Demand Side, the Book

Inflation:

In India and China, food price rises are rampant.  We have argued that this is a worldwide financial bubble due to speculation in financial markets on commodities, via index traded funds and other market instruments.  This is the same experience as the first half of 2008.

But this is not the whole story.  Food and energy price spikes are also due to the ability of some of the population to pay the higher prices. 

Minsky assumes that the wages in the consumer sector are the same as the wages in the investment sector, but this is not the case.  Design, high tech production, and higher skill sets are all more common in production of investment goods, from roads to machinery, from plant to equipment, than in production of consumption goods.

When investment capital flows into a country, it creates the dynamic of Minsky's -- or Kalecki's -- two-part economy.  The more investment, the more workers are in investment goods production, that is, the higher the ratio of investment goods labor to consumption goods labor, the higher will be inflation.  More workers are bidding for the same consumption goods, and on the other side of the coin, the costs and profits of investment have to be built into the price structure.

The experience is that consumption goods workers have stagnant incomes and rising prices are extremely dangerous for them.  Investment goods workers can pay the price, until the bubble breaks.  And in the end, the bubble breaks, asset values drop, investment stops, growth stops.  Sound familiar?