PPI Whopper

[jimmygu3]

Re: PPI Whopper

A quick observation: I just returned from a neighborhood holiday party and got the feeling that nobody there had recession on their radar. Most make good money in FIRE jobs. However, a local metal shop owner told me inflation is getting extreme for him: as much as a 45% increase in the cost of some of the chemicals he uses. And, of course, the metals themselves going up up up.

[Finster]

Re: PPI Whopper

Ouch... that arm twisting is persuasive... ;)

How do you feel about chain pulling …

I just winged it and added a dot for it starting in March 2007, even though the actual cross below zero occurred in Aug/Sept 2006. My best guess is that the NBER will actually call it as having started much later though - perhaps August 2007? Time will tell, and as usual they'll probably call it right around the time that it's over.

Oy, there’s a lot of room for interpretation in declaring a "recession". You could probably say one started this year or that one will start next year and make a solid argument for either one. Even sticking rigidly with the NBER’s definition ("A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade. http://www.nber.org/cycles/november2001/") allows for a lot of slop. (What do you mean by "activity"? How many is "a few"? Visible to who, using what measures? How do you measure "real income"? What inflation gauge to you use to determine that?) Depending on your measure of inflation and time needed for real growth to be negative or positive, you could even make a case that a recession started in early 2000 and hasn’t ended yet.

And for sure, if you wait for the NBER to make it’s pronouncement, you’ll likely be forever stuck documenting history. Seems that what you suspect may happen is just what happened last time … they declared a recession in November 2001, and (later, in March 2003!) declared it to have ended in November 2001. As you know, I don’t even think it’s even very meaningful to try and characterize something as large and complex as the US economy into a simplistic binary classification as either in or not in "recession" in the first place. Add to that the subjective determination and ex-post nature of such declarations, and it’s utterly useless.

[Finster]

Re: PPI Whopper

Double speak still works... *sigh*


"Winston worked in the RECORDS DEPARTMENT (a single branch of the Ministry of Truth) editing and writing for The Times. He dictated into a machine called a Speakwrite. Winston would receive articles or news-items which for one reason or another it was thought necessary to alter, or, in Newspeak, rectify. If, for example, the Ministry of Plenty forecast a surplus, and in reality the result was grossly less, Winston’s job was to change previous versions so the old version would agree with the new one."
-- George Orwell, 1984

Excellent! That book should be mandatory reading for every iTuliper! It is positively uncanny how, despite Orwell's fictionalization, how accurately its descriptions resemble the bureaucratic apparatus we have in real life right here in the United States right now.

An apt point to recall the Younes' comments posted above:

We are in an age of decadence, as I have said in the past, and the trick is understanding whether we are going to stay in that age or enter an age of renaissance. There are no Mother Teresas among us, from top to bottom, from the government to accounting firms and credit-rating agencies, down to CEOs, financial investors and regular citizens. If there is one panacea, it is fixing the inflation index. At the Fed we need more courgage and less politics, and we need to reverse many of the changes that were made in the early 1980s to the inflation index, beginning with the decision to remove house prices from it and replace them with equivalent rents.

He goes on to say that "The inflation index reminds me of a parent who invents Santa Claus and then believes the fantasy"...

[bart]

Re: PPI Whopper

Oy, there’s a lot of room for interpretation in declaring a "recession". You could probably say one started this year or that one will start next year and make a solid argument for either one. Even sticking rigidly with the NBER’s definition ("A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade. http://www.nber.org/cycles/november2001/") allows for a lot of slop. (What do you mean by "activity"? How many is "a few"? Visible to who, using what measures? How do you measure "real income"? What inflation gauge to you use to determine that?) Depending on your measure of inflation and time needed for real growth to be negative or positive, you could even make a case that a recession started in early 2000 and hasn’t ended yet.

And for sure, if you wait for the NBER to make it’s pronouncement, you’ll likely be forever stuck documenting history. Seems that what you suspect may happen is just what happened last time … they declared a recession in November 2001, and (later, in March 2003!) declared it to have ended in November 2001. As you know, I don’t even think it’s even very meaningful to try and characterize something as large and complex as the US economy into a simplistic binary classification as either in or not in "recession" in the first place. Add to that the subjective determination and ex-post nature of such declarations, and it’s utterly useless.

Very well put yet again, Manor Maven.

All the "interesting" items that go into the NBER actually "defining" and calling a recession does indeed make the whole exercise rather special... in the sense of SNL's Church Lady of course.

There are four reasons why I did it anyhow (and note that I did change it to have started in July/August to hopefully have fewer rants and flames arrive):

1. You & I & most iTulipers and almost half the US population think we're in one now (per Gallup).
2. It does actually have meaning for things like sentiment and a broad framework within which to invest.
3. The old definitions of a recession of 2-3 down quarters in GDP have occurred (assuming the use of even partial shadowstats.com adjustments).
4. Because I could... and of course because you told me to, and now I can blame it on you... ;)

[bart]

Re: PPI Whopper

He goes on to say that "The inflation index reminds me of a parent who invents Santa Claus and then believes the fantasy"...

I couldn't resist:

[zoog]

Re: PPI Whopper

Excellent! That book should be mandatory reading for every iTuliper! It is positively uncanny how, despite Orwell's fictionalization, how accurately its descriptions resemble the bureaucratic apparatus we have in real life right here in the United States right now....

I've never read it, but I ordered it from Amazon recently and plan to start reading during my Christmas flights. Assuming the TSA doesn't confiscate it as a weapon of terror...

[Finster]

Re: PPI Whopper

Very well put yet again, Manor Maven.

All the "interesting" items that go into the NBER actually "defining" and calling a recession does indeed make the whole exercise rather special... in the sense of SNL's Church Lady of course.

There are four reasons why I did it anyhow (and note that I did change it to have started in July/August to hopefully have fewer rants and flames arrive):

1. You & I & most iTulipers and almost half the US population think we're in one now (per Gallup).
2. It does actually have meaning for things like sentiment and a broad framework within which to invest.
3. The old definitions of a recession of 2-3 down quarters in GDP have occurred (assuming the use of even partial shadowstats.com adjustments).
4. Because I could... and of course because you told me to, and now I can blame it on you... ;)

Touche El Bartos. Of course. It's like "stagflation". Despite our misgivings, people talk about it a lot. And times being what they are, they're going to be talking about it a lot more. Gonna get pretty hard to have routine financial and economics discussions without speaking the language of the day, so we compromise by engaging while voicing our reservations. We are not going to be a dogmatic semantic eVangelic twit about it ...

[WDCRob]

Re: PPI Whopper

I've been trying to sort this out for awhile on my own (even dug out my c.1985 Econ and c.2003 Fin texts), but haven't solved it...

How are mildly negative growth with zero inflation (stable money/credit) and "strong" growth coupled with slightly stronger inflation (money/credit growing faster than economy) any different? Both yield a slightly negative real GDP.

In particular both would indicate a "mild recession," but I gather Finster at least doesn't like that description. Why? More specifically, and related to my earlier questions, why does NOMINAL GDP matter at all? Jobs?

[Finster]

Re: PPI Whopper

In particular both would indicate a "mild recession," but I gather Finster at least doesn't like that description. Why?

Oy, there’s a lot of room for interpretation in declaring a "recession". You could probably say one started this year or that one will start next year and make a solid argument for either one. Even sticking rigidly with the NBER’s definition ("A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade. http://www.nber.org/cycles/november2001/") allows for a lot of slop. (What do you mean by "activity"? How many is "a few"? Visible to who, using what measures? How do you measure "real income"? What inflation gauge to you use to determine that?) Depending on your measure of inflation and time needed for real growth to be negative or positive, you could even make a case that a recession started in early 2000 and hasn’t ended yet.

And for sure, if you wait for the NBER to make it’s pronouncement, you’ll likely be forever stuck documenting history. Seems that what you suspect may happen is just what happened last time … they declared a recession in November 2001, and (later, in March 2003!) declared it to have ended in November 2001. As you know, I don’t even think it’s even very meaningful to try and characterize something as large and complex as the US economy into a simplistic binary classification as either in or not in "recession" in the first place. Add to that the subjective determination and ex-post nature of such declarations, and it’s utterly useless.

I've been trying to sort this out for awhile on my own (even dug out my c.1985 Econ and c.2003 Fin texts), but haven't solved it...

How are mildly negative growth with zero inflation (stable money/credit) and "strong" growth coupled with slightly stronger inflation (money/credit growing faster than economy) any different? Both yield a slightly negative real GDP...

... More specifically, and related to my earlier questions, why does NOMINAL GDP matter at all? Jobs?

Nominal GDP is a datum you have to get through to arrive at real GDP. Specifically, you measure GDP in current dollars, then apply an adjustment for inflation to calculate real GDP.

So in a nutshell, nominal GDP and real GDP differ by inflation. As your intuition tells you, it's real GDP that matters most - it's the real value of all the production in an economy. And since everything that is consumed must first be produced, it indicates the potential for consumption and hence the ability of an economy to support a given standard of living.

So why goes nominal GDP matter at all? As suggested by the first sentence in the previous paragraph, for the same reason that inflation does. And inflation matters for two main reasons. First, because it causes prices to change independently of values. And prices are extremely important because they are the principal information transmission mechanism in the general market. They are what communicates to producers the value of what they produce and therefore affect their production decisions, and they communicate to consumers the cost of what they consume and therefore guide their consumption decisions. To the extent inflation fouls these signals, it impairs the efficient operation of the economy.

Second, because it represents a covert and involuntary wealth transfer. Inflation (in the sense of rising prices) results from someone creating new cash. It's a lot like counterfeiting, except legal because it's done by an authorized entity. But the economic result is the same; the purchasing power increase experienced by the creator of the new cash is a purchasing power loss to all other holders of the currency. It must be so, since there is only new money created, not new value. (If this were not the case, why would counterfeiting be illegal?). In addition, purchasing power is also surreptitiously transferred from lenders to borrowers, because the former are long the depreciating cash and the latter are short. This creates an economic distortion in favor of borrowers and - (surprise, surprise) - you wind up with a lot more borrowing, lots more people deep in debt, and net impoverishment of the inflating country.

[jk]

Re: PPI Whopper

nominal gdp matters in another way, equally as important. there are a lot of embedded costs which are not indexed. if, for example, many participants in the economy are paying fixed rate debt at, say, 5%, then it matters A LOT whether nominal gdp growth is 7% or 2%, irrespective of inflation.

[WDCRob]

Re: PPI Whopper

Finster, is 10% nominal growth and a 10% increase in money/credit equal to 0% inflation, or 10%? i.e. can inflation be measured independent of GDP, or is there a nominal inflation and a real inflation as well?

JK, if nominal GDP is growing at a rate faster than my fixed interest rates I've got a payment that should be growing, but isn't. Is that what you're saying? Not at all confident that I've followed you here.

Hopefully this sort of basement-up stuff is of interest and useful to more than just me. If not, thanks for explaining this for my benefit.

[jk]

Re: PPI Whopper

Finster, is 10% nominal growth and a 10% increase in money/credit equal to 0% inflation, or 10%? i.e. can inflation be measured independent of GDP, or is there a nominal inflation and a real inflation as well?

JK, if nominal GDP is growing at a rate faster than my fixed interest rates I've got a payment that should be growing, but isn't. Is that what you're saying? Not at all confident that I've followed you here.

Hopefully this sort of basement-up stuff is of interest and useful to more than just me. If not, thanks for explaining this for my benefit.

no. what i'm saying is that if gdp is growing at a nominal rate higher than fixed interest rates, there won't be a squeeze on the payers. if the nominal rate is lower than the level of interest rates, there is a problem.

[bart]

Re: PPI Whopper

Touche El Bartos. Of course. It's like "stagflation". Despite our misgivings, people talk about it a lot. And times being what they are, they're going to be talking about it a lot more. Gonna get pretty hard to have routine financial and economics discussions without speaking the language of the day, so we compromise by engaging while voicing our reservations. We are not going to be a dogmatic semantic eVangelic twit about it ...

Thank goodness for the seatbelt in my chair, I almost fell out cackling on "eVangelic"... and rest assured that it shall be stolen and used in any possible "appropriate" manner. :eek:


And to WDCRob's comment:

Finster, is 10% nominal growth and a 10% increase in money/credit equal to 0% inflation, or 10%? i.e. can inflation be measured independent of GDP, or is there a nominal inflation and a real inflation as well?

Hopefully Finster will jump in but in my opinion there is no such thing as a distinction between nominal and real inflation. There's only one inflation, although there are many different ways to measure it and many opinions on how it should be defined.

If nominal GDP is growing at 10% and there is no inflation, then nominal GDP would equal real GDP.

[WDCRob]

Re: PPI Whopper

Hopefully Finster will jump in but in my opinion there is no such thing as a distinction between nominal and real inflation. There's only one inflation, although there are many different ways to measure it and many opinions on how it should be defined.

But the way you define it matters a lot, doesn't it?

And if it's defined by prices, you're saying that there IS such a thing as real and nominal inflation. Since you could have an increase in money supply that doesn't translate to prices (if it matches GDP) - nominal inflation, offset by GDP. Hopefully that concept makes sense - I suspect I'm not using the right language here.

IIRC, Finster says that any increase in the money supply is by definition inflation. Which would be reflected in a growing economy by prices remaining stable instead of falling. I think.

So...why is it that price increases not related to demand are bad, but prices dropping for reasons not related to demand are not similarly undesirable? Both would serve to confound economic decision-making wouldn't they?

[c1ue]

Re: PPI Whopper

Deflation is bad because it creates a self-reinforcing spiral of over-savings.

When spending a dollar means you wind up with less later, even Americans figure out it is better to spend less.

But spending less means the economy - especially the American one - gets worse.

And so spending falls yet again.