Ed from OC

Inflation

37 posts in this topic

Here is a nice summary of the distortion of official CPI / inflation statistics, and the effect of different ways of measuring those numbers.

biz-inflate430.gif

Sources: San Diego Union-Tribune; The Big Picture.

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I think there are two major things that a person can do. The first is to fight the corrupt government and attempt to get America back on the gold standard. The second is to not leave your money just sitting in a checking/saving account as you are losing money everyday. Invest, invest and invest.

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That graph comes from the "Shadow Stats" site. I would be cautious about using that data, because when I tried drilling down into how it is derived, I did get more detail, but not enough.

At one point, the author implied that the Bureau of Labor Stats (BLS) declares that older figures would show a rate 7% higher than the current method, saying: "Changes estimated by the BLS show roughly a 4% understatement in current annual CPI inflation versus what would have been reported using the original methodology. Adding the roughly 3% lost to geometric weighting -- most of which not included in the BLS estimates -- takes the current total CPI understatement to roughly 7%. "

However, I couldn't find anything like that on the BLS site. Based on the rest of that article (the hamburger example), I am skeptical: the approach is too polemical. There are good reason to make the so called "hedonistic" adjustments (or "anti-hedonistic", if we're going from steak to hamburger).

Also, if one takes the author at his word, we would have to believe that the average U.S. urban worker is getting about half as much in real value today for every dollar spent than in 2001.

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That graph comes from the "Shadow Stats" site. I would be cautious about using that data, because when I tried drilling down into how it is derived, I did get more detail, but not enough.

I agree, one should always be cautious when using this type of data. But, just a general look around and one can estimate that the dollar brings much less than it did 20-30 years ago. I could by a milk from school for a nickle back in the 70's and 80's. In the early 80's I could buy a gallon of gas for around .50 cents. When I worked at McDonalds in the mid 80's the cost of a regular burger was only 50-70 cents and a large soda was just around 1 dollar. I could go to the movies with my girl friend and buy snacks for less than $15. So this person's statistics might be off, but with just a quick glimpse around one can recognize that the dollar's value is lower.

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The relationship between the 3 graphs are way too weirdly close for this to be a realistic depiction of 3 different ways of measuring inflation. They are much closer than any 3 different methods of calculating inflation could possibly be.

Different methods of calculating inflation will give different values for inflation. But if the methods of calculating inflation are really different, then the variation of inflation over time will also differ.

The shapes of the 3 graphs are very similar. The shapes of the two lower graphs relating to the "current method" of calculating inflation and the "pre-1998 method" are identical! This means that the way inflation varies with time is identical for both methods. It is inconceivable that two different methods of calculating inflation give very different values for inflation at any point in time while the way inflation varies with time remains identical for both methods throughout the time period covered!

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... the dollar brings much less than it did 20-30 years ago.
Without doubt.

The question isn't whether the dollar has lost value; it has, and the government agrees. The question is: by how much? The BLS would say that a dollar today could buy half of what it could in 1985. OTOH, the "shadow stats" site would say that a dollar today can buy half of what it could in 1999 - 2000 (approx.).

Also, the CPI does not address the cost-of-living. For instance, suppose the U.S. government mandates that only High-def TVs will be sold from now on. Suppose this causes people to spend more on TVs in aggregate, because of such a mandate. The mandate has increased the cost of living, but it has not increased the CPI.

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I've wanted to post this for so long but haven't had the time until now. This is a graph of the inflation rate using the price of gold. I also have a discussion of it on my blog.

Annualized%20Inflation%20Rate.JPG

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Apparently, I don't know how to post pictures yet. Just click on the link to my blog to see the graph.

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Apparently, I don't know how to post pictures yet. Just click on the link to my blog to see the graph.

post-47-1214234579.jpg

(save the pic as a file, browse, find, upload, click pic on Manage Current Attachments drop-down).

(works best if you wear a copper bracelet and face East).

(previous suggestion is, of course bogus and, besides, the price of copper has also increased to the point where it is just not cost-effective).

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Here is a nice summary of the distortion of official CPI / inflation statistics, and the effect of different ways of measuring those numbers.

biz-inflate430.gif

Sources: San Diego Union-Tribune; The Big Picture.

Our government has pulled exactly the same stunt, now using something called "consumer price index" or CPI which at 3.3% is oddly lower than RPI at 4.4% or the actual cost of living increase which is estimated by sources outside government to be around 11%.

You see the rationale, if you are not able or willing to control something, simply redefine it. It's not 11% inflation its 3.3%. It's not 5.5M people economically inactive and therefore unemployed, it's around 5% of those economically active. It's not crime, it's poverty etc etc Although, the endless drone of obviously rigged stats from government is getting very "Kremlin announces new production record when the stores are empty" No-one believes them anymore.

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This is a graph of the inflation rate using the price of gold.
Doesn't your graph show gold price change rather than inflation? If not, how would you define inflation? I ask because some people use it to mean "the amount that money supply rose" while others use it to mean "the amount by which prices in general rose (i.e. the value of money fell)"? neither of these is consistent with using the price-change in gold to show inflation.

On the other hand, if the price-change in gold is reflective of inflation, would you say that the U.S. did not see any significant inflation for two decades -- 1980s and 1990s -- when the price of gold was rather steady.

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This is a graph of the inflation rate using the price of gold.
Doesn't your graph show gold price change rather than inflation? If not, how would you define inflation? I ask because some people use it to mean "the amount that money supply rose" while others use it to mean "the amount by which prices in general rose (i.e. the value of money fell)"? neither of these is consistent with using the price-change in gold to show inflation.

On the other hand, if the price-change in gold is reflective of inflation, would you say that the U.S. did not see any significant inflation for two decades -- 1980s and 1990s -- when the price of gold was rather steady.

Actually, during the 80's-90's the gold price generally fell. This constituted deflation for that period. (Don't you remember $0.87 gasoline back in '98 or thereabouts, the lowest year for gold since the gold standard?)

Yes, my graph is of the average change in the price of gold and thus the "gold content" of the dollar. Gold being the all important commodity to judge inflation because people still use gold as the ultimate currency. This is backed by a study (sorry no reference, I'm trying to get it though so I'll post it later) that showed that gold has bought the same amount of stuff consistently over hundreds of years. To say it another way, its purchasing power is stable. So, the purchasing power of the dollar is estimated most accurately by how much gold it will buy. This is why I judge inflation by the change in gold price, or the change in its purchasing power.

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Actually, during the 80's-90's the gold price generally fell. This constituted deflation for that period. (Don't you remember $0.87 gasoline back in '98 or thereabouts, the lowest year for gold since the gold standard?)
Yes, sadly, I do! However, gas is just one thing on which people spend money.Are you implying that average price levels of most goods were going down the way gas was? According to the official CPI-U (base year 1982=100), the CPI for Jan 1980 was 78 and for Dec 1990 it was 134. So, according to the CPI-U, the US$ price of an average basket of goods for an "urban consumer" was rising 5% per year.

If the gold price dropped during that period, and gold is a good indicator of inflation, wouldn't we expect the US$ price of an average basket of good to drop as well. Since it did not, how do you resolve this, in your mind? Do you think the government was over-stating inflation in the 1980s? or is there another explanation?

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Here is a nice summary of the distortion of official CPI / inflation statistics, and the effect of different ways of measuring those numbers.

I have a class in international economics this summer and the growth in the money stock as a result of the present crisis was one of the many facts given to us.

M1NS_Max_630_378.png

Or here

CURRDD_Max_630_378.png

Note the spike in 2008/2009.

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I recently read Peter Schiff's book "Crash Proof". I suggest if for those interested in this. Peter speaks the truth and is called "Doctor Doom" because of it. :lol:

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This is backed by a study (sorry no reference, I'm trying to get it though so I'll post it later) that showed that gold has bought the same amount of stuff consistently over hundreds of years. To say it another way, its purchasing power is stable. So, the purchasing power of the dollar is estimated most accurately by how much gold it will buy. This is why I judge inflation by the change in gold price, or the change in its purchasing power.

One benchmark I remember from the 1970's is that an ounce of gold would fetch a high line Colt Model 1911 .45 Auto handgun. The tracking of the two has held a rough equivalency over the years... as both retail for around a grand today.

Only a collapse of the leftist socialist government third party payer Ponzi scam could make the gold standard feasible. Heck, I sure wouldn't mind working for $2 (gold) an hour to be able to buy a car for $500 or a home for $6,000. So what if the numbers were smaller, as long as there is parity between wages and product and service costs. Mind you, the government wouldn't be able to pull the old fiat currency inflation shell game with a gold standard, but that's why it would need to collapse first. But then again... a person doesn't really need to wait for a gold standard to operate on one, for useful things can be as good as gold, and maybe even better when you actually need to use them.

That money supply spike graph does give good cause for optimism... the leftist socialists are in a deficit spending feeding frenzy and I want them to take the bus right over the cliff... because I'm rooting for a full on economic Armegeddon to usher in an American Capitalist Renaissance. smile.gif

Greg

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Greg, I think you will very happy in the near future. By the end of The Chosen One's first term things will have "changed".

Today I submit paperwork to start to manage my 401K through Schwab. I hope I'm not too late...

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Greg, I think you will very happy in the near future. By the end of The Chosen One's first term things will have "changed".

Well, I'm already pretty happy now... life is good. smile.gif

There's no such thing as a vacuum in business...

The inevitable self destruction of the corrupt something for nothing leftist socialist third party payer Ponzi scam that infests government law education insurance credit/debt healthcare and unions is presently taking down those who foolishly invested their financial security and emotional wellbeing in it...

...while Americans continue to do business directly with each other similar to the characters in Ayn Rand's mythical Galt's Gulch. As one system decays... the other flourishes.

Today I submit paperwork to start to manage my 401K through Schwab. I hope I'm not too late...

That's your call to do whatever you see fit...

I can offer another little known investment alternative that might be worth your consideration. It's investing in yourself... in your own creative abilities to produce wealth. I found that there's no need for a 401K retirement account, or life insurance, or health insurance, or home insurance... because instead of investing in others for my own security, I fully invested in "Greggo Enterprises"... where I'm my own banker similar to Midas Mulligan (but on a very small scale) and I loan money to myself interest free for various productive financial ventures. And as to healthcare, we self insure, so any needed services are simply purchased directly and paid in full, outside of the corrupted insurance system, just like any other commodity.

Anyways... that's just another approach. I understand that it's not for everyone... but it works beautifully for us.

Greg

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This is backed by a study (sorry no reference, I'm trying to get it though so I'll post it later) that showed that gold has bought the same amount of stuff consistently over hundreds of years. To say it another way, its purchasing power is stable. So, the purchasing power of the dollar is estimated most accurately by how much gold it will buy. This is why I judge inflation by the change in gold price, or the change in its purchasing power.

One benchmark I remember from the 1970's is that an ounce of gold would fetch a high line Colt Model 1911 .45 Auto handgun. The tracking of the two has held a rough equivalency over the years... as both retail for around a grand today.

Greg

It's interesting you give that example! If anybody wants to prove it to themselves I suggest using the same method. Find an historical price in dollars and then using gold put it in today's dollars. You'll be amazed at how closely you'll get today's price! I've become so convinced of the procedure that I routinely use it to translate any historical price in today's dollars.

As an additional note, I have noticed a few trends. Products that haven't changed significantly (such as a gallon of gasoline) sometimes are actually cheaper in today's dollars. When this happens I think it's because of real productivity gains. Also, some things are more expensive today, but those are usually things that are now a better quality than they were back then, such as automobiles. But by and large most things are damn near the same price. It really is amazing; try it!

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This is backed by a study (sorry no reference, I'm trying to get it though so I'll post it later) that showed that gold has bought the same amount of stuff consistently over hundreds of years. To say it another way, its purchasing power is stable. So, the purchasing power of the dollar is estimated most accurately by how much gold it will buy. This is why I judge inflation by the change in gold price, or the change in its purchasing power.

One benchmark I remember from the 1970's is that an ounce of gold would fetch a high line Colt Model 1911 .45 Auto handgun. The tracking of the two has held a rough equivalency over the years... as both retail for around a grand today.

Greg

It's interesting you give that example! If anybody wants to prove it to themselves I suggest using the same method. Find an historical price in dollars and then using gold put it in today's dollars. You'll be amazed at how closely you'll get today's price! I've become so convinced of the procedure that I routinely use it to translate any historical price in today's dollars.

As an additional note, I have noticed a few trends. Products that haven't changed significantly (such as a gallon of gasoline) sometimes are actually cheaper in today's dollars. When this happens I think it's because of real productivity gains. Also, some things are more expensive today, but those are usually things that are now a better quality than they were back then, such as automobiles. But by and large most things are damn near the same price. It really is amazing; try it!

I am very impressed by the price of gas. I have had the privelege of seeing some of the work being done on the north slope, and there are certainly some productive men and women at work in the rank and file of the oil sites. The top personalities in Alaska oil ownership isn't impressive to me, but I see very little actual information about them, and am confident in even less when it comes to the popular opinion of them.

I think there are a number of Dagnys in the field, and a significant number of James as well.

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This is backed by a study (sorry no reference, I'm trying to get it though so I'll post it later) that showed that gold has bought the same amount of stuff consistently over hundreds of years. To say it another way, its purchasing power is stable. So, the purchasing power of the dollar is estimated most accurately by how much gold it will buy. This is why I judge inflation by the change in gold price, or the change in its purchasing power.

One benchmark I remember from the 1970's is that an ounce of gold would fetch a high line Colt Model 1911 .45 Auto handgun. The tracking of the two has held a rough equivalency over the years... as both retail for around a grand today.

Greg

It's interesting you give that example! If anybody wants to prove it to themselves I suggest using the same method. Find an historical price in dollars and then using gold put it in today's dollars. You'll be amazed at how closely you'll get today's price! I've become so convinced of the procedure that I routinely use it to translate any historical price in today's dollars.

As an additional note, I have noticed a few trends. Products that haven't changed significantly (such as a gallon of gasoline) sometimes are actually cheaper in today's dollars. When this happens I think it's because of real productivity gains. Also, some things are more expensive today, but those are usually things that are now a better quality than they were back then, such as automobiles. But by and large most things are damn near the same price. It really is amazing; try it!

I totally agree... innovation increases real product quality... and production efficiency decreases real product cost.

And the solution to inflation is to become a producer. That way the objective value of what you produce will always retain parity with the objective value of what you consume...

...regardless of how much inflated fiat currency is involved.

As a producer you... are already safely floating in a boat that can never get swamped by any inflation tsunami.

Under these present depressed credit starved economic conditions, cash is king... I've been negotiating incredibly good deals for the useful materials I need for my projects... and have been taking full advantage of the time delay between the present drop in value of the dollar and its expression in the coming inevitable wave of inflation.

Greg

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I just recently came to the “Forum”, so I wasn’t around when this discussion was in its prime. I hope that this post does not come off as didactic. We just need to get the terms straight. It would appear that no one who commented in this string has read the Austrian School or any of the Objectivist economists.

Free-market economists note two things about inflation. One, inflation is the expansion of the money supply. Inflation may cause a general rise in retail prices, most often does. Two, the consequences of inflation depend on and begin at the point in the economy that the inflation is introduced.

In some industrialized countries, inflation is introduced by the purchase of government debt. In the U.S., the process is much more complicated. Inflation is introduced by the expansion of bank credit, i.e. bank loans, by the Federal Reserve System through the manipulation of the bank deposits at the Fed. The decisions to expand the bank reserves are made by The Open Market Commettee, which meets at the New York Federal Reserve Bank. Our inflation is not directly connected to the deficit, or the Congress, or the Executive Branch.

As a consequence of the tremendous expansion of the U.S. money supply over the last 30 years (since the end of our last bout of high price inflation), we have seen a huge, continuous export of dollars (our trade deficit), a boom/bust cycle in the equity market, and the boom/panic in residential real estate and the finance sector. (There were some other consequences.) There is no direct link between our inflation and consumer prices.

The consequences on price inflation, however, have not been severe. Yes, I know that you can’t count on the government figures (but not because of a conspiracy, as Schiff says). The problem with arguing that the rate has been in the 6% to 8% range is that the fall in our standard of living would be much more apparent. We just do not feel it. Retailers would be failing more rapidly, demand for lots of goods would be shrinking, and people would be demanding higher income gains. None of that is there in the proportion a larger price inflation rate would compel. The best way to watch the rate of price inflation is to watch the prices that you personally pay.

I do not know now why price inflation isn’t worse. There are several possibilities, but sorting that out is really for the economist. Our job is to point to the right causes and consequences, which means that we have to clearly understand them.

Incidentally, since shortly after the panic began last year, banks have almost completely stopped lending. We have had a bank credit contraction. Thus, there is no current inflation and there won’t be for months. The continued fall of the dollar will put pressure on our prices, but that is from past Fed sins.

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C.W.,

Maybe I am misunderstanding you, but inflation is caused by the government through the arbitrary increase (or at least approving the increase) of money and credit as the Federal Reserve is a psuedo-corporation set up by the government. How else would the government have the ability to keep passing government spending bills without approval of more taxes if they did not already know they could just print more cash? Or are you going to tell me that the money given auto dealerships was backed by real goods created by American productivity?

Real wealth is not measured in one's accumulation of money, but in the goods produced that can be traded for other goods. Money is the representational tool of one's wealth that cannot be faked for long. If I was to print my own money, to the sum of billions of dollars, and start buying up tons of goods the prices of those goods and more would start to increase, in other words inflate. In a similar way this is exactly what governments do when they increase (or approve the increase) of money and credit with no increase in productivity or goods.

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RayK,

Not unreasonable questions at all. Generally, I am not willing to ascribe motives or intentions to people I don’t know, but Senators and Congressmen are a different breed. I suspect they don’t want to think about where the money comes from that they are spending.

When Congress over spends, the “system” is set up for the government to sell debt, bonds, etc., to cover the difference between taxes collected and what they spend. This would be okay (sort of) if the funds for the debt came from real capital, i.e., savings (think capitalists, not the guy in the street). In the spending/debt process you will find no method in the federal government that has the ability to actually create money. Even the Treasury’s printing office must “sell” its currency. (The actual amount of currency is too small to make much difference in our economy, anyway.)

In the U.S., a significant part of the government debt, as well as the much larger amount of other bank loans, comes from money created by the Fed. This created money arrives at the federal bond market in at least three different ways: one, from the process of expanding bank credit by means of the Fed buying government debt through the banks’ reserves; two, by direct purchase of federal debt by the fed (generally, small amounts) to support the treasury’s auctions and a low interest rate; and three, via the export of dollars that are taken in by foreign central banks which in turn buy U.S. federal debt. The end result is the support of the federal budget. The fed does feel some pressure to support the Treasury and to keep interest rates low. It will be interesting what the Fed will do if we do start seeing price inflation. Will they let interest rates increase?

They, meaning the Congress, don’t “print more cash”. Actually, what does happen is worse. “Printing more cash” probably would not have led to the trade deficit or the residential real estate and financial sector boom/panic. Supporting the federal deficit is actually minor role for the Fed and would require much less of an expansion than we have seen.

Supporting the federal debt does not generate enough new money to account for the steady rise in prices over the last 30 years, nor for the boom and bust cycles we have seen in the late 90’s and in 2008 (the busts liquidated a huge amount of credit), nor for the huge, constant export of dollars in our trade deficit. What Congress spends is certainly a scandal. Yet the federal deficit is small compared to the amount of money that the Fed has created through bank credit expansion. (I intend to explain that process in my own blog soon. I just started the blog.) The Fed has been very busy.

So the money given to the auto industry, since the check came from the Treasury, and was immediately paid for by borrowing with government bonds, could have been from real capital. It probably didn’t. The Fed could have bought those bonds directly, though they were probably bought by a foreign central bank with previously created dollars.

What I am trying to get across is that the way we create money in the U.S. has consequences that are wider and usually worse than current price inflation or the federal debt.

I agree completely with your second paragraph, except that in the U.S. the government has given ability to expand the money supply increase to a “pseudo-corporation” manned by people who believe that they can control an economy by monetary policy. The Fed is the U.S. central bank.

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...that the fall in our standard of living would be much more apparent. We just do not feel it. Retailers would be failing more rapidly, demand for lots of goods would be shrinking, and people would be demanding higher income gains. None of that is there in the proportion a larger price inflation rate would compel. The best way to watch the rate of price inflation is to watch the prices that you personally pay....
C.W. - I appreciate your take on this. The above portion grabbed my attention. In my region I would have to say that we are feeling it. Retailers are failing all around us. Commercial real estate is now mostly empty in my town. I, personally, am demanding higher income and am starting to moonlight to attain it. Those who have not been laid off from their jobs are reluctant to ask for more pay for fear of losing their jobs. The things that I buy have almost all gone up in price over the past year. I'm thinking of my grocery, and utility bills. But, I realize that these things may be just regional. What I fear is what will happen to price inflation, nationally, when the banks start to lend more.

Perhaps I'm part of the tinfoil hat brigade, but I tend to believe what Schiff says about the Feds trying to fool us on this.

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