tag:blogger.com,1999:blog-30643134.post4614694074582794193..comments2023-12-26T01:10:26.319-05:00Comments on Accrued Interest: Inflation statistics can deceive you, don't trust themAccrued Interesthttp://www.blogger.com/profile/05096191765979971184noreply@blogger.comBlogger33125tag:blogger.com,1999:blog-30643134.post-82436094459204712192007-10-11T16:47:00.000-05:002007-10-11T16:47:00.000-05:00Barry: I'm sorry for the ad hominem bull shit, whi...Barry: I'm sorry for the ad hominem bull shit, which you know from my personal comments how I feel about that. I think we're going to have to agree to disagree on this.<BR/><BR/>On Greenspan: I shouldn't have said that their "only" tool is monetary policy. I meant this in context of inflation fighting only. They obviously have banking regulation responsibilities and I agree that Greenspan <I>could have</I> done something about subprime lending. Maybe he didn't <I>want</I> to or didn't think it was the <I>right</I> thing to do. But to say he <I>couldn't have</I> done anything about it is just not true.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-78136165940315747492007-10-10T15:25:00.000-05:002007-10-10T15:25:00.000-05:00Commentors here have criticized my readers, they h...Commentors here have criticized my readers, they have dissecting my career (poorly and inaccurately), and have made other unsupported assertions -- but I can't say that anyone has effectively rebutted my main points:<BR/><BR/>-CPI inflation consistently understates real world inflation;<BR/><BR/>-focusing on the core (i.e., ignoring food and energy) is helpful to formulating policy; <BR/><BR/>-this understatement has had real world repercussions.<BR/><BR/>I know its easier to go ad hominem, but how about actually taking a shot at the main premise of inflation ex-inflation? At least your host here made an attempt . . .Ritholtzhttps://www.blogger.com/profile/08608448405502237269noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-1486764370279172502007-10-03T18:59:00.000-05:002007-10-03T18:59:00.000-05:00Michael said... Why not just increase the Monetary...Michael said... <BR/>Why not just increase the Monetary Base by a constant 2% a year and let the market determine all the rates?<BR/><BR/>An increase in currency (an expansion in the "monetary base") held by the non-bank public is deflationary (will cause a contraction in money & bank credit) unless offset by open market operations of the buying type. The "monetary base" [sic] is not a "base" for the expansion of the money supply.flow5https://www.blogger.com/profile/10233035883019771736noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-21361354470810471772007-10-03T17:22:00.000-05:002007-10-03T17:22:00.000-05:00Tom, I asked this of knzn too, but core PCE to gui...Tom,<BR/> I asked this of knzn too, but core PCE to guide monetary policy is starting to look flawed with persistent inflation prices. Your comments?<BR/>http://fon.gs/fedcore<BR/>http://fon.gs/macrocore<BR/><BR/>RBAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-11193818651160583422007-10-03T10:57:00.000-05:002007-10-03T10:57:00.000-05:00Kudos for this comment:I often find Barry's work e...Kudos for this comment:<BR/><BR/><I>I often find Barry's work enlightening. But his obsession with "inflation ex-inflation" has got to stop.</I><BR/><BR/><BR/>I used to love reading his blog, but it is increasingly fixated on this single topic. I don't like name calling between bloggers, but I think Delong said what is on a lot of people's minds.<BR/><BR/>You get brickbats for the following comments:<BR/><BR/><I><BR/>"A central bank's job is to manage the money supply. Anything that has nothing to do with the money supply isn't the Fed's job."<BR/><BR/>"You are obviously right about what the Federal Reserve Act says, but the tool the Fed is given is monetary policy."</I><BR/><BR/>On the first quote, another commenter already pointed out that the Fed has a dual mandate. <BR/><BR/>On the second quote, the Fed's toolkit is not strictly limited to interest rate policy. They are also responsible for bank regulation. <BR/><BR/>I don't mean to pick on you, however with Greenspan's book it is a topic du jour. I find it highly disingenuous for him to claim that he would have not been able to address the housing bubble without raising rates such that it would hurt the broad economy. That's nonsense, and I would respect the honest answer that Greenspan simply did not place much faith in government regulation.<BR/><BR/>I reiterate that I am not trying to pick on you. Rather, I find it annoying that Greenspan gets a free pass on this point. I think it is a case of something that gets said so often, that it becomes something that is taken uncritically.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-21761049661369811042007-10-03T07:14:00.000-05:002007-10-03T07:14:00.000-05:00Achal: My problem with "core" measures is that the...Achal: My problem with "core" measures is that they arbitrarily leave out energy and food. I prefer either a trimmed mean or median approach, which in essence leaves out <I>whatever</I> seems to be an outlier in a given period.<BR/><BR/>One risk that the Fed runs is creating higher inflation expectations because food and energy prices are rising so quickly. If you believe in inflation expectations theory, then it might make sense for the Fed to have some level of concern over headline figures, because its the headline that creates expectations. The Fed has said as much in various speeches lately.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-22770408802744617252007-10-02T21:37:00.000-05:002007-10-02T21:37:00.000-05:00hymas - no, not saying anything good about Japan. ...hymas - no, not saying anything good about Japan. Think you have me confused with someone else.<BR/><BR/>I am saying that, according to CPI, the dollar has lost half its value during a period the Fed and economists said was a golden age of central banking. I am saying with "wins" like that, who needs a loss?<BR/><BR/>For the record, I agree with tddg that CPI is probably "correct" for what it is supposed to measure -- I just don't think "what it is supposed to measure" has anything to do with inflation. I am not really sure it has any use outside its "official" duties. If so many things weren't tied to it, I doubt anyone would pay attention-- its a rather meaningless statistic.<BR/><BR/><BR/>I wasnt saying anything about Japan. But since you asked, Japan does not have an independent central bank. Yes, I read the propaganda pamphlets. But it is staffed and controlled by the LDP, and really isn't independent. I won't argue that the ECB or Fed are 100% apolitical, but they at least keep up a pretense of independence from the political establishment.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-59776070586057638542007-10-02T20:21:00.000-05:002007-10-02T20:21:00.000-05:00tddg: You are absolutely right - the 19% calculati...tddg: You are absolutely right - the 19% calculation is not right. But I thought the point that you were trying to make is that it is ok for the Fed to measure inflation by leaving out certain "non-core" items.<BR/><BR/>To do that, you showed that an increase in demand for corn will cause a spike in the price. You then inferred that the rise in food prices had nothing to do with an increase in money supply.<BR/><BR/>My point was that your initial thesis was incomplete. The increase in food prices in your example was due to the increase in corn prices, which was due to an increase in corn demand, and that INCREASE IN CORN DEMAND WITHOUT AN OFFSETTING REDUCTION IN DEMAND ELSEWHERE was due to increased money supply, i.e. inflation.<BR/><BR/>The exact rate of inflation, as you point out, is difficult to capture. But I don't see how that implies that leaving out "non-core" items is the solution.Anonymoushttps://www.blogger.com/profile/13589982239628736305noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-24023739352296325242007-10-02T15:08:00.000-05:002007-10-02T15:08:00.000-05:00Now now... let's not be mean to the #1 finance blo...Now now... let's not be mean to the #1 finance blogger going. His blog gets 25 hits for every 1 I get.<BR/><BR/>Barry:<BR/><BR/>Thanks for commenting. In my admittedly stylized example, if the Fed increases the money supply by 5%, <I>someone</I> must have 5% more money to spend. I mean, the money isn't printed and then put into a vault. <BR/><BR/>I wasn't trying to say that the money supply has in fact risen by 5%, therefore what has happened with wages in real life goes beyond the story I was trying to tell.<BR/><BR/>Additionally, if the price of some goods are rising for non-monetary reasons, and the Fed tightens the money supply in response, then what we'll have is deflation. Because the conditions which caused the good in question to rise aren't going to reverse because money is tighter. But other goods will indeed react to the tighter money.<BR/><BR/>Finally, I ask all readers to stop inferring things from my posts that I don't actually say. I never said I didn't care about inflation or thought it wasn't a problem. I just don't think we should be measuring inflation using headline CPI.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-18979145552495836052007-10-02T14:52:00.000-05:002007-10-02T14:52:00.000-05:00BR has worked in Retail=oriented firms through his...BR has worked in Retail=oriented firms through his career , so his view of the market is always from a "little person" not a real money managerAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-17701685576393388892007-10-02T14:50:00.000-05:002007-10-02T14:50:00.000-05:00Barry plays to a huge audience of Tin-Foil Hat con...<B> Barry plays to a huge audience of Tin-Foil Hat conspiracy theorists who read Catcher in the Rye all day long .... they find nothing positive about the economy , statistics , economic indicators and the markets ...<BR/><BR/>BUT as long as they are in full force , 100% negative , they are the best Contra-Indicator I've ever seen on all blogs </B>Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-35990755691411220912007-10-02T14:27:00.000-05:002007-10-02T14:27:00.000-05:00The Fed prints more dollars, and everyone has 5% m...The Fed prints more dollars, and everyone has 5% more to spend? <BR/><BR/>How you figure? <BR/><BR/>Unless Wages are going up 5% -- which we know they have not been -- then people's purchasing power is going DOWN. And worse, its going down even more relative to their net take home pay. <BR/><BR/>That's why inflation is called "the Cruelest tax . . ."<BR/><BR/>Printing money beyond the actual rate needed for non-inflationary growth HURTS the population -- it reduces their purchasing power, and punishes savers.Ritholtzhttps://www.blogger.com/profile/08608448405502237269noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-35120300151666485902007-10-02T11:59:00.000-05:002007-10-02T11:59:00.000-05:00Micheal: I think measuring the monetary base is pr...Micheal: I think measuring the monetary base is pretty hard too, but I agree with you in theory.<BR/><BR/>David: I thought about qualifying my "all goods equally" point because I knew someone would call me on it. Let's say that inferior goods are sufficiently few to safely ignore in my example.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-36480131485741922232007-10-02T11:32:00.000-05:002007-10-02T11:32:00.000-05:00I'm a little disappointed that you think D is an ...I'm a little disappointed that you think D is an increasing function in Y for all goods and services. Indeed there are "inferior goods" for which demand moves inversely to income. Think bus rides, shoe repair, payday loans...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-62469568925466519362007-10-02T11:26:00.000-05:002007-10-02T11:26:00.000-05:00Conspiracy theory was more derogatory than I meant...Conspiracy theory was more derogatory than I meant to be. I wish more people understood that government statistics are designed to measure a particular thing. Yet the media uses them to measure something else. Like CPI was designed to be a cost-of-living index, hence by the BLS calculates it.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-79925982271421227332007-10-02T11:10:00.000-05:002007-10-02T11:10:00.000-05:00Hi tddg,I don't know if I would call that a conspi...Hi tddg,<BR/>I don't know if I would call that a conspiracy theory.<BR/>In the private sector we have independent board members, independent auditors, Sarbanes Oxley, (maybe) shorts etc and still investors are wise to view accounts with a sceptical eye. The public sector has none of those safeguards so their figures should be treated accordingly.fbeckenbauerhttps://www.blogger.com/profile/03450684928398597138noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-1268927296960325172007-10-02T11:04:00.000-05:002007-10-02T11:04:00.000-05:00The Fed needs to get out of the interest rate mgmt...The Fed needs to get out of the interest rate mgmt business period. Your piece inadvertently makes the case that inflation is impossible to measure precisely and "fine tune". Why not just increase the Monetary Base by a constant 2% a year and let the market determine all the rates?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-46193208518464905732007-10-02T10:41:00.000-05:002007-10-02T10:41:00.000-05:00My favorite inflation metric is D. Artig's 3-year...My favorite inflation metric is D. Artig's <A HREF="http://macroblog.typepad.com/.shared/image.html?/photos/uncategorized/2007/07/18/medium_term.gif" REL="nofollow"> 3-year rolling avg. CPI</A> from <A HREF="http://macroblog.typepad.com/macroblog/2007/07/better-not-best.html" REL="nofollow"> this</A> blog post of his.<BR/><BR/>Hat tip <B>tddg</B> for pointing me there.<BR/><BR/>Wish he'd resume posting to his blog.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-83460046533411128322007-10-02T09:59:00.000-05:002007-10-02T09:59:00.000-05:00Flow has my back this time...FBeck: Obviously this...Flow has my back this time...<BR/><BR/>FBeck: Obviously this is my evil twin since no one would ever cook up such a scheme in real life.<BR/><BR/>Look, even if you don't buy fbeck's conspiracy theory, its clear that CPI has many problems. Its a little like the DJIA. We all know that something like the Wilshire 5000 is a superior measure of broad stock market performance, but the Dow lives on out of inertia. Trimmed Mean PCE is too hard for the average newspaper reported to explain, so the media sticks with CPI.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-48548372980558407972007-10-02T09:39:00.000-05:002007-10-02T09:39:00.000-05:00Imagine your politican twin accruedvotes was elect...Imagine your politican twin accruedvotes was elected president of Freedonia.<BR/><BR/>Accruedvotes figures that nominal GDP of Freedonia will grow about 6% p.a. and thats made up of 4% inflation and 2% growth. Thats not great so accruedvotes lets it be known to his independent central bank that it would be great if the figures came out as 2% inflation and 4% growth. There's no independent body to verify the figures so it doesn't get questioned apart from in some obscure blogs.<BR/><BR/>The policy has some beneficial effects for accruedvotes:<BR/>1. Instead of looking mediocre the economic figures now look great.<BR/>2. Theres less pressure for wage increases from unions etc<BR/>3. Corporate profits are good.<BR/>4. Some of accruedvotes most important backers - the hedge funds, have a very nice tailwind when calculating the 20 in the 2 and 20. In fact the higher inflation is the better, so long as no one notices.<BR/>5. Since "growth" is high and "inflation" low, Freedonia can run a large deficit financed with low yield bonds<BR/>6. In spite of the high "growth" and low "inflation" , accruedvotes ratings for his handling of the economy of Freedonia get lower and lower as his reign continues. Analysts struggle to explain this conundrum.<BR/><BR/>Of course this is entirely hypothetical.fbeckenbauerhttps://www.blogger.com/profile/03450684928398597138noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-78735135543009187112007-10-02T08:08:00.000-05:002007-10-02T08:08:00.000-05:00With the exception of hyperinflation, all the “fla...With the exception of hyperinflation, all the “flations” are the consequence of “too much money chasing too few goods and services”, or the opposite. Inflation represents a chronic “across-the-board” increase in prices, or, looking at the other side of the coin, depreciation in money. If the depreciation of money is the consequence of a loss of confidence in the credit worthiness of the government, we have hyperinflation. The ultimate hyperinflations result when the existing government is destroyed, making its currency worthless - a 100 percent depreciation. There are, of course, degrees of hyperinflation. <BR/><BR/>It is a truism that if the flow of money in the market place increases relative to the flow of goods and services offered for sale, prices on the average will rise. Therefore, to say that a cartel or monopoly that posts a higher “administered” price causes inflation has to be premised on the assumption that the monetary authorities respond to such price fixing practices by increasing the volume of money and/or the public responds by increasing the rate of flow (transactions velocity) of money. The same reasoning applies to increases in wages achieved through the monopoly powers of a union. These price increases will result in a transfer of purchasing power and wealth to the groups with dominant economic powers. The resulting price distortions will weaken and depress the economy, increasing unemployment and ultimately creating a deflationary effect.<BR/><BR/>If the response of the monetary authorities is to provide additional legal reserves to the banking system, resulting in an expansion of bank credit and the money supply, other prices will rise and the monopolistically created prices will be “validated”. This obviously may lead to an “administered” price ---credit money spiral, and we have the core of chronic inflation. If the monetary authorities try to compromise the situation and reduce the rate of inflation, we end up with stagflation. But this is preferable to an all out monetary effort to create full employment irrespective of the inflationary effects. For if the rates of inflation increase, so will interest rates; and high interest rates alone are a sufficient factor to induce a severe recession or even a depression. <BR/><BR/>In other words, the powers of the Fed are limited. The solution to this problem is to eliminate, or sharply reduce the economic powers of monopolies, oligopolies and any other form of concentration of economic power. How to do this without the creation of an authoritarian state has yet to be discovered.flow5https://www.blogger.com/profile/10233035883019771736noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-19435080471719031522007-10-02T08:03:00.000-05:002007-10-02T08:03:00.000-05:00Calculating the rates of change in the CPI has bee...Calculating the rates of change in the CPI has been statistically exaggerated by the present practice of calculating the rates of change in terms of a base one year earlier, rather than from the base period of the index. For example, when I first started driving the base period for the CPI was 1967 = 100. Consumer prices in 1967 have increased 623% in terms of base year prices. In other words, a very substantial absolute increase in prices. But the base period keeps changing. Now the reference base period is 1982-84 = 100. And that assumes that the CPI is representative, which, as everyone knows, it is not.flow5https://www.blogger.com/profile/10233035883019771736noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-33017692053680686992007-10-02T07:12:00.000-05:002007-10-02T07:12:00.000-05:00John Walker: Watch yourself. If you have a point, ...John Walker: Watch yourself. If you have a point, great. Don't call anything nonsense. We don't serve that kind here.<BR/><BR/>You are obviously right about what the Federal Reserve Act says, but the tool the Fed is given is monetary policy. They aren't given authority to say, mandate agriculture price caps. Or force farmers to change crop production. Not that I'm advocating anything like that, I'm just saying if the price shifts for some reason other than monetary policy its outside of the Fed's purview.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-54917686160308698172007-10-02T07:08:00.000-05:002007-10-02T07:08:00.000-05:00Achal: Say that CPI is a basket of 10 goods weight...Achal: Say that CPI is a basket of 10 goods weighted equally. The money supply rises by 10%. From $1000 to $1100 to make the math workable. Before the rise in money supply, exactly $100 was spent on every good.<BR/><BR/>Say that the price of good #1 rises by 100%, but the quantity demanded falls by 50%. So in T=0 let's say that the good was priced at $1 and 100 units were purchased. In T=1, the price is $2 but only 50 units are purchased, for $100 spent on that good.<BR/><BR/>The other $1,000 is spread among the other 9 goods, or about $111 spent on each. Previously there had been $100 spent on those 9 goods, so there has been an 11% increase in the price of this good.<BR/><BR/>So what's our average price increase? Good #1 rose by 100%, and the other 9 by 11%, for an average price increase of 19.9%. <BR/><BR/>In this case, is the average telling the real inflation story?<BR/><BR/>Now you say, wait a minute! Shouldn't they adjust the basket to reflect the change in Q for good #1? Sure, but does the BLS actually do this every month with CPI? And are we certain they are really capturing all the changes in consumer behavior every time they do change the mix?Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-49829707154289662582007-10-02T06:57:00.000-05:002007-10-02T06:57:00.000-05:00Willie: No where in the post do I say controlling ...Willie: No where in the post do I say controlling the money supply is easy. So despite your attempts to disagree with me, I actually agree with you through the first 4 paragraphs.<BR/><BR/>And your other thoughts would be correct if inflation measures actually measured <I>everything</I> money was spent on in the entire economy equally. But they don't.<BR/><BR/>Gramps: Purchasing power of the dollar = inflation in my book.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.com