Wages and Panic Buttons (http://www.nytimes.com/yr/mo/day/oped/03tyso.ht

[Ellen Frank]

lbo-talk at lists.panix.com writes:
>From the Tyson article:
>Higher prices in turn mean higher interest rates, as lenders insist
>on higher returns to protect against future inflation and as the
>Federal Reserve acts to quell inflation by raising short-term
>interest rates. And higher interest rates mean lower prices for
>financial assets like stocks and bonds. The implication of this
>chain of simple economic logic is clear: inflation is a common threat
>to Americans as workers and as investors.
The implication is not clear at all.  
>
While inflation means higher nominal interest rates,
it generally means lower real (minus inflation) interest
rates, because (1) existing contracts can't be rewritten,
so lenders locked into 7% are stuck, whatever the inflation
rate; and (2) since inflation is associated with rapid growth
and high demand, competition between lenders keeps 
nominal interest rates from rising too fast.  Short term
real interest rates were negative through most of the 
1970s.  Long-term real interest rates were very low (1-3%)
and actually turned negative during a couple of years. 
That's in the US.  In Italy and the UK most interest rates
were negative during most of the 1970s.  Negative 
real interest rates redistribute wealth from lenders to 
borrowers.  The Fed knows this.  The Fed represents
borrowers.  Ergo, the Fed hates inflation.

What Tyson is in effect saying, is that inflation leads to 
tightening by the Fed.   To quote myself (from a column
written for the Progressive Media Project

 
"The risk to the expansion comes not from some innate 
tendency of a growing economy to crash, but from the Fed 
itself. Under Greenspan's watch, the Fed has indicated time 
and again that it will not abide economic growth that 
empowers or enriches working people. At the merest 
hint that wage gains are outstripping productivity, the 
Fed threatens to derail the economy.

	In 1994, for example, when the unemployment

 rate fell below 6 percent -- a rate Greenspan at the 
time called "natural" -- the Fed doubled short-term 
interest rates. The fallout was severe. Wages and 
incomes fell, and the quality of jobs, in terms of
deteriorating work conditions and employment security, 
has only recently begun to recover.  

	 It is noteworthy that Fed officials expressed no 
concern about economic "imbalances" when, during most 
of this decade, worker productivity rose briskly but wages did not. 
There was no talk of "overheating" when, thanks to falling 
wages and longer work-weeks, corporate profits and executive pay soared.

	Only in the past two years, as the benefits of economic 
expansion have begun, finally, to trickle down the pay-scale 
to low- and middle-income workers, has the Fed expressed alarm. 
But the real cause for alarm should be how much 
lost ground the lower and middle classes have yet to recover."

				Ellen Frank