A new perspective on inflation and unemployment problem
The whole world, especially developing countries, should reconsider the inflation issue. While there is a high inflation risk in countries like Turkey that want to grow fast, developed countries are trying to achieve an inflation level that can help them overcome recession.
First of all, the phenomenon of inflation refers to an upward price movement and is not data on its own. In other words, more data such as the productivity, finance sectors, internal dynamics, openness and borrowing conditions of countries and regions are determinant here.
For instance, an inflation rate of up to 5 percent for Germany is the beginning of the end, given that the country's capital, labor and technology efficiency and sectoral funding costs are balanced by an unemployment rate of around 4 to 5 percent and an inflation rate of around 3 percent. However, this is very different in an economy like Turkey in which sectoral fluidity, population and social movements and market movements are intensive. As I mentioned above, an unemployment rate of 4 percent is a limit for Germany, however, the country is facing an unemployment level of 5.8 percent to 6 percent and an inflation level of 1.5 percent. As can be seen, the non-accelerating inflation rate of unemployment (NAIRU) is above the acceptable level and is too low to generate a growth dynamic in inflation.
So, there is a risk of recession for Germany. This is even graver than the entirety of Europe, as the inflation is not on a level that can help overcome the recession and the possibility of unemployment rising above 15 percent is higher than the possibility of it falling below 10 percent for the next two years. So, the equilibrium is worse than the equilibrium in Turkey in terms of inflation and unemployment.
Europe cannot overcome the state of recession by competing against the dollar and other currencies at the current level of euro. Not only the EU, but also the whole Western world is striving to achieve what they call the natural unemployment level. However, bad neoliberal policies are falling short of helping the West overcome the recession. Western central banks' move for financial expansion in an irresponsible manner just smoothed over the cracks.
On the other hand, developing countries, unfortunately, are implementing bad policies in order to overcome high inflation. They think that they can prevent inflation with high interest rates and monetarist monetary policies.
Unfortunately, this understanding is a dominant approach both in the media and academia, but it has failed. One of the masterminds of this approach was Milton Friedman who served as a counsellor to General Augusto Pinochet who staged the bloody coup of 1973 in Chile. He describes inflation as follows: "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output." This definition seems correct, but it is inadequate as it does not explain why inflation is faster or slower in different countries.
For instance, Germany, which experienced hyperinflation after World War I, had less public expenditure than Britain from 1914 to 1918. Also, the amount of money in circulation in Europe in those years was close to the one in Germany. The pre-war cost of living index of Berlin and London rose by 2.5 times after the war. Germany had to print bills of one trillion Deutsche marks in 1923 when the country's annual inflation was 182 billion. The Germans often attribute this to the Treaty of Versailles and war reparations; however, this is not exactly the case. The root cause of the problem is that Germany could not borrow from global markets on easy terms and ran into domestic debt - which pushed the central bank to print money. Britain, the U.S., France, Italy, London and New York financed themselves by selling their bonds in the same years; however, Germany, Austria-Hungary and Turkey had nothing other than their own resources. On the other hand, those who purchased war bonds in Germany quickly started flying capital to avoid further bankruptcy. You know the end of the story; Germany succumbed to fascism and was defeated one more time.
As can be seen in history, inflation is not a monetary phenomenon alone. We can no longer explain the recession in developed countries and the inflation problem in developing countries with the ultra-neoliberal theories of the 20th century.
Today, the main reason for inflation, including food inflation, in Turkey depends on production and a raft of structural problems, from the proper scale and competition problem of enterprises and the distorted and high financing costs. Inflation in Turkey does not predominantly concern demands, but supplies, and largely stems from the high financing costs of enterprises. In other words, high interest rates are the main reason for inflation in Turkey. Well, if you targeted inflation merely based on a tight monetary policy for a millennium and fought inflation that stemmed from high interest rates, could you achieve your goal for one time? Definitely no.
On the other hand, inflation is turning into a global phenomenon, not a national one, to the extent that economies become globalized. For instance, rising inflation rates in China both increased saving ratios and reduced inflation. In recent years, however, inflation has increased by itself apart from interest rates. This is because the demand for food products have risen in the country and growth has been achieved because of both exports and internal dynamics. The cost of financing for firms has started soaring as a result of rising interest rates.
What do you think global red meat price inflation would be if the Chinese started eating hamburgers like the Americans? After all, inflation is a global phenomenon now and the crises of capitalism will be based on inflation in basic areas like food from now on.
What has to be done is to reacquire agricultural lands, give up lies such as "inflation targeting" and implement a proper production and industrialization policy and supportive monetary and fiscal policies.
Also, developed countries must implement new social policies and develop new economic policies that can balance income distribution and transform monopolistic and oligopolistic economic system into a new competitive system.
First of all, the phenomenon of inflation refers to an upward price movement and is not data on its own. In other words, more data such as the productivity, finance sectors, internal dynamics, openness and borrowing conditions of countries and regions are determinant here.
For instance, an inflation rate of up to 5 percent for Germany is the beginning of the end, given that the country's capital, labor and technology efficiency and sectoral funding costs are balanced by an unemployment rate of around 4 to 5 percent and an inflation rate of around 3 percent. However, this is very different in an economy like Turkey in which sectoral fluidity, population and social movements and market movements are intensive. As I mentioned above, an unemployment rate of 4 percent is a limit for Germany, however, the country is facing an unemployment level of 5.8 percent to 6 percent and an inflation level of 1.5 percent. As can be seen, the non-accelerating inflation rate of unemployment (NAIRU) is above the acceptable level and is too low to generate a growth dynamic in inflation.
So, there is a risk of recession for Germany. This is even graver than the entirety of Europe, as the inflation is not on a level that can help overcome the recession and the possibility of unemployment rising above 15 percent is higher than the possibility of it falling below 10 percent for the next two years. So, the equilibrium is worse than the equilibrium in Turkey in terms of inflation and unemployment.
Europe cannot overcome the state of recession by competing against the dollar and other currencies at the current level of euro. Not only the EU, but also the whole Western world is striving to achieve what they call the natural unemployment level. However, bad neoliberal policies are falling short of helping the West overcome the recession. Western central banks' move for financial expansion in an irresponsible manner just smoothed over the cracks.
On the other hand, developing countries, unfortunately, are implementing bad policies in order to overcome high inflation. They think that they can prevent inflation with high interest rates and monetarist monetary policies.
Unfortunately, this understanding is a dominant approach both in the media and academia, but it has failed. One of the masterminds of this approach was Milton Friedman who served as a counsellor to General Augusto Pinochet who staged the bloody coup of 1973 in Chile. He describes inflation as follows: "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output." This definition seems correct, but it is inadequate as it does not explain why inflation is faster or slower in different countries.
For instance, Germany, which experienced hyperinflation after World War I, had less public expenditure than Britain from 1914 to 1918. Also, the amount of money in circulation in Europe in those years was close to the one in Germany. The pre-war cost of living index of Berlin and London rose by 2.5 times after the war. Germany had to print bills of one trillion Deutsche marks in 1923 when the country's annual inflation was 182 billion. The Germans often attribute this to the Treaty of Versailles and war reparations; however, this is not exactly the case. The root cause of the problem is that Germany could not borrow from global markets on easy terms and ran into domestic debt - which pushed the central bank to print money. Britain, the U.S., France, Italy, London and New York financed themselves by selling their bonds in the same years; however, Germany, Austria-Hungary and Turkey had nothing other than their own resources. On the other hand, those who purchased war bonds in Germany quickly started flying capital to avoid further bankruptcy. You know the end of the story; Germany succumbed to fascism and was defeated one more time.
As can be seen in history, inflation is not a monetary phenomenon alone. We can no longer explain the recession in developed countries and the inflation problem in developing countries with the ultra-neoliberal theories of the 20th century.
Today, the main reason for inflation, including food inflation, in Turkey depends on production and a raft of structural problems, from the proper scale and competition problem of enterprises and the distorted and high financing costs. Inflation in Turkey does not predominantly concern demands, but supplies, and largely stems from the high financing costs of enterprises. In other words, high interest rates are the main reason for inflation in Turkey. Well, if you targeted inflation merely based on a tight monetary policy for a millennium and fought inflation that stemmed from high interest rates, could you achieve your goal for one time? Definitely no.
On the other hand, inflation is turning into a global phenomenon, not a national one, to the extent that economies become globalized. For instance, rising inflation rates in China both increased saving ratios and reduced inflation. In recent years, however, inflation has increased by itself apart from interest rates. This is because the demand for food products have risen in the country and growth has been achieved because of both exports and internal dynamics. The cost of financing for firms has started soaring as a result of rising interest rates.
What do you think global red meat price inflation would be if the Chinese started eating hamburgers like the Americans? After all, inflation is a global phenomenon now and the crises of capitalism will be based on inflation in basic areas like food from now on.
What has to be done is to reacquire agricultural lands, give up lies such as "inflation targeting" and implement a proper production and industrialization policy and supportive monetary and fiscal policies.
Also, developed countries must implement new social policies and develop new economic policies that can balance income distribution and transform monopolistic and oligopolistic economic system into a new competitive system.