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morganovich said...

we bought a great deal of "standard of living" by running up massive debts. 1992 to 2000 saw a 300-400% increase in consumer credit (up around $2tn) and after the 2000 crash, the ludicrously loose money drove double digit annual increases in mortgage debt through 2006. 13% annual increases in debt drives lots of consumption, but it's not real or sustainable.

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PeakTrader said...

If inflation has been understated, then real GDP has been overstated, perhaps to the level where real GDP has been negative.

I doubt anyone really believes we've been in recession from 1982-07. It's more likely 1982-07 was one of the greatest economic booms in U.S. history.

Morganovich says: "we bought a great deal of "standard of living" by running up massive debts."

That's called spending, which actually raises living standards. Falling or low prices induce demand.

You're more likely to spend when there's a bargain, and if there isn't one, you're more likely to save (like the Japanese). I stated before:

Just like the volume of output in itself will cause declining prices and induce demand, the volume of capital will in itself cause interest rates to fall and induce demand. The gains of U.S. assets increased faster than the gains of U.S. liabilities. Similarly, the increases in U.S. output exceeded the rises in U.S. inflation, which induced demand and raised living standards.

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morganovich said...

peak-

i think it's worth breaking the 82-07 period into 2 segments. first, it wasn't until clinton that CPI changed it's calculation, so we can leave 82-92ish alone.

then from 92-2000, we likely saw some real growth in all in comp, though perhaps not so much in cash comp. from 2000 on, no.

that was never a real recovery. the "bargains" you cite were all on cost of capital, not goods.

if you spend more than you earn (and produce) you ought to get inflation. you can borrow, but that's not "real" growth. it's temporally displaced growth and has to be paid back with interest.

are you going to argue that wages and overall wealth are better than a decade ago?

no matter what you think, no one can argue that pre and post 1992 CPI (and therefore real GDP) are not comparable. it's apples and oranges. change the methodology, change the result.

comparisons across data splices are treacherous at best and more often flat out misleading.

the simple fact is that 3% real gdp growth does not mean what it used to because neither does 3% inflation.

they refer to different underlying changes. alternatively, the same changes now would yield different numbers then.

this is rudimentary statistics. if you recalibrate a thermometer and what was 70 degrees now reads 60, you cannot compare the raw data from before with what you get now.

this is precisely what was done with CPI.

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PeakTrader said...

Morganovich, the short answer is 2002-07 was the steepest rise in U.S. living standards since 1982, and it was mostly paid for by export-led economies. The U.S. not only had great efficiencies in consumption, but also in production.

To use your analogy, when a thermometer is wrong and gets worse, then it's broken and either needs to be fixed or replaced.

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morganovich said...

how do you figure that 2000-7 was the steepest rise in us living standards?

and what effect do several trillion in debt have on that?

are we better off now than in 2000?

in 2000, money supply was growing as rapidly as in the peak years of the 70's inflation, yet you claim we had an decline in CPI? that doesn't strike you are implausible?

no matter what, CPI simply does not mean what it used to. therefore, we need to treat the output differently or learn different lessons from past relationships.

isn't it interesting how money supply growth has decoupled from reported CPI? why do you think that is?

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PeakTrader said...

Morganovich, the country is better off when there's 6% nominal annual growth (or 3 1/2% real growth and 2 1/2% inflation), and there's 6% annual trade deficits (where the U.S. captured increasingly greater gains-in-trade, e.g. because of diminishing U.S. marginal utility).

If there was enough liquidity, the steep rise in U.S. living standards over much of the 2000s, that was generated on both the production and consumption sides, would've continued, although we would've shifted more into production than consumption through faster export growth than import growth or through export-led economies slowing.

Global imbalances would've corrected through inflation, interest rates, and currency exchange rates (and even foreigners in export-led economies moving to the U.S.), while the U.S. continued to consume more than produce and produce near full employment.

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Sep 2010

PeakTrader said...

Job growth remains very weak. However, there's hope it'll pick-up. Also, there's relief a double-dip recession is less likely, and Obama will announce a tax cut stimulus plan next week.

Two months before the election, Obama has basically declared the war in Iraq over, and desperately needs success in the new Israeli-Palestinian peace talks.

Moreover, I may add, it looks like Cash-for-Clunkers was a failure:

Study: Cash For Clunkers Was A Wash
September 4, 2010

The government's "cash for clunkers" program boosted auto sales by 360,000 during the two months it was in place, according to a new study.

But in the seven months that followed, sales were down by 360,000 compared with what they would have been without the program, the study found.

And a related study:

Used Car Prices Soar
September 03, 2010

A recent study shows prices have soared in the past year.

The price for the average used vehicle is up 10%.

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Ron H. said...

"The government's "cash for clunkers" program boosted auto sales by 360,000 during the two months it was in place, according to a new study."

Peak, what is your source for this number? The 360k number seems too low. I remember reading that something like 750k clunkers were destroyed through the CFC program, which seems more realistic considering the $3 billion spent at $2500-4500 per clunker. That # of clunkers would require the purchase of the same # of new cars during the program period.

The CFC program is one of my favorite examples of sheer stupidity and waste in government. There were many other losers, but I don't want to start on the subject right now.

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PeakTrader said...

Ron, the study was done by Amir Sufi of the University of Chicago and Atif Mian of the University of California, Berkeley.

VangeIV, why would the BLS lie and why would anyone take the ghost data from shadowstats seriously?

If you believe unemployment is understated, then productivity is understated, inflation is overstated, and real GDP is understated.

Also, to make the U.S. economy look weaker, the conspiracy has to extend beyond U.S. macro-data, e.g. U.S. imports are lower than reported or exports are overstated by U.S. trading partners.

Moreover, markets, which use real money, don't accept the the ghost data from shadowstats.

It's much more likely BLS data have become more accurate over time, reflecting reality, while the shadowstats data became less accurate.

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VangelV said...

"VangeIV, why would the BLS lie and why would anyone take the ghost data from shadowstats seriously?"

There is incentive for the government to overestimate GDP growth and underestimate inflation because it allows it to borrow at lower rates and to rob savers and SS recipients of some purchasing power. As for John Williams, he reports all of the numbers that BLS reports but also comes up with a figure that uses the same methodology that BLS used before they were changed. The same methodology allows for a proper comparison to previous periods.

"If you believe unemployment is understated, then productivity is understated, inflation is overstated, and real GDP is understated."

I don't believe that it is "understated." I point out that the definition has been changed and we no longer count the underemployed, those unemployed but so discouraged that they are not looking for work, and other classifications as unemployed as we used to under Carter and Reagan.

Inflation is clearly understated.

http://tinyurl.com/34b5ucl

So is unemployment.

http://tinyurl.com/yfw5zxj

GDP is overstated.

http://tinyurl.com/248z2s2

"Also, to make the U.S. economy look weaker, the conspiracy has to extend beyond U.S. macro-data, e.g. U.S. imports are lower than reported or exports are overstated by U.S. trading partners."

You are confused. Higher imports mean a weaker America because they imply that the US is not saving enough.

"Moreover, markets, which use real money, don't accept the the ghost data from shadowstats."

Wrong again. The gold market is confirming that Williams was right and Bush/Obama were wrong.

It's much more likely BLS data have become more accurate over time, reflecting reality, while the shadowstats data became less accurate.

Not at all. But in either case, you would still need to apply the same methodology to the historical data as the current data to get a fair comparison. No matter how you look at it, we see that the current situation is not any better than what Americans experienced in the 1970s.

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PeakTrader said...

VangelV, the government has a greater incentive to acquire complete and accurate data. Otherwise, you get "garbage in" and "garbage out."

Here's what the BLS says:

More on the CPI: The BLS Responds!
September 9, 2008

In calculating the CPI, the BLS faces a set of well-known but difficult challenges, including dealing with consumer substitution behavior, accounting for product quality change, and handling the introduction of new products like Ipods and new distribution channels like the Internet. With respect to each of these issues, we attempt to employ the most advanced methods available, subject to the requirement that those methods also be objective and reproducible. There is no perfect way, however, to measure the welfare gains and losses that consumers experience when prices change and products appear and disappear. Thus, we know that the CPI is not perfect, but we do not have an estimate of any statistical “bias” in the index; if there was an accurate and reliable method to estimate such a bias, we would use that method to improve the CPI by eliminating the bias.

John S. Greenlees, Ph.D.
Research Economist
Division of Price and Index Number Research
US Bureau of Labor Statistics

An obsolete, inaccurate, and incomplete methodology will lead to incorrect results.

Higher or rising imports mean U.S. demand is stronger, and the U.S. has been the only country in the world that can expand with huge negative net exports, year after year, which is a sign of strength.

Your alternative CPI chart shows gold fell when inflation accelerated and gold rose when inflation decelerated. So, how can you assume the rise in gold is caused by accelerating inflation?

A more likely explanation is the U.S. began a structural bear market (or long-wave bust cycle) in 2000, and foreigners have been absorbing dollars, i.e. the world is flooded with dollars, although there are too few dollars in the U.S. (which eventually need to be absorbed by the Fed, most likely at huge losses to foreigners).

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VangelV said...

Here's what the BLS says:

....In calculating the CPI, the BLS faces a set of well-known but difficult challenges, including dealing with consumer substitution behavior, accounting for product quality change, and handling the introduction of new products like Ipods and new distribution channels like the Internet. With respect to each of these issues, we attempt to employ the most advanced methods available, subject to the requirement that those methods also be objective and reproducible. There is no perfect way, however, to measure the welfare gains and losses that consumers experience when prices change and products appear and disappear. Thus, we know that the CPI is not perfect, but we do not have an estimate of any statistical “bias” in the index; if there was an accurate and reliable method to estimate such a bias, we would use that method to improve the CPI by eliminating the bias.

The critique of the BLS is valid. If it changes the methodology by using geometric weighting (one of many changes) then it has to use the same method for an apples to apples comparison. It does not do that. When we apply the old method to all of the historical data we see that inflation and unemployment today are higher than is being reported. Of course, we could apply the new method to the historical data and show that unemployment was not as low as was being reported in the past even though people were still not working or that reported prices are lower even though prices were going up at a rapid clip.

The method changes were made for political reasons. The new methods were not applied to the past because of political reasons. The BLS is a political body run by political appointees.

An obsolete, inaccurate, and incomplete methodology will lead to incorrect results.

If the methods were obsolete, why didn't the BLS apply the new ones to the old data? When you have a new method that magically reduces CPI by a percent and unemployment by 5% it makes sense to apply it backwards so that we can do a proper comparison with past periods.

Higher or rising imports mean U.S. demand is stronger, and the U.S. has been the only country in the world that can expand with huge negative net exports, year after year, which is a sign of strength.

Economic strength is measured by real production, not by consumption that was based on borrowing from abroad.

Your alternative CPI chart shows gold fell when inflation accelerated and gold rose when inflation decelerated. So, how can you assume the rise in gold is caused by accelerating inflation?

Gold is going up because people are losing faith in the fiat currencies. It will do well in deflation as well just as it did during the Great Depression when its role as a monetary media was recognized by the public.

A more likely explanation is the U.S. began a structural bear market (or long-wave bust cycle) in 2000, and foreigners have been absorbing dollars, i.e. the world is flooded with dollars, although there are too few dollars in the U.S. (which eventually need to be absorbed by the Fed, most likely at huge losses to foreigners)

The USD will lose its reserve status when the Fed is forced to take its notes back because foreigners are no longer willing to accept them as money. The USD is dead. It helps for you to recognize it.

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PeakTrader said...

VangelV, of course, improvements in the methodology change historical data, and the economy today isn't the same compared to 30 years ago.

You even state the old method is faulty by saying unemployment and inflation are higher than reported. The Phillips Curve shows there's an inverse relationship between unemployment and inflation.

High unemployment typically means high productivity, which lowers the inflation rate. I doubt anyone believes the U.S. economy over the past 30 years has been in a period of stagflation. It's much more likely the U.S. had one of the greatest periods of prosperity (in part, because of the Information Revolution).

Moreover, there's no reason why BLS economists would skew the data one way or the other, which would defeat their purpose as technocrats. There's no proof method changes were made for political reasons. Skewing one variable will skew all the others, i.e. some variables will look better and some worse, because everything in economics is interrelated. So, there would be no confidence in the reported data.

Economic strength is measured by more than production. Capturing greater gains-in-trade is also a measure of relative strength. There are many factors that determine economic strength, and the U.S. economy has been much stronger than any other economy or groups of economies for many decades. The U.S. economy has been the main engine of growth pulling the rest of the world's economies.

The U.S. dollar is the most demanded currency in the world, and the Euro is a distant second. I doubt people will be using gold bars or gold coins to buy assets and goods.

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VangelV said...
VangelV, of course, improvements in the methodology change historical data, and the economy today isn't the same compared to 30 years ago.

It does not matter. The BLS never applied the new methodology to the historical data so that it could do an apples to apples comparison. If this year you introduce a method that stopped counting some people that used to be considered unemployed last year you can't say that the unemployment rate is better than last year unless you apply the methodology to the old data. Saying that you shouldn't because the economy is different is not valid.

You even state the old method is faulty by saying unemployment and inflation are higher than reported. The Phillips Curve shows there's an inverse relationship between unemployment and inflation.

I never said that it was 'faulty.' I said that it defined inflation differently than the way it was in the past. In the old days when the price of beef went up it showed up as an increase in the reported CPI. Now we have the BLS argue that consumer prices did not go up because people will eat less beef and eat more chicken or pork instead. Any method that measures price increases in one period while ignores them in another is not valid and cannot produce reliable data for comparison purposes.

High unemployment typically means high productivity, which lowers the inflation rate. I doubt anyone believes the U.S. economy over the past 30 years has been in a period of stagflation. It's much more likely the U.S. had one of the greatest periods of prosperity (in part, because of the Information Revolution).

The issue is the employment rate. It is now higher than it has been in more than 20 years. Period. End of story.

I also doubt that the US has had one of the greatest periods of prosperity over the past 30 years. It is obvious that when you add more women and immigrants to the labour force and you have individual workers spend more time on the job you will get more production. But it is doubtful that the per person hourly output has improved much over 30 years. Of course, when Americans spent far more than they made they looked much more prosperous than they really were. Now the party is over and we have more American families insolvent than at any time in history.

Moreover, there's no reason why BLS economists would skew the data one way or the other, which would defeat their purpose as technocrats. There's no proof method changes were made for political reasons. Skewing one variable will skew all the others, i.e. some variables will look better and some worse, because everything in economics is interrelated. So, there would be no confidence in the reported data.

The BLS is a political body and has every incentive to report figures that would allow the US government to borrow at lower rates. The motives behind the method changes are not important because it was easy for the BLS to apply the methods to the historical data so that we could do a valid historical comparison. The fact that it did not tells us what we need to know. The BLS is not interested in transparency and truth. It only cares about making life easier for its political masters.

Economic strength is measured by more than production. Capturing greater gains-in-trade is also a measure of relative strength. There are many factors that determine economic strength, and the U.S. economy has been much stronger than any other economy or groups of economies for many decades. The U.S. economy has been the main engine of growth pulling the rest of the world's economies.

The US makes far less stuff as a percentage of what it uses than it used to not all that long ago. While it is obvious that its productive sector is still strong, it cannot offset the predator class that consumes far more than it produces and depends on transfer of wealth and income from the productive to itself.

The game is about over for the US. Its currency is on the edge and while it could rally again during a crisis its fate is sealed as hyperinflation looms over the horizon. There is no way for the government to pay off its debts and its SS and Medicare obligations with money that will have the same purchasing power as it does today.

The U.S. dollar is the most demanded currency in the world, and the Euro is a distant second. I doubt people will be using gold bars or gold coins to buy assets and goods.

The US dollar is a fiat currency that is issued by a bankrupt government that has unfunded liabilities and debts that stand at more than 1000% of GDP, has two unfunded wars abroad, a military that is in more than 100 countries around the world, and a welfare state that is destroying the taxpayer. That makes it a lousy substitute for a real medium of exchange that is a store of value. If I am right we will see gold over $2,000 an ounce and well on its way to more than $5,000 with an eventual hyperinflationary episode that destroys it the way your country's previous fiat money was destroyed.

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PeakTrader said...
VangelV, you seem convinced the U.S. economy is not dynamic enough to make appropriate adjustments (to prevent skewed results), your economic theories make more sense than orthodox economic theories (so, the data and the mathematics are wrong), and the BLS is corrupt (since they're really politicians). No wonder you believe the U.S. hasn't been most prosperous over the past 30 years.

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VangelV said...
VangelV, you seem convinced the U.S. economy is not dynamic enough to make appropriate adjustments (to prevent skewed results),...

I am convinced that the move towards higher taxes, more regulations, foreign wars, a bigger public sector, and constant interventions by the Fed are making the US much weaker than it should be. There is little doubt that the US economy can recover but only if government shrinks substantially and gets out of the way of productive people. There is no reason to believe that it will.

...your economic theories make more sense than orthodox economic theories (so, the data and the mathematics are wrong), and the BLS is corrupt (since they're really politicians).

No, the data and math support my position. The US is bankrupt because it can't possibly pay off all of its debt and meet its unfunded SS and Medicare obligations.

No wonder you believe the U.S. hasn't been most prosperous over the past 30 years.

I never said that there hasn't been prosperity. I simply point out that the illusion of prosperity that you are pointing to was obatined by adding many women into the work forces, by having salaried workers spend much more time at work or working at home, by introducing new labourers due to immigration, and by spending far more than the federal government, states, businesses, and workers earned.

Right now I see the US financial system being technically insolvent due to loans that can never be paid off. Now I have no doubt that the federal government and the Fed can't bail out the banks by taking those loans off their books or by insuring them. But that is not a sign of strength. All you will get is a bankrupt federal government that has even more bad debt on its books. If we get the predicted GSE reset of mortgages that will allow existing borrowers to reset their mortgages at much lower rates we will see a run on the bond market that could easily get out of hand and lead to hyperinflation even faster than many of us can imagine.

None of the points that I am making are unique or profound. They are simple and very logical conclusions reached by logical and observant analysts who can think for themselves and do not go sleepwalking through life as you seem to. Try reading up a bit on the subject and see if you can refute the reasons given for the demise of the USD.

http://tinyurl.com/yaw8bfe

http://tinyurl.com/26t4ghc

http://tinyurl.com/3yrcmbq

http://tinyurl.com/27ufsw4

http://tinyurl.com/qxkhcp

http://tinyurl.com/2vvwfat

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PeakTrader said...
I think, it's safe to say Dr Perry is correct that a double-dip recession is less likely.

We need enough liquidity to get the most productive and greatest wealth-generating workforce back on track to full employment. So, the spectacular economic boom, since 1982, can continue.

If we had a leader like Reagan, U.S. real growth would be 4%, with 2% inflation, by now, after a V-shaped recovery.

We need to stop this game where the Fed creates money, while the Administration and Congress destroy it.