Staying Neutral on Inflation vs. Deflaton
By James Kostohryz Sep 16, 2009 4:30 pm
Use the core CPI as your guide.
I want to go on record saying that I definitely side with… neither.
I’ve been on record several times debunking the notion of hyperinflation or a dollar collapse anytime in the near future. However, I’ve also been on record many times rejecting the doomsday scenarios of the deflationists.
Framing the Debate
Part of the problem with this debate rests in defining what these various terms mean. For example, I can’t recall a single prophet of dollar doom or hyperinflation maven make a specific prediction citing a number or numerical range.
Thus, if the CPI were to rise above 10% per annum, I have little doubt that the mavens of hyperinflation will be declaring victory. And if the US dollar index were to decline another 10% or so, I have little doubt that the prophets of dollar doom with be loudly celebrating.
Similarly, the doomsday deflationists are equally vague in their forecasts. As long as the headline CPI stays below 0%, the doomsday deflationists will likely continue to declare victory.
This will not do. Forecasters need to define what they’re forecasting and be specific about their predictions. For example, the term “hyperinflation” doesn’t have a specific numeric definition. However, various textbooks and other authoritative sources state that the minimum inflation rate that would qualify as hyperinflation would be over 100% per annum. Indeed, most sources that attempt to define hyperinflation cite monthly rates of 20% at minimum.
Similarly, to speak of a 10% or even 20% decline in the value of the US dollar -- relative to a particular currency or a basket of currencies -- as a “collapse” is nonsense.
Because the vast majority of the US economy is made up services and other non-tradeables, such a decline in the value of the US dollar would hardly be felt at all at the consumer price level.
Furthermore, such a decline would actually be quite positive for the US economy, as it would contribute to the lowering of the current account deficit -- a problem that is at the heart of many important economic problems that the US faces, including excess indebtedness, sluggish job growth, and income inequality.
So a 10% to 20% decline in the foreign exchange value of the US dollar is hardly something that should generate the sort of panic that prophets of dollar doom have been attempting to incite -- rather it would be something to be welcomed.
What about the doomsday deflationists? They’re similarly vague in their predictions.
Admittedly, I’ve heard few speak of “hyper-deflation.” So presumably, any inflation rate below 0% would satisfy their criteria.
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2009-09-16 17:02:54
Yeah baby!
Wack them extremests over their heads and knock some sense into them!!! Another fantastic contribution.
Thanx for keeping us in line!!!
Thanx for keeping us in line!!!
2009-09-16 17:03:47
Should we look for higher interest rates then?
If core CPI will be in the 2.5-3% range, it seems like 10 year Treasury rates s/b at least 5%? What does that do the the stock market then?
2009-09-16 17:50:05
good argument
you make a good arguement, but the CPI is not necessarily to be trusted. Baskets of goods are replaced by cheaper substitues to assume consumers that can no longer afford a steak for exmaple, will buy a hamburger, so its clear the CPI is not all its cracked up to be.
further more if the dollar loses another 20% of value you have several problems that will spill over.... costs of anything imported will sky rocket, as will commodities priced in USD, so saying the US consumer will not be effected is bogus. They will get hit, slowly perhaps but the costs will be passed onto them.
and as George Soros correctly points out, market run in feedback loops so a 20% decline in the dollar can lead to a loss of confidence feeding into a crisis blow off bottom where it looses another 20-30-40% of value as panic sets in and the market momentum and perception takes over.
the dollar will not just drop to fair value or a nice clean 10-20% that the article suggests, such a decline will clearly lead to an overshoot further declines.
I agree with the sentiment that its not good to take extreme views or side with one camp.... lose your opinion not your money..... but things are not good for the USD.
on the other hand if the carry traders now pulling USD loans for overseas investment get caugh short we can see a huge surge in the USD, and this is clearly the contraian trade right now, though it may take some months to play out. Its happened in the past, terrible USD weakness in the early 80s led into huge USD strength in the 90s. Perhaps we are drawing to a close on the decade of weak USD ?
further more if the dollar loses another 20% of value you have several problems that will spill over.... costs of anything imported will sky rocket, as will commodities priced in USD, so saying the US consumer will not be effected is bogus. They will get hit, slowly perhaps but the costs will be passed onto them.
and as George Soros correctly points out, market run in feedback loops so a 20% decline in the dollar can lead to a loss of confidence feeding into a crisis blow off bottom where it looses another 20-30-40% of value as panic sets in and the market momentum and perception takes over.
the dollar will not just drop to fair value or a nice clean 10-20% that the article suggests, such a decline will clearly lead to an overshoot further declines.
I agree with the sentiment that its not good to take extreme views or side with one camp.... lose your opinion not your money..... but things are not good for the USD.
on the other hand if the carry traders now pulling USD loans for overseas investment get caugh short we can see a huge surge in the USD, and this is clearly the contraian trade right now, though it may take some months to play out. Its happened in the past, terrible USD weakness in the early 80s led into huge USD strength in the 90s. Perhaps we are drawing to a close on the decade of weak USD ?
2009-09-16 18:09:48
Setting up strawmen
I fully agree with your conclusions and your observation regarding the ideological biases of the many mavens of extreme economic prognostications (as you note, they do not provide specifics so they are not making forecasts). However, I disagree with your emphasis on hyperinflation as being of the sort experienced by the Weimar Republic or third world nations.
An advanced economy needs price stability to function efficiently. The likelihood of even 5 - 10% per year inflation for an extended period, far from YOUR definition of hyperinflation, distorts economic decisions. Those of us who were around in the late 1970's and early 1980's can attest to the problems of making business decisions in an environment of high and variable inflation. Additionally, even modest levels of inflation will raise the cost of debt to the Treasury and American consumers (especially mortgages) and throw us into a new Great Recession.
An advanced economy needs price stability to function efficiently. The likelihood of even 5 - 10% per year inflation for an extended period, far from YOUR definition of hyperinflation, distorts economic decisions. Those of us who were around in the late 1970's and early 1980's can attest to the problems of making business decisions in an environment of high and variable inflation. Additionally, even modest levels of inflation will raise the cost of debt to the Treasury and American consumers (especially mortgages) and throw us into a new Great Recession.
2009-09-16 18:21:32
good argument
Hi Richard,
The CPI is not perfect. What is? But let me tell you that this particular price index is pretty darned good, and there is certainly nothing better out there.
On your hamburger versus steak example that comes straight out of shadowstats, the fact is that a price index can only be constructed on the basis of things people currently consume -- not things the consumed in the past or which they could consume in the future. Furthermore, the shadowstats argument is completely tendentious and unempirical in that it does not take into account the fact that there are an enormous amount of examples that work the other way -- ie superior substitutes are introduced at the same or lower prices into the marketplace thereby improving the quality of life. I wonder why shadowstats doesn't harp on those examples? We know the answer: It doesn't fit their ideological script so they ignore these examples.
On the fact that a modest decline in the US dollar will have an almost negligible impact on inflation, I already explained it. Tradable goods (imports + goods that compete with imports) make up a relatively small portion of total GDP and of the total CPI basket. The vast majority of goods and services that comprise the CPI are neither imported nor impacted by foreign currency movements. So, I am afraid that the arguments that exaggerate the impact of dollar movements on inflation are the ones that are bogus.
The CPI is not perfect. What is? But let me tell you that this particular price index is pretty darned good, and there is certainly nothing better out there.
On your hamburger versus steak example that comes straight out of shadowstats, the fact is that a price index can only be constructed on the basis of things people currently consume -- not things the consumed in the past or which they could consume in the future. Furthermore, the shadowstats argument is completely tendentious and unempirical in that it does not take into account the fact that there are an enormous amount of examples that work the other way -- ie superior substitutes are introduced at the same or lower prices into the marketplace thereby improving the quality of life. I wonder why shadowstats doesn't harp on those examples? We know the answer: It doesn't fit their ideological script so they ignore these examples.
On the fact that a modest decline in the US dollar will have an almost negligible impact on inflation, I already explained it. Tradable goods (imports + goods that compete with imports) make up a relatively small portion of total GDP and of the total CPI basket. The vast majority of goods and services that comprise the CPI are neither imported nor impacted by foreign currency movements. So, I am afraid that the arguments that exaggerate the impact of dollar movements on inflation are the ones that are bogus.
2009-09-16 18:32:38
Setting up strawmen
I have no quarell with your view that inflation in the 5%-10% range has distortive effects. I agree.
Nonetheless, hyperfinflation is what it is. And inflation of 5%-10% it is not. Hyperinflation is a term that people that bandy it about need to take responsibility for. There are two options. They are either economically ignorant and don't know what the term means. Or they know what it means and they are predicting extreme outcomes.
So, I have not set up any strawmen. Many pundits use this term -- including several on Minyanville. If anything, they are setting themselves up as strawmen -- either ignorant, extremist or both.
Nonetheless, hyperfinflation is what it is. And inflation of 5%-10% it is not. Hyperinflation is a term that people that bandy it about need to take responsibility for. There are two options. They are either economically ignorant and don't know what the term means. Or they know what it means and they are predicting extreme outcomes.
So, I have not set up any strawmen. Many pundits use this term -- including several on Minyanville. If anything, they are setting themselves up as strawmen -- either ignorant, extremist or both.
2009-09-16 18:37:42
Should we look for higher interest rates then?
Larry,
If inflation reverts toward the mean, so will rates. If rates stay low enough for long enough to allow enough people to repair their finances through refinancing, restructuring and etc. then rates above 5% 6-12 months from now will not be a problem. In theory, economic growth can make these rates affordable.
Thus, the stock market can continue to rise along with interest rates. Indeed, under the right conditions, both can be considered healthy symptoms of an economy that is healing.
If inflation reverts toward the mean, so will rates. If rates stay low enough for long enough to allow enough people to repair their finances through refinancing, restructuring and etc. then rates above 5% 6-12 months from now will not be a problem. In theory, economic growth can make these rates affordable.
Thus, the stock market can continue to rise along with interest rates. Indeed, under the right conditions, both can be considered healthy symptoms of an economy that is healing.
2009-09-16 18:49:10
The Austrian School
Inflation is a monetary phenomenon according to von Mises.
Hyperinflation is just more of the same.
Rising prices of imported goods is one consequence of expectations for more of the same monetization of the debt, expanded govt programs / deficit spending, and a hobbled economy (Marxists tend to read Keynes, not von Mises).
Food and energy are about the only things we really need... have too many cars, houses, toys, etc.
I think Stagflation will be around for a while. A flat GDP and 1 - 5% CPI increase fits that definition, no?
Hyperinflation is just more of the same.
Rising prices of imported goods is one consequence of expectations for more of the same monetization of the debt, expanded govt programs / deficit spending, and a hobbled economy (Marxists tend to read Keynes, not von Mises).
Food and energy are about the only things we really need... have too many cars, houses, toys, etc.
I think Stagflation will be around for a while. A flat GDP and 1 - 5% CPI increase fits that definition, no?
2009-09-16 19:40:36
good argument
To argue the CPI properly you'd have to take a look at what the basket contains year by year going back at least 20-30 years, i don't think there is room for that on this forum. There is no doubt that the price of a steak in 1901 was dramactically lower than what it costs today and there is no reason for this, since the world is not running short of farmland, cows, restaurants, chefs or steaks. It is only running out of honest bankers and people prepared to do something about it. The only reason for inflation is if supply falls short of demand and this is not the case with almost anything you can find priced in 1901 verses today. In 1980 for example I recall buying a can of Coke for 10 cents, now it costs more like $1-$1.50... 10-15 times the price..... how exactly did that happen, we are not short of Coke, Aluminium cans, water or sugar ?
To back up your claims about imports you need to produce some real hard figures and what you are also fogetting is that oil, wheat, lumber, corn, soy, copper, etc. etc are priced in USD and if the USD goes down 20+% then the prices of those raw commodities will go up, regardless of whether they are imported or not. So claiming that the US can live in an isolated bubble because imports are a small amount of GDP is wrong use of the figures.
If the USD is losing its purchasing power, then consumers will suffer. Short term if there are exchange rate fluctuations ok, consumers will not feel it, but over time it will slowly boil them alive. Any country that loses purchasing power of its currency over the long term is a country on the slide. Devalue the USD 20+% and the USA is slipping into Latin America.
To back up your claims about imports you need to produce some real hard figures and what you are also fogetting is that oil, wheat, lumber, corn, soy, copper, etc. etc are priced in USD and if the USD goes down 20+% then the prices of those raw commodities will go up, regardless of whether they are imported or not. So claiming that the US can live in an isolated bubble because imports are a small amount of GDP is wrong use of the figures.
If the USD is losing its purchasing power, then consumers will suffer. Short term if there are exchange rate fluctuations ok, consumers will not feel it, but over time it will slowly boil them alive. Any country that loses purchasing power of its currency over the long term is a country on the slide. Devalue the USD 20+% and the USA is slipping into Latin America.
2009-09-16 19:58:08
good argument
Here you go, this gives you a pretty good idea of the real inflation going on. Pretty shocking really. Since the $440 my grandfather left me in 1972 to pay my first year of college, will barely pay 5% of it now :-)
http://amath.colorado.edu/courses/DigitalCUrrents/2009Sum/Labs/03ConsumerPriceIndex/LabAndMOWDocs/CPIndexMOW.pdf
year price % increase
1972 440
1973 458 4.09
1974 476 3.93
1975 532 11.76
1976 578 8.65
1977 614 6.23
1978 666 8.47
1979 694 4.20
1980 762 9.80
1981 868 13.91
1982 982 13.13
1983 1070 8.96
1984 1194 11.59
1985 1332 11.56
1986 1466 10.06
1987 1548 5.59
1988 1610 4.01
1989 1714 6.46
1990 1842 7.47
1991 1972 7.06
1992 2080 5.48
1993 2122 2.02
1994 2216 4.43
1995 2270 6.97
1996 2322 2.29
1997 2356 1.46
1998 2386 1.27
1999 2444 2.43
2000 2514 2.86
2001 2614 3.98
2002 2776 6.20
2003 3192 14.99
2004 3480 9.02
2005 4446 27.76
2006 4554 2.43
2007 5418 18.97
2008 5922 9.30
2009 6153 3.90
total average 7.64
http://amath.colorado.edu/courses/DigitalCUrrents/2009Sum/Labs/03ConsumerPriceIndex/LabAndMOWDocs/CPIndexMOW.pdf
year price % increase
1972 440
1973 458 4.09
1974 476 3.93
1975 532 11.76
1976 578 8.65
1977 614 6.23
1978 666 8.47
1979 694 4.20
1980 762 9.80
1981 868 13.91
1982 982 13.13
1983 1070 8.96
1984 1194 11.59
1985 1332 11.56
1986 1466 10.06
1987 1548 5.59
1988 1610 4.01
1989 1714 6.46
1990 1842 7.47
1991 1972 7.06
1992 2080 5.48
1993 2122 2.02
1994 2216 4.43
1995 2270 6.97
1996 2322 2.29
1997 2356 1.46
1998 2386 1.27
1999 2444 2.43
2000 2514 2.86
2001 2614 3.98
2002 2776 6.20
2003 3192 14.99
2004 3480 9.02
2005 4446 27.76
2006 4554 2.43
2007 5418 18.97
2008 5922 9.30
2009 6153 3.90
total average 7.64
2009-09-16 20:22:44
good argument
Richard,
I have done the detailed research, so I am in a position to say what I have said. I would encourage you to do the same. If you do, you will learn about the percentage of tradable goods within the CPI and the impact of US dollar fluctuations. You may also want to run some regressions on the exchange rate and inflation. Ditto for studying the net impact of substitution effects.
As far as the products you cite that have increased in price, the information is completely incorporated into the CPI. Therefore, the point is mute.
In any event, the important point is not to argue what the "true" rate of inflation has been. What is relevant is the rate of change from current levels and I have made my case. The case for hyperinflation or the idea is headed down the road of Latin American countries has nothing empirical whatsoever to back it up. It is pure conjecture, which in the case of most people, perhaps not you, is usually based on certain ideological premises.
I have done the detailed research, so I am in a position to say what I have said. I would encourage you to do the same. If you do, you will learn about the percentage of tradable goods within the CPI and the impact of US dollar fluctuations. You may also want to run some regressions on the exchange rate and inflation. Ditto for studying the net impact of substitution effects.
As far as the products you cite that have increased in price, the information is completely incorporated into the CPI. Therefore, the point is mute.
In any event, the important point is not to argue what the "true" rate of inflation has been. What is relevant is the rate of change from current levels and I have made my case. The case for hyperinflation or the idea is headed down the road of Latin American countries has nothing empirical whatsoever to back it up. It is pure conjecture, which in the case of most people, perhaps not you, is usually based on certain ideological premises.
2009-09-16 21:31:52
good argument
its not pure conjecture to summaise that a certain behavior will have certain consequenes. Someone that drinks two bottles of scotch a day will most likely have an early demise if he is not careful, just as a country that over inflates its currency will be likely to meet a Latin American style hyperinflation disaster. So its wise to be aware of the possibilites...
the question is how far the US Govt and FED has gone towards that end. some say more, some say less.
with all due respect you haven't used a single piece of your indepth research in your article, you haven't cited a single reference or published any details to back up your opinion.
your article is simply an opinion.
i throughly agree with you that its not wise to make sweeping statements about hyperinflation or terrible deflation or aliens living on the moon for that matter, without proper stats and details to back it.
but saying that its not important to understand the real rate of inflation which is quite clearly running several times what we are being led to believe is just burying your head in the sand. what is causing all this inflation is the Govt. printing money. When they over step the mark then we will surely have hyper inflation. Perhaps they might not, perhaps they might, no one can really say, but its clear that 7-8% per year over the last 35 years is way above anything reasonable or honest.
what amuses me most is that everyone myself included sometimes is possessed with this idea about making long term economic projections far into the future which is really like prediciting the weather for summer 2012.
the real money to be made in the markets is in short term easily predictable fluctuations. unless you have more than $10-20M to trade with, that is all that's worth worrying about.....
the long term stuff is just good sport.... and its been great discussing it with you.....
Cheers
R.
the question is how far the US Govt and FED has gone towards that end. some say more, some say less.
with all due respect you haven't used a single piece of your indepth research in your article, you haven't cited a single reference or published any details to back up your opinion.
your article is simply an opinion.
i throughly agree with you that its not wise to make sweeping statements about hyperinflation or terrible deflation or aliens living on the moon for that matter, without proper stats and details to back it.
but saying that its not important to understand the real rate of inflation which is quite clearly running several times what we are being led to believe is just burying your head in the sand. what is causing all this inflation is the Govt. printing money. When they over step the mark then we will surely have hyper inflation. Perhaps they might not, perhaps they might, no one can really say, but its clear that 7-8% per year over the last 35 years is way above anything reasonable or honest.
what amuses me most is that everyone myself included sometimes is possessed with this idea about making long term economic projections far into the future which is really like prediciting the weather for summer 2012.
the real money to be made in the markets is in short term easily predictable fluctuations. unless you have more than $10-20M to trade with, that is all that's worth worrying about.....
the long term stuff is just good sport.... and its been great discussing it with you.....
Cheers
R.
2009-09-16 21:41:07
stats
here is an intersting little fact how stats can easily be misread.
i learned this about a year after my daughter was born.
the doctors and nurses and social workers etc. all go crazy these days promoting breast feeding, that its healthier, better for the baby, etc. etc. etc. you are a sinner if your child is not breat fed.
however our infant ended up on forumla for one reason or another and we worried about it somewhat, even the powder milk packets have warnings about it being better to breat feed.
when she was one year old i came across this article in the guardian newspaper, about how the stats on breast feeding benefits were all wrong.
the thing is that the children of wealthier, more relaxed, non smoking, non working mothers, living in better circumstances, that grow up in general with more opportunities and better over all health care, tend to get breast fed, where as those living in single parent families that rush back to work to cover the rent, or smoke or drink or have poorer living conditions, live in inner cities with more pollution etc. tend to end up on infant formula right away.
so the fuss about breast feeding is totally distorted. in 9/10 cases the infant forumla is simple a general indentifier for a baby whose mother had less perfect circumstances.
this is how stats can be bent out of shape and become misleading....
and if it happens on infant forumla, you can be sure it happens on more important things like inflation figures.
interesting huh....
i learned this about a year after my daughter was born.
the doctors and nurses and social workers etc. all go crazy these days promoting breast feeding, that its healthier, better for the baby, etc. etc. etc. you are a sinner if your child is not breat fed.
however our infant ended up on forumla for one reason or another and we worried about it somewhat, even the powder milk packets have warnings about it being better to breat feed.
when she was one year old i came across this article in the guardian newspaper, about how the stats on breast feeding benefits were all wrong.
the thing is that the children of wealthier, more relaxed, non smoking, non working mothers, living in better circumstances, that grow up in general with more opportunities and better over all health care, tend to get breast fed, where as those living in single parent families that rush back to work to cover the rent, or smoke or drink or have poorer living conditions, live in inner cities with more pollution etc. tend to end up on infant formula right away.
so the fuss about breast feeding is totally distorted. in 9/10 cases the infant forumla is simple a general indentifier for a baby whose mother had less perfect circumstances.
this is how stats can be bent out of shape and become misleading....
and if it happens on infant forumla, you can be sure it happens on more important things like inflation figures.
interesting huh....
2009-09-16 23:07:35
Money
I have some well worn quarters from 1964 that people are trying to pay me $3.00 to take them from me. They also want to pay me over $1200.00 for a $20.00 coin issued by the US. Whats up with that? They must be from a breast feeding family struggling in mathematics. I will quickly run to the bank in my new used car and let the miracles of compounding interest work its wonders on my loot. The miracles of saving money will have their way with me now. The car I just bought may have cost twice as much as a similar make and model I bought last time,but this newer version lets me open my garage door without my opener, and it has some MP3 and bluettoth and some other things I am not sure of that the other one did not. It gets the same mileage as the old one but it costs three times as much to fill it than it did when I bought the old car. I know this car will greatly improve my quality of life and make me much more productive. I wont hurt my fingers reaching for the radio controls and be distracted thus avoiding a potential accident. I will be prudent and put my new found savings in the bank, for a rainy day.
2009-09-17 00:24:01
Banks
http://www.msnbc.msn.com/id/32651151/ns/business-us_business/
Oh well, so much for the bank idea. They would just buy treasuries with it anyway.The compounding of zero interest just has not been my cup of tea, so I guess I will just sit on this old money from a time when we were a productive and prosperous creditor nation. I will consider these an investment in antiquities. Boy am I ever glad the recession is over and everything is back to normal. For awhile it seemed like something was really wrong,and that there was way too much debt. Thank God for the Fed coming to our rescue!
Oh well, so much for the bank idea. They would just buy treasuries with it anyway.The compounding of zero interest just has not been my cup of tea, so I guess I will just sit on this old money from a time when we were a productive and prosperous creditor nation. I will consider these an investment in antiquities. Boy am I ever glad the recession is over and everything is back to normal. For awhile it seemed like something was really wrong,and that there was way too much debt. Thank God for the Fed coming to our rescue!
2009-09-17 09:59:00
Food and fuel
Food and fuel make up a significant portion of day to day expenses and of running a household. They may be volatile in the short run, however over a longer time span the price change is significant in its impact on living standards. So, I think it is wrong to just look at core CPI for time spans exceeding a year or 2.
You should also realize that even a 2% inflation rate is high and over time will rob the savings of millions or people about to retire. A rate of 5% would be disaster. Most pensions are not indexed to inflation and many of the ones that are (many federal pensions) use a rate of cpi-1%. So even those will gradually lose ground.
None of that would matter if there where periods of deflation sufficient to offset inflation. But there never are, we have perpetual inflation even in times of 'deflation'
You should also realize that even a 2% inflation rate is high and over time will rob the savings of millions or people about to retire. A rate of 5% would be disaster. Most pensions are not indexed to inflation and many of the ones that are (many federal pensions) use a rate of cpi-1%. So even those will gradually lose ground.
None of that would matter if there where periods of deflation sufficient to offset inflation. But there never are, we have perpetual inflation even in times of 'deflation'
2009-09-17 11:09:28
Food and fuel
Actually Frank,
From a long term point of view, food costs have been rising slower than overall CPI for decades. And both food and fuel costs have lagged increases in income. In other words, in historical terms, people are spending a relatively low percentage of their income on fuel and food. And there has been a secular tendency for this to decline over time. This is particularly true with regard to food.
With respect to savings, it depends where you have put them and when. A person retiring today at the age of 65 that invested in stocks in a disciplined manner since they were 25 years old -- i.e. 1969 has done fine, even adjusting for inflation. The same is true if the person invested in long term government and/or corporate bonds.
The problem for most people has not been the rate of return on invetments -- it has been that they have not saved/invested enough.
But all of this is besides the point. The point of my article was simply to point out where I stand in the inflation/deflation debate. I do not believe hyperinflation is likely. Nor do I believe that prolonged deflation is likely. I do not deny that moderate inflation creates some distortions. That was not the subject of the article.
From a long term point of view, food costs have been rising slower than overall CPI for decades. And both food and fuel costs have lagged increases in income. In other words, in historical terms, people are spending a relatively low percentage of their income on fuel and food. And there has been a secular tendency for this to decline over time. This is particularly true with regard to food.
With respect to savings, it depends where you have put them and when. A person retiring today at the age of 65 that invested in stocks in a disciplined manner since they were 25 years old -- i.e. 1969 has done fine, even adjusting for inflation. The same is true if the person invested in long term government and/or corporate bonds.
The problem for most people has not been the rate of return on invetments -- it has been that they have not saved/invested enough.
But all of this is besides the point. The point of my article was simply to point out where I stand in the inflation/deflation debate. I do not believe hyperinflation is likely. Nor do I believe that prolonged deflation is likely. I do not deny that moderate inflation creates some distortions. That was not the subject of the article.
2009-09-17 12:52:42
Definition
You make an excellent point about defining terms. I've seen so many posts on here citing the collapse in asset prices as "deflation". You're also on the mark in describing the debate as being ideologically driven. There is often an air of religious fervor when people air their opinions on this subject, for some reason. You also are unusual in having made an actual forecast of your defined metrics. The main shortcoming of your piece, though, is that you cite very little of the reasoning behind your forecasts. Where you do supply some reasoning, it sometimes seems a little shaky:
"However... massive overcapacity in most industries, coupled with widespread unemployment, will tend to put an upper lid on any generalized inflation that would propel the core CPI above 5%."
If you had lived through the 70s, you might have noticed we simultaneously had overcapacity, high unemployment and high inflation -- the famous stagflation.
"...recovering asset prices are likely to create pockets of modest price increases in some sectors of the economy, which should be reflected in a reversion of aggregate core CPI inflation to recent historical norms between 2.5 and 3.5%. " -- having just excluded asset prices from your definition of inflation.
Still, it's nice to see some clarity for a change.
"However... massive overcapacity in most industries, coupled with widespread unemployment, will tend to put an upper lid on any generalized inflation that would propel the core CPI above 5%."
If you had lived through the 70s, you might have noticed we simultaneously had overcapacity, high unemployment and high inflation -- the famous stagflation.
"...recovering asset prices are likely to create pockets of modest price increases in some sectors of the economy, which should be reflected in a reversion of aggregate core CPI inflation to recent historical norms between 2.5 and 3.5%. " -- having just excluded asset prices from your definition of inflation.
Still, it's nice to see some clarity for a change.
2009-09-17 13:01:10
The Ideologues
It is very convenient for you to pick a fight with ALL of the ideologues. It allows you to choose which issues you want to confront and which you don't.
I have tried in vain, for many months, to get you to address the long term ramifications of the American Way of Life. It strikes me as self evident that consumption based on debt is unsustainable. What is my empirical evidence? I don't have any. Does that make me an ideologue? For me it is simple math. You start off with X amount of wealth. Every month you consume more than you produce, import more than you export and borrow or print fiat money to make up the difference. In my economic ignorance I make the assumption that in this scenario X becomes less each month. Now give me the value of X and the difference between consumption and production each month and I will tell you when X, this country's wealth, reaches zero.
Now, again in my ignorance, I make the assumption that terrible things will happen BEFORE X reaches zero. Again, I have no empiriccal evidence. I can't say precisely what bad things will happen or how soon or at what rate.
So, Mr. Kostohryz, I'm begging you to help relieve my ignorance. Share with me some of your research, your data and your empirical evidence to allow me to understand how my assumptions are wrong. Help me see how the central bankers with their "considerable ability through a whole arsenal of measures" can sustain the unsustainable. How do we coninue to live this illusion of prosperity built on debt? Just how will they pull the levers of this amazing perpetual prosperity machine to continue to confound the laws of mathematics and physics...not to mention, common sense?
I'm hoping you can top Alan Greenspan's answer. When he was asked a very similar question he responded by saying 'I don't know but we've always doen it before'.
Surely, your proclamations are supported by wisdom of a more profound and insightful nature.
2009-09-17 18:53:30
Definition
Oliver,
I am aware of the possibility of stagflation. However, there were many ingredients to the 1970s episode that are not present now. In any event, the factors I cite, while certainly not absolute anti-inflation guarantors are important factors to be weighed.
Regarding recovering asset prices I did not mean to give the impression that they have a direct impact on the core CPI. I mention them in the context of the wealth effects and other effects that rising asset prices can have on ecnomic activity in some sectors which will in turn tend to stimulate prices in those sectors.
I am aware of the possibility of stagflation. However, there were many ingredients to the 1970s episode that are not present now. In any event, the factors I cite, while certainly not absolute anti-inflation guarantors are important factors to be weighed.
Regarding recovering asset prices I did not mean to give the impression that they have a direct impact on the core CPI. I mention them in the context of the wealth effects and other effects that rising asset prices can have on ecnomic activity in some sectors which will in turn tend to stimulate prices in those sectors.
2009-09-17 21:58:08
The Ideologues
Too many liabilities. Too much debt out there. Social security and medicare/aid crisis on the horizon. Growth driven from increasing indebtedness isn't real growth at all. Nationalizing it doesn't help anyone but debtors, and our nation is full of those. Savers continue to take it on the chin by the actions taken by our government and the Fed. Fractional reserve banking is a flawed system. If we haven't learned this by now, there's no point in continuing. Where's Andrew Jackson when you need him?
2009-09-18 12:59:46
The Ideologues
Thanks for the comments Justin. It seems Mr. Kostohryz is unable to see the forest for the trees. All the data and empirical evidence in the world is useless when addressing a culminating event brought on by decades of over consumption and willful ignorance. Economics and now even accounting have become tools with which to obscure and obfuscate rather than define and illuminate. Numbers and statistics are used to “explain away” the data that's not favorable to covering up a reality the Pollyannas don't want to see. The issues are very simple but if people like Mr. Kostohryz can succeed in making them seem complex we can continue to pretend everything is fine for a while longer. The answer is to get the obfuscators to define their terms. 'Inflation' is just another word for stealing from savers and giving to debtors. 'Investing' has become just another Ponzi scheme in which the middle class is induced to support the banks and the grifters through their 401K contributions. Insurance companies have become modern day protection rackets as they bleed the fearful workers into becoming the insurance poor. Forty percent of GDP is 'financial services' which actually represents a drag on the economy, not a boost. The entire concept of a 'service economy' is a recipe for disaster.
So the so-called debate continues except we're really not all debating the same thing. Mr. Kostohryz wants to argue the play by play of this unsustainable game but refuses to raise his head above the lies, d@mn lies and statistics because he's afraid of what he might see.
Have you no retort Mr. Kostohryz...beside the promises of articles to come?
The silence is deafening.
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