Economics is not hard - Part I: Don’t let professional economists tell you otherwise

[vanvaley1]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

I thank "Goodness" that I found this website and its leaders and mentors, Ej and Fred. The pursuit of honesty is cherished in a world full of duplicity. As for timing, anybody ever been around for a child's delivery and known the variables and experiences at play in that event? Labor, natural, induced or impeded, is unpredictable bout minutes, seconds, and/or hours til delivery but the kid is gonna be born. So it be with inflation from thus messy process underway and the following one 'incoming'.

I'm so grateful for the insight and education offered by the legitimacy of the 'tug of war' at this site. Unfortunately, I have no pony in this race as the inflexibility of my investment 'guessing' was determined before I found this site. My only regret about this place is that time has ripened the blooming of this evening tulip a bit and the expertise of experience caught a different ship of knowledge that limits a thoughtful and reasoned contribution to the remarkable collection of itulipers that play in this sandbox of gold. So...playmates...and expecially Ej and Fred...thank you. van

[jk]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

This is why we're getting Austerity in Europe.

just want to amend that statement to "this is why we're getting Austerity TALK in Europe." it remains to be seen what will be done, especially if there is another leg down in the global economy.

the austerity talk in europe may be no more meaningful than the fed's occasional announcements that it is discussing its "exit strategy" from easing.

[Chris Coles]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

just want to amend that statement to "this is why we're getting Austerity TALK in Europe." it remains to be seen what will be done, especially if there is another leg down in the global economy.

the austerity talk in europe may be no more meaningful than the fed's occasional announcements that it is discussing its "exit strategy" from easing.

Any small business owner will tell you of the day they had to stop spending and self impose austerity. You do not have time to talk about it, nor think about it, austerity is imposed and you find that, immediately, it is there. My impression of what is being done within executive government here in the UK and Europe, is that everyone is trying to impose austerity upon someone else; to deflect it rather than face the facts of it. The politicals do not show the courage to cut the ranks of the layer upon layer of uselessness and the perpetrators remain aloof to their responsibilities. So as such, I too doubt we will see much to give us hope the message has yet to sink in.

[raja]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

Excellent article . . . .

I would add that even the "independent analyst working for paid subscribers" still has his "book" . . . both financially and personally . . . and this may affect the quality of his or her advice.

The financial factor is the desire to maintain the loyalty of existing subscribers and gain new ones, which paradoxically may result in actions that do not benefit subscribers. On the personal, psychological level, the natural human desire to maintain a positive self-image and boost one's ego can also lead to behaviors by the analyst that can negatively impact the subscribers' bottom lines.

Here are some examples of the independent analyst working his "book":

1. Glossing over, "forgetting", or rationalizing past mistakes, resulting in a published track record that looks better than it is.

2. Failure to quickly address errors out of fear of tarnishing the pristine track record, causing those subscribers who took advice to lose more money than if errors were quickly rectified.

3. Devoting attention and effort to other activities that results in subscribers' interests being neglected.

No matter what the source of financial guidance, the investor would be wise to remain always vigilant.

[rdrees]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

Personally, I think the failure of iTulip to predict deflation is, in a way, an example of them being right but not realizing how right they were. As this site has pointed out before, their dire predictions were often not dire enough. I think that the breadth and depth of this "Great Recession" have been so extensive as to counteract all the efforts of the Fed to reflate in a way even the Fed seems to find suprising. What kind of massive problem economy can stomach nearly two years of 0% fed funds rate and STILL see falling prices? I don't think anyone predicted that.

So my criticism is not even really with iTulip's general thesis that were were in a "pretend" economy for ten years or so. But I really wish iTulip would start grappling with the implications of this economy rather than try to make it seem like they were 100% accuract all the time with no failings.

And I think you are helping rewrite history when you say disinflation is a kind of deflation. It's not. Disinflation is a slowing in the rate of inflation. Assume that "regular" inflation is your $2.00 hamburger today costing $2.10 tomorrow. Disinflation is your $2.00 hamburger costing $2.05 tomorrow. Deflation is your $2.00 hamburger costing $1.95 tomorrow. Very different concepts that EJ made particular note of in his posting entitled, "No Deflation! Disinflation then lots of inflation." But deflation--not disinflation--is what we're seeing now for the past three months. Not major deflation, granted, but deflation nonetheless.

And really, why hasn't this site grappled with this? I find it astonishing that we've had three straight months of price declines for the second time this recession in both CPI and PPI. I recall a post a little while back by EJ going through a whole bunch of anecdotal evidence about how we're seeing inflation accompanied by photographs of his local Target store. Why is EJ wasting time with something like that? One of this site's biggest strengths is its reliance on cold hard data. During the housing boom, I think EJ would have ruthlessly mocked a website taking pictures of local real estate "sold" signs to "prove" that house prices could only go up. Rather, he looked at the data, saw major imbalances, and trusted the numbers rather than the anecdotes. And now he's relying on anecdotes to "prove" he was right about inflation? iTulip is better than that.

I urge iTulip to take a cold hard look at these numbers and provide their trademark analysis to help us understand the market forces at work. Why we're seeing deflation at this point in the recession; whether Japan is indeed a better model for us than previously believed; or why things might change in the imminent future.

Because frankly, a prediction that says ka ka ka....wait for it to eventually be poom is not much of a prediction at all. Surely we will see inflation again SOME day. But let's talk about today and tomorrow and next year, not someday. I mean, surely home prices will start to consitently rise again someday. How credible will Jim Cramer sound if, on that day, he says, "I told you so. I told you house prices would rise again." We need a better model than that, and iTulip is capable of delivering, in my opinion, if only it would turn its attention to it.

[ThePythonicCow]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

Assume that "regular" inflation is your $2.00 hamburger today costing $2.10 tomorrow. Disinflation is your $2.00 hamburger costing $2.05 tomorrow. Deflation is your $2.00 hamburger costing $1.95 tomorrow.

Prices going up or down is a variable and complex matter. I saw the prices of compute cycles and memory bits fall like a rock for the several decades I was in the business.

A useful discussion of inflation and deflation requires a clear understanding of what we choose to mean by those words. Milton Friedman's understanding of these words (if I understand Friedman correctly) as meaning the increase and decrease of the money supply is a more useful meaning in my view. All else being equal, an increase in the money supply will tend to cause prices to rise, but for any given price quote, things are rarely if ever equal. By useful I mean that the broad increase or decrease in the money supply is a systemic property, rather than particular nominal price quotes, which can be all over the lot (like the Target prices EJ reported or the computer prices I mentioned.)

In a debt-based monetary system, money comes into existence as the balancing bookkeeping entry of a debt. After a sufficiently large debt mega-bubble (the largest in human history in the present case) collapses, then debt collapses. The Fed is not printing money as they do in Zimbabwe; the Fed (and its partners in extend and pretend) are creating more bookkeeping entry pairs of money and debt. Even the Fed has a limit to how much new debt it can manufacture; hence it has a limit to how much money it can create.

The Fed cannot monetize all debt as fast it would otherwise collapse. It is not sufficiently powerful or pervasive to accomplish that (thank goodness.)

Prices will encounter severe turbulence; fasten your seatbelt. However on net, both money and new debt are harder to come by than they were in recent boom times. Local conditions vary of course. Goldman Sachs vice presidents are having an easier time of it than Las Vegas real estate investors. Peak Oil will over time force some serious changes in prices, the economy and much else. However price realignments are not what I would call inflation or deflation. Rather they are but possible symptoms thereof.

The overall decline in the supply of money and of debt, hand-in-hand, is real, is massive and is what Friedman would, I believe, call deflation.

[rdrees]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

I'm not sure if you were taking issue with the quoted portion of my post or just clarifying it, but I agree with your conclusion: no matter how you slice it, the past two years of the Great Recession have exhibited deflation. Or at the very least, we have not seen anything one would reasonably call "significant inflation" which was this website's call. That particular call was wrong, though many more have been right.

No problem, people make mistakes. I'm just hoping iTulip will confront this mistake, adapt to it, and integrate it into their otherwise fantastic analyses.

For what it's worth, this crash always seemed (to my surface analysis, at least) the most similar to Japan's "lost decade" after their massive real estate bubble burst. Two years in, and I can't think of a more comparable historic example. I know EJ has always pooh-poohed that comparison because they were a creditor nation while we're a debtor nation. But I'm not sure if it's been explained why that would make such a world of difference. If anything, the fact that we have to make debt payments on top of our other obligations would seem to me to put even more pressure on the money supply and be a deflationary factor. I hope iTulip will at least revisit the similarities and differences between 1990s Japan and us now with a closer analysis why we may turn out differently, if that's still the call.

[jk]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

For what it's worth, this crash always seemed (to my surface analysis, at least) the most similar to Japan's "lost decade" after their massive real estate bubble burst. Two years in, and I can't think of a more comparable historic example. I know EJ has always pooh-poohed that comparison because they were a creditor nation while we're a debtor nation. But I'm not sure if it's been explained why that would make such a world of difference. If anything, the fact that we have to make debt payments on top of our other obligations would seem to me to put even more pressure on the money supply and be a deflationary factor. I hope iTulip will at least revisit the similarities and differences between 1990s Japan and us now with a closer analysis why we may turn out differently, if that's still the call.

the difference being a debtor makes is that we couldn't take even the mild deflation the japanese have had off and on for 20 years. it would be much more devastating here, and so it won't be allowed to happen. it's time to go back and re-read bernanke's 2002 speech, which laid out the whole playbook: http://www.federalreserve.gov/BOARDD...21/default.htm

[ThePythonicCow]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

I'm not sure if you were taking issue with the quoted portion of my post or just clarifying it,

Sorry, guess I wasn't clear. I was taking issue with part of what you said. Guess I'll have to be more disagreeable next time I disagree <grin>.

You were giving hamburger prices to demonstrate inflation, deflation and disinflation.

I was saying it is best not to use prices, not at Target, not for computers, not for oil, not for hamburgers, to define inflation and deflation. Rather I prefer the definitions for inflation and deflation that depend on the increase or decrease of the money supply (and hence also of the debt supply, in a debt-based monetary system such as ours.)

I also had a second message: we need to specify clearly which definition we're using, whether that be money supply, prices, or something else. I sometimes perceive a lack of sufficient discipline in this matter, which frustrates me.

[ThePythonicCow]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

the difference being a debtor makes is that we couldn't take even the mild deflation the japanese have had off and on for 20 years. it would be much more devastating here, and so it won't be allowed to happen. it's time to go back and re-read bernanke's 2002 speech, which laid out the whole playbook: http://www.federalreserve.gov/BOARDD...21/default.htm

You're saying, as have many, a high debt burden with an increasingly strong currency (deflation) is intolerable when you don't have a large base of savers (such as the Japanese did) to borrow from.

I find Charles Hugh Smith's view more persuasive here. Yes, a high debt burden in a strengthening currency, once you've run out of willing lenders, is a serious pain in the backside (the wallet.) However, it's a pain felt by the debtor, not the lender. If you're the lender, you want to be repaid in ever stronger currency.

Who's steering this ship, the debtors or the lenders?

Over a century ago, William Jennings Bryan spoke of the burden of a Cross of Gold. We now endure the burden of a Cross of Debt. Unless we throw off this burden, we Americans (and quite a few countries we've dragged into this mess with us) will suffer under a crushing program of austerity, with a high an even higher percentage of our cash flows and resources going toward debt service.

You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don't you call me 'cause I can't go
I owe my soul to the company store.

[jk]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

You're saying, as have many, a high debt burden with an increasingly strong currency (deflation) is intolerable when you don't have a large base of savers (such as the Japanese did) to borrow from.

I find Charles Hugh Smith's view more persuasive here. Yes, a high debt burden in a strengthening currency, once you've run out of willing lenders, is a serious pain in the backside (the wallet.) However, it's a pain felt by the debtor, not the lender. If you're the lender, you want to be repaid in ever stronger currency.

Who's steering this ship, the debtors or the lenders?

Over a century ago, William Jennings Bryan spoke of the burden of a Cross of Gold. We now endure the burden of a Cross of Debt. Unless we throw off this burden, we Americans (and quite a few countries we've dragged into this mess with us) will suffer under a crushing program of austerity, with a high an even higher percentage of our cash flows and resources going toward debt service.

You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don't you call me 'cause I can't go
I owe my soul to the company store.

i don't find smith's scenario persuasive. marc faber, some time ago, proposed that the wealthy would move their assets off-shore and into tangibles, blow up the currency via inflation, and then repatriate their wealth at much higher prices/rates of exchange to buy domestic assets. sounds more likely to me. who do you think owns all the gold? j6p?

[ThePythonicCow]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

who do you think owns all the gold? j6p?

jtabeb? <grin>

If you're one of the couple dozen wealthiest, most powerful families in the world, why let the rest of the world default on the debt they owe you by printing up a lot of paper dollars for them to pay off the debt easily?

As Charles Hugh Smith suggests, it is better to collect long term, high interest rates on the highest quality long term paper out there -- 20 and 30 year U.S. Treasury Bonds.

• First you pile as much of the world's debt as you can onto the U.S. Fed's, Treasury's, and Agency's (Fannie, Freddie, FHA, FDIC, ...) balance sheets, while you accumulate short term T-Bills and what additional gold you can get cheap. The lower you keep the interest rates on T-Bills, the more debt you can pile on Uncle Sam's shoulders, as stupid Americans will be looking more at the "monthly payment" (or annual Federal budget in this case) than at the debt load.
• Then you jack up the long bond rates for a little while (so they're cheap to buy) and buy a few trillion of them (trading in your T-Bills and the trading portion of your gold).
• Then you collect 15% or 20% per annum "rent" from the U.S. taxpayer for the next 30 years while the long bond's slowly grow in value as well (their rates gradually decline, just as they have the last 30 years.)

Nice job if you can get it.

I'm not saying the same top wealthy won't continue to accumulate real property as always; I'm saying they like to collect rent checks (clip U.S. Treasury Bond coupons) in addition.

I suspect Faber and many of the other goldbugs I enjoy reading are talking their book, and that The Powers That Be are content to let the goldbugs do that, as the fear of inflation can help keep the economic engine from stalling out through these sharp curves. The wealthy and the prescient who got in on gold at low prices don't mind either. But gold is a side show to the current game; its market is way too small.

"Gold is Our Friend" Faber and "Gold is the Enemy" Volcker are playing for opposing teams in a side show that's useful in distracting and controlling the crowds, and on which some nice pocket change can be earned in side bets if you know the major turning points.

I don't hold gold as insurance against global economic collapse. I hold rice, beans and a Berkey Water Filter for that insurance. I hold gold because it's a horse I've placed winning bets on before at the race track, and I'm hoping to win a little more this time around.

[ThePythonicCow]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

and then repatriate their wealth at much higher prices/rates of exchange to buy domestic assets.

The super wealthy won't have to buy distressed U.S. property at fire sales; they will get plenty of such property, including major infrastructure from failing local and state governments, as collateral on failed debt.

the wealthy would move their assets off-shore and into tangibles, blow up the currency via inflation, and then repatriate their wealth

The world's major currencies and economies are too entwined for this to work. They cannot create a sufficiently large imbalance between the Dollar and Other currencies to make this their major move. Sure, the high speed traders such as Goldman and Morgan may slam the Euro this quarter and the Dollar next quarter, to pay for their next Lamborghini Reventon, but that's a game for the second level power players.

[MarkL]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

RdRees, As you've done in other situations, you're carefully selecting time frames to make your arguments. Technically you may be correct that deflation occurred for a short time frame. But if you look at the bigger picture, say 6 months or a year or so (and you don't oh so carefully select them!), disinflation, not deflation occurred on average over time.

Take the time frame that you selected and using your figures sum the inflation and deflation from the numbers you presented here. Summed results over this time frame (which happens to include BOTH periods of the dreaded "deflation") still results in 1.2% CPI increase and 2.7% PPI Increase.



I think waving around these short period of time you're referring to and yelling "Eric was wrong iTulip needs to face this!!!" is missing what's important and expecting things of economic forecasting that are unrealistic. Personally I think calendar years are good time frames to use as a reference points for these things and so far we have only seen disinflation, not deflation over these more reasonable time frames.

Stick to accusing iTulip of calling for inflation to happen prematurely... and maybe ask him to revise his timing estimates based on current facts.

But overall, over the time period you tendered, over calendar years, and over many other time frames Eric was spot on in sticking his neck out and stating "DISINFLATION, NOT DEFLATION." Just cause a car hits a pothole doesn't mean it's going downhill.

[ThePythonicCow]

Re: Economics is not hard - Part I: Don’t let professional economists tell you otherwise

then repatriate their wealth at much higher prices/rates of exchange to buy domestic assets

One more point -- assets that lie fallow are just potential income.

What matters more are assets that are being hard worked by serfs, slaves or renters to pay their dues, rents, taxes, mortgages or other such regular income streams.

Spending one's assets for living expenses only seems attractive to us short term thinking proletarians, who were born broke and expect to die broke. Long running families avoid this as India farmers avoid eating their seed. Long running locks on reliable income streams are the source of spendable income and the fuel for further wealth and power accumulation.