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

[Chomsky]

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

Apologies for the delay in reacting, (busy writing a paper on singularities), but can you please provide me with a reference to this statement. I will then be in a much better position to see if I can provide a repost to your assertions.

PS: Much prefer to being addressed as Chris. Mr Coles makes me feel old and gnarled, when instead, I like to feel like I am on my third wind on the long run into the uncertainty of a possible Century.

Chris,

This thread has the Andy Grove piece on startups.

http://www.itulip.com/forums/showthr...t-Up-Staircase

[Chris Coles]

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

Chris,

This thread has the Andy Grove piece on startups.

http://www.itulip.com/forums/showthr...t-Up-Staircase

Thanks Chomsky, will get back to you all next week.

[goadam1]

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

Do we get to know or not? I'm confused. It feels like the message here is gold is so 00's and maybe Grantham was right about blue chips in march 2009.

[rdrees]

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

Yes, the explanation is rather simplistic because it's just an application of the classic supply and demand curve stuff we probably learned about in High School. As I acknowledged, the real world is of course more compicated.

But the basic principle should remain the same. It's one thing to say that there is more nuance to the picture than the simple graph shows. I agree with that. It's another to say the graph is altogether wrong and that less demand will somehow equal HIGHER prices than lower prices. That's just flat contradictory to basic economics--which maybe is EJ's position, but that's pretty radical and I'd sure appreciate more of an explanation.

As for the variety going down, that doesn't match my experience at all. I actually live in a place where there are still a number of mom and pop businesses left. I've been to several mom and pop hardware stores in the area and believe me when I tell you their variety--even their collective variety--cannot hold a candle to the breadth and depth of selection at the Home Depot or the Lowes down the highway. Not even close.

And in any event, variety doesn't equal price, which was my main point. I mean, at a certain point a good is just a good. Does it hurt your standard of living if Home Depot has three brands of hammers, but not the brand of hammer you used to like at the mom and pop hardware store? To paraphrase Freud, sometimes a hammer is just a hammer.

I don't see where or how this leads to a Soviet style economy. If Wal Mart starts to raise prices beyond the equilibrium, people will shop at Target. If there really is some difference in that fourth brand of hammer that is sufficient to create a market for that brand, you can bet someone will start selling it.

[rdrees]

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

I don't think it's super helpful to just repeat your premise with capital letters, and I'm not sure if you intended to engage. But assuming you did, here goes my response.

If GM and Chrysler went out of business, I imagine Ford might attempt to charge more. And they might get away with it for a bit until someone bought GM or Chrysler's assets and competed again. Ford is not a monopoly, so there's no reason to think that competition would just disappear if two players left the market.

In any event, that doesn't take into account demand, which is what I'm talking about and what this Great Recession is causing to be suppressed. Let's say demand for cars plummetted 30% and that's why GM and Chrysler went out of business. That's the scenario I'm getting at: lower demand. Classical economics says lower demand equals lower price. If Ford survived this 30% demand collapse, perhaps they did it by overshooting the new equilibrium price a bit. When the dust settled, maybe they could then rise the price a bit. But I'm not aware of any economic theory that says the new price will be higher than the price all three could command back when millions more people wanted their cars.

To put some numbers on it, let's say all three sell their cars for about $30,000 before the demand collapse. Then Ford cuts prices more aggresively than GM and Chrysler to $15,000 and survives while they don't. Then they go up to $20,000 because it turns out that is the new equilibrium price. Yes, the final price was $5,000 higher than the lowest price you ever saw for the car, but it's $10,000 cheaper than you used to pay before demand collapsed! The net net is what classical economics predicts: lower demand equals lower price. But you seem to be saying no, somehow Ford could raise prices beyond the $30,000. How? If they try to go much higher than $20,000, a competitor will start selling cars for $20,000 and Ford would have to head back down to the equilibrium price. Competition!

You have a lot of faith in Bernake. But don't you think it's time to start questioning whether he has the ability to create significant inflation with the tools and political environment he has? I mean, it's been two whole years of 0% interest rates! That's the traditional way the Fed "prints money" in our economy. And still no significant inflation. On top of that, we had quantitative easing, too. And the three most recent months of PPI were all declines! Doesn't that raise some legitimate questions? And to reemphasize, I do not expect we'll see sustained, major price declines. But at the same time, I have no reason to suspect that we'll have sustained, major price increases either. The headwinds appear awfully strong against that.

[rdrees]

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

Bart, I appreciate the civility of this debate! And glad to hear we're on the same page at least on some things.

I will concede that my water bills have increased per gallon. They made a point to tell us about the increase, but also that it was directly related to a major capital spending campaign, with new dams and sewers, so it wasn't purely a cost-of-living thing.

I also agree that medical costs--in addition to higher education costs--are rising well above inflation. That concerns me no doubt. But just because medical and education costs are rising doesn't necessarily outweigh all the other aspects of CPI/PPI that have downward pressures in this Great Recession. I guess I just don't think that these two aspects of of the economy--one of which is essentially purely discretionary (higher education) and the other of which imposes the major portion of its costs in a semi-random way--can cause the kind of numbers shadowstats is showing. A person might go years without any reamajor illness and thus not really be subject to most of the major price increases in medicine. Sure, his insurance premium may go up, but I suspect for most people their health insurance premium is not a major slice of their overall living expenses. I just don't see how the price increases in these two fields could counteract all the other stuff, including the fall in housing costs, such that the whole basket ends up at 25% higher prices since 2007.

Anyway, on your last point about stagflation, I don't deny that stagflation can happen. But I do think it's a different mechanism that does not undermine classic economic theory. It's pretty widely agreed that stagflation has identifiable external causes. Energy costs are a big example. Obviously, higher energy costs are going to generally manifest themselves in higher prices. But this is consistent with classical economics since higher energy prices are basically a supply shock: suppliers can no longer supply the same amount of goods as they could before at that price. The supply curve moves leftward pushing prices up. The resulting unemployment suppresses demand pushing the demand curve leftward as well, which puts downward pressure on prices. There's nothing contrary to economic theory if the end result of these two movements is higher prices because the demand suppression was outweighed by the supply constraint. Might we see that with Peak Cheap Oil? Absolutely. But that's a different process--a supply shock--that is different than EJ's statement that firms can raise prices in the face of lower demand EVEN WITHOUT a supply shock to outstrip that process.

Other external causes of stagflation in the 70s included the wage and price controls we imposed which unnaturally messed with the market. You need demand to outstrip supply for prices to rise (putting aside monetary inflation for a moment, which is a different mechanism), and the wage and price controls acted as their own supply shock because suppliers would not supply enough of goods at unnaturally low prices. This excess demand pushed real prices up.

So I don't think stagflation answers the question. I believe EJ has said that Peak Cheap Oil is looming, but not that he was expecting it by Q2 10. But what he WAS expecting by Q2 10 was higher prices, in part because he said that suppliers could raise prices in the face of demand destruction. That still appears to me to be directly contrary to ye olde supply demand curve. Does he really mean that?

[bart]

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

Bart, I appreciate the civility of this debate! And glad to hear we're on the same page at least on some things.

I will concede that my water bills have increased per gallon. They made a point to tell us about the increase, but also that it was directly related to a major capital spending campaign, with new dams and sewers, so it wasn't purely a cost-of-living thing.

I think you'll find that if you delve deeper that water prices are way up since 2007 across the country, just like electricity is.

I also agree that medical costs--in addition to higher education costs--are rising well above inflation. That concerns me no doubt. But just because medical and education costs are rising doesn't necessarily outweigh all the other aspects of CPI/PPI that have downward pressures in this Great Recession. I guess I just don't think that these two aspects of of the economy--one of which is essentially purely discretionary (higher education) and the other of which imposes the major portion of its costs in a semi-random way--can cause the kind of numbers shadowstats is showing. A person might go years without any reamajor illness and thus not really be subject to most of the major price increases in medicine. Sure, his insurance premium may go up, but I suspect for most people their health insurance premium is not a major slice of their overall living expenses. I just don't see how the price increases in these two fields could counteract all the other stuff, including the fall in housing costs, such that the whole basket ends up at 25% higher prices since 2007.

I have little clue what you're driving at or what your purpose is.

I already addressed the housing area in depth, and you have apparently ignored everything I stated.

I thought we'd already agreed to disagree about shadowstats.com and my own similar work?

Anyway, on your last point about stagflation, I don't deny that stagflation can happen. But I do think it's a different mechanism that does not undermine classic economic theory. It's pretty widely agreed that stagflation has identifiable external causes. Energy costs are a big example. Obviously, higher energy costs are going to generally manifest themselves in higher prices. But this is consistent with classical economics since higher energy prices are basically a supply shock: suppliers can no longer supply the same amount of goods as they could before at that price. The supply curve moves leftward pushing prices up. The resulting unemployment suppresses demand pushing the demand curve leftward as well, which puts downward pressure on prices. There's nothing contrary to economic theory if the end result of these two movements is higher prices because the demand suppression was outweighed by the supply constraint. Might we see that with Peak Cheap Oil? Absolutely. But that's a different process--a supply shock--that is different than EJ's statement that firms can raise prices in the face of lower demand EVEN WITHOUT a supply shock to outstrip that process.

Other external causes of stagflation in the 70s included the wage and price controls we imposed which unnaturally messed with the market. You need demand to outstrip supply for prices to rise (putting aside monetary inflation for a moment, which is a different mechanism), and the wage and price controls acted as their own supply shock because suppliers would not supply enough of goods at unnaturally low prices. This excess demand pushed real prices up.

So I don't think stagflation answers the question. I believe EJ has said that Peak Cheap Oil is looming, but not that he was expecting it by Q2 10. But what he WAS expecting by Q2 10 was higher prices, in part because he said that suppliers could raise prices in the face of demand destruction. That still appears to me to be directly contrary to ye olde supply demand curve. Does he really mean that?

If you're going to reject all the evidence and facts I've stated about inflation and shadowstats, there's little I can add other than "money printing" always trumps supply & demand... and yes, that's not "classical economics" (it doesn't work well, as many have shown - like Friedman in the '70s).

The oil shock in the '70s had its echo a year or two ago, and a much larger and unrelated financial/credit/ethics set of issues occurred too - and both were preceded by massive money creation.

Lots of firms raised prices in the '70s during stagflation - literally by definition.

...

[c1ue]

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

I've been to several mom and pop hardware stores in the area and believe me when I tell you their variety--even their collective variety--cannot hold a candle to the breadth and depth of selection at the Home Depot or the Lowes down the highway.

Hardware - especially given that they're largely small machinery and steel dependent - is likely an extremely low variety field to begin with. Just how many hammer makers are there in the world anymore?

Consider instead the original example: Wal-Mart vs. regular grocery stores. Wal-Mart vs. Walgreens/CVS. Wal-Mart vs. an Indian culture grocery store. Wal-Mart vs. an organic grocery store.

As someone who's had first hand experience as an importer - the business practices of any chain in the US whether it is Trader Joe's or Wal-Mart had a crushing effect on any small supplier unless you are the lowest cost. Even then the terms are equally punishing.

But of course this speaks to variety, not cost. Given that Wal-Mart is primarily sourced from China (see old product map), the Chinese peg to the US dollar won't manifest as a price increase immediately. It will be lower quality goods or substitutes - until the suppliers get better pricing power via competitors failing.

walmart product map.jpg

As for prices, I observe the opposite to what you see.

While the prices I pay aren't up dramatically - it is because I am an urban hunter gatherer of items on sale.

If I don't get a minimum of 40% off the total bill, I consider that trip unsuccessful.

However, looking back at 4 years of Safeway receipts, it is quite obvious that the non-sale prices are going up.

Diet Coke - my primary vice - was once $4.99 regular price for a 12-pack. It is now $5.99.

Here's the scan of 2 receipts: 1 from 2006, the other from 2010 documenting this.

Safeway Diet Coke 2006 vs 2010.PDF

The price I personally paid in this case was actually lower in 2010, but the discount rate was higher. The CRV has also significantly increased.

The regular price in 2006 was $19.96 for 4-12 packs with $1.92 CRV. The price I paid was $11.00

The regular price in 2010 was $23.96 for 4-12 packs with $2.40 CRV. The price I paid was $9.56

So officially you could say there was deflation in the price I personally paid. But the prices have gone up significantly. And those who aren't willing to spend the 3 or 4 months between sales as I do, and stockpile when prices are optimum - they're paying much closer to the $5.99 than the $2.39 much as they were paying much closer to the $4.99 than the $2.75 in 2006.

[flyer38]

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

Now I believe that I have worked out the next big trade. This is separate from thepostcatastropheeconomy portfolio that I've alluded to that we plan to launch before the end of August and the hard assets play to diversify out of Treasury bonds that we will also cover as soon as we're ready. This is a speculative bet like shorting tech stocks in March 2000 or the S&P500 in Dec. 2007 or going long gold in 2001 but much, much bigger. However, unlike before I'm not going public with it. In fact, only a handful of specialists under NDA will even understand what the positions are about that constitute the trade until the trade plays out a number of years from now. I'll update the community when we're farther along with it. I can tell you this: looks at least as crazy as buying gold did in 2001.

I figured you out Janszen! Where's my free 1-year iTulip subscription for solving the puzzle?

The reason you won't disclose for a few years, like you did with the tech stocks & gold, is that your Trade of the Century is limited in supply. What's one of the few things limited in supply? Land!

Your new venture: Farmland (in Michigan), close to waterways & railways for cheap transportation costs, and accessible to sell your goods domestic & international markets. Waterways provide a low-cost means of transporting bulky goods over long distances.

It works under your Peak Cheap Oil thesis and your Poom thesis. High gas costs, mean high food costs. You'll have a competitive advantage if you have a farm near waterways and/or train stations.

Now I just got to figure out what you're planning on growing! Or maybe you'll just buy the land, and become a sharecropper. (you're not likely to get your hands dirty).

-Ed

[Jay]

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

But of course this speaks to variety, not cost. Given that Wal-Mart is primarily sourced from China (see old product map), the Chinese peg to the US dollar won't manifest as a price increase immediately. It will be lower quality goods or substitutes - until the suppliers get better pricing power via competitors failing.

My family just had a hard shell lobster dinner with my parents. Two of the new lobster shell crackers snapped; both made in China. No problem with the others which we have had in the family for twenty years.

While the prices I pay aren't up dramatically - it is because I am an urban hunter gatherer of items on sale.

If I don't get a minimum of 40% off the total bill, I consider that trip unsuccessful.

Can you hang out with my beautiful wife for a week?

[Diarmuid]

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

Can you hang out with my beautiful wife for a week?

carefully what you wish for Jay ;-)

PS. hope you are keeping well :-)

[dummass]

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

Can you hang out with my beautiful wife for a week?

[aaron]

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

--> I have less faith in Bernanke than EJ does, but still feel like he will prevent deflation. He was appointed so that it would not happen here (deflation). The bigger inflation comes when foreigners see that their dollars are not going to be be worth very much, so they start dumping them. Unless you have faith that the government and Fed are competent enough to get it "just right" and not screw up the dollar, then we should expect higher inflation.

In a normal business environment, you are probably right with your equilibrium explanation. However, when companies are so leveraged up and owe so much money, small declines in demand are enough to put them out of business. The remaining "competitors" are able to raise prices.
http://en.wikipedia.org/wiki/Oligopoly

I will believe deflation when I see it. Nothing I buy has gone down in price (just the "assets" I owned). Inflation has been a part of life for as long as I can remember. No country has experienced it since we went off the gold standard.

With that said, here is a reasonable argument against high inflation:
Why (Hyper) Inflation Is Not In the Cards


http://charleshughsmith.blogspot.com...-in-cards.html

The policies of the Federal government are set to benefit those who hold the levers of power. Deflation benefits those who own the debt, inflation benefits the debtors. The Financial Power Elites are not the debtors--we are.

[ThePythonicCow]

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

Now I just got to figure out what you're planning on growing! Or maybe you'll just buy the land, and become a sharecropper. (you're not likely to get your hands dirty).

Hasn't EJ been showing us pictures of plants around his home lately? Perhaps he does like getting his hands dirty growing things.

[LargoWinch]

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

What's one of the few things limited in supply? Land!

I am sorry flyer38, but you do sound like a Realtor peddling Olympic-Village-Vancouver condos... VancouverGoinUp is that really you?