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

[rdrees]

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

This is certainly very interesting stuff.

I wonder if it's perhaps agricultural based. One of the areas where the US continues its world-class status is in agricultural production. But there are three countries that produce even more agricultural products than us: China, Brazil, and India. Three countries that many think are on the vanguard of prosperity with relatively much healtier balance sheets. So investing in agriculture may be, to a certain extent, an investment in those economies, plus a healthy part of ours

Plus, if Peak Cheap Oil is on the way, the value of food should tend to rise relative to all other goods since it is, in part, massive inputs of petroleum products that make farming so cheap these days--in other words, we may have a reduction in supply problem. And with a rising global population, demand should sure be there.

The details are probably complicated, since there are so many aspects to world agricultural output. The play could be in simple agricultural commodities, like cocoa as a previous poster pointed out. Or perhaps it's more toward equipment, or fertilizer producers, or agrarian real estate, or god knows what else.

Whatever it is, it sure is intriguing.

[dummass]

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

A few years back, I met a family living on an 80' cargo sailer; they built the ship themselves. At the time they were loaded with coffee from Costa Rica, on their way to Seatle. In their nitch market, they were already competitive with modern shipping companies. That's BPCO, before peak cheap oil.

[rdrees]

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

Actually, I agree with EJ that we are likely to see a decline in standards of living as a result of this "Great Recession," if that's what you mean by a fall in purchasing power of income and savings. If you lose your job, you're income has fallen precipitously, as has your purchasing power.

I have seen the thread about shrinking packages. I have no quibble with someone taking that into account, but I personally do not generally consider anecdotal evidence. I want the hard numbers. I recognize that there's room for intentional manipulation in raw numbers, but I think there's just enough room for intentional manipulation in anecdotal evidence and way more room for unintentional manipulation. Just a personal preference.

Call it deflation, call it disinflation. "Flat/falling prices" seems the most accurate to me, but I don't really care all that much about the terminology. What is abundantly clear to me, and what I do think is important, is that the numbers do not support significant inflation over this time period.

Oh, and the PPI numbers I posted I got straight from the Bureau of Labor Statistics PPI Press Release Archive. http://www.bls.gov/schedule/archives/ppi_nr.htm

[ThePythonicCow]

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

Railroads take a while to retrofit and upgrade - and U.S. rail system is in bad shape.

In the 1990's, I spent some time in several Latin American countries (Ecuador, Peru, Guatemala, Mexico), and I was very impressed by the bus systems,

Ah - I was figuring rail for long haul shipping (when it doesn't have to get there for a few days) and bus for local (and even regional) human transportation. Smaller countries wouldn't need so much long haul shipping rail, but we're pretty big land with major cities spread all over.

[metalman]

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

Actually, I agree with EJ that we are likely to see a decline in standards of living as a result of this "Great Recession," if that's what you mean by a fall in purchasing power of income and savings. If you lose your job, you're income has fallen precipitously, as has your purchasing power.

I have seen the thread about shrinking packages. I have no quibble with someone taking that into account, but I personally do not generally consider anecdotal evidence. I want the hard numbers. I recognize that there's room for intentional manipulation in raw numbers, but I think there's just enough room for intentional manipulation in anecdotal evidence and way more room for unintentional manipulation. Just a personal preference.

Call it deflation, call it disinflation. "Flat/falling prices" seems the most accurate to me, but I don't really care all that much about the terminology. What is abundantly clear to me, and what I do think is important, is that the numbers do not support significant inflation over this time period.

Oh, and the PPI numbers I posted I got straight from the Bureau of Labor Statistics PPI Press Release Archive. http://www.bls.gov/schedule/archives/ppi_nr.htm

chart i posted is ppi finished goods from the bls. where's the controversy? no deflation.

read the mason gaffney interview...

MG: I’m not sure I have a short answer for that one. One thing is that inflation has advanced much faster than the official numbers. And so to some extent in order to maintain your standard of living you had to borrow but that is not an adequate statement by itself. At the same time you had people borrowing on equity. We all did it. I did it. You probably did it. So there, without producing anything, you had purchasing power. You didn’t have to lift a finger to have your house rise in value. Then you borrowed against it. I’m not talking about you…

EJ: I didn’t. I don’t have a mortgage. But I agree there was a period when you could do cash-out refinancing against inflated home prices. You could turn an illiquid asset into a liquid asset. It was a miracle.

MG: It pushed up prices of lots of things deceptively. It pushed up prices without encouraging production of supplies to meet the demand so we started importing them from overseas and borrowing from overseas and so we have a balance of payments deficit on top of the public deficits, enlarging the money supply without a corresponding increase of output. Now we’re waiting for the other shoe to drop. There’s a great inflation around the corner.

EJ: Interesting you should say that. We’ve been so convinced of inflation as the ultimate outcome of asset bubbles and reflation that we bought gold in 2001 when the US was supposedly entering a period of deflation. We seen the ration of new public and private sector debt growth to GDP growth go from 1 to one to nearly 5:1 in 2009. Is there some threshold where neither the private nor public sector cannot increase debt levels.

MG: Well there’s a steep decline in collateral values and I think we’ve reached that. That’s happening. Now as far as public debt is concerned that is a somewhat different story. That can go on quite a bit longer than private debt.

EJ: The Japanese have demonstrated that.

MG: Yes. My big worry is we’re seeing the limit of that, at which point the system is going to start doing some pretty strange things. But maybe inflation is the word for it.

EJ: The forecast I made not long after I first started iTulip in 1998, I didn’t see how the global contest of debt-financed economic growth could end any other way than through a competitive devaluation of currencies that would ultimately be inflationary. It’s looking to me like we’ve reached the phase in the latest series of bailouts that we’re substituting public credit for private credit to maintain the money supply but eventually we’ll run out of credit. Does that theory sound reasonable and what do you think would happen if we do run out of credit?

MG: Interest rates escalate. The bond market collapses. And all hell breaks loose.

EJ: On iTulip we call that a “Poom” derived from Ka-Poom Theory. It follows from the observation that sovereign debt and currency crises have this peculiar tendency to begin as a deflationary process and then suddenly become a high inflation process as bonds sold off and currencies, too. That was the pattern in Russia in the early 1990s, Argentina in the early 1990s and again in 2001, among many instances.

MG: It looks to me like we’re very close to there.

EJ: Where do you see inflation starting up first? Where do you think we’ll see evidence of that?

MG: My crystal ball is a little murky on that point. If you want to know when, I would say though that it is starting right now as evidenced by the rise of interest rates in the bond market.

EJ: The theory I proposed here the end of 2008 is that we’d start to see inflation no later than this quarter, the second quarter of 2010, that the government spending financed recovery was going to focus demand into a much more narrow supply chain. We’d have supply constraint colliding with a money supply expanded by public borrowing. All the manufacturers, wholesalers, and retailers that survived the consolidations and bankruptcies of 2008 and 2009 would see their pricing power quickly rapidly return and we’d start to experience consumer price inflation as in the 1970s but mostly in the form of reduced quality and quantity of goods per dollar, rather than higher nominal prices. Recent reports from our readers seem to confirm this, that manufacturers are not able to pass higher input costs, particularly energy costs—such as oil at $80 per barrel—on to the consumers. What they’re doing instead is that old trick you might remember from the 1970s. We’re seeing smaller packages sold at the same price, the substitution of lower cost ingredients for higher cost ingredients, package contents are shrinking but the prices of goods are staying the same. Also the cost-of-goods (COG) of manufactured products like automobiles is being reduced. The cars are “cheaper” in a quality sense, but the prices are the same or even higher.

MG: There’s definitely a lot of that. And that has been concealed and even turned backwards by economists who’ve been monkeying with the costs of the consumer price index. They bought the line that quality of goods is rising and they can cherry pick a few examples such as computers and leave out all the counter examples. For example, you go into a gasoline station forty years ago and you got three or four attendants swarming all over your car, cleaning the glass, checking the air-pressure, the oil and water. They had a rest room that was usually clean. They’d give you free maps. You could go on and on with all the free services that went with gasoline then. Now, I don’t need to tell you it’s a very different story.

http://www.itulip.com/forums/showthr...-Mason-Gaffney

[jpatter666]

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

Metalman,
What about the claim that there should have been significant inflation in early 2010. I kind of remember that post as well....you usually track down such stuff quickly.
I'm willing to cut EJ more time on that one -- if we've seen one thing it is that EJ sometimes underestimates the severity or the timeline of events. The events *do* happen, but they are (IMO) skewed by political/Fed maneuvering -- and no one can call that with any accuracy.

[ThePythonicCow]

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

Metalman,
What about the claim that there should have been significant inflation in early 2010. I kind of remember that post as well....you usually track down such stuff quickly.

Dang, that Metalman is some kinda' quick. He posted the answer to your question a half hour before you posted the question See the post just before yours, with the line:

EJ: The theory I proposed here the end of 2008 is that we’d start to see inflation no later than this quarter, the second quarter of 2010,

[LargoWinch]

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

Metalman,
What about the claim that there should have been significant inflation in early 2010. I kind of remember that post as well....you usually track down such stuff quickly.
I'm willing to cut EJ more time on that one -- if we've seen one thing it is that EJ sometimes underestimates the severity or the timeline of events. The events *do* happen, but they are (IMO) skewed by political/Fed maneuvering -- and no one can call that with any accuracy.

From my point of view jpatter666, you believe in Ka-Poom or you don't.

Does it really matter if EJ is off by even a few years? [and I am not suggesting he is here]


You have to realize that a whole lot of people still believe in deflation while loading up on long-dated and/or zero-coupon bonds thinking they will come out of this just fine. What I am trying to say is that even if these people get the "timing" right, they are still doomed and that figuring out the right outcome/thesis is so much more important than timing.

[jpatter666]

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

From my point of view jpatter666, you believe in Ka-Poom or you don't.

Does it really matter if EJ is off by even a few years? [and I am not suggesting he is here]


You have to realize that a whole lot of people still believe in deflation while loading up on long-dated and/or zero-coupon bonds thinking they will come out of this just fine. What I am trying to say is that even if these people get the "timing" right, they are still doomed and that figuring out the right outcome/thesis is so much more important than timing.

@Cow -- gahhhh....that's what I get for not refreshing the responses before posting.
@LW -- I believe! I believe! :-) I was just stating that I've learned (ok, going a little ridiculous here....) that EJ is *not* a prophet and pronouncements are not engraved on stone tablets. I think he does have the general trends correct, I'm just stating that given the governmental/Fed added chaos, while the long-term trend remains intact, short to medium term we could see damn well *anything*.

And given that statement, I think while I give it low-probability (look at Hungary for recent example) I think it is *possible* we could enter a short deflationary period (even by Metal's definition) especially after the 2010 elections.

Never underestimate the political powers-that-be's ability to make a bad situation far, far worse.....

[metalman]

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

@Cow -- gahhhh....that's what I get for not refreshing the responses before posting.
@LW -- I believe! I believe! :-) I was just stating that I've learned (ok, going a little ridiculous here....) that EJ is *not* a prophet and pronouncements are not engraved on stone tablets. I think he does have the general trends correct, I'm just stating that given the governmental/Fed added chaos, while the long-term trend remains intact, short to medium term we could see damn well *anything*.

And given that statement, I think while I give it low-probability (look at Hungary for recent example) I think it is *possible* we could enter a short deflationary period (even by Metal's definition) especially after the 2010 elections.

Never underestimate the political powers-that-be's ability to make a bad situation far, far worse.....

ah, yep... let's go back on the gold standard & get a deflation spiral going!

sweden & all other countries in the 1930s went off the gold standard & didn't do a deflation spiral...



why didn't the usa go off the gold standard & reflate? don't understand why the usa made that choice.

[MarkL]

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

That graph really says it all Metalman. The trend over time is quite clear.

Yes, RDRees, if you pick July of 2008 riggghttt at the tippy top of that big peak... and draw a line on Metalman's PPI graph, you get your slight decrease. Yup. You're right. You win.

I can do the same thing with the inflation adjusted peak of gold back in the 80's and show gold has decreased over the last few decades. It's equally meaningless as attempting to indicate or prove an economic trend.

Ask yourself RDRees, is "persistent price decreases" really the trend this graph really shows?
If you honestly drew a line on this graph, what angle would it have?

Throw in the towel on this one and go back to beating Eric up on Premature ejanszinflation.
(please don't boot me for that one!) :-]

[ASH]

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

A few years back, I met a family living on an 80' cargo sailer; they built the ship themselves. At the time they were loaded with coffee from Costa Rica, on their way to Seatle. In their nitch market, they were already competitive with modern shipping companies. That's BPCO, before peak cheap oil.

That is about the most fascinating thing I've read in the last several months.

[MarkL]

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

Great news for you RDRees! The price of oil and gas is dropping!

All you have to do to see this is start your analysis when Oil peaked at $142 a barrel on the not-so-coincidental date of July 08... the same date you gave me to start your deflation calculation, and the same date it was artificially pushing up the prices of everything in the economy, and you can see that we have a HUGE drop in oil prices! Isn't it great that all those forecasters that predicted that the general trend in oil prices would be upward were wrong?

Now...what's wrong with my credit card...?

[Chris Coles]

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

Mr. Coles,

Again, I admire the thrust of your work.

But again, I will note that the mere presence of free market capital will not resolve the hangover from the past decades of FIRE economy.

An increase of free market capital is an increase in the numerator of the economic equation (capital), but the problem right now is a denominator issue.

Even ignoring the massive debt service burden faced individually and collectively in the US, the cost of labor due to housing, taxation, health care, etc is so high that it is simply not possible for American workers collectively to be competitive.

And it is clearly possible for a 1st world nation to be competitive: Germany has shown that you can have a high standard of living AND be a net exporter. The German economic model which has netted out a competitive economy despite (or because of) national health care, no mortgage interest subsidies, 'socialist' taxes, etc etc is a clear disconnect from the 'red in tooth and claw' of neoliberal free market economics.

The path - for there is no solution - towards a better future will involve the myriad painful adjustments to back out the FIRE economy's domination of the US economy.

The longer this takes, the more painful.

Not to mention the greater likelihood of a demagogue or warlord in the model of Chiang Kai Shek or Julius Caesar.

C1ue,

You have missed the point, but at least one other has not and I will start by pointing everyone to a recent New York Times Op-Ed from Thomas Friedman:

A Gift for Grads: Start-Ups By THOMAS L. FRIEDMAN Published: June 8, 2010

"If you have a son or daughter graduating from college this year, you’ve probably gotten the word. When meeting this year’s college grads it’s best not to ask: “Hey, what are you doing next year?” Too many recent graduates don’t have an answer. They can’t find jobs even remotely related to their fields. This year’s graduation theme is: “Don’t ask. Can’t say.”

We owe our young people something better — and the solution is not that complicated, although it is amazing how little it is discussed in the Washington policy debates. We need three things: start-ups, start-ups and more start-ups. ........."

http://www.nytimes.com/2010/06/09/op...homaslfriedman

And I found that from researching a response to my US Mentor, Professor Donald L. Birx's request for my opinion on this:

The Innovation Delusion
By Ralph Gomory

"In the United States, innovation has become almost synonymous with economic competitiveness. Even more remarkable it is argued that the country's economic salvation can only be through innovation. We hear that because of low Asian wages the United States must innovate because it can't really compete in anything else. Inventive Americans will do the R&D and let the rest of the world, usually China, do the dull work of actually making things. Or Americans will do programming design but let the rest of the world, usually India, do low-level programming. This is a totally mistaken belief and one that, if accepted, will consign this nation to second- or third-class status.

The latest offender to advance this line of thought is Thomas Friedman, who has prominently displayed this familiar and entirely incorrect line of thought in The New York Times. Unfortunately, this idea is one that is widely accepted without careful thought about either its truthfulness or its consequences. ............"

http://www.todaysengineer.org/2010/J...n-delusion.asp

My own view is that almost everyone has forgotten that everything we use is, generation by generation, replaced new. EVERYTHING.

What Germany and Japan has done is to stick to designing and manufacturing for themselves first. And not rubbish bought from Walmart made in China, but very high level products made in Germany or Japan. Ceramics is a very good example. Their Sunday lunch is not eaten off of cheap ceramics from another nation, they eat off of wonderful designs of German ceramics that would grace the tables of an Emperor. Pass that thought right across the spectrum of products and act upon the very simple idea that all you need to do is forget the troubles of the FIRE economy and redress the lack of your own high quality products, from local, community based employment and thus local community investment.

You can sit in your derelict economy, constantly recounting why it is in such a dreadful state of dereliction and why nothing you can do will change the situation, or;

You can get up off your butt and think your way out of the FIRE slum into a new economic model that will completely bypass the existing fiasco. - The choice is yours. I choose to get up and do something different. If everyone did the same, the FIRE economy and all its problems would soon disappear into bankruptcy, never to return. Simply believing you cannot will keep you stuck in a rut for the rest of your life. As a once great American leader once said: "The only thing we have to fear is fear itself."

Personally, I chose to try, rather than to argue why not. If I fail, it is at the least with honour.

"It is not the critic who counts: not the man who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming, but who knows the great enthusiasms, the great devotions, who spends himself for a worthy cause; who, at the best, knows, in the end, the triumph of high achievement, and who, at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who knew neither victory nor defeat."

Franklin D. Roosevelt "Citizenship in a Republic,"
Speech at the Sorbonne, Paris, April 23, 1910
http://www.theodoreroosevelt.org/life/quotes.htm

[WDCRob]

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

That is about the most fascinating thing I've read in the last several months.

Had the same reaction. What a great idea if you like the lifestyle anyway.