Objectivism/capitalism... something is wrong here.

Aaron,

==============
Ed- Don't fall for the fallacy that 'inflation' is a symptom (pricing) rather than the monetary cause.
==============

Give me 2 more sentences on this, and I bet that I'll totally understand you (ie. your point).

Ed

Post 121

Saturday, April 1, 2006 - 9:56pm

Check this out ...

===============
What cost $1 in 1800 would cost $0.49 in 1902.
Also, if you were to buy exactly the same products in 1902 and 1800,
they would cost you $1 and $2.04 respectively.

http://www.westegg.com/inflation/
===============

102 years of 'negative' inflation. Even folks who didn't earn any new money -- got twice as rich, in terms of purchasing power. We're over 36 times more productive, but not 36 times more rich (we can't each, on average, feed, house, and clothe 36 families -- even though we ought to be able to do so, given the increased wealth of the market).

Ed

Post 122

Sunday, April 2, 2006 - 12:44pm

Money is simply a tool for trading, it has value because it is extremely liquid and its value is predictable. The value of fiat money is more predictable than rare elements, and its much more liquid. I think the future of money will be awesome due to reduced costs in exchanging one type of value for another and the existence of extremely reliable fiat providing entities. Instead of having a single bank account in one fiat, you may have two or three banks in hundreds of different fiat providers.

Post 123

Sunday, April 2, 2006 - 1:02pm

I'd found that thread through your previous posts, but should have linked to the top of the inflation thread instead of directly to your relatively short post in it. 'Inflation' is itself an expansion of money supply. This is a dominant factor in causing price increases, but pricing levels are a symptom rather than the phenomenon. See that thread and its quotes/link for more info.

Measuring increase in money supply can be hard enough (and there are plenty of potential measures other than M3), but it's nothing compared to the impossible task of trying to infer inflation from price levels. Note that even in the realm of trying to measure average price levels, CPI in particular has undergone changes to make it an underestimate. Eg. House prices have been excluded since the 80s, so recent rampant price increases in housing aren't visible in the index.

In the mid-late 90s CPI also had a number of changes nominally to adjust for the sustitution effect. The canonical example is now considering chicken and beef instead as interchangeable 'meat'. Say chicken is at $2/lb and beef at $4/lb one year, and raises such that chicken is $4/lb and beef $8/lb the next. A simple 'basket of goods' containing beef obviously would show a 100% increase for that product. Under the new system, however, the 2nd year basket could instead replace beef with chicken, hence miraculously producing a 0% price increase for 'meat'.

http://money.cnn.com/2003/11/14/markets/inflation/index.htm
http://www.frbsf.org/econrsrch/wklyltr/wklyltr99/el99-05.html
http://www.mises.org/freemarket_detail.asp?control=150

Post 124

Sunday, April 2, 2006 - 1:33pm

You could measure inflation by comparing how much USD the government destroys (example: burn old $20 bills or subtract $20 from the government's balance in their central bank account) vs how much USD it creates (example: print new $20 bill or add $20 to the government's balance in their central bank account).

Post 125

Sunday, April 2, 2006 - 5:52pm

Thanks Aaron.

I do realize that price is not ONLY increased by US Federal printing presses, etc. But tell me -- is there anything wrong with checking the expansion of the GDP against the expansion of M3, in order to calculate the Fed's actual inflation of our money supply?

By the way, you mentioned that "CPI in particular has undergone changes to make it an underestimate." Do you see one good reason for that (a reason to 'intentionally' make it an underestimate)? It's statism. There's a statist reason for an underestimate of what they are doing to US citizens (it's to throw-off Statism hounds such as myself).

By the way, it's like this with every central power dynamic. For example, the American Cancer Society talks of great advancement (from the billions of dollars in donations) -- yet the chief measure of success, overall age-adjusted mortality rate, is still not below that of a mere half-century ago. The Clinton-Boskin Commission is a great example of this hide-the-inefficiency game.

You remember when Clinton said things like "the era of Big Government is over" -- don't you? That was intentional duplicity -- he knew EXACTLY what he was doing (and that it contradicted what he was saying). You remember when Clinton said that inflation was a thing of the past -- don't you? That was intentional duplicity -- he knew EXACTLY what he was doing (and that it contradicted what he was saying).

If you add back in the 1.1% inflation that the Clinton-Boskin Commission 'made disappear'-- then inflation stood at 3.5% throughout Clinton's second term. That's not counting the house price inflation you mention, which would put a rising cost of living at more than 3.5% per year, every year.

It's not a mere coincidence that the net fiscal worth of the average US citizen went below zero, by the end of Clinton's second term (though the live-beyond-your-means rise of choosing to buy things on credit -- is, squarely, the fault of 'the public'). It's not a coincidence that most homes now 'require' at least 2 bread winners -- to put kids through college (though we've adopted much of this on ourselves, by choosing to increase our standard of living).

Ed
[to parody Rousseau: Generation X was born rich, but everywhere is in the slums of poverty]

(Edited by Ed Thompson on 4/02, 5:55pm)

Post 126

Sunday, April 2, 2006 - 6:26pm

Expansion of M3 is one way to measure inflation of the money supply. I'm not sure exactly what you want to do with a ratio with GDP. Are you trying to estimate productivity gains vs inflation? To find some level of inflation to exactly balance price decreases that would be due to increased productivity?

I remember various ludicrous proclamations of zero-inflation - even the coming dangers of deflation - in the past decade and a half. There's plenty of reasons the government would want to understate CPI (eg. general public perception, increasing tax revenue by slowing tax bracket increases tied to CPI), but none I could call good. You are definitely right with the general motive being 'hide-the-statism'.

Post 127

Sunday, April 2, 2006 - 9:09pm

Ed, you wrote,

Check this out ...

===============
What cost $1 in 1800 would cost $0.49 in 1902.
Also, if you were to buy exactly the same products in 1902 and 1800,
they would cost you $1 and $2.04 respectively.

http://www.westegg.com/inflation/
===============

You mean cost less in inflation-adjusted dollars, not in nominal dollars. The same products would have cost more in nominal dollars in 1902 than in 1800.

102 years of 'negative' inflation.

What do you mean by "'negative' inflation"? In this context, the term "inflation" refers to a rise in the average level of prices that is due to an increase in the supply of money relative to the supply of goods and services. What you're evidently referring to is a rise in the average person's standard of living.

Even folks who didn't earn any new money -- got twice as rich, in terms of purchasing power.

How is that, if the purchasing power of the dollar actually declined due to inflation, which it did? You're evidently viewing the above statistic as referring to nominal prices, when it is actually referring to real, or inflation-adjusted, prices. If someone didn't earn any new money, then he or she would have been poorer, because inflation would have eroded the purchasing power of the money that the person already possessed.

We're over 36 times more productive, but not 36 times more rich (we can't each, on average, feed, house, and clothe 36 families -- even though we ought to be able to do so, given the increased wealth of the market).

That's the wrong way to think about increases in productivity. I'm not sure the "36" figure is correct, but even if it is, it wouldn't mean that the average worker can feed, clothe and house 36 families, because increases in productivity haven't been uniform throughout the economy. They haven't led to 36 times as many houses, bushels of potatoes, pounds of meat, shirts and shoes, etc., because people don't want 36 times as much food, clothing and housing. They want other things like new computers, television sets, electronic equipment, etc., which is where the increased productivity and greater wealth has been concentrated. If we are 36 times as productive, then we are indeed 36 times as wealthy, in terms of the real monetary value of the goods and services being produced, although I would wonder if the figure you quoted is accurate.

- Bill

Post 128

Sunday, April 2, 2006 - 9:28pm

The Gold Standard (or really, any sort of durable, long-lasting metal/precious gem combination will work) is the only defense we have when the government overextends itself in debt, defaults and makes American money worthless (or, at least, worth less than before). Think about it, the only standard that dollars have is the reliability of the government to pay back it's debtors. If the government loses that credibility, we all lose our money, because fiat currency is now dead. If I had it invested instead into a basket of gems/metals that retain value, I wouldn't have to worry about the government, I would still have my wealth.

Post 129

Monday, April 3, 2006 - 12:36am

Bill,

============
You mean cost less in inflation-adjusted dollars, not in nominal dollars. The same products would have cost more in nominal dollars in 1902 than in 1800.
============

No. I mean the reality of life then -- a dollar would buy you twice as much goods in 1902, than what it fetched in 1800; we ALL got twice as rich (in terms of purchasing power) during the 19th century (due to free market mechanics, unfettered by statist power grabs).

============
What do you mean by "'negative' inflation"?
============

An increase in available goods without an increase in money supply (more goods, same money = less cost of living).

============
What you're evidently referring to is a rise in the average person's standard of living.
============

Right. I only care about living people -- not abstracted prices, per se. In the US, the cost of living on earth has increased tremendously -- and politicians are to blame for that.

============
If someone didn't earn any new money, then he or she would have been poorer, because inflation would have eroded the purchasing power of the money that the person already possessed.
============

Not when goods (and services) were increasing faster than the money supply.

============
I'm not sure the "36" figure is correct, but even if it is, it wouldn't mean that the average worker can feed, clothe and house 36 families, because increases in productivity haven't been uniform throughout the economy.
============

I'm using Lomborg's (Skeptical Environmentalist) data: "there has been a 36-fold increase in per capita American production since 1789." And yes, it WOULD mean that the average worker can feed, clothe, and house 36 families, because an 'average' (ie. a mean) factors in the non-uniformity of growth in the economy.

Ed

Post 130

Monday, April 3, 2006 - 6:16am

An increase in available goods without an increase in money supply (more goods, same money = less cost of living).

That's called 'deflation', isn't it?

Post 131

Monday, April 3, 2006 - 7:04am

Ok, I have to try to balance some responses to each person:

William Dwyer:
1 - Arbitrary whims of central bankers - In this case, what is good for the economy is also good for the central bankers, and they are largely private not government banks. However, this is a point I will need to address again. I am not necessarily against a more free system of banking, but that is an independent issue of a gold standard.
2 - This "modest increase in gold supply" would in fact price gold far, far greater than its true value if it remained at a true 1:1 value, and what of countries wuth great amounts of capital but little gold like Japan?
3 - The free market does value currencies against one another based upon their performance - the currency exchanges and investments reflect this.
4 - With deflation and a more constrained money supply, growth and access to capital (necessary for capitalism, natch) is diminished, leading to stagnation (or depression) and greater boom/bust cycles and more instability, not less.
5 - The possibility of printing money and going crazy with it is contraindicated by the fact that the market exists that will abandon your Nation's currency in droves - all of the solid economies have stable currencies, weak economies do not, and there is a good reason for this. In other words, there are no free lunches (which we, as objectivists, should know)
6 - As I said, power is constrained by economic reality. What you propose is no longer an economically sound solution for today's modern economies.

Post 132

Monday, April 3, 2006 - 9:51am

Ed,

Thank you for that information. I stand corrected. I had thought there was some slight inflation during that period, but you are correct. After checking on the value of the dollar in 1800 relative its value in 1902, I found that its purchasing power had increased by a remarkable 31.5%. One hundred dollars in 1800 would have bought $131.50 worth of the same goods and services in 1902. I knew that there had been some inflation during the Civil War and thought that there was a cumulative increase during that century, but after the Civil War, inflation was eliminated and then some. I should have known this, and am a little embarrassed that you had to point it out to me. :-P

You used the term "negative inflation." Actually, the term you wanted was probably "deflation," although George Reisman doesn't like the term, because it suggests something like what happened during the Great Depression, namely, the collapse of fiduciary media - of money that had no real backing. There are two ways to get a fall in the average level of prices: one is by a decrease in the supply of money relative to the supply of goods and services; the other is by an increase in the supply of goods and services relative to the supply of money. The latter is beneficial; the former can be economically disastrous. However, most economists would refer to a fall in the average level of prices, regardless of the cause, as "deflation," not as "negative inflation."

I wrote, "I'm not sure the '36' figure is correct, but even if it is, it wouldn't mean that the average worker can feed, clothe and house 36 families, because increases in productivity haven't been uniform throughout the economy." You replied,

I'm using Lomborg's (Skeptical Environmentalist) data: "there has been a 36-fold increase in per capita American production since 1789." And yes, it WOULD mean that the average worker can feed, clothe, and house 36 families, because an 'average' (ie. a mean) factors in the non-uniformity of growth in the economy.

Okay, but only if the demand for 36 times as much food, housing and clothing were there; otherwise, it would never be produced. You had expressed some skepticism over the ability of the economic system to accommodate that kind of increase, which is understandable, since in the present context of consumer demand, that kind of production would not and could not take place.

Thanks for setting me straight!

- Bill

P.S. I see, though, that my sources on the degree to which purchasing power had increased during that century differed somewhat from yours.

(Edited by William Dwyer
on 4/03, 9:56am)

(Edited by William Dwyer
on 4/03, 5:39pm)

Post 133

Monday, April 3, 2006 - 6:57pm

Kurt,

4 - With deflation and a more constrained money supply, growth and access to capital (necessary for capitalism, natch) is diminished, leading to stagnation (or depression) and greater boom/bust cycles and more instability, not less.

Are you saying that if the government did not increase the money supply (by giving tons of new USD to itself and its friends) then the economy would be worse off? Are you saying that if the money you owned was constantly becoming more valuable (since the number of goods to buy was going up, but the total sum of USD that exists stays constant) that you wouldn't produce as much value or trade for as much value?
(Edited by Dean Michael Gores
on 4/03, 6:58pm)

Post 134

Monday, April 3, 2006 - 10:36pm

Bill,

=============
One hundred dollars in 1800 would have bought $131.50 worth of the same goods and services in 1902.
=============

Bill, would you please share your source for this information (it quantitatively contradicts my information)?

=============
You used the term "negative inflation." Actually, the term you wanted was probably "deflation"
=============

Right (as the Rev'rend had first pointed out)!

=============
There are two ways to get a fall in the average level of prices: one is by a decrease in the supply of money relative to the supply of goods and services; the other is by an increase in the supply of goods and services relative to the supply of money. The latter is beneficial; the former can be economically disastrous.
=============

Right!

=============
Okay, but only if the demand for 36 times as much food, housing and clothing were there; otherwise, it would never be produced.
=============

Right. I didn't mean to imply that that anti-concept 'consumerism' -- drives markets. I'm just looking to the reality of a per capita increase in production (a 36-fold increase, in 2 centuries) -- and I'm saying that it is awful hard to square that magnitude of an increase, with a relative and general lack of millionaire-hood -- in the population at large. I'm saying that there has been serious siphoning of wealth -- in order for most people to retain some measure of economic hardship or pressure in their day-to-day lives.

It has to be taken as true that, 200 years ago, a man could support a family (or we just wouldn't be here now). Taking this as true then, and increasing our average productive power by 36 times -- we ought to have somewhere between, say, 18-36 times the purchasing power that our great fathers' great grandfathers did. This doesn't seem so, though. That's all I'm saying.

Ed

(Edited by Ed Thompson on 4/03, 10:36pm)

(Edited by Ed Thompson on 4/03, 10:38pm)

Post 135

Tuesday, April 4, 2006 - 12:42am

I wrote, "One hundred dollars in 1800 would have bought $131.50 worth of the same goods and services in 1902."

Ed replied,

Bill, would you please share your source for this information (it quantitatively contradicts my information)?

Actually, I made a mistake in my calculations. I should never do this sort of thing early in the morning when I'm in a rush. My source was a table compiled by Robert Sahr, Political Science Dept., Oregon State University, which contained conversion factors for the year 2000.

According to Sahr's table, what cost $10 in 2000 cost $0.76 in 1800 and $0.52 in 1902. So, I calculated the percentage decrease in price from 1800 to 1902 (0.24/0.76), giving me .315 or 31.5%, which I mistakenly interpreted as a 31.5% increase in purchasing power. But this was clearly incorrect. What I should have done was divide the price in 1800 ($0.52) by the price in 1900 ($0.76), which would have given me a quotient of 1.46, equivalent to a 46% increase in purchasing power (not the 31.5% that I had originally calculated).

To make the point more concrete, let's say that a hat costs me 76 cents in 1800; that same hat would cost me 52 cents in 1902. So, whereas in 1800, I could buy a hat for 76 cents; in 1902, I could by the same hat and 46 percent of another hat for the same 76 cents. Or, to put it another way, whereas in 1800, I could buy two hats for $1.52; in 1902, I could buy almost three for the same price, which it is easy to see is close to a 50% increase in purchasing power.

But, of course, this still represents a significant difference from the increase in purchasing power that you reported. According to your figures,

What cost $1 in 1800 would cost $0.49 in 1902. Also, if you were to buy exactly the same products in 1902 and 1800, they would cost you $1 and $2.04 respectively.

Right, because $0.49 to $1 is the same ratio as $1 to $2.04. If you divide $1 by $0.49, you get 2.04, and if you divide $1 by $2.04, you get 2.04. :-) But, again, this is over twice the increase in purchasing power that I got - 104% to 46%. This is really too big a discrepancy. So someone is off somewhere.

- Bill
(Edited by William Dwyer
on 4/04, 12:51am)

Post 136

Tuesday, April 4, 2006 - 2:37am

Bill,

Right. One of us is seriously "off" the mark.

Question being:
Which one of us?

Ed
[whose data can you trust?]

Post 137

Tuesday, April 4, 2006 - 6:54am

Ed - It seems to me that we do have 36x or maybe far more, considering all the advances we have available - cars, appliances, electricity, computers...

Post 138

Tuesday, April 4, 2006 - 9:43am

OK, some questions for the gold people:

If money supply is constant (i.e. gold) then the price of money fluctuates, so the price of gold would fluctuate too. If you ask, fluctuate with regard to what? -- it's fixed against dollars? But it's not fixed against other currencies and nowadays other economies are not insignificant. Gold would have to be worth the total of all traded goods in the world (not just here, or you make us very vulnerable if you think about it,) so gold would become ridiculously expensive -- there's a lot more value in real dollars than there used to be but pretty much the same amount of gold.

The gold standard idea is poor because you're fixing money supply. That means that whenever demand for money goes up, you have instant inflation. That alone is hugely destabilizing. So, for example, the proponent of gold standard would have to find a way to regulate demand for US goods to keep that level constant. Foreign businesses and governments would regulate our price levels. As it is now, when inflation looms, interest rates are bumped reducing demand.

Other questions:
How will forex be set?
How will an arbitrary level be maintained against changing net imports.
Every time demand for money changes, the price of money changes. What does that do to lending or borrowing? What would the gold standard do with something like "long term capital management" -- (a big hedge fund that went bust)? Would we all just have to suffer a depression? How is it that we'd stop the euros or anyone who doesn't like us from buying gold and destroying our forex and thereby trade?
What would happen to currency options? Could you no longer hedge against risk?

Post 139

Tuesday, April 4, 2006 - 4:32pm