Inflation: why it seems understated

[REWahoo]

Originally Posted by brewer12345

Ladelfina, Rock, et al. don't have to - they have one on under their skin.

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[ladelfina]

MichaelB, yes, no doubt I am debating with myself, but that's kind of my nature.. but then, and, if, how about?

Originally Posted by MichaelB

Her lecture is more about the finance business but the book is overspending on housing and subsequent associated costs.

I was just going by the video lecture; I did not read her book or know of its contents. If you want to go into what the book claims, I'd be interested.

Here we part ways. The US stands alone in some choices made - spending over savings, credit, consumption and consumer spending in the face of impending recession. Federal, State, Local government and individually. From generation to generation. People are not stupid, but certainly willing. And it continues today - this year. This month. Who thinks this "rebate" is a gift? It is an advance to be repaid with future taxes, after the house takes their cut. ... The budget debate in Illinois and the property tax change in Florida are just two examples of government behaving poorly and voters following their lead. ...

In this we don't really 'part ways': people are just as likely now as ever to be led into poor apparent choices; that's what I was trying to say. Some of these affect them as individuals and some are collective. But the US is not special; the mortgage mess and property price disconnects are even more severe in Spain, the UK and Australia.

My point was, and is, the "problem" is not CPI mis-calculation, deliberate or not. Nor is it God's vengeance for sinful living, nor cosmic rays. It is the result of choices made.

Sure. I see the 'choices' in the CPI flap as being not really choices that we have any control over, though. Electing this or that politician from year to year doesn't have much hope of changing the long-term underlying structure and practices of Federal economists or the Federal Reserve. We certainly have little individual choice in how the media decides to frame the gov. figures. Some people brush off questions about how well reporting by these entities reflects reality (or better, how useful it is in its intended practical role) as "tin-hattism"; I just call it healthy skepticism.

In the realm of individual choices, on the face of it, are these choices really so 'poor' in context? If someone offers you a no-money-down mortgage with a super-low initial rate, that's appealing. If the mortgage broker gets paid by the number of mortgages he/she sells, that's an incentive to sell iffy mortgages. If the banks don't have to hold the mortgages and so don't feel the need to examine them closely, that's another incentive for disaster. Every choice was "wrong", yet "right"! I'm fascinated by those kind of dynamics.

Another interesting thing just coming out are distortions in the LIBOR
Bloomberg.com: Worldwide
Banks falsely reporting a lower rate have a material advantage.. another "wrong/right" choice that screws up the system for everyone.

My mild panic (or let's say 'perplexity') is due to the feeling that it's all a very creative fiction. No doubt I have been naive to think that companies, banks, and governments would face certain material facts with a certain responsibility and logic.

Thanks to Leonidas and nepo for their research on Faber & Fleckstein. Since I don't pay attention to CNBC or MSN I had no idea who they were.

--Thanks brewer, for your helpful comments.. now all I need is for Nords and Jarhead with their guaranteed pensions no doubt larger than my entire investment SWR to chime in and tell me not to worry my pretty head over yields vs. inflation. I have a tin hat because I don't happen to have a gold-plated one. All's I have is dollars in the bank that buy less and less every day.

[Independent]

Originally Posted by Abreutime

Very good article about our biases in observing the inflation numbers

Seeing Inflation Only in the Prices That Go Up - New York Times

Excellent article.

[brewer12345]

Originally Posted by REWahoo

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Heheh, mithril!

Either that or shiny Jesus Jammies.

[ziggy29]

Consumer prices rise in April, but less than expected - May. 14, 2008

Surprisingly, the Labor Department reported that seasonally adjusted energy prices did not rise from March's levels. Though unadjusted gasoline prices were up 5.6% in April from a month earlier, seasonal adjustments made to that estimate resulted in gasoline prices being down 2% on that basis.


That's despite the fact that gasoline prices posted a string of 16 straight daily record highs in April, according to the motorist group AAA. Other measures of national average gasoline prices, including the U.S. Department of Energy and AAA, showed gasoline prices and rose an average of 9% to 10% over the course of the month. Crude oil prices rose 11% in April.


Seasonal adjustments. How convenient.

[nepo]

Originally Posted by Leonidas

You have a valid point. Faber does talk about income, and the CEX measures expenditures which are ultimately translated into weighting in the CPI. Which made me go back and look at the CEX figures and now I am confused. Looking at 2005 CEX I see that the figures people reported for all expenditures in the two lowest quintiles exceeds their income before taxes:

Lowest 20 percent income before taxes: $9,676
Lowest 20 percent average annual expenditures: $19,120

Second 20 percent income before taxes: $25,546
Second 20 percent average annual expenditures: $28,921

Just a quick check on the CEX for 2006 show consistent results. Check here:

ftp://ftp.bls.gov/pub/special.reques...6/quintile.txt

I believe part of the answer is consumers get in more debt every year. That's really troubling because the credit crunch is going to put a stop to that trend for the majority of consumers. If you look at this item in the report:

Net change in total assets and liabilities.......


All the columns show negative numbers (liabilities increasing more than assets are increasing).

[Independent]

Originally Posted by barbarus

"This is of course why a focus on prices, especially the CPI, is dead wrong. The CPI is not a valid measure of inflation. No measurement of prices is a valid measurement of inflation.

It doesn't matter what you call inflation. What matters is the cost of living, in other words cost of consumption, which CPI estimates, or would estimate if it were done properly.

By definition, nobody has to buy any assets, including houses, ever.
People have to buy consumables. Those are the prices that matter, whether you call consumer price increases inflation or not."


This is a quote of someone from another site. It represents rather well the practical concept that I would like to express. Whether or not the technical definition of inflation is met, the on-the-ground experience of most people is that they are rapidly losing financial ground.
That is a situation that effects even the most well to do visitors of this blog.

I don't get the quote.

My econ textbook defined "inflation" as "the overall increase in prices in the economy". Your quote says "No measurement of prices is a valid measurement of inflation."

I think it's useless to use any word unless we can agree on a definition.

Maybe the best approach is to drop the word "inflation", and clarify what you mean by the "on-the-ground experience of most people".

[MichaelB]

Originally Posted by REWahoo

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Man, this stuff is great! Did you check out the wallet?

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Not quite sure what it protects - maybe it complements the tin foil hat for those that have brain matter in multiple locations...

[REWahoo]

This must be the Lexus/Cadillac of tinfoil hats:

Smart and Subtle

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Research links RF radiation with behavioral and cellular disturbances. Many people can actually sense the differences in the levels of "mind noise" from RF radiation. Provide your brain a quiet place without interference to your mental processes...

And a real bargain at only $29.95.

[brewer12345]

Originally Posted by MichaelB

Man, this stuff is great! Did you check out the wallet? Not quite sure what it protects - maybe it complements the tin foil hat for those that have brain matter in multiple locations...

tinfoil condom? For those who think with their...

[MichaelB]

Originally Posted by brewer12345

tinfoil condom? For those who think with their...

[MichaelB]

Sure. I see the 'choices' in the CPI flap as being not really choices that we have any control over, though. Electing this or that politician from year to year doesn't have much hope of changing the long-term underlying structure and practices of Federal economists or the Federal Reserve. We certainly have little individual choice in how the media decides to frame the gov. figures.

We have all the choice we need and as much control as we wish to exercise. Those that really want to control are doing so.

In this we don't really 'part ways': people are just as likely now as ever to be led into poor apparent choices; that's what I was trying to say.

Led, perhaps, but willingly - and some cut to the front of the line.

In the realm of individual choices, on the face of it, are these choices really so 'poor' in context? If someone offers you a no-money-down mortgage with a super-low initial rate, that's appealing. If the mortgage broker gets paid by the number of mortgages he/she sells, that's an incentive to sell iffy mortgages. If the banks don't have to hold the mortgages and so don't feel the need to examine them closely, that's another incentive for disaster. Every choice was "wrong", yet "right"! I'm fascinated by those kind of dynamics.

The national (or international) conversation is about blame, not about responsibility. Other interesting questions - which financial institutions kept completely clean of this mess, and why? What people bought houses in the past 2-3 years (the very top) but chose to buy within their means and finance with low risk to them (15 or 30 year fixed, more than 20% down) - and why?

Yes, both institutionally and individually, these choices were "poor". Another poor choice is providing taxpayer funding to soften the blow. Poor choices may never completely end, but they will continue and grow uninterrupted, like weeds, if there is no consequence.

Michael

[RockOn]

Originally Posted by brewer12345

Ladelfina, Rock, et al. don't have to - they have one on under their skin.

It makes for a nice summer tan.

[barbarus]

ASSET inflation/deflation GENERAL PRICE("stuff") inflation/deflation CREDIT inflation/deflation WAGE inflation/deflation COMMODITY inflation/deflation What other flavors am I forgetting?

[RockOn]

Originally Posted by Independent

Excellent article.

That article ends with saying the CPI is now being reported as too high because house prices are now falling. Un frickin believeable.

[ladelfina]

Originally Posted by RockOn

That article ends with saying the CPI is now being reported as too high because house prices are now falling. Un frickin believeable.

The more unbelievable, the more "excellent"!


Yeah, yeah this joking about tinfoil is all very humorous unless your lifeline (your money) is at stake. If I REALLY were a tinfoil hat person, I would have cashed out and bought gold when we discussed its value here:
http://www.early-retirement.org/foru...57&postcount=8 where I, too, pooh-poohed the tinfoil-hatters on 8/6/2007 and gold was $670. Now it's $866.

If I REALLY were a cynical person, I would have bought Halliburton in 2003 (and I seriously considered this but rejected it out of moral scruples, believe it or not). Then $10 or so (split-adjusted); now $48.

MichaelB was insightful in that I do indeed debate with myself. I am a cynical tinfoil-hat wearer without the courage of my convictions, is what it boils down to!! Of course the soothing tones of the powers that be who say "all will be well" are seductive, and add to 'justify' my inaction.

Scarier than the tinfoil hat people, though, are the ones not open to debate or inquiry.


---
I think the classical definition of inflation is an increase in the money supply. Usually this includes wage inflation (which in the US has not happened).

Let's think about production, consumption, and inflation in a basic way globally.
(I'm pulling these thoughts together as I go along, so bear with me).

The US GDP is $14 trillion.
70% of GDP is consumer spending.
Trade balance is -$827 billion. That translates into domestic purchases of $6.586 trillion and imports of $7.413 trillion.
If we assume that consumer vs. non-consumer spending is divided along the overall import/export lines, that means 70% of $7.413 trillion is consumer spending on overseas goods. If anything, consumers may be responsible for more purchases of imports, but let's be conservative. 70% of $7.413 trillion is $5.189, more than 1/3 of GDP.

Now if we look at the dollar, it has fallen against a the basket of world currencies by 25% over the last five years (Nov. 07, The Economist). 2006-2007 DXY went from 91-84; 2007-2008 84-76. That, to me, means that in 2006 and 2007, more than 1/2 of consumer spending ended up buying 8% less stuff, and then 10% again less stuff. And none of this would be counting any inflation in the countries of import which, in the case of Europe, is adding its yearly 2-3% in nominal price rises. Only by balancing out with marked deflation on the part that's the non-import side could one come up with a 3-4% overall inflation figure, right?

I don't see what will turn this around for the dollar yet. Since I live in the euro zone I experience all of this, not just a portion. Beyond merely protecting my ego, I don't think this is a stupid line of inquiry or tinfoil-hat territory. It affects more than 1/2 of the US economy. I posted a question on currency resiliency here but, while lots of people were thoughtful in their responses, the answer was
http://www.early-retirement.org/foru...ncy-32499.html

I've been thinking about this a lot. It's easy (for me, too) to get caught up in news and discussion that frames economics as a struggle mechanism taking place in a closed US system between identifiable 'enemies' --whether those are greedy CEOs or Medicare-grasping oldsters, or the unions, or the government, yada yada yada. What we aren't used to expecting is a kind of drain of vitality from within.. like a tapeworm. This affects even the people who make the "good" choices. We don't need tinfoil hats as much as we need to purge the tapeworm, if we can.

(and I agree we DON't need a bailout!)

[brewer12345]

Originally Posted by ladelfina

I am a cynical tinfoil-hat wearer without the courage of my convictions, is what it boils down to!!

So you are a tinfoil hat-wearer who publicly admits in engaging in what an old boss of mine described as "mental masturbation" (worrying about something you couldn't or wouldn't do anything about). Now there's a mental image...