Despite countless data proving otherwise, there are some who simply refuse to accept the idea that inflation is not an issue.

Any reference to deflation or disinflation is met with angry cries of “where do you live?!” “Obviously you don’t have to pay school fees!”.

This is highly frustrating and misleading. And misses the point entirely. It also reflects a real misunderstanding of what inflation is.

So let me try to explain how it is that the economy can be experiencing deflation even when your school fees are going up.

Deflation is the result of a diminishing rate of profit because of a self-perpetuating output glut. Some commenters are fixated with the idea that because factories have high input costs even now this defies the deflation argument.

Actually, when high input costs cannot be passed onto the retail market this is an excellent example of a deflationary economy. Factories running negative margins are forced to shutdown.

Indeed, the whole danger with deflation is that it shuts down marginal players and leads to output cutback which leads to an inferior equilibrium in which we all become poorer. This is because rather than give stuff away for free, marginal players are forced out of the system to improve the profits for the strongest incumbents.

Corporate profits may be rising, but only for the corporates that manage to beat the marginal players, and manage to either source supplies more cheaply, operate more efficiently (with fewer costs) or are able to squeeze their markets. Higher profits show the success of forced scarcity and marginal player destruction, which leads to greater monopolisation.

In an inflationary market there isn’t enough product to go around, meaning monopolies become threatened by new entrants, and are often dismantled — usually by a black market.

The disruptive thing this time around is that the usual monopoly empowerment is being undermined by the disenfranchised part of the economy turning to a “free” collaborative alternative, that has no costs.

They have the chance for the first time ever to get by even without government aid — something that was not the case in the Great Depression.

As for the school fees and rising energy costs argument.

When it comes to retail energy prices these are high only because they have been propped up artificially by monopoly interests, who have been able to dodge liberalisation efforts because of global high prices (the result of potentially another type of incumbent squeeze — see follow up post) and influences from abroad.

But now that the commodity supercycle is finally responding to a substitution effect and commodity prices are coming down, it will be harder for these incumbents to justify the high prices without looking like obvious monopoly businesses. The government or antitrust authorities will be forced to intervene.

Second, inflation is a consumption based index not an asset price index. Higher asset prices DO NOT equal inflation. If anything they contribute to deflation since the asset rich become more inclined to hoard on the presumption asset prices will only go up, and their consumption and living costs continously drop in relative terms.

This segregates society and leads to a self-enforcing depression effect… That being: the asset rich only get richer, while the asset poor become ever more disenfranchised from the system and cannot contribute purchasing power for the goods produced by the asset owners.

As for school fees rising… First off, a lot of this is the result (just like with commodities) of influences from abroad and the fact that foreigners are bidding up the western education market, much like they are bidding up house prices.

This is possibly a reflection of the fact that in a knowledge economy education really does have the chance to become the new gold. But again there is a false scarcity effect because universities are continuously being undermined by free knowledge, and thus struggling to keep themselves relevant — in the manner of luxury goods.

I am not saying there isn’t a role for education in institutional form, there is… But this is once again a form of disenfranchisement designed to keep the “great unwashed” out of one of the last scarcities which is knowledge and educational privilege. For as long as this knowledge economy is defined by access to a private education system which responds to the highest bidder, rather than to academic talent, there will be demand for such tuition, especially from foreigners who come from countries that don’t yet suffer from the deflation problem.

But this problem is easily solved by throwing more money into the state system, abolishing fees altogether and ensuring that a certain proportion of students must be domestic at all institutions.

The state can afford it.

If foreigners want to overpay for private education, meanwhile, let them. If education becomes a product of money rather than meritocracy, we can be sure a private education will mean ever less in the future. It will symbolise incumbent privilege rather than real talent.

And to some extent this is already happening. Many of the most expensive private schools have poor academic results, and are now becoming a stigma on people’s CVs rather than an asset.

The US college system, like the US welfare system is currently about segregating an abundant product from the people, to squeeze a profit out of it, when in reality these services should and can be afforded by the state.

The more threatened the incumbents get the more expensive tuition fees will get, until everyone turns to online learning instead and degrees from open universities become just as meaningful as degrees from Harvard.

The most knolwedgeable minds nowadays are often self-taught “Good Will Hunting” types, because they acquire knowledge out of passion for insight, rather than as the result of a rite of passage that is expected from them by their families and social circles.

So the main point is that rising tuition fees are hardly a good indicator of inflation. They reflect, if anything, another hallmark of the old economy — and in that sense a type of crowded our safe asset, even as those investing in this asset fail to realise that the asset’s value is decaying in its own right.

Last and not least, unless wages rise, inflation remains a non-threat. And wages are unlikely to rise for as long as a significant amount of people remain unemployed or, in the case of the UK, productivity remains too high relative to market needs.

(When you have a bunch of people working too hard for their own good, and you actually need to curtail output, wages cannot rise — but productivity can be cut back).

The fact that more and more people are choosing to work in collaborative sectors or on a voluntary basis just to get their foot into established industries shows inflation is not a threat.

So when you take out tuition fees, energy costs and housing costs (the latter a poor example unless rents are also rising) and account for ever depreciating retail prices — two-for-one offers at supermarkets, service costs, electronic goods and others (especially now that the “new product” market is facing ever more aggressive competition from the “second hand” market thanks to ebay) you realise the problem is definitely not inflation.

The problem remains deflation. And with that comes a dangerous rise in monopoly power as well as a growing disenfranchised sector of society — which may or may not turn to the collaborative non-monetised parallel economy — which creates a self-enforcing declining purchasing power vicious circle, that only leads to more deflation.

As for house prices rising, given the fact rents are not catching up, this only represents another type of negative interest rates. The housing market offers very poor yield at the moment.

Soon enough people who are not asset owners may even end up being paid to occupy properties to prevent depreciation and/or defend from squatters/crime/or for performing basic property management duties.

The alternative is a rise of ghost towns, empty units amidst a growing amount of homeless people — i.e. a lower and inferior equilibrium for all.

Would you rather pay someone to housesit your investment property abroad or have it stand empty because no-one can afford to rent it?