Simple question, based on my near certain conviction that the bears are morally right, but will be stung in the markets, since inflation will push all prices higher. However:
If governments keep using the same heavily manipulated statistic, does inflation exist if noone states it accurately? My instinctive answer is yes, but the more I think about it, the less sure I am.
So if real inflation was 5% and the governments stated it at 3%, when would we see the effects of 5% and how long could it be denied, and what are the consequences of when people finally admit it being 5%?
EDIT: Update. Seems I have MIT on my side.
http://www.slate.com/articles/business/moneybox/2010/12/do_we_need_goog…
Why are you assuming such high inflation? The government is currently stating that it's barely north of 1%, it seems more probable, to me at least, that they're lying on the high end, not the low end. Think about it this way, the Fed is pumping $85 billion per month into the financial system. They're not pumping it into your pocket, they're pumping it into the pockets of large banks. In a normal circumstance, this would give you way more liquidity than required in the financial system, causing a flood of credit, which in turn, would likely cause inflation. Now, if you start adding bad loans and debt onto a bank's balance sheet, you don't get a flood of liquidity, you get losses from bad debt and write downs on non-performing loans. The bank's position on paper doesn't change, but the liquidity that was pumped into the system is gone. To the degree this occurs equals the reduction in potential inflation from a given QE program. Or, put another way, the less inflation you see, the worse the condition of the QE recipient's balance sheet.
I realize this is a massive over-simplification, but I would be wary about assuming that inflation is about to take off. While it's a defensible position to take, it's absolutely a question of "if", not "when". Just my $0.02.
What does the government count in inflation? The costs of tires? The cost of sheet metal? In essence they are counting stuff that the average person does not consider important to their every day lives. When the government does not cost the count of fuel and food in their computation of inflation, does their number even matter? Housing, food, and fuel are the bulk of almost everyone's expenses so when you don't count 2 of those 3 why should I even begin to believe you.
Think about it this way:
The increased liquidity that stabilized the system can now be used the way an expanded supply of fiat currency is designed to in a period of increasing economic activity; to provide a medium of exchange. The US is well positioned for a growth period....aka actual production of stuff / activity as opposed to speculative price run ups....and the system is functioning as it should. That people are looking forward to another recession, gold price spikes, and inflation speaks volumes to not understanding how the system works.
As people's pschological state moves away from thinking "holy fuck the world is going to end" and they start participating in life again, the economy picks up. If business doesn't grow a sack and start taking some risks ($1.5TT in reserves = risk aversion, duh) then people will do it themselves and we'll see a huge uptick in entrepeneurialism. If that fails, then we'll see another era of trust busting. If that fails, and I'm pretty sure it won't, then the US will look like Brazil does now.
I'm optimistic though.
Not sure how much I have to say about this, but paul krugman talks a good bit about it in his blog perhaps you should check it out
I read that, and it was interesting, brought me to the BLS, which is a complete data mine. I dont want to get bogged down in an argument between whether I'm right or wrong about my predictions, it was more a case of is inflation more than just a calculation, should an input variable be belief/perception of the statistic? Inflation is "harmless" in the same way as bullets are, its what people do with it that causes damage. But if there were double the number of physical dollars in circulation than there were a decade ago (numbers accurate), but prices remained in line with official inflation, but dollar counts did not, which is the actual rate of inflation, and do these extra dollars do any inflationary damage while noone acknowledges their existence? What about a few people starting to discover them?
Of course the rate of inflation is understated. Ask any working class individual and they will tell you that inflation has been on the rise for some years now. I'm not saying that inflation is running rampant at the moment, but in this environment, with rising yields and immense excess reserves, future (severe) inflation seems probable if not certain. Whether individuals are able to diagnose the cause or not is irrelevant; the effects will be disastrous. Keynes was right when he proclaimed,
"there is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
In other words, inflation does not become a problem once the government admits that it's a problem.
The problem is the lack of confidence that inflation causes, more then inflation it's self. Obviously this asumes a level which is below say 10%. Assuming that there is high inflation, which may not be the case, negative real interest rates imply a debt of balance sheet recovery at a generic level. That is positive in terms of wealth, although not so much in terms of income.
What is going on here? Inflation is a way to capture the price movement of many types of goods and services in aggregate. It can be measured in different ways. CPI and PCE inflation produce different results in aggregate. So what? I don't understand the problem or the question.
Inflation can only come about when the velocity of money speeds up. With so much cash sitting on the sidelines the printing press at the Fed is inefficient at creating the pegged inflation it hopes to see. Proof of that is in the jitters created in the market when Ben hints at slowing down QE - not stopping, just slowing it down - and markets drop. Now mortgage rates are rising, coupled with already increased home prices and we should see the housing markets cool somewhat.
We need fundamentals in the economy to right themselves before money starts to circulate and inflation can become a viable concern (at least the published index anyway). And with China cooling off and low-paying jobs being created in 2013 to replace high-paying jobs lost from 2006 I don't see inflation being a real concern anytime soon.
NYU is spot on. Although inflation is predicated on increases in the money supply, the many who assume that QE will have a proportionate impact on inflation are woefully misguided. Inflation is a monetary phenomenon but that is just the tip of the iceberg.
RE: Inflation stats… The Fed largely focuses on the PCE (issued by the Dept. of Commerce), but takes other measures such as the CPI and PPI into regard (produced by DOL) when tracking inflation. To the layman these may seem like dubious figures with mysterious origins but in reality they are pretty damn good measures. Some inflation measures exclude cost push inflation by removing fluctuations in the price of assets prone to shocks, others don’t. Bottom line: these measures don’t warrant cause for concern.
On an unrelated note, if you are going to read an economics blog, I recommend Greg Mankiw's. Krugman has really fallen out of favor with much of the economics community, but he does seem to have found some fans at the NYtimes who have taken a liking to his vitriolic rants.
The Fed appears to focus only on the 5Y5Y breakeven rate (assuming you trust zh's analysis - I find it pretty compelling). They certainly watch and monitor the ones you mention, but they appear to take action in response to the breakeven rate more so than other measures of inflation.
Just a point of note, I agree with your statement above.
Didn't know that! Appreciate the input.
Ad rerum sed nemo deserunt architecto. Vel non laboriosam iste. Ex accusamus optio quis voluptatum accusantium.
Recusandae sit saepe illum facilis. Tenetur quisquam assumenda perspiciatis sed accusantium.
Ipsa eos quis temporibus deleniti tempora sunt. Deleniti assumenda amet sed qui velit eius velit.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...