Wage Inflation and Asset Inflation Do Not Exist in the Real World

Such ideas as wage inflation and asset inflation are misnomers. Wholesale wage or asset inflation cannot happen.


"Wage Inflation"

The idea behind so called wage inflation is that workers demand higher salaries which forces businesses to hike prices which causes inflation. But where are individuals going to get the money to pay the higher prices? From the higher salaries they are demanding? Where are businesses going to get the money to pay the higher salaries? From the higher prices they are charging? Back to the first question, where are individuals going to get the money to pay the higher prices? It’s a ludicrous circle that does not exist in reality, only in the minds of the misguided.

Businesses and individuals have to earn or borrow the money they need to survive, they cannot simply go down to the local copy store and have them run off sheets of twenty dollar bills. No new money is created when workers try to demand higher wages or businesses try to raise prices. Such activity causes no inflating of the amount of money in circulation. If something is not inflating the amount of money in circulation then it cannot cause inflation. Wholesale wage inflation does not exist in the real world.


For a time in the 1990’s, the Federal Reserve was basing monetary policy on the idea that anything below 6% unemployment would cause inflation. This idea is simply ludicrous. It would actually be hilarious, if it did not have such a direct impact on so many people’s lives.

Throughout the 1800’s, the unemployment rate was routinely below 2% in the United States, and, except for war times, there was no inflation. In Japan in the 1980’s, the unemployment rate was below 2%, so, according to the logic the Fed was following during part of the 1990’s, Japan should have had roaring inflation. Did they? Of course not. The unemployment rate is irrelevant to inflation.

When businesses hire new workers they cannot simply create money out of thin air to pay those workers. If businesses try to raise prices to pay the new workers, individuals cannot create money out of thin air to pay the higher prices. Individuals and businesses cannot create money, meaning they cannot inflate the amount of money in circulation. Individuals and businesses cannot cause inflation.

If "Wage Inflation" did exist in the real world, there would be a direct correlation between unemployment levels and inflation. When unemployment levels are low, inflation levels would be high, and when unemployment leves are high, inflation would be low. In the real world, the correlation is the exact opposite.

Japan had 2% unemployment during the 1980's with little or no corresponding inflation, while Mexico and Brazil had high unemployment levels with corresponding high inflation levels.

Only the Federal Reserve can inflate the amount of money in circulation in the United States. Only the Federal Reserve can cause inflation in the United States. To blame workers for causing inflation, especially considering what inflation does to workers labors, is ludicrous beyond belief. To base policy on such an idea is the absolute height of incompetence.


"Asset Inflation"

The idea behind asset inflation is that if assets are bid up to high levels, whoever owns those assets will have much more money to spend which will raise prices for all goods and services. This is just not true. No matter how high an asset is bid up, no new money is being created by that act.

If you buy a stock for $10 and it goes to $100 or $200, no new money has been created. When you go to sell the stock for $100 or $200, someone else is paying that price for the stock with money they had to have earned or borrowed, not created out of thin air.

The same is true if you want to borrow money against an asset that has been bid up. If your home has risen in value from $200,000 to $400,000, you must reealize that gain before you can spend it, either by selling your home or by borrowing against the equity. If you sell, whoever buys the house has to pay you money they have either earned or borrowed. If you borrow against the equity, whoever loans you the money must also have earned or borrowed the money to loan you. No new money is created when an asset is bid up in price.

Like wage inflation, wholesale asset inflation does not exist. Both will appear to exist when the Federal Reserve inflates the amount of money in circulation, but neither really does.


Why Real Inflation Causes Higher Wages and Higher Asset Prices

When money loses its value, which is what inflation causes, individuals need more of it to survive and must demand higher wages. (Their labor is not changing, the value of the money they are working for is.)

When that happens it may appear as if wage inflation is happening, but it’s not. It’s simply individuals adjusting to the loss in money’s value, caused by the inflating of the amount of money in circulation, by demanding higher wages to compensate for the loss.

When money loses its value, the prices of assets must also be adjusted to account for the loss in the medium we are using to price the assets, money. Again, it may appear as if asset inflation is occurring but, again, it’s not. It’s simply individuals adjusting to the loss in money’s value caused by the inflating of the amount of money in circulation.


Whenever someone talks about "wage inflation" or "asset inflation" as if they are real, you can pretty much ignore whatever that person says concerning economics. If he or she has no idea what inflation really is, the person has no clue about economics or how economies work.