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Old 11-09-2007, 01:59 PM
DcifrThs DcifrThs is offline
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Default Re: Raul Paul Roasts Bernanke

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The moral of the story is that these economy wide econometric numbers really AREN'T that useful. The only number that is useful, imo, really IS the money supply. That's the one that drives the rest. It's the one that allows you to see the man behind the curtain and what he is doing to you and the economy.

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this, however, is what i was talking about. real life, in the form of people living day to day hasn't been robbed like ron paul and you imply wiht this to the degree that the money supply increases.

sure, milk is whatever it costs, but that isn't a 20% yearly increase (or whatever money has averaged over a long time). further, important things like durable goods etc. aren't changing anywhere near what the money supply would imply they are.

additionally, money supply #s catch huge flows from assets to bank notes/credit etc. that aren't useful and bias upwards your "true" measure of inflation.


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Agree wholeheartedly with Barron here. This is where some of Ron Paul's supporters get me - how can you suggest inflation is higher than GDP growth over the amount of time we've been meaning measuring it faithfully? Shouldn't we have noticed a fairly severe decline in our standards of living by now? More importantly, even if headline inflation were as high as you suggest, it doesn't matter if the market has correct expectations of future inflation and adjusts nominal interest rates accordingly. If the government's numbers were completely wrong, we'd expect to see serious increases in interest rates as well as an added risk premium for not knowing the "true inflation rate" - moreover, an entrepreneurial opening for some firm that would collate and collect the true inflation rate that the market is trying to discover.

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yea, wow. that is a HUUUUGE point that i've overlooked. well done.

basically, when you read (well written/researched) articles about other countries you see the "official" inflation figures and then the "estimated" figures (by some think tanks in that country and/or the US/developed world).

if the inflation #s were hugely off (as they are in those cases) a think thank would definitely be able to pick it apart. but their value in doing so is minimal if the #s aren't off by a ton and rather only off by a little here and there (i.e. <5-10% as many as i've mentioned claim).

well said.

Barron

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These will all be brief, because I have to get to bed to teach in the morning.

First of all, those alternative statistics do in fact exist. For example, one source:


Shadow Government Statistics

He does nothing except use the pre-Clinton definition of CPI.

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so you agree then that the CPI (pre clinton) and CPI now is not off by 5-10% as many claim?

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More importantly however is that monetary inflation is largely hidden. A good chunk of it (about a third as a round figure) is exported and held by foreign central banks (e.g. in Asia & the Middle East).

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are you saying that the dollar being propped up biases inflation downward? that is way wrong relative to the real causes of "downardly biased" inflation there, which is negative and decreasing unit labor costs (wages soar, but productivity soars by a ton more).

propping up the dollar, as i meantioned before, doesn't have a big (or even noticable) effect on prices (of those consuming solely..ormostly in US$).

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Another third or thereabouts had been hidden by increasing productivity.

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that is not "hidden" boro. that is actual reduction in inflation.

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The last third shows up eventually in price inflation, which is then under-reported by government statistics by maybe a half or so.

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so then there should be a clear link between things that "eventually show up in price inflaion" and actual pre clinton era Price inflation (which, judging by the charts are nearly 100% correlated to nowadays CPI so we can use that as a measure of the coreraltion to the things your'e talking about). so let's isolate which things you think "will eventually show up" in price moves and i can very easily test this hypothesis for you(us).

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These fractions are rough estimates and can change over time for lots of reasons of course.

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thats all wella nd good, but they aren't correct to begin with (except for the govt biasing inflation down by ~3%point)

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My third point is that we don't see an increase in interest rates because the Fed keeps them artificially low.

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i 100% agree here. the fed has a low rate bias that needs to be removed. we need to have, in the terms of the chairman at the BoJ "normalized interest rates"

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That's how it inflates the money supply in the first place

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actually, the money supply inflation doesn't come directly from the fed. it comes from the banking system. the fed can only increase or decrease the actual amount of money in the system (and isn't responsible for the extra amount of money created by banks' loans/operation).

further, the changes in the base supply of money (which is less than the changes in money supply overall) is the tool the fed uses to alter rates.

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Until the unsound fundamentals of the economy become so eggregious that they can't be papered over any more, and the Fed has to throw on the monetary brake. Interest rates jump, and people realize suddenly that their artificially inflated standard of living must now be payed for with a period of deprivation. The boom has to be paid for in the bust.

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we are not going down this road again, we're talking now solely about inflation. what you are talkign about is now business cycles. true the two are linked, but lets stay away from the arguments we've been over many times before (and that you have in part won since i do agree with a lot of what you say that i didn't before).

one thing you are confounding here is the "inflated standard of living"

and inflation. you have said that "fed keeping rates low hides inflation"...no...the fed keeping rates too low CAUSES inflation.

note that i'm the one who started this thread by saying we have low rates and higher inflation measurements means we'll have higher rates so lets see if we can't come up with a better way to measure inflation. seems like preclinton era inflation measurement does that fairly well so i'd thinka move back there would at least be a first step, though cautious b/c there are things there are upwardly biasing inflation which is why it was removed in the first place (i have read many independent studies on those biases so it isn't govt manipulation).

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Lastly I will point out that even if you could correctly prognosticate what price inflation will be in the future, which is extremely difficult to do, given that you have little idea what Fed policy or foreign central bank policy will be a year down the line, nor can you predict what will happen to productivity, or any number of other factors that factor into, so that you could calculate what the "actual" interest rate should be, it doesn't help you as an entrepreneur. Why? Because you are trapped in a prisoner's dilemma. Businessmen all over the economy see an artificially lowered interest rate and are borrowing money to invest in expanded production. They are bidding up the prices of your inputs. They are squeezing your profit margins. If you don't also invest in expanded production, you can be put out of business. And as long as you can increse production and your output prices are rising, which they are because consumers are in a frenzy of boom-driven driven consumption, your profits will look great in the short run:



The problem is that input prices rise faster than output prices. Entrepreneurs are using their newly printed money to fight over too few resources to complete all the projects that have been started, and eventually the ride to the top of the rollercoaster is over. The artificially low interest rate drives a wedge between real savings and investment that can't be magicked away with still more paper money.

Now the [censored] is REALLY going to hit the fan when foreign central banks and investors start dumping the dollar. All those little greenbacks are going to come home to roost, and then we'll see what real inflation looks like. That's what happened in the 70s, and we're headed that way again. There were essentially 25 years worth of inflated and exported dollars that had to "clear" through back through the borders at the start of the 70s (from Bretton-Woods).

We've got about that much again.

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this is actually a good analysis of the subject and creates good talkign points, but has some funny quirks in it.

i mean, you can't very well say "CPI can't be used" and then use CPI can you? that is what was high in the 70s. there was low growth and huge inflationary pressures from commodity prices (which there obviously are today).

teh situation was similar as the result of the ROW wanting to hold dollars as the reserve currency and then in 1968 deciding that it (france) doesn't want to do that anymove.

indeed you are right that if the dollar flow back in a huge manner the economy will not be able to deal with it in an orderly fashion. i don't think we'll hit the 70s stagflation again (though people are throwing the word around) but we will certainly have to pay the piiper as you say.

now, some huge differences between what you are preaching and reality.

1) fed can only determine short rates. there is a market that determines the spread of those rates and long rates. once dollars flow back, these rates will increase (long) and the massive inflation you speak of will in part be head off by large rises in the spread of 10yr over 2yr. most borrowing for investment occurrs ont he long end so that will start reducing that area.

2) we now have a (not liquid enough, but there) protection of inflation in the form of TIPS that anybody can buy. this was not available in the 70s. the govt pays CPI, true, but when the "[censored] really hits the fan" CPI will hugely go up like it did in the 70s, downward bias/manipulation or not. holders of TIPS will then get compensated based on that. so a sliver of the negative effect of dollars "coming home to roost" will be fed back throught he system to holders of TIPS and their real capital will be preserved at least in the form of CPI.

now the main point here that i'm trying to get to isn't a sermon on the fed...but thank you for that anyways...i guess we could all have expected that.

what i want to get to is true inflationary #s. your 3 main points above are very poor in relating that. especiallyt he one about inflation being "hidden" in increased productivity.

i very much appreciate the link to the shadow inflation figures since at least that shows real #s.

that is a huge contribution since we now can start thinking about how far off CPI is in terms of simply old CPI. there is probably enough downward bias to counteract the studied upward bias and warrant a switch back to clinton era CPI though for a ton of reasons the govt will not let that happen.

i thinkt he main thing we agree upon is that the fed should not be allowed to maintain a low itnerest rate bias. one way to do that is improve inflation measurement.

since it is unlikely the fed will dissolve anytime soon, they should really learn how to better manage the economy.

Barron


PS- this was quick and unedited so if i've mispoke or made an obvious omission/inclusion that you know i didn't mean to say, please dont fly off the handle.
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