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Why would you adjust for usd money supply? The only reason my (uninformed) self sees is that it’s arbitrary but fits a fiscal Hawk narrative. Fwiw I’m worried a

by sf_rob 6y ago

Why would you adjust for usd money supply? The only reason my (uninformed) self sees is that it’s arbitrary but fits a fiscal Hawk narrative. Fwiw I’m worried about inflation, but this seems uninteresting.

YuriNiyazov 6y ago
The claim is that there is an asset bubble. In other words, stocks and real estate are being inflated, whereas the products that constitute the traditional measure of inflation (basket of goods with bread milk and eggs in it) are not. This attempts to show the “real” inflation so to speak.
- atombender 6y ago
  CPI does show significant inflation [1] among things like dairy (3.8%) and meat/fish (5.1%). But it's offset by lower energy prices and airline fares. As a result, the overall increase from Jan 2020 to Jan 2021 was just 1.4%. [1] https://www.bls.gov/news.release/pdf/cpi.pdf https://www.bls.gov/news.release/pdf/cpi.pdf
  - lumost 6y ago
    TBH the CPI index has had an air of funkiness for the last 2 decades. In the run-up to the subprime crises the measure was altered to use "rental equivalent" to avoid factoring in the increase in real real estate prices. There were interesting arguments for this change of course, and pages of economic research. But the whole thing reeked of finding a justification for a foregone conclusion. Ultimately there are many factors the CPI simply cannot include, or due to the lack of ground truth can be argued away. If tomorrow real estate prices 10x'd but this price change never made it to residential rents then CPI wouldn't budge. If every farm in the US shuttered due to commercial real estate shooting up 10x but consumers could still import food the CPI wouldn't budge. Which ultimately goes to say that the use of CPI as the GDP deflator in monetary theory is arbitrary. Treating it as a gold standard measure of inflation risks ignoring inflation in other prices (and in turn systematically miss-estimating GDP).
roenxi 6y ago
You have to adjust nominal returns with something, and exactly what you use is a matter of style and taste. Exactly what adjuster to use is always arbitrary. Money supply is a lot simpler than inflation, because something like M2 is a pretty simple sum while inflation is a weighting that is a bit hard to follow the implications of (the handbook for how to calculate inflation is a bit of a doorstop, from memory). Plus if an investment aren't even keeping a constant slice of the monetary pie an investor has good reason to be nervous about their strategy. There is a monetary firehose out there and it makes sense to get in on it.
- nanis 6y ago
  Friedman was right when he said "inflation is always and everywhere a monetary phenomenon." Assume doodads are $1 today. If tomorrow money supply is doubled, they will be $2. A reasonable definition of the intrinsic value of a stock market index is the discounted net present value of all the profit streams of all the firms included in it. If it is 100 today, and the money supply doubles, it will be 200. What good are the returns to your investments? At some points, those returns are to be spent on real stuff. If your returns went up by 100% but the prices of the stuff you spend money on went up by 200%, the returns are not that good, to put it mildly. Over 2020 and continuing in to 2021, governments around the world have chosen to burn GDP, and lower the future growth trajectories of their economies. Ceteris paribus, that would mean the intrinsic value mentioned above will be much lower. Given the expansion in the money supply, asset prices will be inflated (i.e. keep going up despite physical reality). As governments fear asset price crashes, inflationary policies will be their refuge. See stagflation in the 70s and the so-called inflation-unemployment tradeoff. > The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level. Among the various theories advanced to account for extensive unemployment, this is probably the only one in support of which strong quantitative evidence can be adduced. I nevertheless regard it as fundamentally false, and to act upon it, as we now experience, as very harmful.[1] [1]: https://www.nobelprize.org/prizes/economic-sciences/1974/hayek/lecture/ https://www.nobelprize.org/prizes/economic-sciences/1974/hay...

by sf_rob 6y ago

YuriNiyazov 6y ago

The claim is that there is an asset bubble. In other words, stocks and real estate are being inflated, whereas the products that constitute the traditional measure of inflation (basket of goods with bread milk and eggs in it) are not. This attempts to show the “real” inflation so to speak.

atombender 6y ago
CPI does show significant inflation [1] among things like dairy (3.8%) and meat/fish (5.1%). But it's offset by lower energy prices and airline fares. As a result, the overall increase from Jan 2020 to Jan 2021 was just 1.4%. [1] https://www.bls.gov/news.release/pdf/cpi.pdf https://www.bls.gov/news.release/pdf/cpi.pdf
- lumost 6y ago
  TBH the CPI index has had an air of funkiness for the last 2 decades. In the run-up to the subprime crises the measure was altered to use "rental equivalent" to avoid factoring in the increase in real real estate prices. There were interesting arguments for this change of course, and pages of economic research. But the whole thing reeked of finding a justification for a foregone conclusion. Ultimately there are many factors the CPI simply cannot include, or due to the lack of ground truth can be argued away. If tomorrow real estate prices 10x'd but this price change never made it to residential rents then CPI wouldn't budge. If every farm in the US shuttered due to commercial real estate shooting up 10x but consumers could still import food the CPI wouldn't budge. Which ultimately goes to say that the use of CPI as the GDP deflator in monetary theory is arbitrary. Treating it as a gold standard measure of inflation risks ignoring inflation in other prices (and in turn systematically miss-estimating GDP).

roenxi 6y ago

You have to adjust nominal returns with something, and exactly what you use is a matter of style and taste. Exactly what adjuster to use is always arbitrary. Money supply is a lot simpler than inflation, because something like M2 is a pretty simple sum while inflation is a weighting that is a bit hard to follow the implications of (the handbook for how to calculate inflation is a bit of a doorstop, from memory). Plus if an investment aren't even keeping a constant slice of the monetary pie an investor has good reason to be nervous about their strategy. There is a monetary firehose out there and it makes sense to get in on it.

nanis 6y ago
Friedman was right when he said "inflation is always and everywhere a monetary phenomenon." Assume doodads are $1 today. If tomorrow money supply is doubled, they will be $2. A reasonable definition of the intrinsic value of a stock market index is the discounted net present value of all the profit streams of all the firms included in it. If it is 100 today, and the money supply doubles, it will be 200. What good are the returns to your investments? At some points, those returns are to be spent on real stuff. If your returns went up by 100% but the prices of the stuff you spend money on went up by 200%, the returns are not that good, to put it mildly. Over 2020 and continuing in to 2021, governments around the world have chosen to burn GDP, and lower the future growth trajectories of their economies. Ceteris paribus, that would mean the intrinsic value mentioned above will be much lower. Given the expansion in the money supply, asset prices will be inflated (i.e. keep going up despite physical reality). As governments fear asset price crashes, inflationary policies will be their refuge. See stagflation in the 70s and the so-called inflation-unemployment tradeoff. > The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level. Among the various theories advanced to account for extensive unemployment, this is probably the only one in support of which strong quantitative evidence can be adduced. I nevertheless regard it as fundamentally false, and to act upon it, as we now experience, as very harmful.[1] [1]: https://www.nobelprize.org/prizes/economic-sciences/1974/hayek/lecture/ https://www.nobelprize.org/prizes/economic-sciences/1974/hay...