Sunday, March 16, 2014

Any 'flation Will Do

I'm astonished to agree with an entire sentence in a Paul Krugman column,

"[I]f you believe that prices should move in proportion to the monetary base, there’s simply no way to rationalize triple-digit money growth associated with 2 percent or less inflation."
I came to the same conclusion recently in thinking about buying Treasuries. Inflation is very tame despite inflationists' anecdotes about various items that have gone up in price.

For example, I figured out today that my Chipotle burrito has gone up 28% since 2002 - an annual increase of 2.1%. The CPI is up just barely more - a little over 30% during the same time period of 12 years. Hardly hyperinflation.

Someone on twitter posted a "Japan: population breakdown - 1880 to 2100":

You can see what I'm talking about with regard to demographics; their CPI stopped increasing when the productive population started falling, at the same time that their central bank began a huge increase of the money supply.

The evidence is now showing in the U.S. and Japan that the price index is not a dependent variable of the quantity of money. However, both experiences are consistent with the price index and the quantity of money both being dependent variables of demographics.

Falling working age population seems to cause desperate but fruitless schemes by central banks.

We may have an answer now to our inflation/deflation question. The underlying trend is deflationary. The central bank can panic everyone into buying inflation "hedges" by doing something crazy, but this is counterproductive.

Most importantly, no amount of central bank jawboning is going to make your boss come into your office and give you a raise. You could just get fired, though, if the central bank makes your company's input costs go up too much due to commodity hoarding.

Whenever people are most in a tizzy about inflation and rising interest rates (during this demographic deflation) you can buy bonds and wait for reversion to the interest rate trend

16 comments:

John said...

A charitable interpretation of Krugman's syntax, but you are exactamondo correct that both inflation and deflation are driven by demographics and not by monetization of treasury issuance.

Hundred trillions worth of dollar bills dropped from helicopters onto main street would be another matter, but that will never happen because the financial elites don't give a crap about the U.S. population. Bailouts of big banks having inevitably bad loans due to the demographics will do little to get the economy moving.

Anonymous said...

Do stock prices at all time highs not get factored in to your inflation formula? The way I see it, you can spend money on goods, services, or financial assets. Sure, you can get a haircut for $6 somewhere, but sp500 is inflated and so are home prices near the major metropolitans. I count that as inflation.

Anonymous said...

You must be joking. Do you eat a stock or live in it? CPI is a *consumer price index*. What it really means is that morons are willing to provide free equity capital to corporations. That will have a predictable ending.

Janet Yellen said...

It's interesting, the Bernank said in his famous 2002 deflation paper that he COULD do helicopter drops of money onto main street to hit an arbitrary inflation target, but he didn't say that he WOULD and he HASN'T.

They could also get wages up without congressional action - and lower unemployment - by sealing the border and rounding up and deporting illegals. But they WON'T do that either.

John is exactly right that what they WILL do is protect the TBTF banks during those sickening lurches downward when the economy overshoots the underlying deflationary trend.

CP said...

From 2010!

http://www.creditbubblestocks.com/2010/09/treasuries-tlt-are-rallying-because-ben.html

CP said...

"Treasuries (TLT) Are Rallying Because Ben Bernanke is Throwing the Inflation Game!"

This speech also confirms one of my favorite principles, never believe anything until it has been officially denied, when Ben says, "I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small."

CP said...

Bernanke Admitted That QE Isn't What Keeps Bond Yields Low
http://www.creditbubblestocks.com/2014/01/bernanke-admitted-that-qe-isnt-what.html

Something Deflationary this Way Comes
http://www.creditbubblestocks.com/2011/02/something-deflationary-this-way-comes.html

Stagflationary Mark said...

John (and Janet Yellen),

Hundred trillions worth of dollar bills dropped from helicopters onto main street would be another matter, but that will never happen because the financial elites don't give a crap about the U.S. population.

Bernanke said, in the 2002 speech, that a determined government can prevent deflation.

At no point did he say that our government would actually be determined though. Seriously.

We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Stagflationary Mark said...

CP,

"[I]f you believe that prices should move in proportion to the monetary base, there’s simply no way to rationalize triple-digit money growth associated with 2 percent or less inflation."

You know I am fascinated with aluminum.

The Quantity Theory of Aluminum

In monetary economics, the quantity theory of money is the theory that money supply has a direct, positive relationship with the price level.

In aluminum economics, the quantity theory of aluminum is the theory that aluminum supply has a direct, negative relationship with the price level.

The hyperinflationists only want to talk about the money supply. In my opinion, that's just being silly.

John said...

Bauxite is essentially a free good, meaning that the price of aluminum is governed by the cost of energy to smelt the ore into usable metal ingots.

Thus the price of aluminum in relation to the price of energy is a useful economic indicator.

Goosing the money supply always worked to stimulate the economy while we had population growth. In all probability increases in the money supply will do a poor job of goosing the economy in real terms now that we have declining populations throughout the developed world. However increasing money supply is likely to trigger rapid and short lived bursts of inflation with longer periods of slow, grinding deflation thus elevating investment risk. We are marching into the economic unknown here.

CP said...

Lol:
Warehouses holding enough aluminium to build 69,000 Boeing 747 jumbo jets are why Peter Sorrentino says the most abundant metallic element in the earth’s crust is too expensive.

Stagflationary Mark said...

CP,

In my more "stagflationary" days I accumulated aluminum foil at Costco (using Costco coupons).

I spent less than $500 in total. It's pretty much a lifetime supply. Alcoa better not be counting on me to buy more. Per central banking wishes, I pulled that demand forward and cannot easily undo the process.

I went in one day with coupon in hand. I saw the biggest pallet of aluminum foil of my life. It was an ungodly amount. That was a very deflationary day. I took the coupon directly to the trash can.

Those predicting hyperinflation should have joined me that day. It would have been a great time to discuss my upcoming Quantity Theory of Aluminum theory in its infancy, lol. ;)

CP said...

Can you imagine, 69,000 747s?

Fewer than 1,500 have ever been made.

There are 8,000 737s and 6,000 A320s.

I wonder if 69,000 commercial aircraft of all varieties have been made, cumulatively?

CP said...

The Aerospace Maintenance and Regeneration Group in Tucson, AZ ("Boneyard") has ~4,400 aircraft - the largest aircraft storage and preservation facility in the world.

CP said...

Tom Petty - Learning To Fly
https://www.youtube.com/watch?v=s5BJXwNeKsQ

Scenes shot at the Boneyard.

CP said...

Mark, how's the lifetime supply of aluminum foil?