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Thread: Doing the math: what the FEDs 2% inflation goal and CPI fudging means for purchasing power

  1. #1

    Lightbulb Doing the math: what the FEDs 2% inflation goal and CPI fudging means for purchasing power

    I've had a long discussion with a Keynesian about the issue of money lately. He maintained that the 2% annual inflation goal of the FED (and many other central banks) would ensure "price stability". I told him that he doesn't understand simple math and that 2% annual inflation annihilated the savings function of money. So I went on to calculate a few examples for him. (I'll get into the phony statistical tricks behind CPI calculations later)

    - Assuming the FED is successful in maintaining 2% annual inflation for 10 years ("over the medium term" as central bankers say"), it doesn't mean we have 20% inflation in 10 years, it means 21.9% (1.02^10 = 1.02*1.02*1.02... and so on) . Over twenty years we already get 48.6% (not 40%), over thirty 81.1% (not 60%). This means that our glorious money loses 4/5 of it's purchasing power every generation. If the FED just got the inflation targeting wrong by 0.1% over the same timeframes we'd get 23.1% (10y) / 51.5% (20y) / 86.5% (30y). As you can see, even very small changes make a significant difference.

    - That brings the CPI into the game. It's basicly an open secret that the CPI is beeing massaged. First of all, it is against the fundamental principle of statistics to change the composition and calculation of an index basicly every year. That destroys any comparative value of annual data. Second of all, setting an index back to 100 every few years is just as deceptive as 2% inflation in the first year is less then 2% in the tenth year (see above). We all know the reasons why governments are doing this: economic indicators like GDP look better and CPI linked goverment payouts (like SS) don't have to be increased as much. Additionally, cold progression on income taxes doesn't look as cruel. Now let's assume that John Williams' (shadowstats) calculation of the CPI is more accurate than the official one.
    For simplicity purposes, let's assume that real annual inflation was 5% instead of 2%. According to Mr Williams it was actually even higher than 5%:



    Comparison 2% vs 5% over 10/20/30 years:
    10y: 21.9% vs 62.9%
    20y: 48.6% vs 265.3%
    30y: 81.1% vs 432.2%


    Q.E.D.
    Last edited by swissaustrian; 11-27-2012 at 05:44 AM.



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  3. #2

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    Quote Originally Posted by swissaustrian View Post
    I've had a long discussion with a Keynesian about the issue of money lately. He maintained that the 2% annual inflation goal of the FED (and many other central banks) would ensure "price stability". I told him that he doesn't understand simple math and that 2% annual inflation annihilated the savings function of money. So I went on to calculate a few examples for him. (I'll get into the phony statistical tricks behind CPI calculations later)

    - Assuming the FED is successful in maintaining 2% annual inflation for 10 years ("over the medium term" as central bankers say"), it doesn't mean we have 20% inflation in 10 years, it means 21.9% (1.02^10 = 1.02*1.02*1.02... and so on) . Over twenty years we already get 48.6% (not 40%), over thirty 81.1% (not 60%). This means that our glorious money loses 4/5 of it's purchasing power every generation. If the FED just got the inflation targeting wrong by 0.1% over the same timeframes we'd get 23.1% (10y) / 51.5% (20y) / 86.5% (30y). As you can see, even very small changes make a significant difference.

    - That brings the CPI into the game. It's basicly an open secret that the CPI is beeing massaged. First of all, it is against the fundamental principle of statistics to change the composition and calculation of an index basicly every year. That destroys any comparative value of annual data. Second of all, setting an index back to 100 every few years is just as deceptive as 2% inflation in the first year is less then 2% in the tenth year (see above). We all know the reasons why governments are doing this: economic indicators like GDP look better and CPI linked goverment payouts (like SS) don't have to be increased as much. Additionally, cold progression on income taxes doesn't look as cruel. Now let's assume that John Williams' (shadowstats) calculation of the CPI is more accurate than the official one.
    For simplicity purposes, let's assume that real annual inflation was 5% instead of 2%. According to Mr Williams it was actually even higher than 5%:



    Comparison 2% vs 5% over 10/20/30 years:
    10y: 21.9% vs 62.9%
    20y: 48.6% vs 265.3%
    30y: 81.1% vs 432.2%


    Q.E.D.

    I have an income of 10 dollars in year one. I buy five apples and five oranges in year 1, each of which cost one dollar. In year 2, the price of apples increases to 2 dollars and I decide to buy 10 oranges with my 10 dollars. What is the rate of decrease in my standard of living? Shadowstats says its a 50% inflation rate but that is mind blowing idiocy. Not so Q.E.D. after all.

    If the cost of a computer in 10 years goes from 1000 to 1500, but the quality of the computer doubles or triples, then there very well may be deflation in the cost of computers, while shadowstats would claim major inflation. Not so Q.E.D. again.

    And of course, surprise surprise, new goods get introduced. Good luck using the same basket from 1950 to measure the cost of living in 2012. People purchase dramatically different baskets of goods in the two years. You have to change the basket over time. Not so Q.E.D. again.

    And wait, oh shoot, holding money itself is stupid because you can hold bonds, which, in the long run, outpace the rate of inflation and deliver a real return. Not so Q.E.D. one more time. You might want to think harder about this one.

  4. #3

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    Quote Originally Posted by ababba View Post
    And wait, oh shoot, holding money itself is stupid because you can hold bonds, which, in the long run, outpace the rate of inflation and deliver a real return.
    Yep, as long there remains any CONfidence in public debt and promise of a greater returns of Fed's dollars promised by issuers, the bond market is As Good As Gold, right? Which makes bonds a Forever Sure Thing, of course, because, well, perish the thought that the bond market, let alone the currency it promises (the "real" return), could ever collapse. Otherwise, we might want to think harder about this one.

  5. #4

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    Quote Originally Posted by Steven Douglas View Post
    Yep, as long there remains any CONfidence in public debt and promise of a greater returns of Fed's dollars promised by issuers, the bond market is As Good As Gold, right? Which makes bonds a Forever Sure Thing, of course, because, well, perish the thought that the bond market, let alone the currency it promises (the "real" return), could ever collapse. Otherwise, we might want to think harder about this one.
    Bonds, or TIPS or stock, or gold or silver or whatever the hell you believe you can hold that will maintain real purchasing power. Cash is stupid next to all of them.

    The point is you shouldn't pick the thing least likely to maintain purchasing power as something to hold up as an example of what loses purchasing power.

    Nice job dodging all of the other points though, congrats.

  6. #5

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    Quote Originally Posted by ababba View Post
    The point is you shouldn't pick the thing least likely to maintain purchasing power as something to hold up as an example of what loses purchasing power.
    Lol. The op is about inflation and the CPI. By definition we are talking about the supply of, and exchange value of, dollars.
    The proper concern of society is the preservation of individual freedom; the proper concern of the individual is the harmony of society.

    "Who would be free, themselves must strike the blow." - Byron

    "Who overcomes by force, hath overcome but half his foe." - Milton

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    Quote Originally Posted by Acala View Post
    Lol. The op is about inflation and the CPI. By definition we are talking about the supply of, and exchange value of, dollars.
    Well I could care less if the dollar maintained purchasing power if nobody holds a lot of dollars or everyone has access to a savings vehicle that has real returns in some way. Its completely irrelevant from a practical perspective. The purchasing power of the dollars is relevant if there are people that hold a substantial amount of assets in dollar bills they hide under a mattress. That's just not true. Most people don't hold mountains of cash. The few people that do are either outside of the United States or drug dealers and gamblers.

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    Please correct me if I'm wrong but isn't constant 2% year over year inflation a compounding interest? Will you not inevitably hit the tipping point of a hockey stick formation which will then shortly (relatively speaking) lead to the demise of such a "one-way" system?

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    Quote Originally Posted by ababba View Post
    Bonds, or TIPS or stock, or gold or silver or whatever the hell you believe you can hold that will maintain real purchasing power. Cash is stupid next to all of them.
    Yeah? So Google, Microsoft, Apple, et all are stupid for hoarding all that cash, keeping their cash balances flush like there was no tomorrow?



    Your presumption revolves around maintaining "purchasing power", with a focus on status quo investment return values, ceteris paribus. Because of legal tender laws, cash (FRN's) is ultimately the only thing with any real purchasing power, regardless of its evaporating exchange value, because you have to actually liquidate whatever else you have (bonds, TIPS, stock, gold, silver, etc.,) to get some of those green stamps before you can efficiently make any actual purchases.

    Nice job dodging all of the other points though, congrats.
    I didn't dodge them, I just didn't take issue with them. Then. I saw your "What is the rate of decrease in my standard of living?", as if that was any kind of valid metric, and rolled my eyes and left it alone. Why can't anyone expect an INCREASE in their standard of living (as people once did?). In a growing economy, a sound currency will gain in value, with a resulting INCREASE--not decrease, not just maintenance--in the standard of living. But somehow a lack of a decrease in the rate of one's standard of living means (assuming we accepted that was even a fact for everyone) means that somehow everything's A-OK. It's not. People are getting ripped off by a monetary policy that actively and deliberately punishes and erodes the value of savings, as it invisibly siphons wealth from all currency holders (irrespective of QE), which deliberately prevents an INCREASE in standards of living that would otherwise have been in place for anyone who followed the now-artificially-defunct mantra of "Work hard and save your money".

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    Quote Originally Posted by Steven Douglas View Post
    I didn't dodge them, I just didn't take issue with them. Then. I saw your "What is the rate of decrease in my standard of living?", as if that was any kind of valid metric, and rolled my eyes and left it alone. Why can't anyone expect an INCREASE in their standard of living (as people once did?). In a growing economy, a sound currency will gain in value, with a resulting INCREASE--not decrease, not just maintenance--in the standard of living. But somehow a lack of a decrease in the rate of one's standard of living means (assuming we accepted that was even a fact for everyone) means that somehow everything's A-OK. It's not. People are getting ripped off by a monetary policy that actively and deliberately punishes and erodes the value of savings, as it invisibly siphons wealth from all currency holders (irrespective of QE), which deliberately prevents an INCREASE in standards of living that would otherwise have been in place for anyone who followed the now-artificially-defunct mantra of "Work hard and save your money".
    This is a methodological point. Its about the science of measuring inflation. Your post is completely orthogonal to that.

    Obviously the purchasing power of money can either decrease, increase or stay the same over time depending on a number of factors. My point that you were responding to is about the proper measurement of the purchasing power of money. I don't really care about the morality of the purchasing power of money.

    Obviously the value of a dollar will eventually be worthless. I think its important to state both that this doesn't matter that much and that we should correctly measure the rate of decrease in its value and not just make up shit and repeat it over and over.

    Companies hold cash partially because inflation is actually very close to zero right now and the cost isn't large. They won't hold the cash indefinitely, they are just waiting for good investment opportunities. In addition, cash probably doesn't even mean dollar bills, its most likely short term debt instruments that pay interest. In the investment community, a money market fund is often referred to as "cash", but it makes a huge difference for this conversation. They also probably didn't hold as much cash when inflation was in the double digits in the 70s.

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    Quote Originally Posted by seraphson View Post
    Please correct me if I'm wrong but isn't constant 2% year over year inflation a compounding interest? Will you not inevitably hit the tipping point of a hockey stick formation which will then shortly (relatively speaking) lead to the demise of such a "one-way" system?
    Absolutely, irrespective of any compounding function during any one time period. It is exponential because the percentage of increase from one time period to the next includes everything that was added in during the previous time periods. The moment anyone says "n% per-given-time-period", it is exponential by definition, with its own doubling rate and a corresponding "hockey stick" curve as a mathematical certainty, and a guaranteed "tipping point" (or decoupling point), as the finite physical realities eventually can no longer keep pace with an infinite expansion that is made possible only by (and within the vacuum of) mathematical constructs.

    Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist. Kenneth E. Boulding

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    Quote Originally Posted by ababba View Post
    Well I could care less if the dollar maintained purchasing power if nobody holds a lot of dollars or everyone has access to a savings vehicle that has real returns in some way. Its completely irrelevant from a practical perspective. The purchasing power of the dollars is relevant if there are people that hold a substantial amount of assets in dollar bills they hide under a mattress. That's just not true. Most people don't hold mountains of cash. The few people that do are either outside of the United States or drug dealers and gamblers.
    Many people are on what folks call a FIXED INCOME. You dig? Millions of people. On fixed income. It matters.
    The proper concern of society is the preservation of individual freedom; the proper concern of the individual is the harmony of society.

    "Who would be free, themselves must strike the blow." - Byron

    "Who overcomes by force, hath overcome but half his foe." - Milton

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    Quote Originally Posted by Acala View Post
    Many people are on what folks call a FIXED INCOME. You dig? Millions of people. On fixed income. It matters.
    Examples? Old people have CPI indexed social security. The hold assets like bonds which pay interest linked to the rate of inflation.

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    Quote Originally Posted by ababba View Post
    Examples? Old people have CPI indexed social security. The hold assets like bonds which pay interest linked to the rate of inflation.
    Pensions? Ever heard of them? Very few private pensions are inflation-indexed.
    The proper concern of society is the preservation of individual freedom; the proper concern of the individual is the harmony of society.

    "Who would be free, themselves must strike the blow." - Byron

    "Who overcomes by force, hath overcome but half his foe." - Milton

  15. #14

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    Quote Originally Posted by Acala View Post
    Pensions? Ever heard of them? Very few private pensions are inflation-indexed.
    Yes, the the rate of inflation matters a lot for people that have a fixed dollar income. Luckily, there aren't that many defined benefit plans anymore like in the 1950s and 1960s, but it would be much better if employers transitioned more toward employee control of their own retirement. The salary is usually based on the salary of the worker in their last year or years, so inflation during their working life doesn't matter, but inflation after their working life does matter. Since the average retirement is probably under 20 years, 2 percent a year inflation will matter a little bit but 5 or 6 percent inflation would have a dramatic impact. Its important to understand that we are closer to 2 percent right now and that attempts by people to claim 6 percent are misguided.

    And of course these workers have other assets too. Homes and social security which increase with the rate of inflation or are indexed to the rate of inflation.

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    You guys are kind of funny. You assert high inflation but nobody wants to talk at all about the methodology of measuring inflation, which was a huge chunk of the OP and 3/4 of my response.

  17. #16

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    Quote Originally Posted by ababba View Post
    You guys are kind of funny. You assert high inflation but nobody wants to talk at all about the methodology of measuring inflation, which was a huge chunk of the OP and 3/4 of my response.
    Fair enough. You correctly identified some of the fudge factors used by the BLS to "adjust" the CPI but you don't give any basis for thinking those are anything other than voodoo. Those are not quantifiable values and so numbers are simply pulled out of a hat. A narrative is one thing, deriving a meaningful number from the narrative is another thing entirely.
    The proper concern of society is the preservation of individual freedom; the proper concern of the individual is the harmony of society.

    "Who would be free, themselves must strike the blow." - Byron

    "Who overcomes by force, hath overcome but half his foe." - Milton

  18. #17

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    Quote Originally Posted by ababba View Post
    This is a methodological point. Its about the science of measuring inflation. Your post is completely orthogonal to that.
    The so-called "science" of measuring [price] inflation is a meaningless hodge-podge, mish-mash jumble of massaged statistics, with selective assumptions, presumptions and weightings that are only reckoned in aggregates by aggregate-thinking macro-economists and collectivists.

    “When a lot of remedies are suggested for a disease, that means it cannot be cured.”
    ― Anton Chekhov

    Framing questions in terms of price inflation (an effect with many possible causes), is extremely convenient for economic obfuscationists everywhere, who get to sound like they are actually addressing something meaningful, as they point infinite fingers in infinite directions, with ad nauseam moot debates that beg more questions than answers. Meanwhile, they completely dodge, minimize, and otherwise dismiss the issue of monetary inflation (a single identifiable cause with many effects).

    I don't really care about the morality of the purchasing power of money.
    Yeah, let's move past the whole issue of outright theft, and talk instead instead about the effects of whatever-it-is-we-just-dismissed-with-full-acceptance.

    Obviously the value of a dollar will eventually be worthless.
    Full agreement there.

    I think its important to state both that this doesn't matter that much and that we should correctly measure the rate of decrease in its value and not just make up shit and repeat it over and over.
    The problem we have there is in what you are comparing it with. You can only measure the rate of decrease in value relative to something else. Because we have no parallel universe economy with which to compare, we have no knowing what its value WOULD HAVE BEEN had it not been fucked with.

    Even so, one thing you can do is PRICE everything in a given value substitution. I posted about that a while back, as I priced corporate profits (only the best of the best) in other commodities (the more raw the better), and showed both the history AND the recent decoupling of values.









    In all cases, and for the very first time (since about 2011), the purchasing power of corporate profits (and again, those are only the BEST economic performers in the entire economy) are no longer keeping pace with raw commodities--the closest thing to a "sound money" proxy you're going to get.

  19. #18

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    Quote Originally Posted by ababba View Post
    Yes, the the rate of inflation matters a lot for people that have a fixed dollar income. Luckily, there aren't that many defined benefit plans anymore like in the 1950s and 1960s, .
    I challenge this assertion. Got any numbers to back it up? My parents are on one and I will be too when I retire.
    The proper concern of society is the preservation of individual freedom; the proper concern of the individual is the harmony of society.

    "Who would be free, themselves must strike the blow." - Byron

    "Who overcomes by force, hath overcome but half his foe." - Milton

  20. #19

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    Quote Originally Posted by ababba View Post
    Luckily, there aren't that many defined benefit plans anymore like in the 1950s and 1960s,
    Yeah, luckily...

    I feel so lucky.
    Quiz: Test Your "Income" Tax IQ!

    Short Income Tax Video

    The Income Tax Is An Excise, And Excise Taxes Are Privilege Taxes

    The Federalist Papers, No. 15:

    Except as to the rule of apportionment, the United States have an indefinite discretion to make requisitions for men and money; but they have no authority to raise either by regulations extending to the individual citizens of America.

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    Quote Originally Posted by Acala View Post
    Many people are on what folks call a FIXED INCOME. You dig? Millions of people. On fixed income. It matters.
    The major "fixed income" class is Social Security recipients. From a political standpoint it's probably the only one that matters. Social Security adjusts with inflation, so any monetization scheme would have to take Social Security obligations into account. Many public & private non-401k pensions adjust, but usually with a cap like 2% per anum. It's tempting to use monetization to trend down overly generous pensions that are causing governments problems, but you still have the Social Security problem.

    The total federal debt is about 16 trillion and SS is about 750 billion per year, which amounts to about 20 years worth of SS for the entire debt. Without going into complex discussions on the effect of discount rates it may actually make sense to monetize because the average person does not spend at least 20 years on SS. I think it's closer to 15 years.

    If you take into account discount rates, the benefit would be even more significant.

    Medicare & Medicaid would be effected by inflation, but not directly, and there are indications that the cost of medical care is starting to level off and even go down in some cases.

    In terms of dealing with debt, it's really either monetize or go around grabbing excess cash from people. People don't like giving up their cash in a nominal sense, so really their is very likely going to be some form of monetization, likely after the federal government gets its budget under control.

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    Quote Originally Posted by Acala View Post
    I challenge this assertion. Got any numbers to back it up? My parents are on one and I will be too when I retire.
    http://www.ssa.gov/policy/docs/ssb/v69n3/v69n3p1.html

    I know its from the devil, but here are some details.

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    Quote Originally Posted by Steven Douglas View Post

    In all cases, and for the very first time (since about 2011), the purchasing power of corporate profits (and again, those are only the BEST economic performers in the entire economy) are no longer keeping pace with raw commodities--the closest thing to a "sound money" proxy you're going to get.
    Yes its difficult to measure inflation. But the fact that its hard doesn't mean we can assume that the economists are always wrong and always wrong in a direction that favors our political arguments. We need reasons for that. And the reasons given in this thread for why inflation statistics are wrong by the OP are just horrible.

    Interesting graphs, but aren't corporate profits an accounting statistic that is so screwed up with manipulation and accounting rules that I wouldn't use it in your graphs? Anyway, commodities aren't the only component of what we purchase. The fact that we have low inflation with rapidly increasing commodity prices means something else is getting much cheaper.

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    Quote Originally Posted by Danke View Post
    Yeah, luckily...

    I feel so lucky.
    I don't know, I guess I assumed libertarians would rather control their own retirement destiny that let their company do it for them.

  25. #24

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    Quote Originally Posted by ababba View Post
    I have an income of 10 dollars in year one. I buy five apples and five oranges in year 1, each of which cost one dollar. In year 2, the price of apples increases to 2 dollars and I decide to buy 10 oranges with my 10 dollars. What is the rate of decrease in my standard of living? Shadowstats says its a 50% inflation rate but that is mind blowing idiocy. Not so Q.E.D. after all.

    If the cost of a computer in 10 years goes from 1000 to 1500, but the quality of the computer doubles or triples, then there very well may be deflation in the cost of computers, while shadowstats would claim major inflation. Not so Q.E.D. again.

    And of course, surprise surprise, new goods get introduced. Good luck using the same basket from 1950 to measure the cost of living in 2012. People purchase dramatically different baskets of goods in the two years. You have to change the basket over time. Not so Q.E.D. again.

    And wait, oh shoot, holding money itself is stupid because you can hold bonds, which, in the long run, outpace the rate of inflation and deliver a real return. Not so Q.E.D. one more time. You might want to think harder about this one.
    1. Shadowstats is using the old CPI, nothing more nothing less. It's just not adjusting the method every year. Comparability over time is one of the basic principles of statistics. If you change the method and the composition, you lose comparability and you can stop recording data anyway.

    2. Hedonics is a flawed trick to reduce the cost of a good, because it assumes that people would still buy an old version of a good. Nobody buys a 486 PC anylonger. This "let them eat ipads" argument which was famously coined by NY FED chairman Dudley is just a trick to have "deflationary" components in the basket of goods. Quality improvements can only be taken into account if consumers still demand the lower quality. The whole consumer electronics market is specifically funtctioning contrary to that idea. So e.g. claiming that the new iphone is 50% "cheaper" because it's performance is double of the previous version is bogus.

    3. Reducing the food component when people are consuming more at the same time (result: increased obesity numbers) has nothing to do with "new products". It's just another trick to limit the impact of rising food prices. So is the usage of a core CPI.

    4. You don't understand all the functions of money: standard medium of exchange (1), unit of account (2) and STORE OF VALUE (3). You're probably to young to having experienced the times of the gold standard (so am I), but money should actually be able to store value. If it doesn't, it is partially disfunctional. Naming bonds as the better store of value means essentially you're thinking money is debt. That's true for fiat money only, it's money with a counterparty. And that's the most fundamental problem we have in economics. If you can only store value in debt or equity and not in money, your freedom to decide the timing you're investments is taken away. Your money has no "time value" as Boehm-Bawerk called it with regards to interest rates: http://mises.org/pdf/asc/2002/asc8-reisman.pdf. The current ZIRP environment is the icing on the cake. Now money doesn't even have a price at all. Bond rates are negative in real terms.

  26. #25

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    Quote Originally Posted by ababba View Post
    Yes its difficult to measure inflation. But the fact that its hard doesn't mean we can assume that the economists are always wrong and always wrong in a direction that favors our political arguments.
    See, you throw the word "inflation" out as if it's universally understood to mean "price inflation". I accept that the word has been bastardized to the point where it means only that in common usage, which is why I NEVER fail to qualify the term when I use it. I say price inflation to refer to an effect (the general rise in price levels), and monetary inflation (the increase in the supply of currency) to refer to a cause without regard to its effects.

    Monetary inflation has many channels (select favored supply spigots), foreign and domestic, and there is always a delay between monetary inflation and the price inflation it causes, as it takes time for newly counterfeited currency to dilute the wider pool of currency, as it propagates and is "felt" as a upward pressure on general price levels throughout an economy. It never spreads or propagates evenly, and it never affects the same industries in the same way. Furthermore, stable price levels are NOT necessarily valid indicators of "no net price inflation". That is because we are not taking into account (nor have we that ability) all the prices THAT WOULD HAVE OTHERWISE FALLEN--NOT REMAINED "STABLE".

    In other words, to put it in more academic terms, it's all a bunch of horse shit.

    Interesting graphs, but aren't corporate profits an accounting statistic that is so screwed up with manipulation and accounting rules that I wouldn't use it in your graphs?
    Funny that you're not so quick to jump on government accounting statistics that are "screwed up with manipulation and accounting rules" (that change from year to year, no less).

    Whatever the case, we're looking at raw reported numbers, and real market prices of commodities (adjusted for NOTHING). At the very least, even if you attribute it to fudged numbers, we can say definitively that Something Very Different has occurred in only the past two years.

    Anyway, commodities aren't the only component of what we purchase. The fact that we have low inflation with rapidly increasing commodity prices means something else is getting much cheaper.
    Did you miss the part where all Finished Tangible Goods (things of real value--not vaporware--that we depend on for life) are rooted in commodities as factors and costs of production? Raw commodities aren't the only component of what we purchase, but they are all at the roots and foundation of life itself, and all that sustains life. Other things "getting much cheaper" becomes meaningless if the commodities required for life itself become so expensive relative to a thoroughly and intentionally debauched currency that those commodities eventually don't even make it to the shelves.

  27. #26

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    Quote Originally Posted by swissaustrian View Post
    1. Shadowstats is using the old CPI, nothing more nothing less. It's just not adjusting the method every year. Comparability over time is one of the basic principles of statistics. If you change the method and the composition, you lose comparability and you can stop recording data anyway.

    2. Hedonics is a flawed trick to reduce the cost of a good, because it assumes that people would still buy an old version of a good. Nobody buys a 486 PC anylonger. This "let them eat ipads" argument which was famously coined by NY FED chairman Dudley is just a trick to have "deflationary" components in the basket of goods. Quality improvements can only be taken into account if consumers still demand the lower quality. The whole consumer electronics market is specifically funtctioning contrary to that idea. So e.g. claiming that the new iphone is 50% "cheaper" because it's performance is double of the previous version is bogus.

    3. Reducing the food component when people are consuming more at the same time (result: increased obesity numbers) has nothing to do with "new products". It's just another trick to limit the impact of rising food prices. So is the usage of a core CPI.

    4. You don't understand all the functions of money: standard medium of exchange (1), unit of account (2) and STORE OF VALUE (3). You're probably to young to having experienced the times of the gold standard (so am I), but money should actually be able to store value. If it doesn't, it is partially disfunctional. Naming bonds as the better store of value means essentially you're thinking money is debt. That's true for fiat money only, it's money with a counterparty. And that's the most fundamental problem we have in economics. If you can only store value in debt or equity and not in money, your freedom to decide the timing you're investments is taken away. Your money has no "time value" as Boehm-Bawerk called it with regards to interest rates: http://mises.org/pdf/asc/2002/asc8-reisman.pdf. The current ZIRP environment is the icing on the cake. Now money doesn't even have a price at all. Bond rates are negative in real terms.
    1. Yes and the old CPI is flawed. It would say that the increase in the cost of living was 50% in that example when we know its less than 50%.

    2. Quality adjustments are really important when you are trying to measure the cost of maintaining your standard of living. If the cost of the computer stays the same but it is better, then that is an improvement in your standard of living. That is what we should be concentrating on measuring here, the value of a dollar in terms of goods.

    3. You reduce the food component if food is a smaller percentage of the goods consumed. People have greater incomes, so they buy more food. But its a much smaller percentage of the total quantity of goods they buy.

    4. A highly inflationary currency would not be a good store of value, we agree. That doesn't mean a country with a high level of inflation involves everyone losing their purchasing power quickly. That was my point, there are other investment vehicles that are more closely indexed to inflation.

  28. #27

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    Quote Originally Posted by Steven Douglas View Post
    See, you throw the word "inflation" out as if it's universally understood to mean "price inflation". I accept that the word has been bastardized to the point where it means only that in common usage, which is why I NEVER fail to qualify the term when I use it. I say price inflation to refer to an effect (the general rise in price levels), and monetary inflation (the increase in the supply of currency) to refer to a cause without regard to its effects.

    Monetary inflation has many channels (select favored supply spigots), foreign and domestic, and there is always a delay between monetary inflation and the price inflation it causes, as it takes time for newly counterfeited currency to dilute the wider pool of currency, as it propagates and is "felt" as a upward pressure on general price levels throughout an economy. It never spreads or propagates evenly, and it never affects the same industries in the same way. Furthermore, stable price levels are NOT necessarily valid indicators of "no net price inflation". That is because we are not taking into account (nor have we that ability) all the prices THAT WOULD HAVE OTHERWISE FALLEN--NOT REMAINED "STABLE".

    In other words, to put it in more academic terms, it's all a bunch of horse shit.



    Funny that you're not so quick to jump on government accounting statistics that are "screwed up with manipulation and accounting rules" (that change from year to year, no less).

    Whatever the case, we're looking at raw reported numbers, and real market prices of commodities (adjusted for NOTHING). At the very least, even if you attribute it to fudged numbers, we can say definitively that Something Very Different has occurred in only the past two years.



    Did you miss the part where all Finished Tangible Goods (things of real value--not vaporware--that we depend on for life) are rooted in commodities as factors and costs of production? Raw commodities aren't the only component of what we purchase, but they are all at the roots and foundation of life itself, and all that sustains life. Other things "getting much cheaper" becomes meaningless if the commodities required for life itself become so expensive relative to a thoroughly and intentionally debauched currency that those commodities eventually don't even make it to the shelves.
    Well this is a good response. I think any type of data put out by government or corporations could be manipulated. But that's not the end of the story. The question is whether there is evidence of manipulation.

    Now, this is kind of subtle. The corporate manipulation is things like hiding earnings for tax purposes. That can be something that everyone knows is going on, that everyone agrees is an accounting technique and yet still is part of reported earnings for the company.

    The criticism of the economists is different. Its an accusation of scientific malpractice, rather than using the tax code to their advantage as in the case of companies. That's perfectly fine to make that accusation, but its reasonable of me to expect some evidence of your claims, which hasn't been provided.

    Of course, the commodities might be more expensive, but the finished final goods might not be if there are cheaper more efficient production methods. The point about commodities, is that you like to focus on the things that increase most because it suits your political argument, and then ex post come up with some justification for it that looks good. If commodities were falling and computers were increasing in price, you would find an argument that says that is the true signal of price inflation. Forget all this individual price junk, that's why we average a bunch of prices in an index in the first place.

  29. #28

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    Quote Originally Posted by ababba View Post
    The criticism of the economists is different. Its an accusation of scientific malpractice...
    No, wrong. That isn't my accusation at all. For me it's a question of misapplied science from the git-go. If I went back to the time of Ptolemy, and claimed that I had something to contribute, I might be greeted with, in essence, "Great! Fantastic! Now, sir, which perfectly circular epicycles and which equants do you think should be applied to our Earth-centric model of the heavens?" Those were all bona-fide scientists, and I would have accused none of them of scientific malpractice (i.e., the intentional hiding or distorting of data). I would have no problem assuming that they were all EXTREMELY intelligent, rigorous and detailed in their work. I'm not questioning their answers OR their methodologies. I'm questioning the very framing of their questions, along with all their governing assumptions, at a root level that they aren't questioning at all. The same thing applies with mainstream economists.

    Of course, the commodities might be more expensive, but the finished final goods might not be if there are cheaper more efficient production methods.
    Commodities are the foundational building blocks of all finished goods. Right now, as commodity prices rise faster than anything else, this erodes EQUITY, which indeed does force firms to cut costs and attempt to become more efficient, in an attempt just to stay in the black. STAPLES' recent move is an example of just that, as they try to get rid of brick-and-mortar overhead (including employees). Meanwhile, the least efficient firms are forced to close their doors as commodity prices continue to rise, as they cannot pass along the increased costs, and find that they can no longer supply the finished goods at a profit. Eventually it gets to the point where even the commodity suppliers can no longer cut costs, because most of their costs are RAW, TANGIBLE AND REAL. Labor, fuel, raw materials, raw machinery. There's nothing more to cut, and no more blood that can squeezed from that turnip.

    You must be aware of the historicity of fact that before a fiat currency eventually becomes worthless (as you and I both agree the USD will be), and long before the currency loses all its value, widespread closing of doors, along with COMMODITY SHORTAGES, are an inevitability.

    The point about commodities, is that you like to focus on the things that increase most because it suits your political argument, and then ex post come up with some justification for it that looks good.
    You're overgeneralizing. Whether the charts I posted can be used as justification for a political argument, the weren't created ex post. It's something I stumbled onto, as I wondered if there was any historical correlation with corporate profits and commodity prices.

    If commodities were falling and computers were increasing in price, you would find an argument that says that is the true signal of price inflation.
    I'm not looking for a "true signal of price inflation", any more than I'm trying to find out which epicycles and equants can be used to support a Ptolemaic model of an Earth-centric universe. I am all about the long term, and only interested in inevitabilities and mathematical certainties in the long term. As a FUNDAMENTAL, even most of the most addle-brained Keynesians will not argue but that monetary inflation is the PRIMARY CAUSE of price inflation, albeit in the long term. You're trying to look at gauges to find monetary inflation's propagation rates and "true signals" (oops, did you feel that? I think I just felt something)--for something that nobody argues is an inevitability. Otherwise, what would be the point of "targeting" price inflation, and deliberately increasing the money supply as a means of deliberately doing just that, in the first place?!

  30. #29

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    Quote Originally Posted by Steven Douglas View Post

    You must be aware of the historicity of fact that before a fiat currency eventually becomes worthless (as you and I both agree the USD will be), and long before the currency loses all its value, widespread closing of doors, along with COMMODITY SHORTAGES, are an inevitability.
    The value of the dollar in 1000 years will be worthless relative to the dollar today, if its still around. Probably in 100 years it will be close to worthless. That doesn't mean the dollar still can't be used to purchase stuff. Its just like the old Italian Lira or the Japanese Yen. You may need 100 yen to buy what a dollar buys but you also earn 100 times more Yen for an hour of work. Both the cost of goods and nominal wages rise along with an increase in the level of prices over time. Just because a dollar is only worth a few cents relative to what it was before doesn't mean it still can't purchase things normally.

  31. #30

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    Quote Originally Posted by Steven Douglas View Post
    No, wrong. That isn't my accusation at all. For me it's a question of misapplied science from the git-go. If I went back to the time of Ptolemy, and claimed that I had something to contribute, I might be greeted with, in essence, "Great! Fantastic! Now, sir, which perfectly circular epicycles and which equants do you think should be applied to our Earth-centric model of the heavens?" Those were all bona-fide scientists, and I would have accused none of them of scientific malpractice (i.e., the intentional hiding or distorting of data). I would have no problem assuming that they were all EXTREMELY intelligent, rigorous and detailed in their work. I'm not questioning their answers OR their methodologies. I'm questioning the very framing of their questions, along with all their governing assumptions, at a root level that they aren't questioning at all. The same thing applies with mainstream economists.
    This is your attempt to have it both ways. Either calculating price inflation is a worthwhile endeavor and we can discuss it, or you disagree and we can go our separate ways.

    If you remember the point of this thread is that the OP wanted to say inflation is understated and going to destroy purchasing power of individuals. If you disagree with even the idea of calculating it, then you can't then turn around and say well I think its understated. If you think its understated, then you implicitly agree that there are ways of approximating it or getting a good sense of what it is.

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