Inflation is deemed benign as long as wages rise at a slower pace than asset prices. The monetarist iron law of wages worked in the industrial age, with the resultant excess capacity absorbed by conspicuous consumption of the moneyed class, although it eventually heralded in the age of revolutions. But the iron law of wages no longer works in the post-industrial age, in which growth can only come from demand management because overcapacity has grown beyond the ability of conspicuous consumption of a few to absorb in an economic democracy.
That has been the basic problem of the global economy for the past three decades. Low wages have landed the world in its current sorry state of overcapacity masked by unsustainable demand created by a debt bubble that finally imploded in July 2007. The whole world is now producing goods and services made by low-wage workers who cannot afford to buy what they make except by taking on debt on which they eventually will default.
– Henry C K Liu (5 May 2009)
Part 1: Monetarism enters bankruptcy