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

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  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
    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
    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
    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
    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.

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  7. #6
    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.

  8. #7
    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".

  9. #8
    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 $#@! 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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  11. #9
    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.

  12. #10
    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.

  13. #11
    Quote Originally Posted by ababba View Post
    Just try and answer a hypothetical once in your life. It won't kill you, you might learn something. I don't even understand your criticism of the apples and oranges point. Its just a question, just answer it. We can argue all day about whether it applies at all to the real world, but just leave your baggage behind for a minute and think about it as a pure intellectual question.

    Anyway, if you don't answer the question, I'm done responding. Its clear you don't want to engage on an intellectual level. Is the person worse off, better off or as well off or you can't tell?

    If you don't want to respond to a simple question, which may or may not have any relevance to economics or the real world, just so we can start to find some common ground, then have a nice day sir, enjoy your life.
    Your reading comprehension leaves MUCH to be desired. I did answer it (WORSE OFF, go back and read) -- in the context of monetary inflation.

    But now let's answer your completely irrelevant apples to oranges question--as best as it can be answered.

    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?
    ANSWER: The "rate" (of decrease or increase) cannot be answered without a definition of "rate" (of what, precisely?) AND "standard of living". Apples and oranges are both in the fruit category, but are nonetheless unlike things. Since I assume that I am consuming the fruit and not buying it for direct resale, or as a factor of production to some finished good for resale, I can only gauge the "standard of living" based on its utility, or what you receive from each, and what you lost or gained through the substitution.

    Oranges have slightly more Vitamin C on average, so your Vitamin C "standard of living" increased slightly.
    Oranges have Folate, where apples contain none, so your Folate "standard of living" increased substantially.
    Oranges have almost twice as much Potassium on average than apples, so your Potassium "standard of living" increased substantially.
    Apples have about twice as much fiber as oranges, so your Fiber "standard of living" decreased substantially.
    Apples have slightly more calories on average, but it's negligible, so your Caloric Intake "standard of living" remains roughly the same.
    Because apples are not oranges, your Fruit Variety "standard of living" went DOWN substantially.

    Now we get to your preference, which is wholly subjective, but you it brought up. When both apples and oranges were priced equally, you bought equal amounts of each. What I do not know, and it would be ridiculous for me to assume, is why you made those choices on that day, or whether you would demonstrate this same preference again, all other things being equal. Furthermore, I don't know how much of your decision is made on the basis of economics vs. health vs. taste preferences (or "other"?). It is quite possible that you would have bought all apples if they were priced the same as oranges. If so, then you're even a bigger loser, and WORSE OFF than if you would have made the same choice as before had the prices been the same.

    See that? I can talk about the differences between apples and oranges, but since these are YOUR BUYING PREFERENCES, I am not in a position to tell YOU whether or not you are better off, worse off, or as well off. I am also not in a position to tell YOU what has happened to your "standard of living", because you have not phrased it as an economics question.

    And that's just the tip of the iceberg, after both humoring you and cutting through your horse $#@! of a question. Did I miss something? Or is this one of those cases where you stomp your feet in a huff and say, "Bah! Such a simple question, but he just doesn't get it."

    And, btw, answer your own question, and tell me why, specifically, you answered that way. I am really curious to see how you process your own information.


    EDIT: BTW, if you try to invoke the strawman argument that I am implying that ALL price differences and changes between unlike things are all because of the Fed, you will be officially out to lunch--because such a universal and absolute pronouncement is not, nor has it ever been, my claim.

    The burden is on you to show how an apples to oranges substitution relates to PRICE INFLATION. And if you call it something else, the burden is on you, once again, to make the logical connection between PRICE INFLATION and whatever relativistic, equivocating term you have inserted as a substitution.
    Last edited by Steven Douglas; 11-28-2012 at 10:53 PM.

  14. #12
    I am just trying to get at a very basic Micro Economics fact. If you change relative prices of goods but give someone enough to be able to afford their old consumption bundle at the new prices, then they must be better off.

    Why? Because they can afford their original bundle but relative prices have changed. They can do no worse and now there is an entire set of new possibilities that they couldn't afford before but they can afford now.

    Its the reason why if you give someone just enough to be able to buy what they bought last year but relative prices have changed, they will actually be better off.

    Thus, if social security is based off of a shadowstats index, an attempt to make seniors no worse off by indexing will actually make them better off than the previous year, because of substitution.

  15. #13
    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?

  16. #14
    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

  17. #15
    I like the Big Mac Index:

    http://blog.cwpub.com/post/5179859473/big-mac-inflation

    To determine the Big Mac inflation or deflation rate for any one-year period, subtract the previous year’s price from the current year’s price, divide the answer by the previous year’s price and round to the nearest 1/10th percent. Here is an example using 2010 and 2011.

    $3.80 - $3.73 = $ .07 $ .07 / $3.73 = .0187 = 1.9%

    We're being governed ruled by a geriatric Alzheimer patient/puppet whose strings are being pulled by an elitist oligarchy who believe they can manage the world... imagine the utter maniacal, sociopathic hubris!

  18. #16
    Buy silver and gold, stack stack stack!
    It's just an opinion... man...



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  20. #17
    Right now, U.S. treasury bonds are the most affordable and safest investment you can buy.
    "Unless someone like you cares a whole awful lot,
    nothing is going to get better. It's not." - Dr. Seuss, from The Lorax

  21. #18
    Let's say you give the person in my point 1 enough income to be able to afford their original consumption bundle of 5 apples and 5 oranges at the new prices. Would they be better off than before the price change, worse off or you can't tell?

    This is a basic question from any intro Micro Econ course. If you get it right, you will be telling yourself why shadowstats is wrong.

  22. #19
    Here's the point. If we want to use CPI to index social security, we want to give people increases in income that make them as well off as before. This is why the question is relevant. This is why standard of living is relevant. It is as simple as do you prefer one basket of goods to another. More preferred is a higher standard of living. We want an index that roughly keeps people indifferent between the different consumption bundles they buy over time.

  23. #20
    Quote Originally Posted by ababba View Post
    Here's the point. If we want to use CPI to index social security, we want to give people increases in income that make them as well off as before.
    More qualitative, relativistic equivocating nonsense. This is why your question is irrelevant.

    Likewise with your absolute bull$#@! nonsense of "do you prefer one basket of goods to another", which has only the most subjective and tenuous ties to price inflation, and the reason why terms like "standard of living", "worse off/better off/as well off" are completely irrelevant.

    We want an index that roughly keeps people indifferent between the different consumption bundles they buy over time.
    Thank you, social engineer, for your indifference, and desire and objective toward other people's indifference. Now go take a Soma, and Be One With The Indifferent Masses.

    I would be far more interested in knowing how, quantitatively and objectively, not qualitatively and subjectively, PRICE INFLATION has taken place (since that is what we are actually talking about). It may well be (::: think think think :::) that they would have been BETTER OFF, not just neutral, or indifferent, or the same without monetary inflation that led to price inflation. We know that to be true, in fact, because it is well known that raw scarce goods do not "HOLD" or "MAINTAIN" value, but can actually INCREASE, becoming MORE VALUABLE over time in a growing economy.

    Thus, if you can prove the very neutrality, or zero-sum-game indifference you think is such a valid metric for comparison, it can be argued that they are indeed WORSE OFF (for not having reaped the gains that would otherwise have been theirs and theirs alone).



    Let's put it another way, in terms that any would-be social engineering thief should appreciate. You hold stock. That stock periodically pays a dividend. I steal that dividend, intercepting it, forging your signature, and cashing it EVERY TIME YOU RECEIVE IT. And let's say that you're none the wiser. You didn't even know you had a dividend coming. Furthermore, I don't touch your stock. That's yours to keep. Can I now declare with a straight face that you are "no worse off" than before, or "as well off" as before, and is there anything whatsoever even meaningful about that?
    Last edited by Steven Douglas; 11-28-2012 at 09:55 PM.

  24. #21
    Just try and answer a hypothetical once in your life. It won't kill you, you might learn something. I don't even understand your criticism of the apples and oranges point. Its just a question, just answer it. We can argue all day about whether it applies at all to the real world, but just leave your baggage behind for a minute and think about it as a pure intellectual question.

    Anyway, if you don't answer the question, I'm done responding. Its clear you don't want to engage on an intellectual level. Is the person worse off, better off or as well off or you can't tell?

    If you don't want to respond to a simple question, which may or may not have any relevance to economics or the real world, just so we can start to find some common ground, then have a nice day sir, enjoy your life.

  25. #22
    Quote Originally Posted by ababba View Post
    I am just trying to get at a very basic Micro Economics fact. If you change relative prices of goods but give someone enough to be able to afford their old consumption bundle at the new prices, then they must be better off.

    Why? Because they can afford their original bundle but relative prices have changed. They can do no worse and now there is an entire set of new possibilities that they couldn't afford before but they can afford now.
    That isn't "a very basic Micro Economics fact". In fact, it's gibberish. What the hell does that mean: "If you change relative prices...but you give someone enough..." - Who is doing all of this? Who is 'changing' relative prices, and by what mechanism, and who is 'giving someone enough'? You think you're talking Micro Econ, but you're doing it with gibberish, and from a decidedly statist, monetarist Macro Econ social engineering perspective. Which then begs more questions...which you evade while pretending to talk Micro Econ only...which you are not.

    You throw out terms like "...able to afford their old consumption bundle...", in the context of substitutions that are NOT the old consumption bundle at all!
    Your standard for "better off" is also flawed for a number of reasons. For one, you take EXTREME liberties with "better off" attribution for things NOT ATTRIBUTABLE TO MONETARY INFLATION; things like efficiency and technological improvements, which, it can be argued, might otherwise have been greatly INCREASED in the absence of wasteful resource misallocation and malinvestment. Ergo, we could be much WORSE OFF, because you have completely ignored the potential LOSS OF AN OTHERWISE GAIN.

    Once again, you are fixated on the notion that so long as someone's "standard of living" (as YOU loosely, presumptuously and subjectively define it) remains the same, nobody is harmed in the process. That is an absolute absurdity, which brings back full circle to the point I made--which you ignored. So here it is again, to give you another opportunity to address it. You don't have to answer. You can attack the phrasing or relevance of my question--but not out of ignorance or hand-waving dismissal. At least be logical about it.

    You think that if you can demonstrate a zero-sum-game, (i.e., so long as people can make substitutions, or can afford exactly the same $#@!), that you can then argue that they are "as well off", if not "better off" (in the context of CURRENCY DEBASEMENT and resulting PRICE INFLATION).

    ONCE AGAIN: You hold stock. That stock periodically pays you dividends. I steal those dividends, intercepting them, forging your signature, and cashing those checks EVERY TIME YOU RECEIVE THEM. And let's say that you're none the wiser. You didn't even know you had a dividend coming. Furthermore, I don't touch your stock. That's yours to keep. Can I now declare with a straight face that you are "no worse off" than before, or "as well off" as before, and is there anything whatsoever even meaningful about that?

    Oh, and to sweeten the pot, as we roll up our sleeves and decide things for others: What if I see you can't quite afford next year what you could last year, and "give you enough to be able to afford" yada yada yada. Would that make you "better off", if I, as a thief, did that for you?

    It's a simple question. If you think it doesn't apply, or has no relevance, EXPLAIN WHY.

    Its the reason why if you give someone just enough to be able to buy what they bought last year but relative prices have changed, they will actually be better off.
    WTF is with your "if you give someone just enough"? You make it sound as though allowances are being doled out from some parent figure who is looking over your shoulder and approving a personal budget. What the $#@! kind of Orwellian bull$#@! planet are you living on?

    Furthermore, what you said MADE NO SENSE! How can having just enough to be able to buy next year as last year make anyone BETTER off? Explain. Is your Inflation Normalcy Bias so freakishly ingrained in you that merely keeping pace with an artificial treadmill counts AS A GAIN?! The $#@!ing gain would be if there was no treadmill, and you actually ADVANCED.

    Thus, if social security is based off of a shadowstats index, an attempt to make seniors no worse off by indexing will actually make them better off than the previous year, because of substitution.
    Holy crap, what a loaded, screamingly fallacious, compound question. "...and attempt to make seniors no worse off by indexing..." WTF DOES THAT MEAN? What does that mean, first of all, and who, exactly, is trying to do whatever-that-means?

    I deliberately avoided reference to that monstrously tortured scam called Social Security, and its relation to CPI. We're talking about the CPI and its accuracy or inaccuracy with regard to price inflation only, without respect to anything else. Even so, wow. Total meltdown--"...better off than the previous year, because of substitution(?!)..." is absolute gibberish! How is that true, and what, exactly, does that have to do price inflation?
    Last edited by Steven Douglas; 11-29-2012 at 12:20 AM.

  26. #23
    Quote Originally Posted by Steven Douglas View Post
    That isn't "a very basic Micro Economics fact". In fact, it's gibberish. What the hell does that mean: "If you change relative prices...but you give someone enough..." - Who is doing all of this? Who is 'changing' relative prices, and by what mechanism, and who is 'giving someone enough'? You think you're talking Micro Econ, but you're doing it with gibberish, and from a decidedly statist, monetarist Macro Econ social engineering perspective. Which then begs more questions...which you evade while pretending to talk Micro Econ only...which you are not.

    You throw out terms like "...able to afford their old consumption bundle...", in the context of substitutions that are NOT the old consumption bundle at all!
    Your standard for "better off" is also flawed for a number of reasons. For one, you take EXTREME liberties with "better off" attribution for things NOT ATTRIBUTABLE TO MONETARY INFLATION; things like efficiency and technological improvements, which, it can be argued, might otherwise have been greatly INCREASED in the absence of wasteful resource misallocation and malinvestment. Ergo, we could be much WORSE OFF, because you have completely ignored the potential LOSS OF AN OTHERWISE GAIN.

    Once again, you are fixated on the notion that so long as someone's "standard of living" (as YOU loosely, presumptuously and subjectively define it) remains the same, nobody is harmed in the process. That is an absolute absurdity, which brings back full circle to the point I made--which you ignored. So here it is again, to give you another opportunity to address it. You don't have to answer. You can attack the phrasing or relevance of my question--but not out of ignorance or hand-waving dismissal. At least be logical about it.

    You think that if you can demonstrate a zero-sum-game, (i.e., so long as people can make substitutions, or can afford exactly the same $#@!), that you can then argue that they are "as well off", if not "better off" (in the context of CURRENCY DEBASEMENT and resulting PRICE INFLATION).

    ONCE AGAIN: You hold stock. That stock periodically pays you dividends. I steal those dividends, intercepting them, forging your signature, and cashing those checks EVERY TIME YOU RECEIVE THEM. And let's say that you're none the wiser. You didn't even know you had a dividend coming. Furthermore, I don't touch your stock. That's yours to keep. Can I now declare with a straight face that you are "no worse off" than before, or "as well off" as before, and is there anything whatsoever even meaningful about that?

    Oh, and to sweeten the pot, as we roll up our sleeves and decide things for others: What if I see you can't quite afford next year what you could last year, and "give you enough to be able to afford" yada yada yada. Would that make you "better off", if I, as a thief, did that for you?

    It's a simple question. If you think it doesn't apply, or has no relevance, EXPLAIN WHY.



    WTF is with your "if you give someone just enough"? You make it sound as though allowances are being doled out from some parent figure who is looking over your shoulder and approving a personal budget. What the $#@! kind of Orwellian bull$#@! planet are you living on?

    Furthermore, what you said MADE NO SENSE! How can having just enough to be able to buy next year as last year make anyone BETTER off? Explain. Is your Inflation Normalcy Bias so freakishly ingrained in you that merely keeping pace with an artificial treadmill counts AS A GAIN?! The $#@!ing gain would be if there was no treadmill, and you actually ADVANCED.



    Holy crap, what a loaded, screamingly fallacious, compound question. "...and attempt to make seniors no worse off by indexing..." WTF DOES THAT MEAN? What does that mean, first of all, and who, exactly, is trying to do whatever-that-means?

    I deliberately avoided reference to that monstrously tortured scam called Social Security, and its relation to CPI. We're talking about the CPI and its accuracy or inaccuracy with regard to price inflation only, without respect to anything else. Even so, wow. Total meltdown--"...better off than the previous year, because of substitution(?!)..." is absolute gibberish! How is that true, and what, exactly, does that have to do price inflation?
    Its clear, you don't understand Intro Micro Economics. Read a book about it sometime. This is simple textbook substitution. I explained it clearly and you refuse to get it. Maybe the graphs and details in a book might help you understand the most basic of economic concepts.

    Stop criticizing substitution adjustments until you understand what substitution is.

  27. #24
    Quote Originally Posted by ababba View Post
    Its clear, you don't understand Intro Micro Economics. Read a book about it sometime. This is simple textbook substitution. I explained it clearly and you refuse to get it. Maybe the graphs and details in a book might help you understand the most basic of economic concepts.

    Stop criticizing substitution adjustments until you understand what substitution is.
    You said...nothing. I have no problem with substitution effects as it relates to microeconomics -- only your misapprehension and misapplication of them. It's clear to me now that you are the one without the slightest understanding of various substitution effects, and their relevance to the CPI's ability to accurately reflect price inflation. You say, in essence, "Hey, you don't get it, so why don't go and read a textbook", sounds very Southpark Cartman bluffish to me. You didn't cite a textbook (as requested), you didn't quote from a textbook, and you couldn't even recommend a specific book (so that I could go and do your work for you). If you ever did take an ME course (intro or otherwise), I seriously doubt that you paid attention.



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