Research Article The Real Causes of Inflation

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1 Current Researh Journal of Eonomi Theory 7(1): 1-10, 2015 ISSN: , e-issn: X 2015 Maxwell Sientifi Publiation Corp. Submitted: Otober 12, 2014 Aepted: January 27, 2015 Published: May 20, 2015 Researh Artile The Real Causes of Inflation Ernest Hamsag Eole Polytehnique Fédérale de Lausanne, Université de Genève 26, Chemin du Bassin, 74520Vulbens, Frane, Tel. and Fax: Abstrat: Having defined what inflation is, this study proposes some hypothesizes to eliminate external and psyhologial fators; it also examines a losed eonomy. It shows that the deep ause of inflation is the out of balane relation between onsumption expenditure and saving. If onsumption expenditure inreases more than saving, the result is an inflation of the real eonomy. If saving inrease to the prejudie of onsumption expenditure, the finanial markets are undergoing inflation. The main auses of the unbalane of the relation onsumption expenditure/savings are: 1) the unbalaned allotment of the benefits of the produtivity inrease between apital revenues and employee ompensation, 2) Either the introdution of fored saving (for example: introdution of retirement founds), or the introdution of fored onsumption expenditure (example: introdution of retirement by immediate repartition of the ontributions). Leverage an inrease the unbalane. The first indues an inflation of the finanial markets, the seond of the real eonomy. Natural inflation of the real eonomy is defined depending on the relative inrease of the produtivity of different agents. Keywords: Inflation of the finanial markets, natural inflation, produtivity inrease distribution INTRODUCTION What is inflation? The inflation is a ontinuous inrease of the general prie level based on maroeonomi mehanisms. In the following we resume the general views of most eonomists whih an be found in textbooks so we do not give referenes. Aording to the monetarist theory, when the quantity of money inreases faster than the Gross National Produt (GNP), the inflation brings bak the market to equilibrium. Several well-known artiles of Milton Friedman are shoving the influene of the quantity of money on inflation. Inflation by demand happens when the pries are inreasing beause of an unbalaned situation resulting of a too high demand ompared to the supply of produts or servies. To reah equilibrium between the total value of demand and offer, the pries are inreasing. Keynesians are speaking of inflation by global demand when the inrease of onsumption expenditure is faing a stiff supply, when the system annot reat to the variations of the quantity of money through an inrease of the prodution of goods or servies. Inflation produed by the inrease of osts of elements entering in the prizes (raw materials, salaries, margins, et.,) is alled inflation by the ost. For the Marxists, inflation is the result of a onflit between groups in order to obtain a bigger part of the produed wealth. This ase is ompatible with all the others above. The exessive inreases of the quantity of money, a higher global demand then the supply and the result of onflit between groups have deeper auses. The searh of these is the subjet of this study. We did not find in the literature relationship between the allotment of the benefits of the produtivity inrease between apital revenues and employee ompensation. We think that this relationship will show the auses of inflation in a new light. This is the main subjet of this study. In order to understand the relationship between the benefits allotment of the produtivity and the inflation, we have to isolate the eonomy of other fators of inflation as external fators, money reation, government intervention and psyhologial fators. For this reason we define the following working onditions. WORKING CONDITIONS As we have seen above, the inrease of the quantity of money may ause inflation (monetarist theory). This inrease an be produed beause of maroeonomi reasons inluding government budget poliies, regulation poliies of the entral bank or may be aused by outside the ountry finanial markets ation. Soial onflits inluding onflits between apital/labor or soial disturbanes like the one whih indued hyperinflation in Germany after the First World War and the one in Hungary after the Seond World War an also ause inflation. The inflation an also be originated by an exessive outside demand (exportation), by an unfavorable modifiation of the exhange rates, or an This work is liensed under a Creative Commons Attribution 4.0 International Liense (URL: 1

2 Curr. Res. J. Eon. Theory, 7(1): 1-10, 2015 inrease of the ost of raw materials aused by international onflits. In order to eliminate these external auses as well as the effet of soial onflits, we will define the following onditions: We assume the ase of a State with independent urreny, where the quantity of money is stable, where the inome and the expenditure of the government are equal, where publi and private debts are stable, where import, export and soial onflits are exluded. Psyhologial auses are not influening the propension to spend or to save. We assume also that the ompetition on the market is lose to a "pure and perfet ompetition". Today, all the savings are not invested in the real eonomy. As Savings are equal to investment (S = I), the exess of savings is invested in the stok markets as apital stoks. DISCUSSION In suh an eonomy, inflation an only our when the supply of produts and servies annot math the demand. The general assumption is that a strong growth initiates inflation. This affirmation should however be moderated as if there is an inrease in onsumption demand, this indues an inrease of produtive investments. Figure 1 shows that any inrease of the demand auses an inrease of the pries if the supply does not hange: if the demand inreases, the equilibrium point moves from A to B. On the ontrary, if the supply inreases (thanks to onvenient investments) balaning the demand, the equilibrium moves from A to C. Therefore, the inrease of produtive investments has to ahieve an inrease of the prodution equivalent to the inrease of the demand of produts or servies, onserving the same pries, to avoid inflation. An eonomy with zero growth, with a zero growth of the produtivity will lead to an equilibrium between the inome used for onsumption expenditure and those intended for investment use, so between onsumption expenditure and savings. This means that the Fig. 1: Stok market pries depending on demand and supply Fig. 2: Propensity for onsumption 2

3 Curr. Res. J. Eon. Theory, 7(1): 1-10, 2015 PROPENSITY FOR CONSUMPTION Fig. 3: Consumer produts pries depending on demand and supply enterprises are investing the savings in a manner to allow the prodution of quantity of produts and servies orresponding exatly to the demand. Now, if we assume a regular inrease of the produtivity, with an inrease of prodution per ating unit, produing a growth of the eonomy, the affetation of the benefits of the inrease of the produtivity will deide if there will be inflation or not. If the inome affeted to onsumption expenditure is inreasing more than those affeted to saving, the enterprises will not have enough means to invest in prodution to follow the demand, the pries will inrease. Figure 3 shows an extreme ase, where the supply does not inrease following a lak of investment: when the demand inreases from D1 to D2, the equilibrium moves from A to B and the pries are inreasing from P1 to P2: this is inflation. How to define the soure of onsumption expenditure means and the origin of saving? If we onsider the real eonomy, not an eonomy orresponding to our working onditions, it is possible to state, in first approximation, if the inrease of inome is oming from inrease of produtivity, the inrease of salaries math the inrease of onsumption expenditure and the inrease of the apital inome mathes the inrease of saving (or investment). This is justified by the well-known relation between inome and propension to spend (Fig. 2) (Mihael, 1990), whih shows that the low-inome persons are spending the major part of their inome, whilst high revenue people are saving a higher part of their inome. For those, living from the apital inome, the inrease of their inome is used more to inrease their saving, as their onsumption needs are already mainly satisfied. We an therefore admit as a hypothesis that the inrease of the labor inome (salaries) will be used for onsumption expenditure (people with apital inome have often also salaries) and the inrease of apital inome will be used for saving. 3 The assertion that marginal onsumption expenditure is lower for the high-inome people then for the low ones, oming from Keynes, is today rejeted by the adepts of the neo-lassial theory. We will show below that in the atual situation Keynes is right. Aording to Fréderi (2011), «Keynes states that the marginal onsumption is dereasing with the inrease of the inome» and page 360: «the hypothesis that all the benefits distributed to the families by the firms are saved is lose to the fats». If we onsider the extreme ase of a very high inome, for example one billion per year, if the person makes 10 million more, he will not spend more as all his needs are already satisfied. This means that C/ Y tends to zero and the urve is a hyperbole so the marginal propension to spend is not onstant and dereases with the inrease of the revenue. Friedman pretends to disprove Keynes s above argumentation using statistis omparing low rural inomes to twie higher urban inomes (Fréderi, 2011) showing a marginal propension of onsumption spending higher for the (higher) urban inomes. Suh onlusion is wrong as rural people, depending more on the events of the nature do not reat the same manner as urban (often-salaried) people to an inrease of inome. They know that a bed one often follows a good harvest, so they may save more and will not spend in onsumption the exess of benefits related to the past year. It is strange how the sientifi ommunity ould aept suh an argumentation! Two other deiding fators are going to sustain Keynes s affirmation: Retirement funds are holding a big proportion of shares and these do not spend in onsumption the reeived dividends as most funds are relatively reent, (they do not spend yet for retirement), but reinvest in the finanial markets. The above must be levelheaded by the way the retirement systems by apitalization are working. At the beginning all the inomes of those found are invested. Only after the first retirees start to reeive their benefits will the inomes serve partially for onsumption and it is only after years that the main part of the apital revenue will be spent for onsumption. The ontribution of the new entrants will still be aumulated as investment. The firms are not distributing all their benefits; they are hoarding a part, to invest in the finanial markets or for the aquisition of other enterprises or their own shares. They are also paying a part of the high salaries with «stok options» or using a part of their benefit as ash reserve making them independent from the banks. We an dedut from the above, if all the inrease of the apital revenues are not used exlusively for

4 Curr. Res. J. Eon. Theory, 7(1): 1-10, 2015 investment, that the major part is intended to be invested and the major part of the wages is used for onsumption. We an therefore support the hypothesis that a modifiation of the relation of salary inome/apital inome will modify the relation of onsumption and savings in the same diretion until an equilibrium between onsumption demand and offer is obtained. As we have shown above, if the benefit of the inreased produtivity is ompletely used to pay salaries, it provoques inflation. In the real eonomy not subjet of our working onditions, it is true, that it is unlikely that any investment to inrease prodution will not be made, beause the firms will borrow to finane the inrease of the apaity of prodution in order to satisfy the demand. In this ase, if there is not enough saving, the interest rates will inrease, whih will at the end inrease the produt pries. To lend money to the firms the banks reate money: the quantity of money or the irulation veloity of the money inreases. Let us onsider the ontrary, when the apital (the enterprises) takes all the benefits of the produtivity inrease. In this ase, the onsumption annot inrease (we exluded to go into debt). The enterprises have no interest to invest to inrease prodution so an exess of savings will remain. The exess of savings will be invested in the finanial markets. Figure 1 shows that if the demand inreases from D1 to D2 the equilibrium moves from A to B and the prie of the shares (or other finanial instruments) will inrease from P1 to P2. In fat, a small part of the investment serves for reation of new shares (produtive investment), the supply inreases from S1 to S2 (the inrease of supply is not neessarily dependent on the demand in this ase) and the equilibrium moves from A to C, orresponding to an inrease of the prie from P1 to P3-orresponding to inflation. In fat, finanial markets are reating aording to the laws of demand and supply if the demand inreases, the prie inreases. As the produtive investment is only partial, the value of the assets inreases partially only. It is inflation. Now, if we onsider the real eonomy, outside of our working onditions, in ase of exess in savings, the total of apital stok will inrease and with it the apital supply, ausing the derease of the interest rates and the agents are tempted to borrow money to buy more shares as the market is bullish. This aentuates the inflation of the finanial markets. Lending money, the banks are reating money and so the quantity of money inreases, but in this ase, this inrease will not produe inflation in the real eonomy. If, in this ase, the entral bank reats to redue the quantity of money by inreasing the interest rates, it punishes the real eonomy without any justifiation. Note: The value of the shares depends on the dividends the shares are generating and on the growth of the value of the shares, short term for some agents, long-term for 4 others. The important inrease of the share pries obliges the CEO's of the ompanies on the stok market to inrease the short-term rentability of the ompany to the detriment of the salaries, of investment and researh, with risks for the long-term expansion of the ompany. Therefore, the pressure on salaries inreases and unbalanes more the relation between salaries/apital gain (or onsumption expenditure/ saving) and inreases further the inflation of the finanial markets. Lay-offs, resulting of this poliy, produing unemployment unbalane the labor market and so intensify the inflation. STOCK MARKET PRICES DEPENDING ON DEMAND AND SUPPLY The yearly inrease ( ) of about 8% of the quantity of money in the 17 European ountries and of about 6% in the USA, with an average of yearly inrease of the GNP of 2.6% and a yearly average inflation of the real eonomy of about 2.5% in the OCDE ountries, with an important inflation of the finanial markets (inrease of the pries of shares yearly approximately 12% for Europe and 15% for the USA) are sustaining our theory (OCDE. Stat Extrats statistis 2012). Basially, it is the lak of equilibrium between the money available for savings and the money available for onsumption, whih provokes inflation. If the unbalaned situation is in favor of onsumption, the real eonomy will undergo inflation, if on the opposite side, the unbalane is in favor of savings and the finanial markets will undergo inflation. This is shown by the inflation of the finanial markets for the last ten years ending in 2002 by a slow rash of the stok markets. The last risis in with the rash of the real estate market in the USA and other ountries is also a onsequene of the inflation of the apital (finanial) market. The total stok market values (the market apitalization) in the United States exeeded already in 1996 the total net value of private assets orresponding to industry and servies, exluding housing aording to OCDE and FIBV Statistis 2012 (Fig. 4). As the prodution of added values of the enterprises on the stok market does not exeed 15-20% of the total added value; we were witnessing a huge inflation. Even if the statistis of the private assets do not take in aount intangible assets inluding patents, know-how, et, the inflation was important, so the diretor of the Federal Reserve Bank of the United States publily announed that the stok values were too high. On the other hand ( ) the inrease of the value of real estate was highly exeeding the inrease of the ost of onstrution and the historial trend, whih showed the evident inflation of the pries. Bonds for Frane until 1989 and for Germany until 1991 are not taken in aount.

5 Curr. Res. J. Eon. Theory, 7(1): 1-10, USA Germany Frane England Fig. 4: Total stok market value; Soure: FIBV and OCDE statistis Net private stok inlude industry and servies, exlusive housing. The values of the net private stok for the United States from 1994, for Germany from 1995 and for England were obtained through extrapolation. On the other hand, the relation of salaried inome (salaries+employees benefits as soial seurity, retirement funds and various insuranes)/apital inome (Property and entrepreneurial inome+operating surpluses of private uninorporated enterprises) did derease substantially sine United Nations Statistis (1992) show that the inrease in produtivity Perent growth in family inome % -7.4% Lowest fifth 97.9% 3.7% Seond fifth 103.5% Third fifth 11.2% 104.7% Fourth fifth 22.7% 88.7% Highest fifth 49.0% Fig. 5: Real family inome growth by quintle, and ; Analysis of the Eonomi Poliy Institute, February 9, 2011 was mainly in favor of the shareholders hene for the apital inome. We an mention some numbers: The relation remuneration of labor/remuneration of apital dereased 8% in the United States from and 6.9% from This relation dereased between 1980 and % in Frane, 34.3% in the United Kingdom, 40.1% in Holland 18.8% in Germany 13.4% in Italy and 30.2% in Belgium. It is possible that between 1945 and 70 the salaried people took more benefit from the inrease of the produtivity Fig. 6: Produtivity and hourly ompensation, Nonfarm bussiness setor inflation rate; Soures: Produtivity-ompensation: Mihael Chernousov, Susan E. Flek and Shawn Sprague: Produtivity trends in business yles, a visual essey. Monthly labour review, June 2009, 61. Inflation rate: Historial inflatio rate, inflationdata.om 5

6 Curr. Res. J. Eon. Theory, 7(1): 1-10, 2015 in the USA, aording to government statistis the real median inome inreased from 1945 to 75 of 124% but dereased from 1975 to 98 of 4% and taking the inrease of taxes in aount even 9%). We have to mention the speial ase of Switzerland where the relation of salaried inome/apital inome inreased 28% between 1970 and 92 and where the unemployment rate during this period remained under 1% of the ative population. Figure 5 shows the real family inome growth by quintile, and : The growth was very lose for the 4 lowest quintile (98-117%) somewhat lower for the highest fifth quintile (89%). The growth was almost linearly inreasing from -7.4% for the lowest fifth to 49% for the highest fifth. This onfirms the United Nations statistis above as the highest quintile has the highest apital inome. If we ompare the inflation rate with the differene of produtivity inrease versus inrease in wages (the produtivity-wages gap) for various ountries we an see the orrelation (Fig. 6 to 9). As the real eonomy fats do not orrespond to our working hypothesizes the orrelation is not always there. Crisises, government ations and external fators influene the inflation. If we onsider the United States, the low inflation rate after 1983 orresponds to the produtivity wages gap (Fig. 6). For Frane the orrelation is visible from 1987 (Fig. 7). For Italy the inflation rate dereases from 1984 (Fig. 8). For the United Kingdom the inflation is low sine 1984, orresponding to an inrease of the produtivity-wages gap (Fig. 9). Note: Inflation always provokes a partial loss of revenues, short term for the inflation of the real eonomy and long term for the inflation of the finanial markets, as illustrated by the reent stok market rash with a huge loss for the apital inome. The real estate market rash aused losses not only to the apital Fig. 7: Produtivity and hourly ompensation and inflation rate in Frane Fig. 8: Produtivity and hourly ompensation and inflation rate in Italy 6

7 Curr. Res. J. Eon. Theory, 7(1): 1-10, 2015 Fig. 9: Produtivity and hourly ompensation and inflation rate in United Kindom inome but also to the salarial inome, resulting in a redution of the onsumption expenditure. Already before the last risis ( ) more than 10% of the work fore of the OCDE ountries was unemployed and about 15% of the industrial apaity was not used. Therefore, the eonomy is not effiient. It is to the advantage as muh for the apital as for the labor to reah an equilibrium in the repartition of the benefits of the produtivity inrease. As far as a balaned repartition of the benefits promotes growth: growth is tied to onsumption expenditure and investments, if one or the other does not inrease the growth will be weak or none. Creating wealth is maximized when the repartition of the benefits of the produtivity inrease is balaned between apital and labor. Considering the ideal ase of a balaned benefits repartition of the produtivity inrease, the same perentage of salary rise as apital revenue rise, this will have the following onsequenes: The prie level of onsumer goods an be expressed aording to Hyman (2008). The simple equation, admitting that profits equal investment and the wages are spent on onsumer goods: W W + i N P 1 A W N = i P : Prie level (of onsumer goods) W : Money Wage rate in onsumer goods W i : Money Wage rate in investment goods N : Employment in onsumer goods N i : Employment in investment goods WN : Wage bill : Average of produtivity of workers with produtivity inrease If the money wage rate is the same in onsumer and in investment goods: 7 P = W 1 + N i N Whih for our purposes an be written as: (1) P = W M (2) From this we get by hanging to logarithms: lnp = lnw ln ln M By differentiation we obtain: dp P = dw W d + dm M As in our hypothesis M is onstant: dp dw = P W da A (3) (4) Whih means: If the proportion of inrease of wages is equal to the proportion of inrease of produtivity, there is no inflation. Not all the setors of the eonomy have the same inrease of produtivity; the inrease of produtivity in the administrative field is today not negligible beause of the use of omputers, but during the fifties and sixties it was little. In some fields, the inrease of produtivity is lose to zero. We do not see how the produtivity of a medial dotor or a hairdresser ould be improved 30 years ago or even today. We assumed that the salaries were inreased aording to the produtivity inrease yearly. The buying power inreasing, the setors of the eonomy with low or zero inrease of produtivity ould also rise the pries and hereto the salaries. In this ase, the GNP should

8 Curr. Res. J. Eon. Theory, 7(1): 1-10, 2015 inrease also approximately with the inrease of the wages if the onsumption and investment ustoms are not hanged. However, the setors with no inrease in produtivity having still inreased their expenditure, an inflation of the real eonomy will our. Assuming the proportion of workers with the produtivity inrease equal to their wages inrease is a and the proportion of workers with no produtivity inrease is b, a + b = 1, a = 1 b, The inflation an be expressed aording to equation (4): dp = [ 1 b] dw P W d + b dw = dw W W d + b d (5) As the wages inrease is equal to the produtivity inrease, aording to our hypothesis: And, dw W dp P d = 0 = b d is the inflation in our ase (6) The average inrease of the produtivity will be: a d (7) Aording to our simple hypothesis the inrease of the GDP (Gross Domesti Produt) will be dgdp GDP = a d (8) If we divide Eq. (6) by (8): dp GDP b dp b dgdp = and = P dgdp a P a GDP The level of the inflation will be the inrease of the GDP multiplied by the proportion of workers with no produtivity inrease divided by the proportion of workers with the produtivity inrease equal to their wages inrease. We will all this a «natural inflation» in opposition to an inflation aused by an unbalaned repartition of the benefits of the produtivity inrease or other fators suh as the inrease of onsumption by indebtness, inrease of the raw materials ost, variation of the urreny exhange rates or modifiation in the repartition of the ontributions for retirement funds or for retirement by distribution, et. Exemple: if b/a = 0.8 and the inrease of GDP 3 % the inflation will be 2.4%. The Central Banks have to take into aount the natural inflation. For this reason they should never fix a maximum inflation whih ould be lose to the natural inflation. 8 If the inrease of the wages is different of the produtivity inrease, but the other hypothesizes are the same: dp P = b a λ dgdp GDP where λ = dw W d This means, the inflation will be lower when λ is less than 1 and higher if it is more then 1. The entral banks are used to reat to what they onsider as ausing inflation: exessive inrease of the quantity of money, strong growth. In fat, they should hek the reasons for the inrease of the quantity of money or the GDP as an important growth yield by an important inrease of produtivity is not ausing a higher inflation than the natural inflation. The inflation is maintained through the inrease of salaries in order to ompensate de previous inflation, so the eonomy annot return to an equilibrium salaried inome/apital inome. The inflation of the finanial markets is also self sustaining as if the inrease of the produtivity does not orrespond to an inrease in salaries it will provoke unemployment. The unemployment will unbalane the labor market and will ause a derease of the salaries inreasing even more the apital inome and whih was already exessive ompared to the salaried inome. The relation of saving/onsumption expenditure will steadily inrease and feed the inflation of the finanial markets with umulative effet-until the market will ome bak to the equilibrium through a rash. In 2002, we had a delayed rash, as the fall of the stok market was slow in opposition to the one in As the real eonomy was somewhat disonneted of the finanial markets, the result of the rash was not like in In the finanial markets were onneted to the real eonomy as the bubble was in real estate. The effet on the real eonomy was redued by the massive intervention of the governments. As the maroeonomi equilibrium between labor inome and apital inome did not hange and the massive leverage for speulation ontinued, after a big loss for many stokholders, the inflation of the finanial markets is starting again. As the relation between dividends and stok values is high again, nobody knows how long until the next rash. During the period after the world war two, the unemployment rate was low in spite of the high inrease rate in produtivity, but it was a high inflation of the real eonomy, probably beause the salaries inreased faster than the apital inome (we do not have statistis for this period). As we have seen, the unbalane between savings and onsumption is produing inflation. The lak of balane an also our when produed by other fators than the inadequate repartition of the benefits of the inrease of produtivity. Here follow some examples where the initial working hypotheses are not always taken in aount.

9 Curr. Res. J. Eon. Theory, 7(1): 1-10, 2015 In ase of boom, psyhologial reasons an inite the onsumer publi to spend more then they earn, as they hope to earn the oming years more and so they need to make less savings or an make debts. The produtive investment will in this ase not over the prodution needs leading inevitably to inflation. It is worthwhile to examine the effet on the eonomy the introdution of a retirement system without disussing the advantage or disadvantage of the two possible systems. A mandatory retirement system like the soial seurity, whih distributes to the presently retired people the money subsribed by the working, will inrease the onsumption and derease the saving (utilized for investments), will ause inflation to the real eonomy. The introdution of retirement funds by apitalization will signifiantly inrease the saving, derease the onsumption and thereby indue inflation on the finanial markets. Only at the end of the retirement of the first ontributors, will the main part of the ontribution be transformed to onsumption expenditure: when the ontributions will be equal to the allowanes paid. Consequently, during thirty to forty years the ontributions represent aumulated savings. From experiene, we an tell that savings are inreased as a result of the introdution of retirement funds by apitalization. These savings have to be invested in the real eonomy in order to bear fruits. All savings, whih do not orrespond to an investment, are lost on a long term. (Investing in gold for example does not bring benefits even if it keeps its value. Only produtive investments an have an output similar (or better) than the soial seurity type of retirement. Exessive borrowing for onsumption will also produe inflation of the real eonomy as well as the leveraging whih will indue inflation on the finanial markets. The amount of investments taken up by the eonomy depends on its growth and so of the growth of the onsumption expenditure. We have seen above that the manufaturing and the servie industry an inrease their investments when the onsumption is stagnant. However, we have shown that all the saving is not invested in a produtive manner beause of a phenomenon onneted to the inflation of the finanial markets. Consequently, the inrease of onsumption expenditure is redued in favor of the higher inrease of savings, all the savings annot be invested in a produtive eonomy. As the introdution of retirement by apitalization is made to the prejudie of onsumption spending, it unbalanes the relation savings/onsumption expenditure. Inreasing exessively the savings and reduing the onsumption expenditure will reate inflation of the finanial markets. This is the seond ause of inflation of the finanial markets presently observed, produed by an exessive amount of saving. How will the market balane the supply and the demand of investment on the long term? The supply and the demand of onsumption 9 produts are balaned by the market; in ase the salaries are inreasing faster than the inrease of produtivity, the prodution annot follow the demand; the produed inflation will anel the exess of salary inrease. In a similar way, the exess of saving will be anelled on long term by the inflation of the finanial markets. Introduing a pension fund by apitalization in a period of low growth (the eonomy annot take up too muh savings), the retirees will loose a part of their retirement. The introdution of the retirement by distribution, as we mentioned above, orresponds to an inrease of the onsumption spending, as the insured persons will lessen their savings and the retired persons will immediately spend the money in onsumption. This is perhaps the seond ause of the after war inflation, beside of the inrease of the salaries, perhaps higher than the inrease of produtivity. CONCLUSION As it shows from the above arguments, the basi ause of the inflation, as well as the inflation of the real eonomy and of the finanial markets, is the unbalane of the relation between onsumption expenditure/ savings (or investments). The main auses of a lak of balane of these fators are the inadequate repartition of the benefits provided by the inrease of produtivity and the introdution either of a fored saving or a fored onsumption. Soial auses an also modify the balane of onsumption/saving. The introdution of a retirement by distribution orresponds partially to a fored onsumption and the introdution of retirement funds by apitalization orresponds partially to a fored saving. The first provokes an inflation of the real eonomy, the seond of the finanial markets. The leverage effet aentuates the unbalane. We have to add to this auses the natural inflation, as defined above, whih is however relatively small. The above mentioned statistis showing the inrease of the relation apital inome/salaried inome during the period (other statistis show the same trend between 1992 and 2004) orresponding to an exessive inrease of the stok market values, orroborate the theory onerning the inflation of the finanial markets. The well-known statistis of the inflation of the real eonomy during the period orroborate the theory on this subjet. Consequently, the entral banks and the governments should try to balane savings and onsumption: savings, whih are not invested in the real eonomy, annot produe value. If the savings are not enough for the produtive investments needed, the inflation of the real eonomy will deprive it from a part of its growth. In ase of introdution of retirement systems one has to be onerned about the maroeonomi effets of this introdution. One

10 Curr. Res. J. Eon. Theory, 7(1): 1-10, 2015 solution would be to start the two types of retirement systems in the same time and to balane them in ourse of time with the maroeonomi tendenies. The interest rates should be differentiated for bank redits for the real eonomy and the finanial markets. The great risis of 1929 (and the one of ) an be explained by this theory. It was a period of big eonomi hanges. Eletriity replaed the steam power and the produtivity inreased dramatially espeially in the United States. However, the inrease of produtivity did not bring an inrease equivalent to the ompensation of employees. A huge number of workers were laid off in favor of more effiient tehnologial solutions. As in the meantime the ompensation of employees was stagnant, the demand did not reah the supply. At the end of the twenties, the US industry did only use 75% of its apaity in key setors. The benefits of the inrease of produtivity were not delivered to everybody to inrease onsumption and empty the warehouses. In order to inrease the demand, the banks and the distribution did promote heap redit. During 1929, the amount of the onsumption debt beame unbearable. The stok pries beame muh higher than their value, feed by the redits for speulation and above all, by the unbalane between savings and onsumption spending aused by the embezzlement by the apital of the main part of the benefits of the inrease of produtivity. At the end, the market restored the maroeonomi equilibriumleading to a ollapse of the eonomy. The differene with the present risis is that the use of new sophistiated finanial instruments as well as a very high leverage, often irrational, inreased the indebtedness of the finanial ators; the irresponsible deregulation also ontributed to make the finanial markets ompletely obsure. Another differene: The intervention of the governments to save the banking system and to stimulate the eonomy. The government intervention attenuated the risis, but a drasti regulation of the apital markets and the banking system is essential to avoid an aggravation of the risis and new rises. REFERENCES Fréderi, P., La Pensée Éonomique de Keynes. 3rd Edn., Dunod, pp: Hyman, P.M., Stabilising an Unstable Eonomy. MGrav Hill, NY, pp: Mihael, P., Eonomis. Adison-Wesley Publishing Co., New York, pp: 653. United Nations Statistis, Main Aggregates and detailed tables 1.6 and 3.32: Compensation of employees/operating surplus of private uninorporated enterprises+property and entrepreneurial inome. National Aounts Statistis. 10