

The One Number That Proves the Inflation Threat Is a Bogeyman - mattobrien
http://www.theatlantic.com/business/archive/2012/04/the-inflation-threat-is-a-bogeyman/256514/

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grandalf
It's important to note that the main reason the graphs do not show inflation
is b/c of the massive housing crash.

We have a situation where we have significant inflation in some sectors of the
economy, but we also have enough deflation to offset it. I'm not talking about
_bad_ deflation, I'm talking about new advances in microchips, etc., that make
computers cheaper and more powerful every year.

Inflation and deflation are natural aspects of a dynamic economy. The thing to
watch for is when they signal structural problems. If microchips increased in
performance so quickly that vendors refused to order inventory and store
shelves were empty, then it would be a structural concern. Policymakers find
it useful to wave the very imprecise notion "deflation" in front of the public
without bothering to mention that it's all due to technological advancement,
automation, outsourcing, etc.

Similarly, inflation isn't always bad -- developer salaries are "inflating"
now, which sends a signal for more people to learn to write code. This will be
self-correcting. The thing to be concerned about is when government action
causes inflation sufficient to undermine peoples' willingness to accept the
currency.

Policymakers try to get away with doing as much micro-tweaking as they can
with the economy. Tax breaks for one select group of people, subsidies for
another, etc. These sorts of policies can, over time, create inflation that is
not self-correcting, since the policies are rarely ended once they have been
created. Consider the massive over-investment in real-estate fueled by tax
breaks. This led to an unstable real-estate market that crashed hard a few
years ago.

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dpatru
An essential premise of his argument is that real GDP can't decline if jobs
are being added. So if jobs are being added, and they seem to be, then real
GDP growth must be positive. Real GDP growth is nominal GDP growth (4%) minus
inflation, so inflation must be no more than 4% to keep real GDP growth
positive.

"Let's try a thought experiment. If inflation really is 10 percent, that
implies that real GDP fell around 6 percent last year. How bad is that? That's
roughly where the economy was in the first quarter of 2009. Basically,
complete free-fall. And thanks to Okun's Law -- which relates real GDP and
unemployment -- we can guesstimate what that would mean for jobs. A back-of-
the-envelope estimate says that unemployment should have risen between 3 and 4
percent in that scenario. Instead, we added 1.899 million jobs in the last
year."

But of course jobs and production (GDP) do not need to grow in lockstep. This
assumes that productivity is constant. If productivity is falling, then
production could be declining even as the number of jobs increases.

For example, if the star employee (say Steve Jobs) of your company (Apple) no
longer works there, your company may still suffer a production loss even if
several employees are hired to replace the star. This is a case where
production can fall even as employment increases.

~~~
roc
> _"If productivity is falling, then production could be declining even as the
> number of jobs increases."_

Good catch. But where's productivity been going? (Hint: not down. [1])

So while this indicates an assumption that should be identified and
recognized, the correction doesn't impact the conclusion in this case.

[1] <http://www.bls.gov/news.release/prod2.nr0.htm>

~~~
dpatru
The productivity of some workers may be rising, but not all. For example, with
all the investment in government we've had, government should be very
efficient. Government services such as roads, transportation, education, care
for the poor, wars on brown people, business regulations, prisons, etc should
be very cheap right? Or could it be that as the private sector increases its
productivity, the public sector correspondingly consumes/wastes more?

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crazy1van
Forget the word inflation -- it is too politically charged and people think it
means all kinds of different things.

However, in the long run there is little doubt that an expansion of the money
supply will cause a rise in the price of goods and services.

Forget fancy metrics like NGDP and consider this thought experiment: if all of
a sudden magically everyone's bank account balance had the decimal point moved
to the right one place, what would happen to prices? After a very short
transient period, they would increase by about a factor of 10. This is exactly
what is happening right now (on a smaller scale and the magic occurs in the
treasury department). The difference is that the extra money has been created,
but is not really in circulation. Once banks and companies feel they no longer
need the money in their accounts and can begin to put it into the general
economy, prices will rise. Sure, the fed could take action to take money out
of circulation as companies release it into circulation, but that is too
politically unpopular and won't happen.

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Retric
A _lot_ of Money was destroyed when all those housing loans died. On net the
Fed may have created more money, but it's not as big a deal as you might
assume.

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davvid
All numbers are cooked, especially unemployment. The whole argument of this
article is based on leaky correlations. GDP is gamed in many ways. I'm a bit
of a skeptic.

Head squid Goldman just slashed their April NFP employment estimates to
125,000, just barely higher than the disastrous March 120,000 NFP print which
launched a thousand new QE rumors.

What is the point of this article? Is it to get everyone to nod their heads
while they prepare to launch another round of QE? The NFP numbers prove that
unemployment is not really doing that great.

I think this article is short-sighted. The prices of things like gas matter
because the cost of energy impacts everything. The central planners' only tool
is injection of more liquidity, which has a direct impact on the cost of
commodities, oil, etc.

We've already been pumping the market with liquidity. Where did it all go? To
euro banks, it seems. The employment numbers are not reflecting it, that much
we know. Is this article suggesting we keep course?

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beagle3
FTA:

> The things people buy the most often -- gas and groceries -- have gone up
> the most the past few years. The things people buy the least often --
> gadgets and other goods -- have not. It's an understandable mistake. But
> still a mistake.

Can someone explain the math behind this? The important thing is not "how
often", but "what percentage of the overall expense", but I would guess that
(as percentage of overall expense), gas and groceries are larger than gadgets
for everyone?

As an example, in my household, we're about a thousand/month on food &
transportation (rising much faster than 2%/year), thousands a month for rent
(rising much faster than 2%/year). And while gadgets are getting cheaper
(nothing else seems to), they account for ... say, 2% of our overall expenses.

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option_greek
Inflation need not be just seen in the country with monitory supply. It can be
felt around the world. The flood of money is being felt in developing
countries and commodity markets where gold and oil seem to have just taken
flying lessons.

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rjsamson
Great article - mostly I'm amazed that there are folks out there who are
supposed to be intelligent, who actually believe 10% inflation is a reality...

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lalalalahaha
I believe it because my food bill has increased approximately 50% in 3 years
and gas prices are at the same level as during the bubble in 2008 but with a
much more subdued economy. I don't understand how an article with an NGDP
chart and some fancy hand waving negates this.

~~~
mattobrien
Can you refute the point that we can't have positive job growth and negative
real GDP? Then how is overall inflation more than 2-3%?

~~~
Zarathust
It is easy. Fire one 40 hours worker. Hire thirty-nine 1 hour workers.
Congratulations! You've increased your "labor force" by 3800% !!!

You have a net loss of 1 man-hour however. I'm not totally sure how this
relates to inflation, but jobs absolute numbers and gdp are only slightly
related.

Another example would be to fire everyone making more than 100k$/year and
relocate them to potato farming. In terms of gdp, this would be a net decrease
despite the absolute worker count remaining the same

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robatsu
There is a little bit of misunderstanding sometimes when people discuss
"inflation". To some, if not most people, inflation means increasing prices.
To others, it means increase in the money supply, which eventually may cause
rising prices after some latency, especially if the growth rate of the economy
doesn't keep up with the increase in money supply.

I have no idea whether "rising price inflation" has been underreported,
especially by design, by the government. I would concede that there are
political and bottom line reasons (e.g, minimize increases in
salaries/benefits tied to COLA), but again, if this is happening, IMO it is
probably more just institutional slouch than a top-secret directive from the
Federal Reserve bunker.

Overall, I don't have an informed opinion what the facts of the matter are wrt
to underreported inflation - I only have anecdotal evidence.

OTOH, it is pretty clear that "money supply inflation" has increased
dramatically in the past few years due to the various policies associated with
the bailout.

Whether this will cause "rising price inflation" remains to be seen - there is
always latency between money supply increase and rising prices. In the bailout
policies case, the latency is pretty large, as the bulk of the money went to
securing "toxic" assets and so forth rather than directly into the consumer
economy.

The overhang of this increase in money supply/government debt naturally
constitutes rising price pressure, but again, how much is anyone's guess, as
there are deflationary pressures as well (falling asset prices, and such).

~~~
mattobrien
The Fed has tools like interest on reserves, reverse repos and term deposit
facilities to make sure that all of the excess reserves on bank balance sheets
don't turn into actual price increases.

Austrian economists conflate increases in the money supply and price
inflation, but it's not necessarily true. In fact, mainstream New Keynesians
(that includes conservatives like Greg Mankiw) have predicted for years that
increasing the Fed's balance sheet wouldn't increase inflation. They have been
right.

~~~
grandalf
But this is due to the larger forces of supply and demand for US treasury
bills. So it's the US's role as an empire that makes its sovereign debt
demanded by nations with less solid foundations.

The US enjoys this position largely b/c of its size but also b/c of the
frequent policymaking folly that occurs in other nations.

The only thing that can impose true discipline on this process is the
existence of competition.... it's the only thing that could decrease demand
for US Treasury bills.

It's obvious that we're not currently experiencing hyper-inflation, but the
configuration of the world that will allow the trend to continue becomes less
certain the further things get extended.

Imagine someone issues you a credit card with a $1 per month minimum payment.
As long as you can keep getting the limit increased you'll surely be able to
make the payment each month, no matter what other spending you do. The US is
able to keep borrowing and borrowing, and its creditors are very lenient b/c
they lack a better option.

~~~
Symmetry
The debt situation might get out of hand, but that doesn't necessarily mean
we're headed for inflation. The US has gone for hundreds of years without a
default[1] and I'm sort of proud of that as a US citizen, but if worst came to
worst we could always just default - unlike, say, 1920s Germany.

[1] There was a few payment in the 1970s that was slightly late due to a
clerical error, but that hardly counts.

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cperciva
Removing the ability to exchange US dollars for gold was arguably a form of
default.

