Inflation: why it seems understated

[MichaelB]

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]

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]

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]

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/forums/showpost.php?p=543857&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/for...es-difference-go-currency-currency-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]

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...

 

[Nords]

Now there's a mental image...

I think you need to add a few more posters to your "Ignore" list!

 

[MichaelB]

Hi Ladelfina

Seems we agree that the US has lived beyond it's means and now it looks like that's changing. This will affect those that made poor choices and those that did the right thing - perhaps not equally but we all will pay.

The upcoming decade will be very hard on lots of folks in the US, and we all will pay - even Gates, the bankers, the CEOs. It's gonna be a lower standard of living and higher taxes.

In the meantime I focus on those things I can affect

- Live beneath my means, save and invest the difference, have no debt, and hope I can get through this period intact.
- Work hard to teach my children, brothers and sisters and other family and friends to do the same
- Stay very active with my political representatives to make sure they know exactly what I feel and how I want them to act
- Encourage and assist family and friends to do the same
- Make sure I have skills and options in case I do too many dumb things (again) and mess up too much (again).

Easy to write, harder to do, but I have faced much worse and understand the need and benefit of staying steady and focused and trusting in my judgment.

Michael

 

[ladelfina]

Thanks for the inspiration, Nords, you two are now officially the FIRST two on mine. Funny how the people who decry posters as 'someone to ignore' also bother to take the time not only to read the thread, but also to post juvenile responses, sometimes multiple ones. [oops can't remove Nords.. oh well, I can mentally masturbate to the thought of removing him].

MichaelB, thanks for your thoughtful list. I do aim to do many of those things, but it is good to be reminded of them. They're pretty much all we can do. Trusting in my (investment) judgment is hardest of all. I just feel like I am watching a slow-motion car crash. I'd sure like to have enough dough to put my money in negative-earning bonds, lie back and think of England; that would indeed make the process less painful. It's not masturbation, it's the slow rape of savers via artificially low interest rates, and the mortgage/MBS debacle is just a sideshow. And to my mind it absolutely is not random. It's a far wider, deeper, more systemic transfer of wealth than anything so vulgar and obvious as taxation.

 

[RockOn]

It's a far wider, deeper, more systemic transfer of wealth than anything so vulgar and obvious as taxation.

I really like that.

 

[Independent]

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).

I'm not sure where you're getting the "classical" definition of inflation. Mine was from "Principles of Macroeconomics" by Mankiw.
I also tried Googling and got: define:Inflation - Google Search
The increase in the money supply is a possible cause of inflation. If the money supply increases faster than real production, and the velocity of money doesn't change, then you will get increasing prices. (This is for a closed economy.)

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'm also having trouble matching these numbers. I looked here: http://www.bea.gov/national/nipaweb/TableView.asp#Mid
and got gross imports to be 1/6 of GDP, not 1/2.

 

[ladelfina]

Can you have inflation w/o increasing the supply of money?

I definitely mis-understood the trade stuff. I'm having a bad day, looks like! Apologies. Sorry, it's too late to edit.. thanks for the correction, though, Independent. I still think the effect should be considered but it's less than I made it out to be.

 

[barbarus]

I'm not sure where you're getting the "classical" definition of inflation.

Perhaps Milton Friedman's most pithy statement.

http://en.wikipedia.org/wiki/Milton_Friedman "Inflation is always and everywhere a monetary phenomenon."

i.e. Inflation is caused by only one thing. An increasing money supply/expanding credit.

Ask one of the moneterists on the board or pop in to the Economics Department at the University of Chicago..

 

[MichaelB]

Can you have inflation w/o increasing the supply of money?

Yes, if the supply of money were to stay the same and the availability of goods and services were to decline - for example, artificial scarcity coming from price controls, trade restrictions or sudden catastrophe.

Ladelfina, have you seen this paper?PIMCO - Glidepath Paper- 8-2007htm
While slightly inwardly focused on their product line, they do a good job of framing, identifying and quantifying the risks you mention.

They also discuss what I think is the single biggest financial risk US population faces - the transfer of risk from employers to individuals by changing pensions from DB to DC. Liability and asset management responsibility is being transferred to 10's of millions who don't have the education, training or tools to properly manage, and the most unfortunate consequences will not show for decades, fat too late for any effective remedy.

Michael

 

[Independent]

Can you have inflation w/o increasing the supply of money?

I definitely mis-understood the trade stuff. I'm having a bad day, looks like! Apologies. Sorry, it's too late to edit.. thanks for the correction, though, Independent. I still think the effect should be considered but it's less than I made it out to be.

Like Michael says, you can have fewer goods and the same number of dollars. You could also move the dollars around more quickly (volatility), for example by holding less cash because you know that ATMs are convenient. Or, "money" could change while we're not looking. Maybe we're tracking currency and checking accounts as "money" and miss the fact that some people are using money market mutual funds like checking accounts.


I think your idea on trade makes conceptual sense. To the extent that we import goods, and the terms of trade become unfavorable, we lose real income. The Fed believes the best way to manage that loss is to have some inflation. So we consumers see the cost of imports going up while our incomes don't. But you need to start with 1/6 instead of 1/2.

 

[spazz]

Three more to add:
A decreasing unemployment rate ( excl stagflation of course), government deficits, and the depreciation of a local currency can all have an impact on the inflation rate