Why This Isn’t Stagflation

As someone who lived through the 1970s as a business economist the stagflation term is more a fiction then an accurate description of the 1970s. Yes, we had the inflation and there were frequent forecast of stagflation, 1%-2% real growth and high inflation. But the sub par growth never seemed to actually materialize.

Growth was highly volatile but if you look at the actual data, growth was either above trend of negative. Moreover, average real growth for the 1970s was actually just as strong as it was in the 1980s.

“In the stagflation of the ’70s, energy prices were rising because of absolute declines in oil production. There was a wage-price spiral because of strong unions. Neither of these holds today.”

Right, because the only way for energy prices to rise is from a decline in oil production and the only way for wage-price inflation is from strong unions. Since we don’t have those today it is impossible to have inflation right?

The only point of Baum’s piece is that the MSM does tend to repeat the same stories, terms, etc. The term “stagflation” has been overused, and it clearly isn’t here yet. I have stated that the risks of stagflation are real and rising, but the economy is not in stagflation today.

Baddriver, good observation.

The real error in Baum’s piece is that she accepts (and parrots) the concept that slowing growth will reduce inflation. In this view, growth is slowing, and CPI lags growth, so inflation will fall soon. This is pure Keynesian nonsense, and it is the same trap limiting the FED today.

Why do so many people ignore the 800 pound gorilla in the room? How can we even begin to compare the 70’s to now, when the numbers have been massaged better than those Kobe cows? THIS blog covered some of the same issues with massaged numbers roughly 6 months ago!

http://bigpicture.typepad.com/comments/2006/11/the_return_of_m.html

So, did we all forget? The numbers for M3, GDP, inflation & on and on have been reworked under new methodologies to arrive at the numbers. Growth is a JOKE! We aren’t growing except on paper! From the same site you guys pulled from it’s right here….

http://www.nowandfutures.com/forecast.html#real_gdp

So when M3 runs at 10%…this by definition (Austrian – superior) is inflation of 10% and growth is clearly negative. Do the math for YOUR household and tell me costs are not up 10% from just one year ago. NOT TO MENTION – WE PAY FOR ENERGY AND FOOD FOOLS, SO HOW CAN INFLATION NOT INCLUDE THIS?

“Wages are the price of labor. Inflation is a general rise in the price level.”

I think Caroline is missing the point. The classical definition of inflation is not a general rise in the price level. True inflation is an increase in the money supply and credit over and above the supply of goods and services. The corollary is a decrease in the availability of goods and services with respect to the money supply.

With this definition in mind, there is no lagging effect with respect to the cause of inflation, only in its effect on wages and prices. Of course, wages and prices can rise for other reasons such as an increase in the cost of producing goods or delivering services.

What we are experiencing right now is both classic monetary inflation and credit expansion, and a gradual increase in the cost of the fuel of the economic engine: oil. It’s a double whammy, and I think it will be a big blow to the global economy when its effects really begin to be felt. Peak oil, anyone?

IMHO, the other thing we are experiencing is a constant re-tooling of both CPI and PPI yardsticks to make price level increases (a result of inflation) appear lower than what most folks are experiencing in their daily lives. So much for indexed retirement vehicles.

Perhaps we should be concentrating on the causes of the increase in price levels, and not the price levels themselves. It’s a more direct way of pointing the finger at flawed monetary, economic and energy policy.

Wouldn’t all this be symptomatic of post 2k bubble global over capacity? It prevents broad inflation by preventing demand pull. It would indicate that cap-ex is unnecessary since the capacity is already there. Which would lead to more financial engineering since cash doesn’t need to be invested in capacity.

It would also fit with inflation in segments such as health care. Health care doesn’t have the same over capacity since physicians available is kept artificially low. This leads to more capital spending to get the most out of the physicians available.

From a housing perspective the extra liquidity injected in response to the stock bubble and 9/11 didn’t go towards cap-ex since capacity was already there. So it ended up in mortgages. Even with the cash-out refis capacity wasn’t exceeded so cap-ex and jobs didn’t materialize.

If over capacity is the problem then what predictions could test it?

The solution to our problems would be an increase in world wide demand. Either a lot of the wealth currently in the hands of capital needs to move to labor where it will get spent or, I guess a dollar revaluation vs. the renminbi. I’m sure there is a flaw in my logic somewhere, but it explains why Paulson is focused on the renminbi, gotta keep capital happy.

Well this post was longer than I was expecting.

I know that economists like to view everything in their own terms, but to me the long growth period from the early 1980s to about 2000 is suspiciously aligned with two things: the maturation of boomers through their work careers and the invention, spread and triumph of personal computers/ the internet.
Those are one-time events just like the post WWII growth.

The March CPI increased the expected 0.6% but Core was 0.1 better than expected. Once again the necessities of life soared in price while other necessities exhibit bewildering benignity.

Energy costs jumped 5.9% (gasoline +10.6%). Transportation costs increased 2.8%. Food increased only 0.3%, as did owner’s equivalent rent.

The CPI release shows unfathomably low y/y increases in the necessities and near-necessities of life.

Healthcare 3.96%, food & beverage 3.27%, education and communication 2.24%, and transportation 1.17% (probably due to hedonic adjustments for light trucks)

The Cleveland Fed’s Median CPI increased 3.76% y/y. Numerous analysts and some Fed officials view this metric as a more accurate arbiter of core inflation.

spencer: Perhaps “stagflation” and “stagnation” are kind-of synonymous, “stagflation” essentially being “inflation without the growth”, as opposed to “inflation with growth”. I’m not sure there has been a “third way” over the last few decades. When did we last have price stability in necessities?

“”Peak oil, anyone?”
No thanks, I’m still trying to digest ‘The Population Bomb’.”

Well, the two are intimately connected.

“to me the long growth period from the early 1980s to about 2000 is suspiciously aligned with two things: the maturation of boomers”

I wonder about that a lot. Did stocks go up in the ’90’s simply because way more people were buying them? What happens when boomers retire and maybe take money out of the market?

Maybe somebody out there who studies the economy for a living could chime in and tell me what the pros believe on this issue.

Energy isn’t factored into inflation though. 15$ gas is no problem in 2020. There will be tons more money from China and everywhere. So I guess that means uncounted inflation – true.

Spencer had it right. STAGNATION. Money is worthless but debt is endless. Plantation economy

I rarely lecture these days as: 1) I have no college degree, 2) I’ve never in my life taken a single class in economics or business, and 3) numbers 1 and 2 above limit the fees I can demand for my economic lectures.

However, I can read; I can reason; I can use logic. In this day and age, those three items may trump all of the negaitive reasons above.

It is odd to debate the causes and cures of inflation without a definiton of the term itself. Fortunately, others more educated than me find this odd as well:

From an article by Frank Shostak: http://www.mises.org/story/2525
“Despite the use of sophisticated mathematical and statistical techniques, the research paper never gets to the heart of the phenomenon of inflation. Covering undefined terms with mathematical dressing cannot make the analysis more meaningful if the object of the analysis is not clearly identified.”

Part of the problem is the English language and the tendency to use substitutional words – we think of inflation in the same concept of inflated waistlines, inflated balloons, and inflated tires, i.e., a fattening, an expansion from the norm. We then tend to think of higher prices, higher costs, as an expansion from the norm, hence inflation.

However, I do not think this is correct. Price movement is an economic phenomenon based on the law of supply and demand. We tend to simplify and say that money growth causes higher prices because of too many dollars chasing too few goods – but the expansion of money has no effect on the price of a product that no one wants to buy. It is still a divergence of demand from supply that causes price movements.

So all the imaginary measuring of “inflation” is simply a measurement of price changes, and not actual inflation.

The core of inflation – what inflation is and can never be anything else – is a debasement of money. This debasement of money, however, has no direct effect on prices. One might argue that the huge climb in the average price in homes was a direct effect of money expansion (debasement); I would say this an innaccurate assumption. The increase in home prices was a direct effect of easy credit that spurred demand, which caused a divergence from supply. (Easy credit is not inflationary although it encourages money expansion which is inflationary. If no one borrowed, there would be no inflation. But interest rate targets can effect demand for money.)

I am supported in this view by Minyan Mish at http://www.minyanville.com/articles/Fed-Interest+Rates-Funds-Economy/index/a/12489.
“…the Fed has an interest rate target (as opposed to a money supply target) the Fed is not pumping money per se, the Fed is defending an arbitrary target that it has established, no more no less. Thus it is not the Fed initiating anything, the Fed is merely meeting demand for money at the arbitrary target they set.”

If this is the case, then what is the purpose of inflation? Simply, inflation is a method of accumulation of wealth without work. Inflation is alchemy.

Suppose a country ran on a strict economy of gold coin. The ruler of this country ordered all gold coins to be delivered to him and a new coin was to be issued by fiat (decree) that would hold the same value as the previous gold coin. But what the ruler in fact did was take 1/2 the gold from every coin for himself and issue the new 1/2 gold coins that he decreed was to have the same value as the old. The money has been debased as its real value has been decreased while the ruler has increased his wealth.

And that is the proper definition of inflation – an increase in the ruler’s wealth with no corresponding output of labor by simply debasing the money. Therefore money expansion IS inflation.

Is it any wonder the Federal Reserve does not want to worry about money supply and instead focus on interest rates? If they controlled money supply, interest rate would fluctuate based on supply and demand, but the government’s wealth would not build due to restricted currency growth; however, by concerning themselves with interest rates and protecting the low rate by increasing currency, they automatically expand (inflate) the government’s wealth.

Wiser people than me agree: From an article by Antony Mueller at http://www.mises.org/story/2462
“Central bankers sometimes describe their activity as “more art than science,” which is implicit recognition of their ignorance. The “art of central banking” is the art of pretending to know what one does not know. Not only is it not a science; it is not even an art. At best it is alchemy; at worst it is a gigantic cheat.”

So all the concern over inflation, deflation, stagflation, and stagnation is irrelevant, because under it all is economics, the law of supply and demand that determines prices, while earnings ultimately determince a company’s worth.

Everything else is window dressing.