Professor Mark J. Perry's Blog for Economics and Finance
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
14 Comments:
mark-
that is not an accurate statement. it is the market's assessment of CPI that is reflected in TIPS, not inflation.
i would not bet on CPI either. it's a rigged game where they take out everyhting that goes up in price.
no one sophisticated is buying tips, they are a terrible instrument.
post the annual inflation chart from bpp, and a very different picture emerges.
"that is not an accurate statement, it is the market's assessment of CPI that is reflected in TIPs, not inflation."
Here is the one year chart for the ETF TIP. TIP is the iShares Barclays TIPs Bond Fund.
Year to Date Return: 12.51%
Current Yield: 4.2%
The market's assessment of TIP seems to be positive for the last year. TIPs are Treasury Inflation Protected Securities.
Those who believe inflation is understated or real GDP (real income = real output) is overstated don't seem to understand incomes tend to rise over time, while monthly payments tend to remain fixed or rise less. So, real income rises.
"...don't seem to understand incomes tend to rise over time, while monthly payments tend to remain fixed or rise less. So, real income rises"...
Well maybe under normal conditions they do...
Some aren't so optimistic...
Three Charts Which Don’t Point to a Recovery
economist karl smith suggested an interesting way to "pay for" the payroll tax cut; issue 10 year TIPS at their current 0.2% percent real interest rate; after 10 years the $119 billion cost would have risen to $120.4 billion, but that could be paid for then off what should be a much bigger tax base; & if the economy hadnt grown by that time, TIPS rates would likely be negative, reflecting deflation, so the can could be kicked further down the road by issuing more TIPS at a profit...
http://modeledbehavior.com/2011/12/03/funding-the-payroll-tax-cut
"TIPs are Treasury Inflation Protected Securities."
not quite.
tips are indexed to CPI.
there is a great deal of selection bias here, as most of those worried about inflation do not believe CPI and therefore would not consider the TIPS an effective hedging instrument.
CPI is not inflation, it is an algorithm intended to try to measure inflation. the map is not the terrain.
if you underweight everyhting going up in price (as CPI does) and then take reduce reported price moves further using completely subjective quality assumptions (that all seem to go in one direction) then you get a number that does not look much like the costs consumers are actually facing.
betting on CPI is not the same as betting on inflation.
most of those deeply concerned about inflation have been focused more on things like gold, up over 22% this year despite big hikes in margin requirements and up 165% in the last 5 years, a 20% compound increase.
Only Morgan sees the rampaging inflation, missed by the BLS, MIT and also by TIPS investors.
In the real world, inflation is dead. The USA is likely entering an era already entered into by Japan, in which the villain is deflation and a too-cautious Federal Reserve.
From 1982 to 2008, the USA experienced many years of prosperity, and moderate and varying inflation, usually between 2 percent and 5 percent.
Now the Fed says we must clamp down on growth whenever we get to 2 percent inflation.
The Fed is suffocating America, and American businesses.
Benji writes:
"From 1982 to 2008, the USA experienced many years of prosperity, and moderate and varying inflation, usually between 2 percent and 5 percent.
Now the Fed says we must clamp down on growth whenever we get to 2percent inflation."
"The Fed is suffocating America, and American businesses.
Benji, take a look at this St. Louis Fed graph showing the U.S. monetary base. Do you see any change and if so, is it dramatic beginning in 2008? The growth in money is unprecented.
"Now the Fed says we must clamp down on growth whenever we get to 2 percent inflation."
and just where are you getting that wild fantasy bunny?
inflation is nearly twice that and the fed is still running the loosest money in us history.
do you just make this stuff up?
Buddy-
Start reading Money Illusion blog, by Scott Sumner, or Milton Friedman.
Ultra low interest rates and inflation rates are a sign of tight money. You do not get simultaneously low inflation and interest rates through loose money.
The Fed needs an aggressive and sustained QE program that targets results, not amounts. And no more paying interest on reserves.
Benji, did youn look at the St. Louis Fed graph? What is your reaction?
"Start reading Money Illusion blog, by Scott Sumner, or Milton Friedman."
Did not Milton Friedman push for a consistent 3% growth in money supply by the Fed?
Buddy-
I think MD did suggest steady money supply growth---but he also told Japan to engage in large and steady QE to fight their perma-gloom.
Really, there is an excellent school of economic thought emerging--Market Monetarism--free of partisan shibboleths. I encourage everyone, including Dr Perry to familiarize themselves with this school.
Times change. We are not fighting the Russkies anymore, and free trade dominates USA markets. It ain't the 1970s, baby. (Although I wish disco and my hair would come back)
Inflation swap breakevens (chart below) is a better indicator of the market's inflation view as the TIPS breakeven is polluted by its being a cash instrument (note the divergence between swap and TIPS breakevens during the liquidity crisis period in 2008).
http://www.adsanalytics.com/dashboard/docs/dashboard.php?treepage=tree_definition_main.php&chart=chart_inflation_bes
ADS Analytics
Benji, I don't know what Market Monetarism is, but will look into it.
So, again I ask for your reaction to the St.Louis Fed graph I linked to.
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