are economists ever right?? I listen to none of them, absolutely not a single one. They have apparently never discovered the underlying causes of the business cycle as evidenced by their worse than random ability to predict ANYTHING. What did we hear all during the 90's?? Inflation. It just did not happen. I seriously doubt if what the Fed does has as much effect on the business cycle as most people think it does.
oil prices do not necessary indicate the presence or absence of inflation, although one would expect prices to rise in an inflationary environment (surprise, they have). productivity has driven certain prices so far down that apparently some of the affects of inflation have been mitigated. but not so in the housing market, for example.
One problem is that there is no "one" measure of inflation, if it is even possible to have one numbe describe it. My guess is that inflation is a matrix or a tensor, or ultimately a function, certainy not a scalar. Think about this for a minute. You have four children. They are all college age. Can this person seriously say that there is no inflation? When he went to college, it might have cost $3K/yr for his eduaction. Now he spends $15K a year for each of his children a year, and not even at a top school! You think this guy thinks there is inflation? You better believe it. Now consider this. You are some twenty something kid that spends all his time on the internet (for example, all the posers on ET) and doesn't spend any money. Why would he see inflation? The problem is also probably political. With an aging population worldwide (not just in the US) governments simply cannot afford to have the perception of high inflation because of the benefits (Social Security etc) they have to put out. Who the heck wants to pay out to a bunch of old people that don't produce anything, right? Finally, alot of inflation is just an illusion. Think of it in terms of money supply, in the form of M1, M2, and M3. M1 is the only one that really means anything because it is the amount of money that is actually in currency. M2 and M3 are just ledger entries!!!! That means for example that if the DOW went from say 10,000 to 11,000, those that owned (DOW) stocks would feel 10% richer- and yet, less than 1% of the float may have changed hands! That means wealth is created out thin air. The point is, if everyone rushed in to cash their investments at DOW 11000, it wouldn't be at 11000 anymore. Some inflations exist only on paper once we were taken away from the Gold dominated currency. How many think of rising stock prices as inflationary? It is in the sense of M2 and M3, but not in the sense of M1!!!! nitro
Inflation and the "AMT" Alternative minimum tax, check this out...:eek: The "AMT" is going to be the politicians secret weapon to make up for the Bush tax cuts to the fat cuts. Think about it for a minute; everyone knows this is in the tax code ( i got a letter from the IRS about 5 or 6 years ago stating that i am very "CLOSE" to getting hit by the "AMT" because my deductions etc were all legal but the amount of tax actually paid was quite minimal relative to my income.) The IRS was being nice but yet "shooting a round across my bow" to let me know i am in their sights... The middle class is going to get hit hard starting next year with the "ATM", it is a GIVEN. Then if inflation picks up even faster, the middle class will get hit that much sooner. The facts stand on their own, the middle class will pick up what the fat cats get away with as they laugh all the way to the bank. A society with a losing middle class is a society in a downslide. history has proven that over and over. The party in power takes care of big business and big fat cats...BEWARE THE ATM...
Here are some thoughts I had about inflation while I was in the train station in Edinburgh Scotland a few years back. An increase in the price of a commodity can either be inflationary, that is an increase in both prices and economic activity, or stagflation, that is an increase in prices and a reduction in economic activity. The effect can also be very regional and effect different sectors of the economy differently. For example an increase in oil prices is inflationary for Alberta, and stagflationary for Ontario. Texas and Michigan have a similar relationship.
http://www.frontlinethoughts.com/gateway.htm Inflating the Numbers A 12% jump in energy prices in September caused the CPI to rise by 1.2 % last month, the largest monthly increase since a 1.4% rise in March of 1980. The sharp rise in September followed increases of 0.5% in each of the prior two months, bringing the annual inflation rate for the quarter to 9.4%. (Dean Baker at CEPR) However, if you look at the core inflation, without food or energy, it was just 0.1%, which is the same as it has been for the last five months. That means that the annual rate in the core inflation rate for the last quarter has been just 1.4%. But as we will show in a few paragraphs, that number doesn't tell the whole story. If you take out the housing component of the core index, you find that inflation has been rising 2.2% over the last quarter. But the government changed the way it calculates the housing portion of the CPI back in 1982. If you use the old method, you would find that inflation is 5.3% today and even core inflation is 4.3%. This is a far cry from 2.2%. Can you imagine the 10 year bond prices if inflation was thought to be 5.6%? Somewhere north of 7%, I would think, and certainly high enough to put more than a crimp in housing prices. If all of this sounds a bit confusing, that is because it is. Let's see if we can shed some light on the process. The government currently assumes that housing costs are 23.158% of the Consumer Price Index. Prior to 1982, the housing cost numbers were based upon what you actually spent for the house and the related mortgage. After 1982, the Bureau of Labor Statistics (BLS) began to use an imputed number. They now use what is known as "owners' equivalent rent of primary residence" for the housing portion of the CPI. This is based on an economic theory that says that homeowners are essentially leasing the houses from themselves and paying implied rent for that service. In theory, they are trying to figure out what it would cost you to rent your home. There's actually a rational reason for doing this and we will talk about that in a minute, but first let's look at the numbers. Why are these imputed rents so low? Dean Baker tells us, "The main factor holding down shelter costs is the overbuilding associated with the housing bubble. This has led to record nationwide rental vacancy rates, which is putting downward pressure on rental prices in many of the areas with the biggest bubbles in housing prices. For example, rents in the New York City area rose by just 1.9 percent over the last year. They rose by 1.8 percent in Tampa, Florida and by just 0.3 percent in both Boston and San Francisco. (This is the inflation rate for the owners' equivalent rent index, which strips out utility prices.)" How much does using imputed rent affect the CPI? Bill King wrote a few months ago, "In the Q1 GDP data, the US government has housing prices up only 1.1%, yet industry data shows double digit gains. And this week the June existing home sales data shows a 14.7% increase in the median house price. The BLS has 'owners' equivalent rent of primary residence' up only 2.2%. "A couple of months ago, we delved into the BLS web site and discovered that "owners' equivalent rent of primary residence" is also suppose to account for real estate tax hikes. The Rockefeller Institute has the average US real estate tax bill +6% y/y. Of course it's double digits in most urban areas. "Here's the math: 14.7% + 6% = 20.7%. But the BLS calculates this at 2.2%. 20.7% minus 2.2% = 18.5%. Now multiple by 23.158% and you get 4.28%. So by this metric, CPI is understated and thus GDP overstated, by 4.28%." Remember that real GDP is calculated after inflation. You subtract the inflation rate from nominal GDP to get real GDP, which is the number everyone focuses on. So if inflation is higher than the BLS statistics show, which means GDP is not as high. The numbers have not changed all that much since the first quarter, so that would mean that GDP growth is almost non-existent if we used the old method of figuring housing costs. If the CPI were 5.3%, we would be in a serious recession. But it doesn't feel like a recession. Profits are rising, unemployment is falling and things seem to be moving along just fine, thank you. So what gives? Is there some government conspiracy to understate inflation, so that they don't have to pay large increases in Social Security and other inflation indexed payments? The answer is not really. If you look at a graph of home ownership cost you find that the numbers are actually very volatile. And I mean very volatile. In 1985, prices were rising at 6%, and just two years later prices were falling by 6%, but one year later 1988 prices are rising over 8%. Dramatic swings of 4-5% over a period of a year are quite common. If you look at a graph of owners' equivalent rent you find that the volatility is much less and the moves take a longer time. Instead of 14 percentage points swings in just one year, you get 1-2%. If you put these charts together, it almost looks like the imputed rent is an average mean of the actual costs. By that I mean that the actual costs swing both higher and lower, constantly reverting to the mean or long term average. Now that is not what it actually does from a calculation standpoint, but the chart sure looks that way. In an odd sort of way, the imputed price seems to work rather well in smoothing the volatility. Otherwise we would have times when GDP said "recession" while the economy was growing and vice-versa. And this makes a certain sense. Economists often claim that the CPI overstates inflation. And the housing component did do just that in the periods around 1987 (by 10% at one point!), from 1989 through 1994, briefly in 1996 and from 2001 through 2003. But now, we are getting a rather large difference of almost 8% between actual costs and imputed rents! Looking back since 1982, this is the largest such difference of any one period. What does that tell us? If this is indeed a mean reversion effect, as the chart makes it look to be, then we would expect either rents to rise or housing prices to become stable or fall, and not too far into the near future. But as noted above, we now have record nationwide rental vacancy rates. Such does not portend for a rise in rents, so we are left with the thought that housing prices must at least stop growing, if not fall somewhat. And we read in paper after paper that they seem to be doing just that. Could it be that the Fed rate increases are having an effect? Today, if you decided to buy a home and planned to pay it off in a few years, you find that a 15 year loan is cheaper than a one year arm. In fact, you would pay 5.625% a year with perfect credit! That is a far cry from the lower than 2% ARM rates of just a few years ago. (I know, Bloomberg says rates are lower than that, but try and get one!) Gone are the days of the cheap mortgage. In the United States, refinancing a home last year brought in an astonishing $600 billion - or about 5% of GDP. That is, people "made" more money from refinancing their houses than they gained from salary increases, investment returns or any other source. (Daily Reckoning) As housing price gains slow and then maybe stop, as interest rates continue to rise, that "cheap" money from borrowing against your home is going the way of the dodo, at least for awhile. So, which is it? Is inflation running at a 9.4% clip, a 5.6% rate of just over 2%? The correct answer is all three. It just depends upon how you want to calculate the numbers and over what time period you want to calculate them. But the various Fed governors seem to be calculating them using numbers which suggest inflation. Bert Dohmen brought this quote from Fed Governor Richard Fisher of Dallas to my attention, "We cannot let the equivalent of sclerosis block the arteries and disrupt the workings" of the economy, Fisher said. "Nor can we let the inflation virus infect the blood supply and poison the system." As a little side note, using BLS statistics, health care costs are about 17.5% of consumption, but it is weighted much less in the CPI calculation. Healthcare is 4.649% of CPI; healthcare commodities are 1.484% of CPI. Healthcare is reportedly 15 to 17% of GDP. This presents a huge discrepancy in CPI weighting. If CPI healthcare costs were in tune with reality AND they had an accurate weighting, CPI would be substantially greater. (Bill King) BLS assumes health care costs have risen about 4% a year for the last ten years. Anyone who is paying health insurance knows this is not the case.
Bottom line is simply that Governments in deficits can and will foster inflation to pay off the old debt in "INFLATED" monies. Inflation is a two sided sword, that is why the CPI is rigged to say a certain improvement in a product etc is a reduction in cost. Is a computer with a 3.6 chip really cheaper if you never need to buy a 3.6 computer? The guy that said old people are useless and produce nothing is missing the boat. First off without older persons he would not be here... Tell the drug companies old people are irrelevent and see what reaction you would get. The greedy side of the political aisle surely distain paying out social security to others but surely they pad themselves a nice pension. Car buyers say the healthcare and pensions of auto workers ecost a lot of money but yet will scream bloody murder when ever a "NATIONAL" healthcare is mentioned. Who is right? Should only special groups get healthcare? Should only certain groups get that when we "ALL" pay for it when we buy their products? If you buy a new car you help an older person, but if a "NATIONAL" system is brought up you raise heck....Kind of silly is it not? Either way you pay for their healthcare, would a revamping of the whole healthcare system be in order? The real problem with healthcare is that it is a for "PROFIT" business. To many hands digging in the same pie, greed is pervasive.
the new mortgage/tax write-off proposal / consumer debt / new bankruptcy laws / Fed's rate hikes / the sticky CNY will keep a lid on inflation. take it lightly.
Unfortunately after I read what I wrote I realized that the sarcasm did not come through as I had planned and it was too late to change it. Believe me, I think the whole disrespect we have for the elderly is reaching alarming proportions. nitro
Nitro, Nicely said. I especially think we all should give a great handshake to all the guys and gals who banded together and stopped the likes of Hitler, Himmler and the rest of those horrible maddogs. The folks that won the war for us all gave us all a really great country and life for the past 60 years. We need to be more aware what we are "NOW" doing for everuone during the next 60 years and beyond. Trade well and save some for me...