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With a gold standard, you have little/no inflation. (Although from 1933-1971 it was only a partial gold standard, because individuals could not redeem their do

by fsk 11y ago

With a gold standard, you have little/no inflation. (Although from 1933-1971 it was only a partial gold standard, because individuals could not redeem their dollars for gold. Only foreign central banks could trade dollars for gold.) In a paper money system, you have inflation of 10%-30%. (The CPI is currently low, but it is a misleading and biased statistic.) When you have 10% inflation, who gets that new money? It isn't workers. That 10% goes to the government (deficit spending), big banks (quantitative easing), and large corporations (who can borrow cheaply). Inflation concentrates wealth among insiders, because they get to print and spend the new money ahead of everyone else. 10%+ annual inflation is a 10% tax on the total value of the economy, with it all going to insiders.

ChrisLomont 11y ago
Inflation and deflation were terrible when on the gold standard [1], and the terrible volatility was a reason every single country in the world left gold standards. The research from the great depression demonstrating that having one's currency tied to the rate one can dig up metal, instead of tied to the needs for trade, put the nail in the coffin. See also the list of US recessions, and the behavior before and after the gold standard was removed [2]. When volatility is high, everyone has to have higher prices to help plan for an uncertain future, so it is a drain on all aspects of an economy. If inflation were zero, then planning could be perfect, and there would be a much more efficient system. However, zero inflation is nearly impossible to do, since there are accidents, demand shocks, wars, and other events that shake an economy. History has shown that deflation can lead to a deflationary spiral, seriously damaging an economy and putting everyone out of work, so the Fed targets slight inflation. This provides protection against runaway deflation and also provides stable, predictive economy so people and businesses can plan. See, for example, the Great Moderation and related literature [3]. The CPI is quite accurate, and matches multiple other places that also measure inflation, such as the MIT based Billion Prices project [4]. If CPI and actual inflation were vastly different, there would be a host of financial products one could invest in that capture the difference, since many items are tied to formal CPI. Knowing people that work in places that would create such trades, if CPI were as far off as you claim, I've asked them, and they say there is no arbitrage. Can you show me where people are consistently making money trading with their "better" knowledge of inflation versus the standard CPI? Finally, if inflation were 10%-30%, as you claim, then prices would double every 2-7 years, which is clearly wrong. Using your claims, prices from 1971 till now (2015-1971=44 years) would be 80 =2^(44/7) to 4,000,000 = 2^(44/2) times higher, which is clearly false, bordering on ridiculous. You're also wrong about who benefits from inflation: basically borrowers (you and me and mortgage holders, etc) owe less money in real terms, and lenders will get paid back less than they lent, in real terms. Over the life of a loan, future fixed payments are easier to make, not harder. So inflation transfers value from lenders to borrowers, not the other way around. Inflation hurts banks and benefits borrowers. You have your claims backwards. [1] http://pages.stern.nyu.edu/~ekerschn/courses/c150042/lectures/09_flations.pdf http://pages.stern.nyu.edu/~ekerschn/courses/c150042/lecture... [2] http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States http://en.wikipedia.org/wiki/List_of_recessions_in_the_Unite... [3] http://en.wikipedia.org/wiki/Great_Moderation http://en.wikipedia.org/wiki/Great_Moderation [4] http://bpp.mit.edu/about-us/ http://bpp.mit.edu/about-us/
- hammock 11y ago
  An even-handed explanation of why the CPI may not be accurate: http://www.investopedia.com/articles/07/consumerpriceindex.asp http://www.investopedia.com/articles/07/consumerpriceindex.a... What the CPI would look like if its methodology was not constantly being adjusted: http://www.shadowstats.com/alternate_data/inflation-charts http://www.shadowstats.com/alternate_data/inflation-charts
  - ChrisLomont 11y ago
    >was not constantly being adjusted CPI is rarely adjusted, and all reasons are quite well explained at the BLS site [1]. As people buy less horses and more cars it makes sense to adjust the basket of goods to match what people currently buy, not what they used to buy. They also provide the methodology on how data is gathered, processed, what changes were made, why, and the effect on future numbers using both old and new methods. They select new methods because it tracks what CPI is supposed to track better than old methods. Shadowstats is often a nonsense site. The article you link provides no methodology, and as I pointed out above, if the inflation they claim existed we'd see it in massive price changes. Those changes are not there. Do yourself a favor: take the shadowstats claimed inflation, start in 1985, and compute how prices should have increased. Then look at prices of those goods from 1985 till now. You'll see it's nonsense. The Billion Prices project is an independent group trying to compute inflation as accurately as possible. Here [2] is one place showing how well BPP and CPI match up. And as above - if shadowstats, or any group had a way to compute inflation that was much different than CPI, there would be huge wealth flowing to them from simply trading derivatives based on the mismatch between the official inflation and their more accurate number. I've seen no one doing that, and I've looked. Care to show me who is making all this money based on having more accurate inflation numbers? [1] http://www.bls.gov/cpi/ http://www.bls.gov/cpi/ [2] http://www.mymoneyblog.com/inflation-cpi-vs-bpp.html http://www.mymoneyblog.com/inflation-cpi-vs-bpp.html
- dnautics 11y ago
  >Inflation and deflation were terrible when on the gold standard Inflation and deflation cycles, compared to now, were more severe, yes, but we ALSO have far more liquidity in markets and a wider swath of the population is educated and participating in capital markets, directly or indirectly. That can contribute to stability. Comparing before/after without taking the fact that the world has completely changed in those two epochs is completely risible.

by fsk 11y ago

ChrisLomont 11y ago

Inflation and deflation were terrible when on the gold standard [1], and the terrible volatility was a reason every single country in the world left gold standards. The research from the great depression demonstrating that having one's currency tied to the rate one can dig up metal, instead of tied to the needs for trade, put the nail in the coffin. See also the list of US recessions, and the behavior before and after the gold standard was removed [2]. When volatility is high, everyone has to have higher prices to help plan for an uncertain future, so it is a drain on all aspects of an economy. If inflation were zero, then planning could be perfect, and there would be a much more efficient system. However, zero inflation is nearly impossible to do, since there are accidents, demand shocks, wars, and other events that shake an economy. History has shown that deflation can lead to a deflationary spiral, seriously damaging an economy and putting everyone out of work, so the Fed targets slight inflation. This provides protection against runaway deflation and also provides stable, predictive economy so people and businesses can plan. See, for example, the Great Moderation and related literature [3]. The CPI is quite accurate, and matches multiple other places that also measure inflation, such as the MIT based Billion Prices project [4]. If CPI and actual inflation were vastly different, there would be a host of financial products one could invest in that capture the difference, since many items are tied to formal CPI. Knowing people that work in places that would create such trades, if CPI were as far off as you claim, I've asked them, and they say there is no arbitrage. Can you show me where people are consistently making money trading with their "better" knowledge of inflation versus the standard CPI? Finally, if inflation were 10%-30%, as you claim, then prices would double every 2-7 years, which is clearly wrong. Using your claims, prices from 1971 till now (2015-1971=44 years) would be 80 =2^(44/7) to 4,000,000 = 2^(44/2) times higher, which is clearly false, bordering on ridiculous. You're also wrong about who benefits from inflation: basically borrowers (you and me and mortgage holders, etc) owe less money in real terms, and lenders will get paid back less than they lent, in real terms. Over the life of a loan, future fixed payments are easier to make, not harder. So inflation transfers value from lenders to borrowers, not the other way around. Inflation hurts banks and benefits borrowers. You have your claims backwards. [1] http://pages.stern.nyu.edu/~ekerschn/courses/c150042/lectures/09_flations.pdf http://pages.stern.nyu.edu/~ekerschn/courses/c150042/lecture... [2] http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States http://en.wikipedia.org/wiki/List_of_recessions_in_the_Unite... [3] http://en.wikipedia.org/wiki/Great_Moderation http://en.wikipedia.org/wiki/Great_Moderation [4] http://bpp.mit.edu/about-us/ http://bpp.mit.edu/about-us/

hammock 11y ago
An even-handed explanation of why the CPI may not be accurate: http://www.investopedia.com/articles/07/consumerpriceindex.asp http://www.investopedia.com/articles/07/consumerpriceindex.a... What the CPI would look like if its methodology was not constantly being adjusted: http://www.shadowstats.com/alternate_data/inflation-charts http://www.shadowstats.com/alternate_data/inflation-charts
- ChrisLomont 11y ago
  >was not constantly being adjusted CPI is rarely adjusted, and all reasons are quite well explained at the BLS site [1]. As people buy less horses and more cars it makes sense to adjust the basket of goods to match what people currently buy, not what they used to buy. They also provide the methodology on how data is gathered, processed, what changes were made, why, and the effect on future numbers using both old and new methods. They select new methods because it tracks what CPI is supposed to track better than old methods. Shadowstats is often a nonsense site. The article you link provides no methodology, and as I pointed out above, if the inflation they claim existed we'd see it in massive price changes. Those changes are not there. Do yourself a favor: take the shadowstats claimed inflation, start in 1985, and compute how prices should have increased. Then look at prices of those goods from 1985 till now. You'll see it's nonsense. The Billion Prices project is an independent group trying to compute inflation as accurately as possible. Here [2] is one place showing how well BPP and CPI match up. And as above - if shadowstats, or any group had a way to compute inflation that was much different than CPI, there would be huge wealth flowing to them from simply trading derivatives based on the mismatch between the official inflation and their more accurate number. I've seen no one doing that, and I've looked. Care to show me who is making all this money based on having more accurate inflation numbers? [1] http://www.bls.gov/cpi/ http://www.bls.gov/cpi/ [2] http://www.mymoneyblog.com/inflation-cpi-vs-bpp.html http://www.mymoneyblog.com/inflation-cpi-vs-bpp.html
dnautics 11y ago
>Inflation and deflation were terrible when on the gold standard Inflation and deflation cycles, compared to now, were more severe, yes, but we ALSO have far more liquidity in markets and a wider swath of the population is educated and participating in capital markets, directly or indirectly. That can contribute to stability. Comparing before/after without taking the fact that the world has completely changed in those two epochs is completely risible.