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Old 03-25-2012, 02:43 PM   #61
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Just now, saw a Web site saying that it is 3.24%. So, I used another Web site that said the cumulative inflation from 1914 till now is 2176%. That number over 98 years indeed works out to 3.24%/yr (geometric mean, not arithmetic mean).
And if you look at the year-to-year inflation rates over the past century, you'll see extreme volatility up until modern times when Central Banks discovered how to control inflation. Since 1990, inflation as measured by CPI has averaged 2.6% and has rarely exceed 5% in any given year. If anything, the trend has been toward lower inflation. Now with an explict 2% Fed target, we're more likely to have even lower inflation over the next 30 years than we had over the prior 30.
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Old 03-25-2012, 02:49 PM   #62
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We will see their prowess in the years ahead. I have got nothing to lose if they are that good.
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Old 03-25-2012, 03:01 PM   #63
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If the trend to lower inflation is the result of Central Bank policy execution, we may indeed be seeing lower levels for a long time. If the bankers are taking the credit but other unattributed factors are at play we may be setting ourselves up for an unhappy surprise.
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Old 03-25-2012, 03:07 PM   #64
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If the bankers are taking the credit but other unattributed factors are at play we may be setting ourselves up for an unhappy surprise.
Agreed. We don't know what we don't know.

But it's hard to see the dramatic differences in inflation outcomes between the financial panic of 2008 and those of 1929 as anything other than the results of better monetary policy. Even in the midst of all hell breaking loose, prices remained amazingly stable when they should have fallen off of a cliff.
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Old 03-25-2012, 03:19 PM   #65
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Sooooo......

When the time comes that we must consume less of certain natural resources due to depletion and lack of adequate development of substitutes, what will signal us to do so if monetary policy is successful at maintaining stable prices?
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Old 03-25-2012, 03:21 PM   #66
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If inflation is indeed now largely under control of central banks, they can raise it as well as lower it as needed to suit policy. For example, such control may allow retiree entitlements within the US to be honored in nominal terms, but far below honor in real terms.
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Old 03-25-2012, 03:22 PM   #67
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The policy response to 2008 was different, much better, and shows knowledge, understanding and policy execution. It is very encouraging. The lower inflation over the past two decades that defied belief and laid waste to so many forecasts may also be a victory for monetary policy here and elsewhere, but it might be deflationary economic pressure from China, or a long spurt of global productivity increases that has come to an end. Like others, I don't know, but I am somewhat skeptical that such understanding allows the central bankers to control inflation but not be aware of severe credit imbalances and asset price bubbles that have caused major distortions in US and global economies.
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Old 03-25-2012, 03:31 PM   #68
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But, but, but I thought I already proposed a solution.

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Sooooo......

When the time comes that we must consume less of certain natural resources due to depletion and lack of adequate development of substitutes, what will signal us to do so if monetary policy is successful at maintaining stable prices?


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Old 03-25-2012, 03:35 PM   #69
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I'm surprised when retired buddies shake in fear over the prospect of a 50% drop in portfolio value (and a 50% drop in portfolio generated income) but yawn at the prospect of moderate inflation causing the purchasing power of their non-COLA'd pension to drop by 50% over the next decade.
I sure hope they're not yawning. 50% in a decade is about 7% annual inflation, and I'd use a lot of words other than "moderate".

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In an earlier post, I said that the average inflation in the US is 3.16%. I thought I saw that on a Web site, but could not find it again.
Dimson & Marsh's "Triumph of the Optimists" quoted something like 3-3.5% annually for the 20th century, with 5% annually over the 1970-2000 era.

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Sooooo......
When the time comes that we must consume less of certain natural resources due to depletion and lack of adequate development of substitutes, what will signal us to do so if monetary policy is successful at maintaining stable prices?
I think that today's gasoline prices are indicating the second and maybe even possibly the first, but certainly not anything to do with the third or the fourth.
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Old 03-25-2012, 03:47 PM   #70
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I sure hope they're not yawning. 50% in a decade is about 7% annual inflation, and I'd use a lot of words other than "moderate".
I think you're a tad high on the 7% estimate. Wouldn't it be less than 5%?
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I think that today's gasoline prices are indicating the second and maybe even possibly the first, but certainly not anything to do with the third or the fourth.
Ahhhhh... Yes, definitely! Your conclusions are certainly in line with the international experts.
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Old 03-25-2012, 04:06 PM   #71
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But, but, but I thought I already proposed a solution.




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Good point! Da Soup Guy's method of rationing is certainly more direct and to the point than allocation via pricing.
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Old 03-25-2012, 04:09 PM   #72
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The policy response to 2008 was different, much better, and shows knowledge, understanding and policy execution. It is very encouraging. The lower inflation over the past two decades that defied belief and laid waste to so many forecasts may also be a victory for monetary policy here and elsewhere, but it might be deflationary economic pressure from China, or a long spurt of global productivity increases that has come to an end. Like others, I don't know, but I am somewhat skeptical that such understanding allows the central bankers to control inflation but not be aware of severe credit imbalances and asset price bubbles that have caused major distortions in US and global economies.
Wouldn't deflationary pressures from China and elsewhere have made the deflationary pressures of the recent credit collapse even harder to control?

A complex understanding of the economy may be needed to achieve some kind of optimal monetary policy, but controling runaway inflation really only requires a willingness to raise rates to a sufficiently high level. I don't see the difficulty.

I think one of the differences between today and decades past is not so much a more sophisticated understanding of the economy, but a belief among central bankers that low inflation is an end in and of itself. In the early 70's, many economists questioned whether the Fed should even concern itself with inflation, preferring to focus on the rate of unemployment instead. Things today could not be more different.
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Old 03-25-2012, 04:14 PM   #73
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Sooooo......

When the time comes that we must consume less of certain natural resources due to depletion and lack of adequate development of substitutes, what will signal us to do so if monetary policy is successful at maintaining stable prices?
Stable prices doesn't mean every single price is stable. It means that average prices are stable . . . rising prices are offset by falling prices. And indeed, if there is a shortage of natural resources and those prices rise, a non-inflationary monetary policy necessitates other prices to fall.

Consider what happens when a price rises and your paycheck and credit availability remains unchanged. You either buy less of the thing that has risen in price, you buy less of other things, or both. The same thing happens on an economy wide basis. The things we buy less of fall in price to accommodate the thing we want or need to buy that has risen in price.

If, however, income and/or credit availability expands, then we can afford to buy the thing that has risen in price along with everything else we normally buy . . . presto - inflation.
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Old 03-25-2012, 04:22 PM   #74
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Average annual inflation since 1913 3.24% source US Inflation by Decade Chart. That is one of my face charts.
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Old 03-25-2012, 04:33 PM   #75
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The policy response to 2008 was different, much better, and shows knowledge, understanding and policy execution. It is very encouraging. The lower inflation over the past two decades that defied belief and laid waste to so many forecasts may also be a victory for monetary policy here and elsewhere, but it might be deflationary economic pressure from China, or a long spurt of global productivity increases that has come to an end. Like others, I don't know, but I am somewhat skeptical that such understanding allows the central bankers to control inflation but not be aware of severe credit imbalances and asset price bubbles that have caused major distortions in US and global economies.
I think globalization had a LOT to do with keeping prices lower over the last two decades, the same as it did with keeping wage growth in check in the US. Now that developing countries have a growing middle class with more expensive tastes, not to mention competition for global commodities, this may have run its course. I see prices of goods rising more easily. I still don't see sources of wage pressure in the US.

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Old 03-25-2012, 04:42 PM   #76
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Wouldn't deflationary pressures from China and elsewhere have made the deflationary pressures of the recent credit collapse even harder to control?

A complex understanding of the economy may be needed to achieve some kind of optimal monetary policy, but controling runaway inflation really only requires a willingness to raise rates to a sufficiently high level. I don't see the difficulty.

I think one of the differences between today and decades past is not so much a more sophisticated understanding of the economy, but a belief among central bankers that low inflation is an end in and of itself. In the early 70's, many economists questioned whether the Fed should even concern itself with inflation, preferring to focus on the rate of unemployment instead. Things today could not be more different.
Central bankers, and many others, appear to want some inflation. And yes, when inflation runs away the central bankers can step and kill it. Collateral damage, however, can be pretty bad, and folks around here are likely casualties.

I think there are only two levels of inflation: not enough or too much. We never have the one we want and overshoot when we reach for the one we don't have.
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Old 03-25-2012, 04:54 PM   #77
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I think globalization had a LOT to do with keeping prices lower over the last two decades, the same as it did with keeping wage growth in check in the US. Now that developing countries have a growing middle class with more expensive tastes, not to mention competition for global commodities, this may have run its course. I see prices of goods rising more easily. I still don't see sources of wage pressure in the US.

Audrey
Consumer price inflation with a declining real wage would help correct some global imbalances, but it also means a lower standard of living overall in the US.
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Old 03-25-2012, 05:35 PM   #78
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Consumer price inflation with a declining real wage would help correct some global imbalances, but it also means a lower standard of living overall in the US.
Agreed. I see a lowering standard of living in the US while the developing nations catch up. We had a good run!
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Old 03-25-2012, 07:23 PM   #79
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... but yawn at the prospect of moderate inflation causing the purchasing power of their non-COLA'd pension to drop by 50% over the next decade.
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I think you're a tad high on the 7% estimate. Wouldn't it be less than 5%?
See, this is why they shouldn't be yawning. Humans suck at estimating exponential rates of decay and compounding.

You made it easy by setting it up to drop in half (instead of double). I guesstimated the Rule of 72 (Rule of 72 - Wikipedia, the free encyclopedia) to come up with 7% because the rule works both ways. It turns out that the actual inflation rate is 7.17735%.

Juggling that Wikipedia formula gives you

r = exp[(ln2)/T] - 1 = exp[0.6931472/10 years] -1 = 0.0717735 per year.

In other words, you start with a buck and at the end of the first year you have 92.8 cents left. Do that nine more times and you only have 51 cents.

If inflation was 5% then at the end of the first year you'd have 95 cents. Doing it nine more times would leave 63 cents.

Getting it down to 50 cents would require about 14.4 years by the Rule of 72, although the actual number turns out to be about 14.206699 years.
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Old 03-25-2012, 09:01 PM   #80
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Agreed. I see a lowering standard of living in the US while the developing nations catch up. We had a good run!
I hate to say it but I think this is inevitable. I just hope it doesn't come more rapidly than we can adjust to it. And in reality, I don't know that our standard of living is falling as much as it is that others are more quickly catching up to us while we are running in place (or slowly backpedaling).
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