"Nobel laureate Paul Krugman is attacking Amity Shlaes as a paranoid "crank" for her latest column about inflation, which is pretty much what you'd expect from Professor Krugman, who, by the way works for a newspaper whose weekday single copy New York City cover price has increased to $2.50 from the 60 cents that it cost in 1999, or 417%.
...Let's consider Mr. Pethokoukis' argument [that Amity Shlaes is "dead wrong" about her inflation concerns]. He writes:
The Consumer Price Index, including food and energy, has risen by an annual average of just 1.6% since 2008, including 1.5% last year. Is Washington phonying up the numbers? Well, MIT's Billion Price Project, which "uses prices collected from hundreds of online retailers around the world on a daily basis" puts US inflation at just over 2% the past year. In other words, the CPI is roughly correct, though your personal mileage will vary a bit.
Mr. Pethokoukis describes a difference between "just over 2%" and "1.5%" as "roughly correct." But another way to look at it is that the government numbers are under-reporting inflation by 25%.
...Nor is it just talk radio "hawkers" who want to own some gold to protect against the erosion of the dollar. The president of the Federal Reserve Bank of Dallas, Richard W. Fisher, owned at least $1 million worth of gold, according to a report of his personal financial disclosure form. John Paulson's hedge fund reportedly owned $1.19 billion worth of shares in a gold exchange-traded fund. Maybe he's a paranoid crank, too?
...And as the French economist Thomas Piketty, one of Professor Krugman's favorites, no less, pointed out in his book, "inflation is hard to control: once it gets started, there is no guarantee that it can be stopped at 5 percent a year.""
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I do not know much about economics. How easy is it to spiral into hyperinflation in a tightly-regulated financial environment?
22 comments:
I am dubious about any economists ability to predict anything but, Gold Faces a Volatile Road Downward in 2014 For These Key Reasons.
One of the reasons is no expectation of inflation.
On the theme economists don't know squat this article shows how difficult it is for actively managed mutual funds to outperform an index fund over even a relatively short time period, five years. Their performance would be much worse over a typical lifetime investment period.
I haven't gotten a raise in more than 3 years, and even then it was paltry.
By all means lets keep inflation, interest and wages down. That helps everyone.
I lived through a period of high inflation. It was very demoralizing. If money doesn't make sense, very little else in life makes sense.
When they don't include food and fuel in the CPI (thank you Whiplash Willie), it's hard to gauge inflation, but we haven't seen real inflation since Reagan killed it and a lot of people who don't remember the 70s can be conned.
Inflation, if nothing else, is a hidden tax.
On everything.
And, The TrollWhoseNomDeNetMustNot BeDissed notwithstanding, all that stands between us and Weimar-level inflation (remember all those trillion dollar deficits?) may be that bubble we talked about yesterday.
Inflation is a tax on savings, not on everything.
It frees debtors and punishes debt holders.
If your wages don't go up to match inflation, it's not inflation.
There's no inflation now because the newly printed money is being held on deposit in the Fed rather than circulating. It was a way to recapitalize the banks by getting shit off their balance sheets in return for Fed deposits. The feds keep it there by paying interest on it, and maybe arm twisting.
With interest rates low, the stock market is the only place with a return.
But to that extent, stocks act like long term bonds. Long term bonds, even if absolutely safe, will drop like a rock when interest rates rise; as I'd imagine stocks will too, to the extent they're substitute long term bonds.
What appears safest to me is short term Treasuries (say 2 year), which pay no interest to speak of either, but won't fall much when rates rise, and you can roll them over at the new higher rate when they mature. The idea is that short term Treasuries plus interest will pretty much track inflation, so you don't lose to inflation. Otherwise who would buy them.
It's not an investment though. A bank CD is a good, short term only, again.
If you're young you have time to replace losses in any case, and stocks are fine.
s/is a good/is as good/
My last three raises were 7.5%, 7.9% and 9.7% (market adjustment).
i am doing fab-thanks.
Raymond Frolander - is that you?
Sixty, you're fab!
LOL
@ARM, your comment confuses economists with financial advisors. The story you cite is exactly what garden-variety efficient-markets theory predicts.
The paradox is that w/o lots of smart people trying to beat the market it would actually be beatable.
The Shlaes article was weird. Her main complaint seems to be that the CPI is much better constructed than it was in the past.
Looked like she dashed this one off quickly before going on vacation.
Man, I am glad someone got it - tough crowd!
Thanks, rh, very interesting. So the short term Treasuries are like a savings account and though you won't make much in interest, you won't lose anything. But you'll still have to pay higher prices for some goods, but if you live moderately, it should be okay.
Chip S, the Shlaes article was maddening in tone.
article shows how difficult it is for actively managed mutual funds to outperform an index fund over even a relatively short time period, five years<
There is a lot to be said for holding indexed funds as a core holding in a portfolio, HOWEVER, there is a lot to be taken up against this article. First of all, they used "broad based" mutual funds, which are essentially a mini mimic of indexed funds so, of course, when you throw in the higher management fees and other costs, they WILL underperform an index fund of essentially the same type of investment holdings. Duh!
In addition, the study used the same funds for years instead of using the rational strategy of moving from a diminishing sector to a growing sector. An advisor is supposed to be able to keep on top of these things and counsel you to either buy into a growing sector like the BRIC funds used to be and be able to tell you when to get out of the BRIC funds. You don't just buy and sit on it with your thumbs up your butt.
Bonds and bond funds are also a good part a portfolio and the client/advisor team should know when to buy bonds and when NOT to buy bonds. Hint....don't buy when interest rates are at an all time, artificial low because you will certainly experience big losses when the interest rates go up.
So sure....if you are comparing apples to apples. Broad based equity only mutual funds of the same category....one with fees and one without....DUH....the one with fees will underperporm.
rhhardin said...
Inflation is a tax on savings, not on everything.
I disagree, in the sense the dollar is worth less, buys less.
YMMV
The CPI consists of a lot of items and then determines if the total cost has gone up (inflated) or not. That is a very very VERY simplified explantion. There are actually many different calculations of the CPI.
Where it is deceptive and not reflective of the reality that normal people are facing is that it includes many items that are rare for people to purchase or that are not a general part of our everyday expenses.
FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
APPAREL (men's shirts and sweaters, women's dresses, jewelry)
TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).
If you throw out the items that are not purchased on an annual basis, such as cars, televisions, appliance, houses, airfares, vacations. Then the CPI might actually reflect a more accurate picture of what it is costing to just LIVE.
They can say that the cost of food items has not gone up or only gone up about 2%. Anyone who has gone shopping in the last 6 years knows that is complete and utter bullshit.
Chip S. said...
@ARM, your comment confuses economists with financial advisors. The story you cite is exactly what garden-variety efficient-markets theory predicts.
The paradox is that w/o lots of smart people trying to beat the market it would actually be beatable.
I wasn't confused but I did conflate the two into a more general frustration. I don't disagree with your other point but no one running a fund makes this fact clear to their clients, for obvious reasons.
Sixty, it's local news. "My foot and my fist" is right up there with "Don't taze me, bro" as one of the all time great lines from Florida cime history!
Also the line "Dad was acting like a dad. I don't see anything we should charge the dad with."
Not much of a fan of law enforcement any more, but sometimes they get it right.
The perp's face is amusing, although he has too many teeth left, and at least one eye too many.
I assume the father's fist got tired.
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