Monday, September 06, 2010

Two Market Measures of Risk Show Improvement


The charts above over the last 12 months of: a) the Bloomberg U.S. Financial Conditions Index (data here) and the S&P 500 Volatility Index (data here) show that the financial markets went through a rough patch in May, June and July of slightly elevated risk, but have now recovered to the conditions that prevailed in the spring.  The recent improvements in these two daily market measures of risk should probably mean that the chances of a double-dip recession are much less likely now than at any time over the last four months.

35 Comments:

At 9/06/2010 10:16 AM, Blogger VangelV said...

The recent improvements in these two daily market measures of risk should probably mean that the chances of a double-dip recession are much less likely now than at any time over the last four months.

If we assume that you are right we should be looking at a major decline in the bond market because there is no reason for investors or traders to hang on to bonds that pay nothing in the way of interest when they could do better in equities. That would drive rates higher and put pressure on the early stages of a weak recovery, making it more likely that you are actually wrong.

My main concern is still with the fundamentals. I see no argument that can be made in favour of a sustained recovery because of the massive amounts of debt and malinvestments that have yet to be cleared out of the system. No matter how we try to spin the story, the American banks are insolvent because they are sitting on a mountain of non-performing loans that have yet to be written off because they are supposedly insured by the Federal government. If we argue that the implied backing of the US government makes the banks solvent we still need to transfer those bad loans to someone who will have to pay the bill. Ultimately, that someone is the US government and the taxpayer. But if we see another trillion or so of debt added to the balance sheet why would lenders who buy treasuries not ask for compensation for the extra risk they are being asked to take?

Unless I am missing something, there is no way out of this mess that will not require a massive devaluation of the USD, a write-down of bad debt, rising interest rates, increased taxes, or a combination of the four.

 
At 9/06/2010 11:45 AM, Blogger Buddy R Pacifico said...

Why havn't stocks dropped more with all the emphasis on a double dip? Corporate earnings have been consistently good.

What we need now is to lower one of the world's highest corporate tax rates (US) so that a lot of these earnings are invested at home.

 
At 9/06/2010 1:30 PM, Blogger Benjamin said...

Buddy-

I think the corporate income tax should be eliminated. It has become a minor revenue source for the federal government, hardly worth enforcing anymore. Multi-nationals can offshore profits for tax purposes anyway.

But what we need now is an aggressive, confident Federal Reserve, more than anything else.

Japan has experimented with a strong yen and zero inflation for 20 years. The result has been an economy that expanded at 0.8 percent annually (less than statist France!), and 75 percent declines in property and equity markets. There is the irrefutable track record of tight-money policies.

The siren song of zero inflation and strong dollar are dangerous utopian pipe dreams. Japan has paid the price of conservative central bankers, who pettifog and issue sermonettes about inflation.

We are paying the price too.

 
At 9/06/2010 2:00 PM, Blogger PeakTrader said...

I think, it's safe to say Dr Perry is correct that a double-dip recession is less likely.

We need enough liquidity to get the most productive and greatest wealth-generating workforce back on track to full employment. So, the spectacular economic boom, since 1982, can continue.

If we had a leader like Reagan, U.S. real growth would be 4%, with 2% inflation, by now, after a V-shaped recovery.

 
At 9/06/2010 2:16 PM, Blogger PeakTrader said...

We need to stop this game where the Fed creates money, while the Administration and Congress destroy it.

 
At 9/06/2010 3:17 PM, Blogger VangelV said...

But what we need now is an aggressive, confident Federal Reserve, more than anything else.

No we don't. What we need is for the Federal Reserve to be shut down and to eliminate the legal tender laws.

Japan has experimented with a strong yen and zero inflation for 20 years. The result has been an economy that expanded at 0.8 percent annually (less than statist France!), and 75 percent declines in property and equity markets. There is the irrefutable track record of tight-money policies.

Japan never had tight-money policies. Its government went on a spending binge that created all kinds of new but unnecessary infrastructure and piled on debt that threatens to ruin the lives of its citizens. Its weak growth period was the result of actions taken to prevent the liquidation of bad investments. As a result, the weak banks and corporations were allowed to survive. Their subsidies allowed the weak corporations to hang around and weaken the profits of the better run companies, which were forced to pay higher taxes to support the bailouts.

The siren song of zero inflation and strong dollar are dangerous utopian pipe dreams. Japan has paid the price of conservative central bankers, who pettifog and issue sermonettes about inflation.

We are paying the price too.


You have not paid much at all. Unlike Japan, the US government relies on foreigners to buy most of its debt and to finance its trade deficits. When those foreigners demand higher rates USTs will no longer be seen as a store of value and the USD will collapse. Currency rallies should be sold and profits should be used to buy the dips in the gold market.

 
At 9/06/2010 3:21 PM, Blogger VangelV said...

We need enough liquidity to get the most productive and greatest wealth-generating workforce back on track to full employment. So, the spectacular economic boom, since 1982, can continue.

A reversal would mean increased interest rates and a collapse of the bond market. How will the economy recover if rates are going up? Why would lenders accept low rates if the economy is booming and equities offer a better return?

If we had a leader like Reagan, U.S. real growth would be 4%, with 2% inflation, by now, after a V-shaped recovery.

Reagan talked a better game than the one he played. While he understood the principles that would make the US a much stronger nation he sold his soul and compromised with the Democratic Congress. By doing so he never reversed the decline. It is too much to expect that any current Republican or Democrat leader being able to get the economy out of the mess that it is in without reducing the size of government by 90% or so, calling the troops back home, and cutting taxes to the bone.

 
At 9/06/2010 4:04 PM, Blogger Benjamin said...

Vange:

I did a little research on the NYT archives.

By HEDRICK SMITH, Special to the New York Times (The New York Times); Financial Desk
December 13, 1984, Thursday
Late City Final Edition, Section A, Page 1, Column 5, 1503 words
[ DISPLAYING ABSTRACT ]
Treasury Secretary Donald T. Regan charged today that Paul A. Volcker's ''remarkably tight'' management of the money supply was slowing economic growth and hurting the Christmas shopping season. This was the Administration's most extensive and pointed public criticism of the Federal Reserve chairman in months. The Federal Reserve System, the nation's central bank, is an independent agency that is not directly answerable to the President. Mr. Regan, answering reporters' questions, said it was ''possible but not probable'' that the current economic lull would turn into a recession. He forecast slight improvement during the next six months but said it would probably be mid-1985 before the economy returned to the 4 percent growth rate that the Administration is counting on to help reduce Federal budget deficits."

For the record, the annual rate of inflation in 1984 was 4.3 percent--double or triple the rate now.

Now, we are near deflation, but we have to listen to pettifogging by the likes of Richard Fisher, Dallas Fed President, about the perils of inflation.

BTW, I am no leftie. I am just sizing up the political fault lines here. Why are some Fed members sermonizing about inflation now?

 
At 9/06/2010 6:58 PM, Blogger morganovich said...

neither of these 2 indexes are meaningful.

bloomberg is just a yield spread model that fails to function when yields are heavily manipulated or when short term interest rates approach zero. it has very little useful correlation with the markets and exhibits not forward predictive ability that i am aware of.

VIX is not a risk measure at all. vix is always low at market tops, and high at bottoms. it's just implied volatility from CBOE options. it has absolutely no forward predictive value either for markets of for the economy. it's just a gauge of current fear.

 
At 9/06/2010 8:32 PM, Blogger VangelV said...

For the record, the annual rate of inflation in 1984 was 4.3 percent--double or triple the rate now.

If we used the same method to calculate current inflation levels as we did in 1984 we would see that the current rate is higher than what we experienced in 1984.

The difference comes from the change in the definition of consumer inflation. In 1984 the BLS used the premise that CPI should be based on the price changes of a fixed-basket of goods that were related to maintaining a constant standard of living. That changed when Greenspan, Boskin, and other argued that such an approach overstated inflation because if the price of steak rose people would buy more hamburger or chicken and by doing so offset the increase in their cost of living. Although this violated the CPI concept the politicians in Washington jumped on the chance to make the numbers look better, even if they were inaccurate because the reduction in CPI inflation was reduced artificially by resorting to methodological tricks. The incentive to lie was obvious. Congress could reduce the outlays for the cost-of-living adjustments for Social Security payments, get to borrow at lower rates, etc.

Now, we are near deflation, but we have to listen to pettifogging by the likes of Richard Fisher, Dallas Fed President, about the perils of inflation.

You are nowhere near deflation. While the price of some asset classes fell as they should have the price of essentials like food, energy, health care, tuition, insurance, property taxes, etc., have mostly gone up.

BTW, I am no leftie. I am just sizing up the political fault lines here. Why are some Fed members sermonizing about inflation now?

Because, unlike you, they can see the writing on the wall and are scared of the dollar going over the edge. The action in the gold market is telling us that people are scared about the fiat currency and are questioning the use of treasuries as a store of value. The Fed members know that and see a scenario in which an improving economy triggers a collapse in the municipal bond market that could take treasuries down as well. They have seen how much money the Fed has used to buy bad mortgage backed papers from the banking sector and how much of the gold that the treasury was holding was swapped with other CBs so that it could be sold into the open market to manipulate bullion prices. With the current gold pool breaking down they know that the danger of hyperinflation is a lot closer than most can imagine so they are protecting their future reputations by speaking out now.

 
At 9/06/2010 10:50 PM, Blogger Benjamin said...

Vange-

Why do you confuse Japanese deficit spending with monetary policy?

The yen is an incredibly strong currency. They have zero inflation, and occasional bouts of deflation. That has killed their stock and property markets.

And your statement that inflation is higher than reported is just BS. The BEA GDP deflator is under 2 percent also.

Tight money is nice in theory. The track record is misery, misery, misery.

 
At 9/07/2010 6:54 AM, Blogger Paul said...

"Tight money is nice in theory. The track record is misery, misery, misery."

Especially for guys like Benji who want someone to bail him out of his bad real estate investments.

 
At 9/07/2010 7:10 AM, Blogger VangelV said...

The yen is an incredibly strong currency. They have zero inflation, and occasional bouts of deflation. That has killed their stock and property markets.

The Yen is strong because it is heavily borrowed by hedge funds and banks that want to speculate and do not want to worry about having to come up with cash to pay interest. if you borrow Yen for a decade at zero percent and have the ability to keep refinancing it means that you don't have to worry about negative cash flows that come from interest payments. The BoJ has not been tight and has not done anything to strengthen the Yen. In fact, it has been buying USTs in order to keep the Yen from rising in the face of all that buying. Obviously, the hedge funds are hoping for a collapse of the Yen so when they finally pay their debts off, they will do so with money of far lower value than when they borrowed at near zero percent.

And your statement that inflation is higher than reported is just BS. The BEA GDP deflator is under 2 percent also.

My statement is valid. When you use exactly the same method as was used under Carter/Reagan the CPI number comes out to be higher today than in 1984. When you do a valid comparison you can't use a different methodology and pretend that nothing has changed.

Tight money is nice in theory. The track record is misery, misery, misery.

Except that the theory is invalid. When people are broke they will not use easy money policies to buy more crap that they don't need. They will simply try to survive by paying off their debts for as long as they can before they can dig themselves out or have to admit that their efforts are futile and that they are better off by declaring bankruptcy and starting over again. As we debate this the true money supply is at an all time record, corporate borrowing is higher than it was before the correction began, and government debt is significantly higher than at any point in history.

The gold markets are telling us what we need to know. While they have been going through severe corrections at certain technical points when the commercials have been taking money from the speculators gold has been going up steadily against the USD, housing, stocks, and bonds. This means that people are having doubts about the viability of many of the fiat currencies being used today. Eventually those doubts will destroy the UST market and the USD and will take most paper money down with them. That is why you should be looking to purchase gold and gold producers and stop fantasizing about the merits of destroying the currency even faster by loosening monetary policy further.

 
At 9/07/2010 9:14 AM, Blogger morganovich said...

vangel is absolutely correct about the inflation measurement. 18984 CPI is not comparable to the current one. the method is very different.

the substitution effects he cites are accomplished by geometric weighting of consumption.

we modeled this ourselves by taking a basket of 100 goods each priced at $1 and having them fluctuate in price (and use the new prices to start the next round) but always keep their sum at 100. run it for 10 iterations and see what you get.

the basket still costs 100, but the "CPI" you report will show deflation.

geometric weighting produces disinflation as an inherent artifact of the methodology.

the "great moderation" we have seen is not low inflation, it's just bad math. alternately, if this methodology is the correct one then inflation in the 70's was more like 4%.

our current deflationary fears are entirely an artifact of this bad math.

v-

alas, this has been explained to benji at least a half a dozen times. his memory is like an etch a sketch. it's not going to get through to him. he's too wedded to this idea that monetary policy is currently "tight" despite it being looser than any time in US history.

 
At 9/07/2010 11:25 AM, Blogger Benjamin said...

Here is a reprint from the Stanford Hooover guys, of a Milton Friedman piece on Japan's deflation problems

http://www.hoover.org/publications/hoover-digest/article/6549

MF advocates printing health doses of money and quantitative easing. Japan didn't listen.

Vange, perhaps you are a better economist than MF. Perhaps Obama should call you up for some advice. But, I would read MF's reasoning closely in this piece.


Morgan:

This is from Scott Grannis, a very conservative economist, a Perry ally, and an Obama-loather. Yet even he says inflation is probably overstated, if anything.

From Scott Grannis:
"If you don't believe that the Bureau of Economic Analysis is staffed by professionals that do their best to measure inflation accurately, then this post is not for you. I've been working with the BEA's numbers since 1980, and I have never managed to turn up evidence of gross or chronic error in their numbers. It's fashionable to say that the government is systematically understating inflation, but as the Boskin Commission found, the CPI, for example, may actually be overstating inflation (the CPI is calculated by the Bureau of Labor Statistics). I've compared the CPI to the broader and better-calculated personal consumption deflator (shown above), and to me it looks like there is indeed a case to be made that the CPI overstates inflation as measured by the PCE deflator by maybe as much as 0.5% per year over time. But that's relatively small potatoes. The PCE deflator is arguably the best measure of inflation at the consumer level that we have, and that's why the Fed has adopted it as their preferred measure of inflation."

So Michael Boskin, who spent serious time on this issue, thinks the CPI overstates inflation by about 0.5 percent a year. Boskin, again, is a very conservative guy and Stanford conservative.

Morganivich? What studies have you conducted into this issue? Were they published? Why do think what you do? Do you undestand that CPI measurements becomne outdated and have to be updated?

 
At 9/07/2010 2:18 PM, Blogger VangelV said...

v-

alas, this has been explained to benji at least a half a dozen times. his memory is like an etch a sketch. it's not going to get through to him. he's too wedded to this idea that monetary policy is currently "tight" despite it being looser than any time in US history.


I am sure that many on this board have done what they could to educate benji and that he still has issues that do not allow him to pay attention to the arguments. But reality has a way of imposing itself on people, even if they do not want to pay attention to it.

 
At 9/07/2010 2:27 PM, Blogger morganovich said...

benji-

as ever, you are completely missing this argument.

it doesn't matter which one you believe is a better inflation gauge.

what does matter is this: the calculation methodology changed dramatically.

no one argues that this is not true. this is a stone cold fact.

as a result of this, the same price movements in items result in a different CPI number now than they did then. this is also incontestably true.

that means that you cannot reliably compare CPI across this methodology change. the series is just grafted. old data was not updated to the new methodology.

if you use the old methodology, you get inflation of over 4% now. if you use the new one for the 70's, you only got about 5% inflation then. (this is very difficult to do precisely as the hedonic adjustments are arbitrary and the geometric ones are sensitive to start date)

so, either inflation was only about 5% in the 70's (and i think we can agree that the 70's had unpleasantly high inflation whatever number we choose) or inflation is (by historical standards) over 4% now.

what you are literally trying to do is swap out the speedometer on your car from KPH to MPH and then claim you are going more slowly as a result.

this is math. there is nothing arguable or subjective about it. even a 1st year statistic student knows you can't splice data like this.

bill gross agrees with me as does david enihorn and i'd take their view over boskin any day.

boskin is the political hack who greenlighted this change by claiming inflation was overstated.

but again, this does not matter.

what is incontestably true is that you cannot compare pre 90's CPI to current CPI. all the "deflation" lessons come from using the old CPI. if you swap a thermometer's markings from F to C, it's still the same temperature outside.

 
At 9/07/2010 2:30 PM, Blogger VangelV said...

Here is a reprint from the Stanford Hooover guys, of a Milton Friedman piece on Japan's deflation problems

http://www.hoover.org/publications/hoover-digest/article/6549



MF advocates printing health doses of money and quantitative easing. Japan didn't listen.


The link you cited has a grapt that shows that Japan was growing its money supply at 3% a year when Friedman was calling for more. Why is 3% inadequate and why should the bank create money out of thin air in the first place?

Vange, perhaps you are a better economist than MF. Perhaps Obama should call you up for some advice. But, I would read MF's reasoning closely in this piece.

I am certainly a better economist than any of the idiots that Obama is listening to. I know that you can't create wealth by printing money and that when you have dug yourselves into a big hold it is better to stop digging than to make things worse. Obama is doing what Bush was but more recklessly and will pay the price when the real economy tanks and takes the bond market and the USD with it.

So Michael Boskin, who spent serious time on this issue, thinks the CPI overstates inflation by about 0.5 percent a year. Boskin, again, is a very conservative guy and Stanford conservative.

What do you expect Boskin to say; that his method was no good or that it should be applied to the historical data so that a proper comparison can be made? There is no way to spin the story and avoid the fact that if you apply the same method to measuring inflation you will see that today we have at least as much inflation as Reagan did in the bad old days of 1984.

Morganivich? What studies have you conducted into this issue? Were they published? Why do think what you do? Do you undestand that CPI measurements becomne outdated and have to be updated?

The argument is valid.

Start by taking a basket of 100 goods each priced at $1.

Come up with different price changes for various items but always ensure that the sum stays at 100. No matter how you run the numbers the method used by Boskin shows deflation even though the total price of the goods has not changed.

It can't be simpler than that and even you should be able to understand. The fact that you choose not to means that yours is a faith based approach to the dismal science.

 
At 9/07/2010 2:37 PM, Blogger morganovich said...

this is from 2008, so the claim about current inflation are dated, but the argument holds:

this is literally a who's who of inflation analysts. if you're going to go with "experts" benji, these are the guys, not boskin.

Bill Gross of California-based PIMCO, the world's biggest bond manager, tells investors that interest rates on U.S. Treasury notes are inadequate. Inflation around the globe has averaged nearly 7 percent over the past decade, but the official U.S. inflation rate has averaged 2.6 percent. "Does it make any sense," says Gross, "that we have a 3 percent to 4 percent lower rate of inflation than the rest of the world?" And if Washington understates inflation by one percent, he adds, then gross domestic product has been overstated by that same amount. ("U.S. Inflation understated, Pimco's Gross says," MarketWatch, May 22, 2008)

Nor is Gross alone. In May, former Federal Reserve Chairman Paul Volcker told the Congressional Joint Economic Committee that "I think there's a lot more inflation than in those [CPI] figures." He said that the sharp run-up in housing before the recent implosion wasn't reflected in CPI data, adding that food and energy prices should not be excluded in gauging long-term trends. And when prices do go up, he said, government calculators are "much more inclined to say that there are improvements in quality" rather than an increase in inflation.

At Charles Schwab & Company, one of the nation's biggest money managers, chief economist Liz Ann Sonders wrote in June that "Over the past 30 years, major changes have been made to the calculation of the CPI due to "re-selection and reclassification of areas, items and outlets, [and] to the development of new systems for data collection and processing," according to the Bureau of Labor Statistics. If you eliminate those adjustments and calculate CPI as it would have been calculated in 1980, it would be nearly 12 percent today...No wonder clients constantly tell me they distrust government inflation data." ("Back to the 1970s?" Charles Schwab Investing Insights, June 19, 2008)

 
At 9/07/2010 2:43 PM, Blogger morganovich said...

http://www.nytimes.com/2010/05/27/opinion/27einhorn.html?pagewanted=all

read this as well. david is one of the most successful hedge fund managers in the world.

so again, if you're going to appeal to expert opinion, get some real experts, not political appointees.

 
At 9/07/2010 2:49 PM, Blogger Junkyard_hawg1985 said...

Actually, if you are going to use the ^vix index to see if it is predicting a recession, you should probably compare the current values to the onset of recent recessions. Here's the data:

^vix range during month recession started:

July 1990: 15.63-21.11
March 01: 24.12-32.84
December 07: 18.28-24.86

August 10 for comparison: 21.36-28.92

I gain no comfort that we will avoid a recession based on these results.

 
At 9/07/2010 3:18 PM, Blogger Benjamin said...

Vange-Ad hominem arguments mean you have little real ammo.

The record of Japan is that tight money to the point of zero inflation is a disaster. Milton Friedman told them this.
Zero inflation is a dangerous utopian pipe dream, loved by central bankers but poison in the real world.

Morganivich: Friend, The Boskin Commission was formed to investigate the proper measurement of inflation, and Boskin is a widely respected and deeply conservative economist at Stanford/Hoover.

You are citing hedge fund tyros and bond gurus, who may know thir craft well, but not the technical arguments of measuring inflation.

Anecdotes? Life is cheaper in Los Angeles than three years, by far.

Rents are down, especially office-industrial and retail. 99 cent stores are everywhere. Gasoline about the same. Property values cut one-quarter to one-half (motels, offices).

Even Starbucks has a $1 cup of coffee. I think the re-use the grinds with a flavor "enhancer."

Health care is more.

Anyway, good luck Morganovich. You have a different point of view than me, but I like the conversation....

 
At 9/07/2010 3:46 PM, Blogger Junkyard_hawg1985 said...

"Zero inflation is a dangerous utopian pipe dream, loved by central bankers but poison in the real world." - Benjamin

Benji, you really should pay attention to history. For a century in the U.S. (1800's), inflation averaged -0.7%/yr. Real economic growth in the U.S. was greater in the 1800's than the 2000's. Price stability promotes growth.

 
At 9/07/2010 4:15 PM, Blogger Benjamin said...

Junkyeard-

First, measuring inflation in the 1800s--oh, come on. And what is an accurate way to do that?

Lincoln's log cabin cost more than the rude huts built by Apaches in 1899?

In the modern-era, has any nation prospered with deflation?

On the other hand, have not many nations prospere with mild inflation?

Indeed, since the 1970s, the globe has been in a boom. It has been a wonderful time, with many being lifted out of abject poverty.

As Milton Friedman said, having a gold standard just means men tunnel around like gophers.

 
At 9/07/2010 4:41 PM, Blogger Benjamin said...

The Boskin Commission, formally called the "Advisory Commission to Study the Consumer Price Index", was appointed by the United States Senate in 1995 to study possible bias in the computation of the Consumer Price Index (CPI), which is used to measure inflation in the United States. Its final report, titled "Toward A More Accurate Measure Of The Cost Of Living" and issued on December 4, 1996, concluded that the CPI overstated inflation by about 1.1 percentage points per year in 1996 and about 1.3 percentage points prior to 1996.

The report was important because inflation, as calculated by the Bureau of Labor Statistics, is used to index the annual payment increases in Social Security and other retirement and compensation programs. This implied that the federal budget had increased by more than it should have, and that projections of future budget deficits were too large. The original report calculated that the overstatement of inflation would add $148 billion to the deficit and $691 billion to the national debt by 2006.

The report highlighted four sources of possible bias:

■Substitution bias occurs because a fixed market basket fails to reflect the fact that consumers substitute relatively less for more expensive goods when relative prices change.
■Outlet substitution bias occurs when shifts to lower price outlets are not properly handled.
■Quality change bias occurs when improvements in the quality of products, such as greater energy efficiency or less need for repair, are measured inaccurately or not at all.
■New product bias occurs when new products are not introduced in the market basket, or included only with a long lag.

 
At 9/07/2010 6:14 PM, Blogger VangelV said...

The record of Japan is that tight money to the point of zero inflation is a disaster. Milton Friedman told them this.

Since when is a 3% increase in the money supply considered tight money policy? How do you define tight?

If we look at what happened in Japan we are quickly led to aftermath of the Plaza Accord when the yen exploded and exports were hit hard. Economic growth fell from 4.4 percent to 2.9 percent in one year. The BOJ cut the discount rate in half from 5% to 2.5% over a 13 month period. The stimulus made its way into real estate and equities. Both markets exploded and created one of the largest financial bubbles ever. To fight the damage created by the easy money policy the BoJ raised rates to 6 percent and the market collapsed.

The crisis was not created by the aftermath of the crash, during which rates were hanging around zero and money supply growth averaged around 2-4%, but by the spectacular growth in the money supply that created a bubble during which companies sold solar powered lamps and shoes without soles so that you could feel the grass beneath your feet.

Japan's problem was the unwillingness of the BoJ and the government to let all of the lousy companies go under. Instead of clearing out the inefficient distribution system that cost consumers a big chunk of the total retail price, clearing out the banks that had made reckless loans that could never be paid back, or clearing out the less competitive manufacturers the government decided to keep them alive by extending loans, providing subsidies and changing regulations that helped the weak players by hurting the strong ones. With the exception of a few quarters Japan has had very loose monetary policies and more than enough growth in money supply, particularly given the demographic and outsourcing trends. That still has not helped and Japan is still looking at letting the market shake out the weak players who are making a sustained recovery impossible.

Zero inflation is a dangerous utopian pipe dream, loved by central bankers but poison in the real world.

During the most rapid period of American and British growth there was deflation. Wasn't that the real world?

 
At 9/07/2010 6:23 PM, Blogger VangelV said...

Morganivich: Friend, The Boskin Commission was formed to investigate the proper measurement of inflation, and Boskin is a widely respected and deeply conservative economist at Stanford/Hoover.

He is a political hack. But you still miss the argument. It does not matter which method you use; you have to apply the same method to all of the data if you want a valid comparison. The old method shows that current inflation levels are running from 4% - 8% depending on which quarter you are looking at. The new method would have 1984 at around 1%-2% inflation and the 1970s around 4%-6%. Either way, you would see that today's environment is not all that different than the 1970s.

You are citing hedge fund tyros and bond gurus, who may know thir craft well, but not the technical arguments of measuring inflation.

Wrong. Bill Gross knows what inflation is far better than Boskin or Krugman.

Anecdotes? Life is cheaper in Los Angeles than three years, by far.

Rents are down, especially office-industrial and retail. 99 cent stores are everywhere. Gasoline about the same. Property values cut one-quarter to one-half (motels, offices).


Real Estate prices should have fallen from the peak during the bubble. But if you send your kids to university, buy health insurance, eat food, drink beer, smoke, take your pet to the vet, go to the dentist, or pay property taxes you will find that you are paying a lot more.

Even Starbucks has a $1 cup of coffee. I think the re-use the grinds with a flavor "enhancer."

You must have a different Starbucks where you live. Out here prices have been rising steadily. Tim Horton's and other coffee outlets have also raised prices.

Anyway, good luck Morganovich. You have a different point of view than me, but I like the conversation....

What conversation? What I see is a one way conversation. He tries to educate you but you keep refusing to look at the arguments while you appeal to authority, sometimes out of context.

 
At 9/07/2010 6:35 PM, Blogger morganovich said...

benny-

you have to be joking.

if those guys were really any good at what they do, they'd be working for funds and making a killing. these guys are the best financial analysts in the world. you think bernanke doesn't go ask PIMCO for advice? puh-leez.

boskin served as a political hack. his job was to whitewash the scenario. the conclusions of his report were written before he did any research.

i'll take volcker's word over his any day. are you arguing that the architect of the most effective campaign to break run away inflation of all time doesn't understand CPI?

i've also done the math myself. the new methodology has a provable downward bias. (go try my geometric weighting experiment yourself) any statistics 101 student could find it. random chained fluctuation with zero sum yields deflation. it get worse the more period you run. after a while, even inserting inflation into the actual basket still reads as deflation. it becomes especially pronounced if you have a few items that drop in price very rapidly (technology) and a few that rise rapidly (like healthcare).

the fact that such an obvious iterative flaw made it through can only be deliberate. i'm not claiming these guys are stupid, i'm claiming they have an agenda.

the mere fact that healthcare is 1/6 of GDP and 1/16 of CPI basket provides massive downward bias.

add in the fact that it is now full of subjective bias that was not present before and these numbers are just flat out not trustworthy.

that's why so few people on wall st use them in their models.

BUT YOU ARE STILL MISSING THE GLARING FACT THAT IT DOESN'T MATTER WHO IS RIGHT ABOUT THE INFLATION METHODOLOGY.

YOU STILL CANNOT COMPARE DATA ACROSS 1992.

it's like taking half your measurements in Fahrenheit and the other half in celsius. you cannot blend that data without doing a conversion, and that has not been done with CPI. if you do do it (as williams has)

nor can you compare our current inflation to japan in the 90's, because again, the methodology is too different.

what is it going to take for you to understand that.

 
At 9/07/2010 6:35 PM, Blogger VangelV said...

First, measuring inflation in the 1800s--oh, come on. And what is an accurate way to do that?

Lincoln's log cabin cost more than the rude huts built by Apaches in 1899?


It was very accurate. The dollar gained purchasing power over time as productivity increases and the opening up of new territories made goods much cheaper for consumers. Savings was not confiscated by money printers because money had to be backed by specie and was redeemable on demand.

In the modern-era, has any nation prospered with deflation?

You can't have deflation in a fractional reserve system that uses fiat money. Such a system needs an ever growing supply of money and credit until it collapses and the money becomes worthless. The US went off the gold standard in 1971. Since then the FRN has lost about 85% or so of its purchasing power and probably has another year or two before it loses most of the rest.

On the other hand, have not many nations prospere with mild inflation?

No. Mild inflation is still theft from savers and investors. It leads to a lower standard of living than a system without inflation.

Indeed, since the 1970s, the globe has been in a boom. It has been a wonderful time, with many being lifted out of abject poverty.

Correct. Ending the Cold War, the adoption of modern agricultural techniques, deregulating large sections of the economy and creating new electronics industries will do that. But during the boom we saw many savers lose everything they set aside as one currency after another collapsed and governments defaulted on what they owed.

As Milton Friedman said, having a gold standard just means men tunnel around like gophers.

Milton was the guy who predicted that gold would fall to $16 because that was its value as a dental material. He did not understand that the markets do not trust politicians to fiddle with the money supply so they will always choose gold as a medium of exchange that can be used to store value. This is why gold is substantially higher than the $37 that it was quoted in during the first year of the 1970s. How much higher does it have to go before you figure it out?

 
At 9/07/2010 6:40 PM, Blogger VangelV said...

The report highlighted four sources of possible bias:

■Substitution bias occurs because a fixed market basket fails to reflect the fact that consumers substitute relatively less for more expensive goods when relative prices change.


Even if this is true, people would substitute just as readily in the 1970s as in the 1990s.

■Outlet substitution bias occurs when shifts to lower price outlets are not properly handled.

The same argument could be used for the 1970s and 1980s.

■Quality change bias occurs when improvements in the quality of products, such as greater energy efficiency or less need for repair, are measured inaccurately or not at all.

Once again, goods and services improved in the 1970s and 1980s too.

■New product bias occurs when new products are not introduced in the market basket, or included only with a long lag.

Again, we have the same argument about the 1970s and 1980s.

There is nothing in what you have cited that shows that we should have one methodology for the 1970s and 1980s and another for the 1990s and subsequent periods. An apples to apples comparison requires that you use the same method to measure Inflation, GDP, Unemployment, and whatever else you want to track.

 
At 9/07/2010 6:47 PM, Blogger VangelV said...

BUT YOU ARE STILL MISSING THE GLARING FACT THAT IT DOESN'T MATTER WHO IS RIGHT ABOUT THE INFLATION METHODOLOGY.

YOU STILL CANNOT COMPARE DATA ACROSS 1992.

it's like taking half your measurements in Fahrenheit and the other half in celsius. you cannot blend that data without doing a conversion, and that has not been done with CPI. if you do do it (as williams has)

nor can you compare our current inflation to japan in the 90's, because again, the methodology is too different.

what is it going to take for you to understand that.


I think that he understands but it too weak to admit his error.

 
At 9/07/2010 6:49 PM, Blogger Benjamin said...

Vange-

You are a prolific poster, and I have to make furniture.

You win this round. I am saving up energy for the next post-fest.

PS I think it is unduly harsh to refer to Boskin, or the commission on which he served (led) as "political hacks (s)."

They have a different point of view than you--and that is that inflation is overstated. I share Boskin's view.

 
At 9/07/2010 6:58 PM, Blogger VangelV said...

You are a prolific poster, and I have to make furniture.

You win this round. I am saving up energy for the next post-fest.


I have two little kids that take up a lot of my attention. But being retired gives me a lot of time to argue about things that I believe strongly in.

PS I think it is unduly harsh to refer to Boskin, or the commission on which he served (led) as "political hacks (s)."

They have a different point of view than you--and that is that inflation is overstated. I share Boskin's view.


The truth is what it is. Boskin is a political hack who made some very basic math errors that have been pointed out to you. When the price of all the goods in a fixed basket goes up but your method still reports deflation you know that there is a problem.

But even if you don't know and you accept the method you still can't argue that you can compare two periods by pretending that the methods do not matter. But if they don't then why change them?

 
At 9/07/2010 8:38 PM, Blogger Junkyard_hawg1985 said...

Benji,

The methodology may not be great for the 1800's, but prices overall fell for the century. You can only argue about the amount, not the direction. When you ignore an entire century of data because the inflation measurement was not perfect, you are like a man looking for his keys under a lamp post. He lost the keys in the alley, but the light is better under the lamp.


I also find it interesting that you mention how great the economy has been since the 1970's. I looked at this last year and found something interesting. While you claim the economy has boomed, the American experience doesn't really reflect it. I had compared 2008-09 data to 1972 (right after gold window closed). Here are a few of the observations:

New home construction was down sharply over this time period. It was down around 75%.

Auto manufacturing was down significantly (down around 30%).

Oil production was down significantly (about half).

Steel production down
Aluminum production down
Wheat production was up.
Electricity production doubled.

Interestingly, the best performing item that I found comparing 1972 to 2008 was gold production. It was up 4X. So much for not digging like gophers.

 
At 9/07/2010 9:07 PM, Blogger morganovich said...

benji-

we can bat appeals to authority back and forth all day.

none of that changes the fact that you are literally taking the same thermometer with the same column of mercury and changing the readings from Fahrenheit to Celsius and then saying "wow, it's below freezing even in the summer these days" because it reads under 32.

that won't put ice on your driveway any more than pretending prices aren't rising by overwieghting everything that drops in price (like technology) and underweighting everything that rises (like healthcare). healthcare doesn't even get half the weighting in CPI it holds in the economy.

this is really statistics 101 stuff.

statistics 102 would then teach you that if you add piles of subjective adjustments to data (like assumed elasticities and hedonic adjustments) that you really have no idea what you are measuring anymore. the result becomes a function of a whole bunch of assumptions about how much products improved and consumption trade offs that cannot ever be empirically validated.

when such assumptions actually give you the opposite trend of the raw data, they are probably incorrect.

 

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