01 September 2010

Beautiful Bermuda

Another letter from (well, to) Bermuda.  A letter writer there, anonymously, wrote to blame the island's economic woes on the wage earning work force.  Some other writers then chimed in.  I've no way of knowing what the balance of writers was, only what the Editor chose to print.  So, I was moved to offer a volley.  Which is below.

Neither "neither a construction worker or a lawyer" nor the various letter writers (well, those you've decided to print) understand the sources of inflation.  Inflation exists over time (the usual way people think of it), but also from place to place.  Here in the US, the metro Washington, DC area costs more to live in to a non-trivial level than the national average.  Places in Appalachia, less.

Bermuda's cost of living is not a function of wages paid to blue collar (a US term) non-skilled and skilled workers.

The three drivers of inflation are:  cost push, wage push, and demand pull.

Cost push:  when the cost of goods on the market rise without regard to local wages or monetary policy; petrol is a prime example.

Wage push:  when cost of goods on the market rise due to wage growth beyond productivity growth; allegedly happened in the US in the 1960's.

Demand pull:  when prices of goods on the market rise due to increase of cash available to buyers, generally attributed to machinations by the nation's monetary authority, but only when the cash is distributed to the consuming public (the recent bailout monies distributed in the US went to financial institutions, which goes some way to explaining why the bailout was not only not inflationary, but with increasing obviousness, deflationary).

So, where does Bermuda fall among the three?  From my stay, it is clearly cost push.  The islands are essentially uninhabitable from local sustenance.  Wages to workers simply reflect the cost of stocking goods.  Reducing their wages to that of, say a sharecropper in Alabama, won't reduce the cost of living in Bermuda.  With sufficient police state effort, you might be able to enforce greater poverty on this class of citizen, but if you do, the level of unrest clearly visible on your pages will grow geometrically.  That may be what some Bermudians want.

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