A Stroll With Mish - "Through da-flation looking glass"

[bart]

Re: A Finster Rant

I guess speculators - one of the latest whipping boys - didn't exist in the 1990s when oil prices were falling!

That's one of my favorites these days - asking the folk bitching about speculators if they thanked a speculator when oil went down to about $10 in the last '90s... or dropped about 50% from 2000 to 2002. :eek: ;)

[Guest]

Re: A Finster Rant

... want to pose the question as food for thought. Then maybe we can take on Mish ... ;)

Finster, I fully take your point that Mish is a very capable analyst. He covers a lot of ground, and as you note the greater part of his observations is spot on.
You hint that before one "takes Mish on" on needs to get one's ducks in a row? Well of course I could never hold a patch to Mish's capability, and indeed I am not even anyone's excuse for an economic analyst. Even the notion would be an embarassment to me. But what may "exhonerate my impertinence" here is that those few holes in his theses that do exist are so broad and logically exasperated that anyone who has read even a few scraps of iTulip could spot them from a hundred yards away. Does this guy ever even read people like Doug Noland, or John Williams for instance?

You really don't have to read very far in the cited article - for example statements "explaining" why gold is going up but the dollar is going down - which according to some more rationally ironed out version of "Mishology" should both be going up or down together, because they are "both money".

As they evidently are not moving in concert with each other, "Mishology" has to develop a construct as to why they have in fact traced almost perfect, inversly related trajectories for years, and his construct on that particular rationailizaton is so strained that it is almost painful to read. For rationalisations this fanciful, one does not need a particularly exalted proficiency in economics, right? So it's due to spectacular departures (into the realm of the irrational!) regarding observable price action such as this example that I posted a spoof of "Mishology". It may appear to be "unseemly" at first glance that an absolute analytic nobody like me is posting impertinent comments about this guy, but the fact is that spotting these "logical lacunae" in fact requires no particularly special knowledge whatsoever.

I'm not sure if the Netiquette Squads will have me summarily clapped in irons for this audacious foray into condemnation, but the conclusions he draws seem at times strained to the point of appearing comical (aka "Just Plain Nuts"!).

[Finster]

Re: A Finster Rant

That's one of my favorites these days - asking the folk bitching about speculators if they thanked a speculator when oil went down to about $10 in the last '90s... or dropped about 50% from 2000 to 2002. :eek: ;)

Speculators were invented by Bush and Cheney in 2001 not long after they blew up the WTC, sent anthrax all over the place, and started a plot to heat the planet up ...

[FRED]

Re: A Finster Rant

I appreciate your patience with my penchant for getting into dust-ups with very smart people, Lukester ... some of the most illuminating discussions seem to come out of them.

:cool:

The answer to your question depends on the context. Keep in mind that my comments were painting in broad strokes. Of course acute systemic shortages and any number of other transient issues can and do affect the prices of commodities in general and oil in particular. Hence caveats such as "over time".

But my argument isn't based on an assumption of static money, viz. "If over time (e.g. over the course of a full credit cycle) the supply of money grew no faster than the supply of physical commodities, the net price action would be identically zero. Whatever degree of scarcity or abundance may occur in the physical commodities, the same would be reflected in money." In other words, between the end points of this "cycle" there could be significant fluctuations in both the supply of money and that of commodities, provided the net changes were similar. If the supply of physical commodities grew by 50%, for example, and the supply of money grew by 50%, all else being equal we'd expect the price to go nowhere. Oil prices in gold have been stable over time not because the supply of gold is never-changing, but because of broadly similar changes in abundance.

What actually has happened to dollar prices, however, is not even close. Without delving into the detailed data, the price of a barrel of oil has gone from something like $3.35 in 1970 to $119.35 in 2008. Oil supply has actually increased quite a bit, but money supply by orders of magnitude more. Hence the remarkable "price increase". Notice that we casually toss out those figures as the "price of oil", but crucially, they relate two variables, oil and dollars. As in "dollars per barrel".

The point is to counter the endless stream of media propaganda about how oil prices went up because of hurricanes, strikes in Nigeria, greedy speculators, economic growth overseas, etceteras, as if our own government had nothing to do with it. Hurricanes were not invented yesterday, nor was labor unrest, nor global economic growth. I guess speculators - one of the latest whipping boys - didn't exist in the 1990s when oil prices were falling! And as pointed out elsewhere, oil is not the only commodity whose price has risen - not even an exceptional example - it just gets the most press.

Crucially, whether the price has risen at all is simply a function of what you price it in. We cited gold as a monetary unit above, but others work, too. For example, if you happened to be a Brazilian doing your accounting in reals the price of oil hasn’t done much of anything over the past year or two.

How can we conclude that "price of oil" even exists as an independent element of objective reality? It doesn’t! It only exists in relation to some monetary unit. And if different monetary units can tell such wildly diverging stories, we are forced to conclude that we learn from the "price of oil" much more about the monetary unit we’re using to express it in than we do about the oil.

There is another part to this story that we haven’t gotten into yet, though. If the "price of oil" doesn’t exist apart from a monetary unit, then what about the value of oil? How can we measure that? If it rose, how would we know? How could we isolate what’s happening to the value of oil? Apart from the vagaries of seemingly ephemeral, changing, monetary units? Is there some standard of market value that we could use?

I think there is an answer, or at least some credible candidates for one, but want to pose the question as food for thought. Careful consideration of that question alone may enlighten more than any number of words spilled in this post.

Then maybe we can take on Mish ... ;)

Blaming "speculators" for bad government policy is a tried and true tradition.

As for Mish, we've covered that exhaustively already here.

Anyone who will not admit that inflation is occurring is at best confused and at worst is not being truthful. Further, any analyst says one thing, that delfation is "in the cards," but recommends an asset that only makes sense own under inflationary conditions – gold – is at best misguided but is more likely playing games with his audience.

The reason for these inconsistencies is that these analyses are based on ideology versus intellectually independent theory. Mish openly admits that his analysis is based on the Austrian school, which assertion itself is an appeal to an audience of gold-bugs. We recommended gold in 2001 and will recommend when it is likely that those reasons for buying it then are no longer true. Mish will, we presume, continue to insist that "gold is money" much as similarly ideology-based analysis insisted from 1980 forward that "gold is money" even as gold plunged into a 20 year bear market.

This is antithetical to our approach. We are more aligned with Jim Sinclaire's thinking on that subject. Our philosophy is that there are times to bet with government and times to bet against it. Our analysis is informed by the Austrian school, but also Keynesianism, Hayek, Minskey, Galbraith, and many others. We hope are taking the best of the best to inform our analysis, and we are always broadening our base.

We have little use for analysis that is confused and avoids facts because it is narrowly based on a single ideology. If we wanted that we can read Ben Stein or listen to FOX news. It brings in to question all of the other "analysis" and makes it singularly unreliable for making investment decisions.

[Finster]

Re: A Finster Rant

Finster, I fully take your point that Mish is a very capable analyst. He covers a lot of ground, and as you note the greater part of his observations is spot on.
You hint that before one "takes Mish on" on needs to get one's ducks in a row? Well of course I could never hold a patch to Mish's capability, and indeed I am not even anyone's excuse for an economic analyst. Even the notion would be an embarassment to me. But what may "exhonerate my impertinence" here is that those few holes in his theses that do exist are so broad and logically exasperated that anyone who has read even a few scraps of iTulip could spot them from a hundred yards away. Does this guy ever even read people like Doug Noland, or John Williams for instance?

You really don't have to read very far in the cited article - for example statements "explaining" why gold is going up but the dollar is going down - which according to some more rationally ironed out version of "Mishology" should both be going up or down together, because they are "both money".

As they evidently are not moving in concert with each other, "Mishology" has to develop a construct as to why they have in fact traced almost perfect, inversly related trajectories for years, and his construct on that particular rationailizaton is so strained that it is almost painful to read. For rationalisations this fanciful, one does not need a particularly exalted proficiency in economics, right? So it's due to spectacular departures (into the realm of the irrational!) regarding observable price action such as this example that I posted a spoof of "Mishology". It may appear to be "unseemly" at first glance that an absolute analytic nobody like me is posting impertinent comments about this guy, but the fact is that spotting these "logical lacunae" in fact requires no particularly special knowledge whatsoever.

I'm not sure if the Netiquette Squads will have me summarily clapped in irons for this audacious foray into condemnation, but the conclusions he draws seem at times strained to the point of appearing comical (aka "Just Plain Nuts"!).

I haven’t spent much time reading Mish (can’t think of a reason to…;)), so risk unfairly distorting his views. But with that caveat, it looks to me like the object of your criticisms is rooted in his confusing himself with imprecise terminology. Word like "inflation" and "deflation" have multiple meanings, but many analysts use them as if they were unambiguous elements of symbolic logic.

For example, the word "deflation" has one meaning that refers to a contraction of credit. It has another meaning that refers to a general decrease in the price level. Mish correctly asserts that we are having "deflation" in the first sense. Then he transmogrifies that into the second sense, concluding that we therefore ought to be experiencing falling prices. This comes about from using the term "deflation" as if it described a single, well-defined, phenomenon. Ambiguous terms, sloppy reasoning. As a result, because we have rising prices instead of the falling prices that he erroneously assumes "ought" to be there, he has to invent an external explanation for that. This leads him down a chain of strained reasoning and traps him in an unnecessarily complex set of rationalizations.

Contrast this with EJ’s references to "debt deflation". Rather than just say "deflation" and risk getting lost in fuzzyisms and ambiguity, he is careful to be clear that he is talking about a contraction of credit.

We can put a still finer point on credit contraction. Real or nominal? That is, exactly what contracted, the real outstanding value of credit, or the nominal outstanding value of credit? Well, if the value of the currency unit were constant, they would be identical. But there’s no reason why that has to be the case. Right now we’re on the far side of a credit bubble, and real credit is contracting. The government and the banking system, however, are attempting to paper it over by keeping the nominal outstanding value of credit from contracting as well. And if nominal credit is to remain static to expanding while real credit contracts, that means the value of the currency unit must decline. Ergo, rising prices.

So what Mish paints as an anomaly doomed to transience is nothing particularly unusual at all. Sure, you can get deflation in the outstanding real value of credit and inflation in prices.

The only thing standing in the way of that would be something that prevented currency inflation (e.g. a gold standard), and that last time that was the case was in the early thirties. Since then, debt deflation has normally been accompanied by price inflation.

[bart]

Re: A Finster Rant

Speculators were invented by Bush and Cheney in 2001 not long after they blew up the WTC, sent anthrax all over the place, and started a plot to heat the planet up ...

I see you're working on your next merit badge for your tinfoil hat too... ;)


And on a more serious note, that Youtube Nixon video just posted by Fred is priceless. All hail the internet... and I wonder how long it will be until someone does a MasterCard (aka MasterBlaster ) "priceless" take off ad on inflation & wage and price controls, etc. :cool:

[bart]

Re: A Finster Rant

Contrast this with EJ’s references to "debt deflation". Rather than just say "deflation" and risk getting lost in fuzzyisms and ambiguity, he is careful to be clear that he is talking about a contraction of credit.

A winnah!... give that EJ d0000d a kewpie doll, and take one for yourself too.


Herewith one of my few speculative charts to try and illustrate what's actually going on with "money". There are a number of relatively wild assumptions behind it and its full of holes and is even a bit extreme... but it also provides one view of "debt deflation".

All I did is add up M3 and all forms of credit that I track, and also added in quarterly US derivatives data notional totals from the Treasury report. Then I adjusted the derivatives total downward since June 2007 by the percentage drop in the BKX (the Philadelphia Bank Index), the BKX being used as a proxy for actual losses in derivatives values. The actual dollar totals are on the left hand scale, and the annual rate of change is on the right hand scale.

Quite a picture...













Here's the same chart, but since 2000 and without any derivatives, for comparison.

[Guest]

Re: A Finster Rant

A winnah!... give that EJ d0000d a kewpie doll, and take one for yourself too.

Bart - Finster is too old for a kewpie doll. It would not look good for the Shadowfed Chairman to be seen accepting a kewpie doll award.

[bart]

Re: A Finster Rant

Bart - Finster is too old for a kewpie doll. It would not look good for the Shadowfed Chairman to be seen accepting a kewpie doll award.

ssshhhh... "Kewpie doll" is triple secret iTulip Shadowfed code for things that mere mortals may not know until they are worthy... :eek: :cool: ;)

And besides, I'm way older than Finster... I was here way before dirt was even thought of...

[Finster]

Re: A Finster Rant

Blaming "speculators" for bad government policy is a tried and true tradition...

A timely headline from Bloomberg underscores that perfectly:

Wall Street Grain Hoarding Brings Farmers, Consumers Near Ruin

By Jeff Wilson

April 28 (Bloomberg) -- As farmers confront mounting costs and riots erupt from Haiti to Egypt over food, Garry Niemeyer is paying the price for Wall Street's speculation in grain markets...

http://www.bloomberg.com/apps/news?p...d=aDZej7GJjpjM

[c1ue]

Re: A Stroll With Mish - "Through da-flation looking glass"

We all have to hold SOME assets in dollars for daily transactions. At what time will every thing else be secondary to getting everything out of the dollar. When that time comes, I expect the stock market action will confirm the inflation by making steep rises in response to the loss of purchasing power of the monetary unit.

Actually you don't even have to do that.

One thing I never see happening: any country preventing money from coming IN.

For example: A bank account in New Zealand paying 10% interest. An ATM card.

Each time you run out of dollars in your wallet, you go to an ATM and extract $200 out - instantly converted from NZ plus a bit of ATM fee.

This is a microcosm of what rentiers have historically been able to do.

Ain't modern technology grand?