Wednesday, February 12, 2014

Excellent Comment on Inflation

There's a good thread going on in the comments section of Huge Short Interest in Treasuries. I thought this was profound:

"My current take on inflation is that basket of goods the Fed considers for inflation calculations simply can't inflate due to demographics, credit saturation (all credible future promises have been extracted from the willing) and wealth inequalities." [original link]

12 comments:

Stagflationary Mark said...

ZIRP: Great Depression vs. Great Recession

More fuel for the fire.

World War II did see inflation problems but even then interest rates did not rise. They were not allowed to rise!

So what would have happened if the inflationary World War II would not have appeared?

Even more ZIRP I suspect, if Japan is any indicator.

Can't prove it though. We're in uncharted territory. That doesn't stop me from strongly suspecting it and bracing for it though.

Anonymous said...

I agree with the original post.

There needs to be better discernment when it comes to measuring inflation.

The inflation basket gives the public an impression that price stability exists for the average American household.

It's a fallacy to assume that because basket prices are inflating at 1.5%, all other markets will inflate at the same rate.

Economists who study national economic measures will tell you there is much more variance and that there also is something known as a "margin of error."

QE multiplies this margin of error.

But what's staggering is that the real economy (as measured by Gross World Product) is about $85 trillion USD, whereas the financial economy is now a quadirillion US dollar global derivatives market.

It's good that the FED can measure -- or guesstimate -- how much leverage is coming out of the financial economy -- but why does the FED turn a blind eye to monitoring prices (and inflation) within global derivative markets?

What can one observe when they look at poor data on inflation at a quadirillion-dollar scale with high variance and higher margins of error?

My hypothesis is that derivative prices are inflating at a more rapid rate that 1.5% and fluctuating more frequently.

I am 95-99% confident that derivative prices are inherently unstable, unlike the basket of food, transport, and other prices.

Stagflationary Mark said...

Anonymous,

Here's the problem I have, for what it is worth.

The Fed wants 2% inflation overall. Doesn't seem to care how it gets it.

So...

If real wages fall thanks to increased auromation and outsourcing then the Fed must boost real commodity prices to compensate. That's what the math says.

Put another way, the less you get paid, the more you'll need to pay to fill your gas tank.

Two wrongs won't make a right.

Lately, the Fed's finding it difficult to raise commidity prices though. The higher the prices go, the less we can afford to buy and the more commodity producers want to produce.

It's one reason silver is no longer $40+ dollars per ounce and oil can't seem to get back to $145 a barrel.

Nathan said...

Mark,

Yes, it's rather perverse to include iPads into your inflation basket and conclude that food and fuel prices need to rise commensurately.

Fortunately, the BoJ took that idea to its logical conclusion and has done a fantastic job exposing it as a terrible idea. Hopefully the Fed is taking notes :)

Stagflationary Mark said...

Nathan,

Fortunately, the BoJ took that idea to its logical conclusion and has done a fantastic job exposing it as a terrible idea. Hopefully the Fed is taking notes :)

Rumor has it that in addition to random squiggles in the shape of dinosaurs to pass the time, the notes also include a theory.

If 20 years of ZIRP can't work, then certainly 40 years can!! :)

Anonymous said...

Mark,

Actually, like Moses in the desert, 40 years might do the trick. Population wave hits the beach and recedes and, voila, the way is clear for organic growth.

Japan is 18 years ahead of us on the curve.

Now if we could just stop with the life prolonging medical advances...

Stagflationary Mark said...

Anonymous,

Now if we could just stop with the life prolonging medical advances...

If I want my nest egg to last as long as I'm alive then I must do one of two things.

1. Lock in a real yield in case real yields continue to fall.

2. Take on riskier hobbies to lower my lifespan.

At the rate we're going, I may need to take up competitive scuba diving for smokers. Is there a rational reason that tanks can't be filled with smoke? I think not, lol. Sigh.

Gallows humor.

Anonymous said...

Mark have you looked at how the US experience might be different from Japan? the concept of Triffin's dilemma has got me thinking about the huge differences with having the worlds reserve currency. Good primer.
http://www.zerohedge.com/news/2014-02-05/triffins-dilemma-2014-edition

Stagflationary Mark said...

Anonymous,

Mark have you looked at how the US experience might be different from Japan?

Yes. It concerns me greatly. I haven't written about it much lately because I don't really have anything more to add than what I've already said.

June 3, 2010
Cumulative Trade Deficit Nightmares

How can anyone in their right mind possibly think this economic model is sustainable? You think things are bad now? Just wait until we eventually lose our "free lunch". We export paper dollars and we get back cheap goods and not-so-cheap oil. As hard as it is to believe, life is actually good right now. How could we possibly ask for a better deal?

In my opinion, the eventual failing of such a model will have a huge impact on most of the world's population, from homeowners to stock investors to retired savers to the unemployed, just as the Great Depression did.

It would be easy to say that hyperinflation/stagflation is coming when looking at such a model, especially for those of us who live in the United States. I did call myself Stagflationary Mark after all. There's certainly a decent chance.

I don't think it is that simple though. This is similar to the economic model of the Great Depression. The world was built on the exponential growth of production capacity then too. When the exponential growth in demand is no longer there to meet it we could just as easily slide into an ongoing deflationary spiral.


And speaking of production capacity, check out this chart I just finished.

Long-Term Industrial Production Growth

As seen in the red trend line, the growth rate is exponentially decaying over the long-term.

Anonymous said...

USD is still the flight to safety currency. Until that changes, economic weakness anywhere means USD and Treasuries rally.

Stagflationary Mark said...

Anonymous,

I'm comfortable in TIPS and I-Bonds long-term. I'm not at all worried about needing to bribe the border guard to flee the USA. Let's just put it that way.

On a related note, I have no desire whatsoever to move to China, nor does the thought of parking my money in Chinese banks appeal to me in the slightest.

And then there is the Euro. They've had more centuries to watch slower growth. Don't see how moving money there would help me. I'm not going to diversify just for diversification's sake.

My bills are paid in dollars and my bills are tied to American inflation. TIPS and I-Bonds pay me in dollars and they too are tied to American inflation. As a general believer in KISS (keep it simple stupid), that seems fairly optimal to me.

Time will tell.

Anonymous said...


"In my opinion, the eventual failing of such a model will have a huge impact on most of the world's population, from homeowners to stock investors to retired savers to the unemployed, just as the Great Depression did."
In the 30's--this is what happened--everything deflated against the dollar and treasuries--homes,farms,stocks and commodities. However, a better way to say it was that every one of those items deflated against gold not the dollar. In fact until 1933 the dollar was legally 1/20 of an oz. Everything therefore deflated to gold not to the dollar as the US dollar itself was 75% devalued to 1/35 of an oz in 1933. We are in a similar deflationary depression now as the DJIA for example was 39 oz of gold in 2000 at the market peak and is now only 13 ounces.