Sunday, November 19, 2006

ON YOUR MARKS, GET SET, GROW

The Cunning Realist has a great post up today, dealing with inflation-as-policy. A key quotation:
[I]t's been interesting to watch the stock market march higher with the attendant hype about "new all time highs" for the Dow. Of course, outside of niche market commentators, there's no mention that those new highs are nominal . . . Jude Wanniski would have been proud -- and I'm sure he'd be reminding us right now that the Dow would have to rise several thousand more points to reach a "real" all-time high after accounting for inflation. This is one reason why, despite the stock market's rise in recent months, the economy still ranks as a major concern in public opinion polls. Give me a large truckload of million-dollar bills to distribute randomly for a few years, and I guarantee you the stock market will rise. I also guarantee that everything we need to live will get more expensive, and everything we merely want will get cheaper.

At this point, it's clear we've entered a period in which policymakers have decided that it's never a good time for a stock market decline or a recession. Natural ebbs in the business cycle used to be times of cleansing and adjustment. Now, with a Federal Reserve chairman whose scholarly interest is the Great Depression, soft spots are considered "deflation" and are to be avoided at all costs . . . After the Fed's brief dalliance with sanity (draining liquidity) earlier this year -- during which the Nasdaq fell about 15% and some overseas markets plunged 25% or more -- the liquidity jets are blasting away again at full strength.

It's hard to predict how long this can continue (and risky to bet against it, of course). Monetary policy is the art of the possible, and much depends on our overseas creditors.
(Emphases added.) It's worth reading the entire post, which includes a discussion of When Money Dies by Adam Fergusson, a book about the Weimar Republic's hyperinflation, and the attendant economic and social upheavals that bedeviled Germany during the inter-war years. One of the most interesting, and enlightening, of the comments:
The book is an account of the inflation that ravaged Europe in the 1920's, particularly in Germany. Let's be clear....anyone who thinks we're living in Weimar-redux is either shrill or uninformed. Despite our current fiscal and monetary mess, the dollar is still the world's de facto reserve currency (although certainly not to the degree it has been in the past) and the U.S. still makes things the rest of the world buys. Germany enjoyed neither of these advantages eighty years ago, and that's important. But the basic dynamic of inflation doesn't change, and certain parallels are worth noting if only to understand the potential dangers of the path we've clearly started down.

I'd always thought Germany's runaway inflation in the early 1920's resulted from the harsh reparation terms imposed after World War I. Instead, Fergusson shows that inflation was a calculated path chosen by Germany's central bank to boost the country's exports and thus its domestic employment.
Wow. That's a damning revelation, and one I'm curious to look into. We know the road to ruin is often paved with good intentions. And by way of comparison, I'm sure Ben Bernanke, unlike his predecessor, believes his polices help the country. But the subquestions I focus on are: When? For how long? For whom, precisely? At what cost to fundamentals and soundness?

Again, I recommend checking out the entire post. Enjoy.

9 Comments:

Blogger Weaseldog said...

But most of us that can still see the forest for the trees are the minority.

The system doesn't melt down until screwing it over is an institutionalized technque, right?

When the short sellers, in whatever form they come in, sell us out en'masse, then its game set match.

And you're right, the market doesn't look so hot, when compared to the rising cost of milk.

"At least the Republicans have gotten gas prices down. For that, they've got my vote." - Anonymous guy on the train.

1:33 AM  
Blogger Dwilkers said...

Its a fine tuning thing, one beyond my understanding. Inflation hasn't really been an issue for the US since Volcker choked it out in the late seventies and early eighties.

Prior to that it was just a fact of life, you kind of had to keep it in mind all the time. Bread, milk, everything was constantly rising in price and it was an issue in our (or my) daily lives.

Back then one group of economists or another was constantly carping at the other over this, and the things they argue over are just too complicated for the untrained to understand IMO. I have no idea if this guy's criticism is valid or not.

I know I am so well trained to expect it even now that when oil prices rise as they have and prices do not shoot up across the board it baffles me.

10:23 AM  
Anonymous Mike said...

Dwilkers-

With all due respect, I can't agree. The notions that "inflation's just one of those things we have to live with," or that "inflation hasn't been a problem for 20 years" are just not true.

Inflation occurs when governments create it, to deal with debt, to increase their own spending, to finance wars, etc. In America, the greatest inflationary periods were just after the Revolutionary War, during the Civil War, and for nearly 100 years since the Federal Reserve began in 1913, especially during and after WWII, and the post-Vietnam era.

The dollar has lost 95% of it's value since 1913, due to inflation.

The definition of inflation that I agree with, that makes the most sense, is the so-called Austrian School:

http://en.wikipedia.org/wiki/Inflation#Austrian_economics

It states, simply, that inflation goes up when we inject more money and credit into the economy.

Also, the "inflation" numbers we see are government created, arbitrarily delineated "baskets" of goods and services. "Core CPI," for instance, is based on a basket of goods that excludes energy and food.

Also, how about the clear "inflation" we all see in health care, in education, in real estate, in the stock market? We all agree that prices have sky-rocketed in all these areas over the past 5-10 years, yet we're told that inflation's well-managed, and not a problem.

It's a problem, and it's also well-managed in that it's intentional.

11:01 AM  
Blogger Dwilkers said...

Mike I didn't say it was something we have to live with...although I've certainly had to live with it all my life. And when I said it wasn't an issue, I mean in the literal sense, that is, it hasn't been a political issue in over 20 years or so.

It used to be big. Remember Reagan's misery index? This used to be the biggest political issue there was, ever present in our lives. Big as the Iraq war is now.

Anyway, I've been trying to figure it out for longer than just since I read your post. Some things clearly have not been inflating over the last twenty years or so and some have.

Your point about health care is spot on, that's a great example of something that seems more expensive. But is it really? We certainly spend more for it. 25 years ago though we didn't have cholesterol medicine (costs me $128 per month) or acid reflux meds (costs me $117 per month) or viagra (don't need it, thanks) or on and on.

The way it appears to me is that 'health care' means something totally different than it used to.

Other things are way easier to buy than they were back then. Furniture. TV's. Lot of consumer goods are pretty flat price-wise I think, or in relation to wahges perhaps.

When Clinton was president and I used to wonder what was goping on with this I decided it was just because the economy had become more productive.

Anyway, its not like it used to be. When inflation was at around 10% you could watch the bills grow month to month. Doesn't have the same feel to me now.

OTOH, my wife and I figured out this weekend that we're paying $200 per month for cable TV + digital phone + internet. I'm still in shock.

11:24 AM  
Anonymous Mike said...

You're righ-on in terms of different goods inflating at different rates. As Cunning Realist said in the post I linked to, The price of things we want stays the same, while the price of things we need goes up.

The liquidity, or the money and credit, injected into the economy is directed, it doesn't just seep in. Money from the Fed, for instance, goes to the core 22 (25?) banks in the Reserve system,a nd from there to whereever they see fit. Usually investment banks, real estate banking, etc.

And, sorry to keep beating on this, but things like, "When inflation was at around 10% you could watch the bills grow month to month," don't mean much to me. I don't know what that 10% means, as it derives entirely out of an arbitrary collection of goods and services.

11:32 AM  
Blogger Dwilkers said...

Well it is something that's difficult to quantify after all. In the seventies gasoline went from .19 per gallon where I live to about $1. That was noticeable believe me. I had a motorcycle and it cost less than $0.50 to fill the tank, that went to $2.

Its a subjective thing to a large extent though. Like I said a lot of the big ticket things we middle class folks buy are cheaper. Cars, appliances, etcetera. So the way I experience life inflation is 'lower'. Might not seem that way to a guy that lives in New York though so your mileage may vary.

Other things have definately increased in price and they don't seem to be reflected in the CPI. Beef for example. Steak costs me around $10 per pound nowadays, I rarely buy it unless its on sale. As a result our diet has changed and we eat a lot more chicken in our household than in days of yore.

Did they change the way the CPI was computed? I read your excerpts but not the linked post. I know housing costs used to be included and that was controversial. The argument went that you don't buy a house every month so why should it be in the CPI? Of course, even if you only buy a house 4 times in your life and it has gone up 100% every time it still has the same effect. More is more is more.

1:10 PM  
Blogger Weaseldog said...

The way the CPI is calculated, is updated every few years.

I posted a comment earlier and it was lost somehow.

But Dwilkers, the reason economics is confusing is because its all an invention. The talking heads don't understand what they are saying, anymore than we understand them.

Greenscam and Bernanke just string grand sounding words together to create figh fallootin's sounding nonsense sentences.

Then the High Priests of finance appear on television to interpret the bones, omens and the grand pronouncements made by the Economics Gods.

They all contradict each other in order to confuse.

In the end, its all a circus act, designed to make you think these people are smart and competent.

In the end, the game is rigged, somewhat simple and has nothing to do with economic theory as taught in college. But the High Priests won't tell you that, because then, they lose their mystique.

The whole system really is set up like an orthodox church. But instead of the priests speaking in Latin or Greek, the sermons are made up in economics lingo.

But in the end its for the same purpose, its to insulate the congregation from the inner workings of the system, and give them relief that such weighty matters are handled by people smarter and wiser than we are.

You're supposed to be confused by it all. Thats the intent.

1:40 PM  
Anonymous Mike said...

In addition to beef and gasoline, I'm not sure cars haven't appreciated too. 30 years ago a decent American family car cost about $6,000, right? Today it's $25,000? $30,000?

That's an increase of 400-500%. If that's not inflation, what is?

And, as Weas said, the elements of CPI are changed constantly. Not so much in cynical pursuit of consumer confusion (though I doubt that's a side effect that bothers anyone in the Fed/Treasury/GAO), but in oredr to shunt out those products/services that are inflationary, and replaced by those that are not.

I mean, look at it this way: if the government chose to calculate core CPI based on the costs of natural gas, higher education, finance-oriented mutual funds, real estate, and hourly fees charged by lawyers, you think we'd find the economy wasn't inflationary?

It'd be 15-25%! Yet those products and services are as arbitrary as those currently in the basket.

That's why I view inflation through inputs not the other way around. More money, more credit? You get more dollars chasing a static amount of goods and services. And, voila, higher prices.

But the GAO tries to tell us that inflation just magically arises in the costs of things, as if no one, no entity, caused it.

That's bullshit.

2:24 PM  
Blogger Weaseldog said...

The government in a rare instance of truth telling, or maybe just in a wry humurous way, call these adjustments to the CPI, 'hedonistic'.

Which to me, seems as if they are saying that these are pleasure seeking adjustments. So they are designed to make you feel good.

I'm still baffled as to why they haven't changed the term to something less descriptive.

2:53 PM  

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