others for later: 1) high chance of winning votes over from the chavista side; 2) low chance of being countered by the chavista side. This proposal seems to be weak on both counts. It would be difficult to explain to those who would benefit from it and difficult to swallow for those who would suffer worse for it, which makes it easy for chavismo to counter through misiones adjustment promises, economic stabilization be damned.
3) Personally, I don’t merely analize whether a proposal is a good or bad action to take, but whether it is a better or worse action to take than another. For this reason, I reiterate the comparison with the proposal of Unconditional Cash Transfer (UCT). As opposed to Daily Indexing (DI), UCT reduces inequality. The way I envision it, UCT is also indexed to the dollar, or as was put in your reply “the NON-MONETARY economy would be stabilised AS IF it is dollarized”. Not only is UCT more likely to flip the citizen:government relationship, making citizens go from supplicants to citizens (see:http://caracaschronicles.com/2007/07/17/torres-in-bethlehem/ ), it seems that DI could in fact make citzens more supplicants than ever.
I disagree with stating that UCT “does not guarantee the sustainable development of the economy” since DI does not either, so no difference there. Also, the statement that “State of the art education, equal opportunity, free competition and abundant availability of investment capital (e.g., via quantitative easing) in the above model I described do a good job of generating sustainable developement in an economy” applies just as much to the UCT model as it does to the DI model, even more so. As per the article in the link, UCT at least forces the government to have the incentive of increasing its taxation income, whereas the DI model continues the petrostate model of the government’s incentive to increase oil income, not citizen success."
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Nicolaas Smith

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