Mental Experiment

[Finster]

Re: Mental Experiment

1. No explanation is necessary since I never asserted anything other than a working economy, and money always exists in one.

Which means you can have deflation without first having inflation how?

2. No necessity to provide an example since the logic is self evident.

No possibility of providing an example since none exists.

http://www.nowandfutures.com/grins/rubber_ducky.wav

I see your rubber ducky and raise you a finster.

On top of that, you ignored the word "significant" in my original statement - a .3% change isn't significant in your situation #1.

Draw the cutoff point wherever you like. Modify the example accordingly. There is no getting around that the classification of "recession" or "no recession" fails to distinguish between wildly divergent circumstances even as it separately classifies similar circumstances.

This latter to the point even of elevating a poorly performing economy above a good one, as pointed out in the this sentence from my last post, which you ignored:

In fact, depending on the context, overall economic performance in situation 1) might even be better than in situation 2), but the history books would neverthess call 1) a "recession" and 2) "growth".

I submit that almost any long term consistent view that adds to understanding and makes valid classifications is useful, especially when definitions don't change and valid historical comparisons can be and are made...

But that’s the problem. It doesn’t add to understanding, and doesn’t allow us to make valid historical comparisons. Moreover, it’s even worse than that, because it conveys the impression of understanding where there is none and leads us to make invalid historical comparisons.

And besides, its your assertion that I'm trying to classify everything into "recession" or "no recession"... *harruumph*... ;)

Refer back to bugsy and finster supra…

Of course the GDP picture now is different than in the 19th century, but when *fiddling* is removed via things like John Williams adjustments then the comparisons become valid again.

This is the problem. They don’t make the comparisons valid again. Please carefully reread my comments about how using consumer prices as one’s yardstick of inflation leads to distortions in figuring GDP. The SGS (Williams) adjustments do not help us here, because they do not correct for time-axis displacements, only amplitude-axis displacements. SGS CPI is a corrected index of consumer prices, but it is still an index of consumer prices, not inflation.

Forget for a moment about the presence or absence of "fiddling" in the CPI. Assume we have a good index of consumer prices like the SGS CPI. The following still applies 100%:

…Inflation severely distorts and undermines any attempt to discern real GDP. Even when consumer price inflation was reported more faithfully, we still had a major disconnect on the time axis. In times of rising inflation, nominal GDP rises before consumer prices do, leading to the illusion of real GDP growth. Conversely, when inflation is declining, nominal GDP falls before consumer prices do, leading to the illusion of real GDP recession. Conventional economists are misled by these illusions because they fail to understand that consumer price trends themselves lag inflation.

Now, one more time for good measure ...

[bart]

Re: Mental Experiment

Which means you can have deflation without first having inflation how?

By not making the assumed assertion you make, of course.

No possibility of providing an example since none exists.

Quality logical fallacy, I like it! ;)

I see your rubber ducky and raise you a finster.

I'll raise with a *prayer* from one of our favorite people:

Draw the cutoff point wherever you like. Modify the example accordingly. There is no getting around that the classification of "recession" or "no recession" fails to distinguish between wildly divergent circumstances even as it separately classifies similar circumstances.

I never asserted or opined that it did. Take an ipso facto and call me in the morning... ;)

This latter to the point even of elevating a poorly performing economy above a good one, as pointed out in the this sentence from my last post, which you ignored:

Of course, since it had nothing to do with my point whereas dropping "significant" significantly changed my meaning.

But that’s the problem. It doesn’t add to understanding, and doesn’t allow us to make valid historical comparisons. Moreover, it’s even worse than that, because it conveys the impression of understanding where there is none and leads us to make invalid historical comparisons.

I see - using an unchanging definition of an economic condition over a long period of time and also correcting for bogus info is useless or does not add to understanding?

This is the problem. They don’t make the comparisons valid again. Please carefully reread my comments about how using consumer prices as one’s yardstick of inflation leads to distortions in figuring GDP. The SGS (Williams) adjustments do not help us here, because they do not correct for time-axis displacements, only amplitude-axis displacements. SGS CPI is a corrected index of consumer prices, but it is still an index of consumer prices, not inflation.

Forget for a moment about the presence or absence of "fiddling" in the CPI. Assume we have a good index of consumer prices like the SGS CPI. The following still applies 100%:

I maintain there's a high enough correlation between inflation and a corrected CPI, as in your amplitude example, that making those comparisons is valid and useful. And, as I recall, after doing a small time shift in the FDI, it does show a very strong CPI correlation.

We're not talking extreme accuracy in 100-150 year old data anyhow, only about recessions and comparisons and an unchanging definition. And you can review that chart to see that your point is correct - CPI lagged GDP and always will.

[Finster]

Re: Mental Experiment

By not making the assumed assertion you make, of course.

Quality logical fallacy, I like it! ;)

Stop it. You’re making me crack up.

I'll raise with a *prayer* from one of our favorite people:

It’s heretical to pray to yourself, Al … I mean … Bart.

I never asserted or opined that it did. Take an ipso facto and call me in the morning... ;)

If I do, I’d have to wash it down with gallons of repos.

I see - using an unchanging definition of an economic condition over a long period of time and also correcting for bogus info is useless or does not add to understanding?

So by your logic, you start with a meaningless economic variable, then you stick to the definition no matter what (assuming it is even possible), and be sure to measure it correctly. Reminds me of an old saying out here in the sticks: You can’t polish a turd.

I maintain there's a high enough correlation between inflation and a corrected CPI, as in your amplitude example, that making those comparisons is valid and useful.

If it weren’t for the lead-lag problem, I’d agree. But you still have a major disconnect on the time axis. In times of rising inflation, nominal GDP rises before consumer prices do, leading to the illusion of real GDP growth. Conversely, when inflation is declining, nominal GDP falls before consumer prices do, leading to the illusion of real GDP recession. Conventional economists are misled by these illusions because they fail to understand that consumer price trends themselves lag inflation.

The problem is nothing like an error of rounding. In fact it is the central fallacy of all of Keynesian economics. The whole Phillips Curve paradigm rests on the theory that inflation and economic growth are variables between which monetary policy must compromise. And it completely collapses when you recognize that it only appears to present a tradeoff because much of what passes for "economic growth" is just plain old inflation. It is simply not recognized as such because in the early stages, the inflation hasn’t yet impacted consumer prices and it is therefore mistaken for growth.

[bart]

Re: Mental Experiment

It’s heretical to pray to yourself, Al … I mean … Bart.

http://www.nowandfutures.com/grins/rimshot.mp3
http://www.nowandfutures.com/grins/rimshot2.mp3 !!

If I do, I’d have to wash it down with gallons of repos.

So by your logic, you start with a meaningless economic variable, then you stick to the definition no matter what (assuming it is even possible), and be sure to measure it correctly. Reminds me of an old saying out here in the sticks: You can’t polish a turd.

Far be it from me to question such impeccable logic? ;)

If it weren’t for the lead-lag problem, I’d agree. But you still have a major disconnect on the time axis. In times of rising inflation, nominal GDP rises before consumer prices do, leading to the illusion of real GDP growth. Conversely, when inflation is declining, nominal GDP falls before consumer prices do, leading to the illusion of real GDP recession. Conventional economists are misled by these illusions because they fail to understand that consumer price trends themselves lag inflation.

The problem is nothing like an error of rounding. In fact it is the central fallacy of all of Keynesian economics. The whole Phillips Curve paradigm rests on the theory that inflation and economic growth are variables between which monetary policy must compromise. And it completely collapses when you recognize that it only appears to present a tradeoff because much of what passes for "economic growth" is just plain old inflation. It is simply not recognized as such because in the early stages, the inflation hasn’t yet impacted consumer prices and it is therefore mistaken for growth.

As long as you stipulate that lead lag and are clear about the real inflation and growth relationship, I agree basically 100%.
I haven't deeply studied all the data on the Phillips Curve, but it wouldn't surprise me to see that its only being partially applied, much like how the Keynesian approach is only applied when it serves the purposes of the behind the scenes folk.

By the way, I just saw an article today in the NY Post by Crudele about Treasury TIOs - lets hear it for only about a 6 week lag between my research being published and the concept being picked up by major media. Color me a happy chart bart.

[Finster]

Re: Mental Experiment

http://www.nowandfutures.com/grins/rimshot.mp3
http://www.nowandfutures.com/grins/rimshot2.mp3 !!



Far be it from me to question such impeccable logic? ;)

As long as you stipulate that lead lag and are clear about the real inflation and growth relationship, I agree basically 100%.
I haven't deeply studied all the data on the Phillips Curve, but it wouldn't surprise me to see that its only being partially applied, much like how the Keynesian approach is only applied when it serves the purposes of the behind the scenes folk.

Ahhh … thought so. After that comment about zero inflation, I just knew you couldn't be a real Keynesian … ;)

As for the Phillips Curve, it has really been totally discredited. Except of course, for Wall Street and Washington economists and other Keynesians. The Phillips Curve just graphically illustrates the Keynesian theoretical trade-off between inflation and unemployment (or inflation and growth). After the high-inflation high-unemployment experience of the 1970s totally trashed the theory, the Keynesians, rather than just admitting their theory was junk science, simply invented the NAIRU concept to try and salvage it. NAIRU being of course the notion of a variable "Non Accelerating Inflation Rate of Unemployment". The idea was the due to mysterious and dark forces understood only by those with PhDs in economics, the point of inflection of the Phillips Curve merely shifts over time. Thus, the 1970s did not ‘disprove’ Keynesian economics and the Phillips Curve, but merely reflected a period in which the equilibrium point between inflation and unemployment inexplicably shifted higher.

Is it any wonder conventional economics is such a dismal failure?

By the way, I just saw an article today in the NY Post by Crudele about Treasury TIOs - lets hear it for only about a 6 week lag between my research being published and the concept being picked up by major media. Color me a happy chart bart.

Huh? The NY Post has published your research?

Congratulations! I hope you are indeed a very "happy chart bart"!

[bart]

Re: Mental Experiment

Ahhh … thought so. After that comment about zero inflation, I just knew you couldn't be a real Keynesian … ;)

As for the Phillips Curve, it has really been totally discredited. Except of course, for Wall Street and Washington economists and other Keynesians. The Phillips Curve just graphically illustrates the Keynesian theoretical trade-off between inflation and unemployment (or inflation and growth). After the high-inflation high-unemployment experience of the 1970s totally trashed the theory, the Keynesians, rather than just admitting their theory was junk science, simply invented the NAIRU concept to try and salvage it. NAIRU being of course the notion of a variable "Non Accelerating Inflation Rate of Unemployment". The idea was the due to mysterious and dark forces understood only by those with PhDs in economics, the point of inflection of the Phillips Curve merely shifts over time. Thus, the 1970s did not ‘disprove’ Keynesian economics and the Phillips Curve, but merely reflected a period in which the equilibrium point between inflation and unemployment inexplicably shifted higher.

Is it any wonder conventional economics is such a dismal failure?

(my own expletive laced commentary on conventional economics deleted ;))

I'm not certain that the Phillips Curve is hugely invalidated. I just updated a chart I made some time ago when I was reading about it - there is an unmistakable correlation once a 2 year lag is added and of course CPI is "adjusted" to closer to actual (and I imagine the FDI would be even closer in '75 & '82). I wish I had John Williams full adjustment data on unemployment loaded in - I imagine the amplitude and more recent data would match much better too.

Can you say the "Fed will be surprised in a year or so"? *sigh*

Huh? The NY Post has published your research?

Congratulations! I hope you are indeed a very "happy chart bart"!

Sorry for accidentally misleading you. They didn't directly publish me, but rather referred to the "Treasury repos" and manipulation that was the subject of my article and original research - Post link here.
Let's just say I have both education and experience in knowing what "buttons" to push and where in order to create an effect... and I hope that doesn't sound arrogant.

[Finster]

Re: Mental Experiment

Sorry for accidentally misleading you. They didn't directly publish me, but rather referred to the "Treasury repos" and manipulation that was the subject of my article and original research - Post link here.
Let's just say I have both education and experience in knowing what "buttons" to push and where in order to create an effect... and I hope that doesn't sound arrogant.

You still are worthy of congratulations. We don't know that your work didn't spark what was cited anyway. I've had similar experiences with writing something and then seeing the same point raised by a more well-known figure within days, the Froelich quote in the Something's Always Going Up! thread being just the latest example.

[Finster]

Re: Mental Experiment

(my own expletive laced commentary on conventional economics deleted ;))

I'm not certain that the Phillips Curve is hugely invalidated.

You should be because it has been! All you need to prove it is the invention of the NAIRU, which as explained above is as explicit admission as you can get from the econoacademics crowd that it didn't work and needed fixing.

I just updated a chart I made some time ago when I was reading about it - there is an unmistakable correlation once a 2 year lag is added and of course CPI is "adjusted" to closer to actual (and I imagine the FDI would be even closer in '75 & '82). I wish I had John Williams full adjustment data on unemployment loaded in - I imagine the amplitude and more recent data would match much better too.

This is where we get back to the worse-than-useless zone. As I've already explained, changes in the value of the dollar lead to changes in the value of real wages. When we get one of those rare increases in the value of the dollar, real wages rise. If they do so faster than nominal wages can adjust, it results in the price of labor being temporarily artificially high. And we all know from Econ 101 that when the price of anything is artifically high, a surplus develops. It's no different with labor than with anything else ... except we give it a special name ... unemployment.

This fully explains the observed short term relationship between unemployment and inflation without all the Keynesian voodoo and black magic. But far more importantly, the policy implications are dramatically different. Following the Phillips Curve model in the 1970s led the Fed to attempt to fight unemployment with easier money. This led to a pitiful decrease in the unemployment rate at the expense of much greater consumer price increases. Why? Those consumer price increases reflected not only the inflation the Fed was creating contemporaneously, but were playing catch-up to inflation that had been created years earlier. The result was that finally Paul Volcker had to push rates into the 20% area creating the deepest economic calamity since the Great Depression. The net result was that all that "unemployment fighting" was for naught. We got the unemployment anyway.

This is the sorry result of Keynesian-Phillips-Curve economics!

Total, complete, abject, failure!

The point is not only extremely important but extremely timely, as the situation now facing us is not unlike that of the 1970s. Not only that, but the Fed has been repeating the same policy mistakes, founded on the same flawed Keynesian-Phillips Curve dogma, now erroneously convinced that that dogma has been salvaged by the NAIRU tweak. The eventual result will not be different - we will still endure the simultaneous high inflation and high unemployment that the Phillips Curve says doesn't exist - the NAIRU will shift dramatically upward, and the Keynesians will point with smug satisfaction to the "success" of the NAIRU adjustment while real people and the real economy suffer the real consequences of their once-again failed central planning philosophy.

[bart]

Re: Mental Experiment

You still are worthy of congratulations. We don't know that your work didn't spark what was cited anyway. I've had similar experiences with writing something and then seeing the same point raised by a more well-known figure within days, the Froelich quote in the Something's Always Going Up! thread being just the latest example.

Actually, I'm pretty sure that my work did spark it at root - it just went through a few other folk before Crudele became aware of it. Its the six degrees of separation area, taken to its conclusion and also reinforced by the simple fact of no one else having done prior original research about those Treasury repos.

[bart]

Re: Mental Experiment

You should be because it has been! All you need to prove it is the invention of the NAIRU, which as explained above is as explicit admission as you can get from the econoacademics crowd that it didn't work and needed fixing.

Yes, that's true but my basic points are that not only is there an actual and valid correlation but also that the fiddling with the data is a major cause of why they don't track as well as they used to. The CPI vs. real inflation rate also enters in.

This is where we get back to the worse-than-useless zone. As I've already explained, changes in the value of the dollar lead to changes in the value of real wages. When we get one of those rare increases in the value of the dollar, real wages rise. If they do so faster than nominal wages can adjust, it results in the price of labor being temporarily artificially high. And we all know from Econ 101 that when the price of anything is artifically high, a surplus develops. It's no different with labor than with anything else ... except we give it a special name ... unemployment.

This fully explains the observed short term relationship between unemployment and inflation without all the Keynesian voodoo and black magic. But far more importantly, the policy implications are dramatically different. Following the Phillips Curve model in the 1970s led the Fed to attempt to fight unemployment with easier money. This led to a pitiful decrease in the unemployment rate at the expense of much greater consumer price increases. Why? Those consumer price increases reflected not only the inflation the Fed was creating contemporaneously, but were playing catch-up to inflation that had been created years earlier. The result was that finally Paul Volcker had to push rates into the 20% area creating the deepest economic calamity since the Great Depression. The net result was that all that "unemployment fighting" was for naught. We got the unemployment anyway.

This is the sorry result of Keynesian-Phillips-Curve economics!

Total, complete, abject, failure!

The point is not only extremely important but extremely timely, as the situation now facing us is not unlike that of the 1970s. Not only that, but the Fed has been repeating the same policy mistakes, founded on the same flawed Keynesian-Phillips Curve dogma, now erroneously convinced that that dogma has been salvaged by the NAIRU tweak. The eventual result will not be different - we will still endure the simultaneous high inflation and high unemployment that the Phillips Curve says doesn't exist - the NAIRU will shift dramatically upward, and the Keynesians will point with smug satisfaction to the "success" of the NAIRU adjustment while real people and the real economy suffer the real consequences of their once-again failed central planning philosophy.

The sorry result of Keynesian-Phillips-Curve economics indeed, at least as practiced by various lowlifes... my point being that only half of Keynes basic concept has ever been implemented. I just wonder if I dug deeper into the original Phillips work if I'd find similar partial applications.

Indeed on the (surprising to very many) high inflation and high unemployment to come in our future... and the original purpose on my corrected CPI & unemployment chart. Methinks one of my favorite econ quotes applies, at least to "conventional" econ:
"Economics exists to make astrology look respectable."
-- John Kenneth Galbraith

[Finster]

Re: Mental Experiment

Actually, I'm pretty sure that my work did spark it at root - it just went through a few other folk before Crudele became aware of it. Its the six degrees of separation area, taken to its conclusion and also reinforced by the simple fact of no one else having done prior original research about those Treasury repos.

Seems likely to me, too. So once again ...

Congratulations! I hope you are indeed a very "happy chart bart"!

[bart]

Re: Mental Experiment

Seems likely to me, too. So once again ...

Congratulations! I hope you are indeed a very "happy chart bart"!

Thanks Finster, truly much appreciated.
The reaction to that TIO article has been odd. There has been *much* less response to it than my M3 resurrection effort, even taking into account that the repo game is very poorly understood.

I was actually surprised at an $8 billion 5 day Treasury repo being issued today too... we'll see. It may be a basing action to help encourage a Santa rally...

[Finster]

Re: Mental Experiment

Yes, that's true but my basic points are that not only is there an actual and valid correlation but also that the fiddling with the data is a major cause of why they don't track as well as they used to. The CPI vs. real inflation rate also enters in.

It doesn’t matter how "actual and valid" the correlation is if it’s misleading and results in ruinous macroeconomic policy. Statistical correlations are an excuse for all sorts of central planning mischief. The positive correlation is temporary and short term; on a larger time frame we actually see a negative correlation, as illustrated by what we saw later in the cycle.

The reason this is so important is that we would all be better off if monetary and economic policy makers completely forgot about that correlation. Employment and economic growth should have absolutely nothing to do with Fed policy. Zero inflation is all it should concern itself with. You said so yourself.

[bart]

Re: Mental Experiment

It doesn’t matter how "actual and valid" the correlation is if it’s misleading and results in ruinous macroeconomic policy. Statistical correlations are an excuse for all sorts of central planning mischief. The positive correlation is temporary and short term; on a larger time frame we actually see a negative correlation, as illustrated by what we saw later in the cycle.

The reason this is so important is that we would all be better off if monetary and economic policy makers completely forgot about that correlation. Employment and economic growth should have absolutely nothing to do with Fed policy. Zero inflation is all it should concern itself with. You said so yourself.

No question there FinSan, I almost made the same point myself in an earlier post... but we were having too much fun in the whole area. The relationship is also one with a long lag, so it wouldn't be helpful in determining tweaks to maintain zero inflation.

[Finster]

Re: Mental Experiment

No question there FinSan, I almost made the same point myself in an earlier post... but we were having too much fun in the whole area. The relationship is also one with a long lag, so it wouldn't be helpful in determining tweaks to maintain zero inflation.

Imagine that ... tooo much fun!

Thank you for indulging my raw meat fang ... :eek: :p ;)