6 ms·

The One Number That Proves the Inflation Threat Is a Bogeyman

25 points by mattobrien 14y ago

rjsamson 14y ago
Great article - mostly I'm amazed that there are folks out there who are supposed to be intelligent, who actually believe 10% inflation is a reality...
- lalalalahaha 14y ago
  I believe it because my food bill has increased approximately 50% in 3 years and gas prices are at the same level as during the bubble in 2008 but with a much more subdued economy. I don't understand how an article with an NGDP chart and some fancy hand waving negates this.
  - mattobrien 14y ago
    Can you refute the point that we can't have positive job growth and negative real GDP? Then how is overall inflation more than 2-3%?
    - Zarathust 14y ago
      It is easy. Fire one 40 hours worker. Hire thirty-nine 1 hour workers. Congratulations! You've increased your "labor force" by 3800% !!! You have a net loss of 1 man-hour however. I'm not totally sure how this relates to inflation, but jobs absolute numbers and gdp are only slightly related. Another example would be to fire everyone making more than 100k$/year and relocate them to potato farming. In terms of gdp, this would be a net decrease despite the absolute worker count remaining the same
    - dpatru 14y ago
      Everybody's aim in an economy is not to have to work, or at least to work less, and to produce more. No one wants to work more and produce less. So what we want is negative jobs (people working less) with positive GDP (people enjoying more goods and services.) In bad times, when there is a loss of productivity or where people stop working in the productive (private) sector and go to work for the unproductive (public) sector, you absolutely can have negative real growth with more employment.
    - deleted 14y ago
      [deleted]
  - rjsamson 14y ago
    As I mentioned in another comment, food and fuel are not counted when calculating inflation - they are both commodities whose prices are determined by external market forces (ie speculation, weather, etc) and do not accurately reflect rising prices due to monetary inflation. Inflation of a few percentage points is healthy - and that's where we are now. Any less and you begin to risk slowing economic growth - currency that declines in value slightly over time gives one the incentive to spend their cash, rather than hoard it.
    - lalalalahaha 14y ago
      To dismiss food and fuel is simply erroneous. There is a reason why governments push to have them removed from the inflation numbers... they have an economic incentive to lie and maintain their power.
      - aaronblohowiak 14y ago
        it especially hurts the poor (both young poor and elderly, like those on social security.)
  - aaronblohowiak 14y ago
    Now is a terrible time to have food as a large portion of your budget (ie: are poor)
    - sokoloff 14y ago
      Any time is a terrible time to have food as a large portion of your budget.
robatsu 14y ago
There is a little bit of misunderstanding sometimes when people discuss "inflation". To some, if not most people, inflation means increasing prices. To others, it means increase in the money supply, which eventually may cause rising prices after some latency, especially if the growth rate of the economy doesn't keep up with the increase in money supply. I have no idea whether "rising price inflation" has been underreported, especially by design, by the government. I would concede that there are political and bottom line reasons (e.g, minimize increases in salaries/benefits tied to COLA), but again, if this is happening, IMO it is probably more just institutional slouch than a top-secret directive from the Federal Reserve bunker. Overall, I don't have an informed opinion what the facts of the matter are wrt to underreported inflation - I only have anecdotal evidence. OTOH, it is pretty clear that "money supply inflation" has increased dramatically in the past few years due to the various policies associated with the bailout. Whether this will cause "rising price inflation" remains to be seen - there is always latency between money supply increase and rising prices. In the bailout policies case, the latency is pretty large, as the bulk of the money went to securing "toxic" assets and so forth rather than directly into the consumer economy. The overhang of this increase in money supply/government debt naturally constitutes rising price pressure, but again, how much is anyone's guess, as there are deflationary pressures as well (falling asset prices, and such).
- mattobrien 14y ago
  The Fed has tools like interest on reserves, reverse repos and term deposit facilities to make sure that all of the excess reserves on bank balance sheets don't turn into actual price increases. Austrian economists conflate increases in the money supply and price inflation, but it's not necessarily true. In fact, mainstream New Keynesians (that includes conservatives like Greg Mankiw) have predicted for years that increasing the Fed's balance sheet wouldn't increase inflation. They have been right.
  - rjsamson 14y ago
    Yup - in theory the two can be related, but in the real world its a lot more complicated than that.
  - 14y ago
option_greek 14y ago
Inflation need not be just seen in the country with monitory supply. It can be felt around the world. The flood of money is being felt in developing countries and commodity markets where gold and oil seem to have just taken flying lessons.
dpatru 14y ago
An essential premise of his argument is that real GDP can't decline if jobs are being added. So if jobs are being added, and they seem to be, then real GDP growth must be positive. Real GDP growth is nominal GDP growth (4%) minus inflation, so inflation must be no more than 4% to keep real GDP growth positive. "Let's try a thought experiment. If inflation really is 10 percent, that implies that real GDP fell around 6 percent last year. How bad is that? That's roughly where the economy was in the first quarter of 2009. Basically, complete free-fall. And thanks to Okun's Law -- which relates real GDP and unemployment -- we can guesstimate what that would mean for jobs. A back-of-the-envelope estimate says that unemployment should have risen between 3 and 4 percent in that scenario. Instead, we added 1.899 million jobs in the last year." But of course jobs and production (GDP) do not need to grow in lockstep. This assumes that productivity is constant. If productivity is falling, then production could be declining even as the number of jobs increases. For example, if the star employee (say Steve Jobs) of your company (Apple) no longer works there, your company may still suffer a production loss even if several employees are hired to replace the star. This is a case where production can fall even as employment increases.
- roc 14y ago
  > "If productivity is falling, then production could be declining even as the number of jobs increases." Good catch. But where's productivity been going? (Hint: not down. [1]) So while this indicates an assumption that should be identified and recognized, the correction doesn't impact the conclusion in this case. [1] http://www.bls.gov/news.release/prod2.nr0.htm http://www.bls.gov/news.release/prod2.nr0.htm
  - dpatru 14y ago
    The productivity of some workers may be rising, but not all. For example, with all the investment in government we've had, government should be very efficient. Government services such as roads, transportation, education, care for the poor, wars on brown people, business regulations, prisons, etc should be very cheap right? Or could it be that as the private sector increases its productivity, the public sector correspondingly consumes/wastes more?
grandalf 14y ago
It's important to note that the main reason the graphs do not show inflation is b/c of the massive housing crash. We have a situation where we have significant inflation in some sectors of the economy, but we also have enough deflation to offset it. I'm not talking about bad deflation, I'm talking about new advances in microchips, etc., that make computers cheaper and more powerful every year. Inflation and deflation are natural aspects of a dynamic economy. The thing to watch for is when they signal structural problems. If microchips increased in performance so quickly that vendors refused to order inventory and store shelves were empty, then it would be a structural concern. Policymakers find it useful to wave the very imprecise notion "deflation" in front of the public without bothering to mention that it's all due to technological advancement, automation, outsourcing, etc. Similarly, inflation isn't always bad -- developer salaries are "inflating" now, which sends a signal for more people to learn to write code. This will be self-correcting. The thing to be concerned about is when government action causes inflation sufficient to undermine peoples' willingness to accept the currency. Policymakers try to get away with doing as much micro-tweaking as they can with the economy. Tax breaks for one select group of people, subsidies for another, etc. These sorts of policies can, over time, create inflation that is not self-correcting, since the policies are rarely ended once they have been created. Consider the massive over-investment in real-estate fueled by tax breaks. This led to an unstable real-estate market that crashed hard a few years ago.
crazy1van 14y ago
Forget the word inflation -- it is too politically charged and people think it means all kinds of different things. However, in the long run there is little doubt that an expansion of the money supply will cause a rise in the price of goods and services. Forget fancy metrics like NGDP and consider this thought experiment: if all of a sudden magically everyone's bank account balance had the decimal point moved to the right one place, what would happen to prices? After a very short transient period, they would increase by about a factor of 10. This is exactly what is happening right now (on a smaller scale and the magic occurs in the treasury department). The difference is that the extra money has been created, but is not really in circulation. Once banks and companies feel they no longer need the money in their accounts and can begin to put it into the general economy, prices will rise. Sure, the fed could take action to take money out of circulation as companies release it into circulation, but that is too politically unpopular and won't happen.
- Retric 14y ago
  A lot of Money was destroyed when all those housing loans died. On net the Fed may have created more money, but it's not as big a deal as you might assume.
beagle3 14y ago
FTA: > The things people buy the most often -- gas and groceries -- have gone up the most the past few years. The things people buy the least often -- gadgets and other goods -- have not. It's an understandable mistake. But still a mistake. Can someone explain the math behind this? The important thing is not "how often", but "what percentage of the overall expense", but I would guess that (as percentage of overall expense), gas and groceries are larger than gadgets for everyone? As an example, in my household, we're about a thousand/month on food & transportation (rising much faster than 2%/year), thousands a month for rent (rising much faster than 2%/year). And while gadgets are getting cheaper (nothing else seems to), they account for ... say, 2% of our overall expenses.
davvid 14y ago
All numbers are cooked, especially unemployment. The whole argument of this article is based on leaky correlations. GDP is gamed in many ways. I'm a bit of a skeptic. Head squid Goldman just slashed their April NFP employment estimates to 125,000, just barely higher than the disastrous March 120,000 NFP print which launched a thousand new QE rumors. What is the point of this article? Is it to get everyone to nod their heads while they prepare to launch another round of QE? The NFP numbers prove that unemployment is not really doing that great. I think this article is short-sighted. The prices of things like gas matter because the cost of energy impacts everything. The central planners' only tool is injection of more liquidity, which has a direct impact on the cost of commodities, oil, etc. We've already been pumping the market with liquidity. Where did it all go? To euro banks, it seems. The employment numbers are not reflecting it, that much we know. Is this article suggesting we keep course?

25 points by mattobrien 14y ago

Great article - mostly I'm amazed that there are folks out there who are supposed to be intelligent, who actually believe 10% inflation is a reality...

lalalalahaha 14y ago
I believe it because my food bill has increased approximately 50% in 3 years and gas prices are at the same level as during the bubble in 2008 but with a much more subdued economy. I don't understand how an article with an NGDP chart and some fancy hand waving negates this.
- mattobrien 14y ago
  Can you refute the point that we can't have positive job growth and negative real GDP? Then how is overall inflation more than 2-3%?
  - Zarathust 14y ago
    It is easy. Fire one 40 hours worker. Hire thirty-nine 1 hour workers. Congratulations! You've increased your "labor force" by 3800% !!! You have a net loss of 1 man-hour however. I'm not totally sure how this relates to inflation, but jobs absolute numbers and gdp are only slightly related. Another example would be to fire everyone making more than 100k$/year and relocate them to potato farming. In terms of gdp, this would be a net decrease despite the absolute worker count remaining the same
  - dpatru 14y ago
    Everybody's aim in an economy is not to have to work, or at least to work less, and to produce more. No one wants to work more and produce less. So what we want is negative jobs (people working less) with positive GDP (people enjoying more goods and services.) In bad times, when there is a loss of productivity or where people stop working in the productive (private) sector and go to work for the unproductive (public) sector, you absolutely can have negative real growth with more employment.
  - deleted 14y ago
    [deleted]
- rjsamson 14y ago
  As I mentioned in another comment, food and fuel are not counted when calculating inflation - they are both commodities whose prices are determined by external market forces (ie speculation, weather, etc) and do not accurately reflect rising prices due to monetary inflation. Inflation of a few percentage points is healthy - and that's where we are now. Any less and you begin to risk slowing economic growth - currency that declines in value slightly over time gives one the incentive to spend their cash, rather than hoard it.
  - lalalalahaha 14y ago
    To dismiss food and fuel is simply erroneous. There is a reason why governments push to have them removed from the inflation numbers... they have an economic incentive to lie and maintain their power.
    - aaronblohowiak 14y ago
      it especially hurts the poor (both young poor and elderly, like those on social security.)
- aaronblohowiak 14y ago
  Now is a terrible time to have food as a large portion of your budget (ie: are poor)
  - sokoloff 14y ago
    Any time is a terrible time to have food as a large portion of your budget.

robatsu 14y ago

There is a little bit of misunderstanding sometimes when people discuss "inflation". To some, if not most people, inflation means increasing prices. To others, it means increase in the money supply, which eventually may cause rising prices after some latency, especially if the growth rate of the economy doesn't keep up with the increase in money supply. I have no idea whether "rising price inflation" has been underreported, especially by design, by the government. I would concede that there are political and bottom line reasons (e.g, minimize increases in salaries/benefits tied to COLA), but again, if this is happening, IMO it is probably more just institutional slouch than a top-secret directive from the Federal Reserve bunker. Overall, I don't have an informed opinion what the facts of the matter are wrt to underreported inflation - I only have anecdotal evidence. OTOH, it is pretty clear that "money supply inflation" has increased dramatically in the past few years due to the various policies associated with the bailout. Whether this will cause "rising price inflation" remains to be seen - there is always latency between money supply increase and rising prices. In the bailout policies case, the latency is pretty large, as the bulk of the money went to securing "toxic" assets and so forth rather than directly into the consumer economy. The overhang of this increase in money supply/government debt naturally constitutes rising price pressure, but again, how much is anyone's guess, as there are deflationary pressures as well (falling asset prices, and such).

mattobrien 14y ago
The Fed has tools like interest on reserves, reverse repos and term deposit facilities to make sure that all of the excess reserves on bank balance sheets don't turn into actual price increases. Austrian economists conflate increases in the money supply and price inflation, but it's not necessarily true. In fact, mainstream New Keynesians (that includes conservatives like Greg Mankiw) have predicted for years that increasing the Fed's balance sheet wouldn't increase inflation. They have been right.
- rjsamson 14y ago
  Yup - in theory the two can be related, but in the real world its a lot more complicated than that.
- 14y ago

option_greek 14y ago

Inflation need not be just seen in the country with monitory supply. It can be felt around the world. The flood of money is being felt in developing countries and commodity markets where gold and oil seem to have just taken flying lessons.

dpatru 14y ago

An essential premise of his argument is that real GDP can't decline if jobs are being added. So if jobs are being added, and they seem to be, then real GDP growth must be positive. Real GDP growth is nominal GDP growth (4%) minus inflation, so inflation must be no more than 4% to keep real GDP growth positive. "Let's try a thought experiment. If inflation really is 10 percent, that implies that real GDP fell around 6 percent last year. How bad is that? That's roughly where the economy was in the first quarter of 2009. Basically, complete free-fall. And thanks to Okun's Law -- which relates real GDP and unemployment -- we can guesstimate what that would mean for jobs. A back-of-the-envelope estimate says that unemployment should have risen between 3 and 4 percent in that scenario. Instead, we added 1.899 million jobs in the last year." But of course jobs and production (GDP) do not need to grow in lockstep. This assumes that productivity is constant. If productivity is falling, then production could be declining even as the number of jobs increases. For example, if the star employee (say Steve Jobs) of your company (Apple) no longer works there, your company may still suffer a production loss even if several employees are hired to replace the star. This is a case where production can fall even as employment increases.

roc 14y ago
> "If productivity is falling, then production could be declining even as the number of jobs increases." Good catch. But where's productivity been going? (Hint: not down. [1]) So while this indicates an assumption that should be identified and recognized, the correction doesn't impact the conclusion in this case. [1] http://www.bls.gov/news.release/prod2.nr0.htm http://www.bls.gov/news.release/prod2.nr0.htm
- dpatru 14y ago
  The productivity of some workers may be rising, but not all. For example, with all the investment in government we've had, government should be very efficient. Government services such as roads, transportation, education, care for the poor, wars on brown people, business regulations, prisons, etc should be very cheap right? Or could it be that as the private sector increases its productivity, the public sector correspondingly consumes/wastes more?

grandalf 14y ago

It's important to note that the main reason the graphs do not show inflation is b/c of the massive housing crash. We have a situation where we have significant inflation in some sectors of the economy, but we also have enough deflation to offset it. I'm not talking about bad deflation, I'm talking about new advances in microchips, etc., that make computers cheaper and more powerful every year. Inflation and deflation are natural aspects of a dynamic economy. The thing to watch for is when they signal structural problems. If microchips increased in performance so quickly that vendors refused to order inventory and store shelves were empty, then it would be a structural concern. Policymakers find it useful to wave the very imprecise notion "deflation" in front of the public without bothering to mention that it's all due to technological advancement, automation, outsourcing, etc. Similarly, inflation isn't always bad -- developer salaries are "inflating" now, which sends a signal for more people to learn to write code. This will be self-correcting. The thing to be concerned about is when government action causes inflation sufficient to undermine peoples' willingness to accept the currency. Policymakers try to get away with doing as much micro-tweaking as they can with the economy. Tax breaks for one select group of people, subsidies for another, etc. These sorts of policies can, over time, create inflation that is not self-correcting, since the policies are rarely ended once they have been created. Consider the massive over-investment in real-estate fueled by tax breaks. This led to an unstable real-estate market that crashed hard a few years ago.

crazy1van 14y ago

Forget the word inflation -- it is too politically charged and people think it means all kinds of different things. However, in the long run there is little doubt that an expansion of the money supply will cause a rise in the price of goods and services. Forget fancy metrics like NGDP and consider this thought experiment: if all of a sudden magically everyone's bank account balance had the decimal point moved to the right one place, what would happen to prices? After a very short transient period, they would increase by about a factor of 10. This is exactly what is happening right now (on a smaller scale and the magic occurs in the treasury department). The difference is that the extra money has been created, but is not really in circulation. Once banks and companies feel they no longer need the money in their accounts and can begin to put it into the general economy, prices will rise. Sure, the fed could take action to take money out of circulation as companies release it into circulation, but that is too politically unpopular and won't happen.

Retric 14y ago
A lot of Money was destroyed when all those housing loans died. On net the Fed may have created more money, but it's not as big a deal as you might assume.

beagle3 14y ago

FTA: > The things people buy the most often -- gas and groceries -- have gone up the most the past few years. The things people buy the least often -- gadgets and other goods -- have not. It's an understandable mistake. But still a mistake. Can someone explain the math behind this? The important thing is not "how often", but "what percentage of the overall expense", but I would guess that (as percentage of overall expense), gas and groceries are larger than gadgets for everyone? As an example, in my household, we're about a thousand/month on food & transportation (rising much faster than 2%/year), thousands a month for rent (rising much faster than 2%/year). And while gadgets are getting cheaper (nothing else seems to), they account for ... say, 2% of our overall expenses.

davvid 14y ago

All numbers are cooked, especially unemployment. The whole argument of this article is based on leaky correlations. GDP is gamed in many ways. I'm a bit of a skeptic. Head squid Goldman just slashed their April NFP employment estimates to 125,000, just barely higher than the disastrous March 120,000 NFP print which launched a thousand new QE rumors. What is the point of this article? Is it to get everyone to nod their heads while they prepare to launch another round of QE? The NFP numbers prove that unemployment is not really doing that great. I think this article is short-sighted. The prices of things like gas matter because the cost of energy impacts everything. The central planners' only tool is injection of more liquidity, which has a direct impact on the cost of commodities, oil, etc. We've already been pumping the market with liquidity. Where did it all go? To euro banks, it seems. The employment numbers are not reflecting it, that much we know. Is this article suggesting we keep course?