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PeakTrader said...

One major reason there's little inflation is the U.S. economy has the capacity to produce $1 trillion a year more in output (although peak oil and overregulation can place constraints on some growth).

However, demand is too low to take out the slack in supply, and accelerate inflation.

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After 4 1/2 years and an additional $5 trillion in federal debt, which didn't make up for over $3 trillion in lost output from underproduction, U.S. Annual Per Capita Real GDP remains below the 2007 peak (in 2005 dollars):

2007 43,726
2008 43,178
2009 41,313
2010 42,205
2011 42,671

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And the 10-year moving average of U.S. Real GDP fell from above 3% in 2007 to below 2% in early 2012.

Chart:

http://www.advisorperspectives.com/dshort/charts/indicators/GDP-overview.html?GDP-since-1947.gif

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Methinks, what matters is real income or output growth, not deflation or inflation (of course, large economies, similar to large firms, expand at slower rates than smaller economies).

Obviously, the Fed has smoothed-out business cycles. The four longest expansions in U.S. history took place since the 1960s, recessions were shorter and less severe, and the Fed also smoothed-out long-wave business cycles, including the 1973-82 bust, which resulted in higher real growth.

The Fed doesn't micromanage the economy. It directs the macroeconomy, in a crude way, using crude tools. Periods of feast and famine are suboptimal, because resources are either overemployed or idle, which leads to lower overall growth (like wind energy, it's better to have a steady wind than a strong wind one day and no wind the next day).

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An economy can have a quick and massive creative-destruction process in a mild recession (see early 2000s).

Maintaining sustainable growth is optimal growth, because economic boom-bust cycles use resources inefficiently, both in the boom and bust phases.

Monetary policy either preempts or reacts to positive and negative shocks to the economy, e.g. Y2K, 9-11, an oil shock, technology shocks, and a financial crisis, to cite some recent examples.

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VangelV says "Boom and bust cycles are primarily created by central banks and government meddling with the supply of money and credit."

There were more economic boom-bust cycles, and they were more severe, before the Fed than after the Fed.

Since the Great Depression, the Fed has increasingly improved in smoothing-out business cycles, including long-wave business cycles.

Periods of economic strain and economic slack are suboptimal. Sustainable growth is optimal growth.

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Methinks, what matters is real income or output growth, not deflation or inflation (of course, large economies, similar to large firms, expand at slower rates than smaller economies).

Obviously, the Fed has smoothed-out business cycles. The four longest expansions in U.S. history took place since the 1960s, recessions were shorter and less severe, and the Fed also smoothed-out long-wave business cycles, including the 1973-82 bust, which resulted in higher real growth.

The Fed doesn't micromanage the economy. It directs the macroeconomy, in a crude way, using crude tools. Periods of feast and famine are suboptimal, because resources are either overemployed or idle, which leads to lower overall growth (like wind energy, it's better to have a steady wind than a strong wind one day and no wind the next day).

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The Fed article is a plausable explanation of one of the causes of asset boom-bust cycles, or financial crises (afterall, economies are made up of people).

However, the Selgin, Lastrapes, & White article asks the ridiculous question "Has the Fed Been a Failure?"

Choosing some and parts of articles and data, while ignoring others is obviously biased. The article doesn't even mention the optimization of U.S. living, working, and environmental standards, thanks to the Fed.

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VangelV says: "But the texts that you read for your tests are biased. They are careful narratives to persuade without much logic and very little empirical evidence."

That's another false assumption. Economics is based on sound mathematical and empirical models.

Of course, there are trade-offs based on value judgements. Nonetheless, that doesn't make the models wrong.

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Methinks, to assume monetary and fiscal policies have little or no impact on the economy is a naive view.

Idle resources for long periods of time are unnecessary.

I wrote the following in early 2009 to prevent an annual economic contraction in 2009:

1. Obama should change his stimulus plan to a $5,000 tax cut per worker (or $750 billion for the 150 million workers), along with increasing unemployment benefits by a similar amount. This will help households strengthen their balance sheets, i.e. catch-up on bills, pay-down debt, spur consumption of assets and goods, etc. This plan will have an immediate and powerful effect to stimulate the economy. When excess assets and goods clear the market, production will increase.

2. Shift "toxic" assets into a "bad bank." The government should pay premiums for toxic assets to recapitalize the banking industry and eliminate the systemic problem caused by global imbalances. The Fed has the power to create money out of thin air, to generate nominal growth, boost "animal spirits," and inflate toxic assets.

3. Government expenditures should play a small role in the economic recovery. For example, instead of loans for the auto industry, the government should buy autos and give them away to government employees (e.g. a fringe benefit). So, automakers can continue to produce, instead of shutting down their plants for a month. Auto producers should take advantage of lower costs for raw materials and energy, and generate a multiplier effect in related industries.

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Methinks, so, you believe monetary and fiscal policies are effective in preventing more idle resources and smoothing-out business cycles?

Your article spends a lot of time on inflation and deflation, or losses in purchasing power. However, that's meaningless when you want to maximize economic growth, either through price stability (zero inflation is not necessarily price stability) or avoiding another deep depression, e.g. in the 1970s.

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The Long Depression

The National Bureau of Economic Research dates the contraction following the panic as lasting from October 1873 to March 1879.

At 65 months, it is the longest-lasting contraction identified by the NBER, eclipsing the Great Depression's 43 months of contraction.

In the US, from 1873–1879, 18,000 businesses went bankrupt, including hundreds of banks, and ten states went bankrupt, while unemployment peaked at 14% in 1876, long after the panic ended.

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The Depression of 1893

The Depression of 1893 was one of the worst in American history with the unemployment rate exceeding ten percent for half a decade.

During this period population grew at about 2% per year, so real GNP per person didn't surpass its 1892 level until 1899.

The depression, which was signaled by a financial panic in 1893, has been blamed on the deflation dating back to the Civil War, the gold standard and monetary policy, underconsumption, a general economic unsoundness, and government extravagance.

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The Selgin, Lastrape and White article states:

"Although some early studies suggested otherwise, recent work suggests that there has been no substantial overall improvement in the volatility of real output since the end of World War II compared to before World War I."

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VangelV, people like you rather believe in broken clocks, like Peter Schiff, than proven economic models.

Obviously, international and macroeconomic models are beyond your understanding. So, take a look at microeconomic models, which firms actually use.

Also, anyone can make up data or rewrite history to fit a square peg in a round hole. Long periods of idle resources are unnecessary.

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I've shown above how to facilitate economic growth, which is based on many sound mathematical and empirical models.

It's unnecessary for the U.S. economy to underproduce by $1 trillion a year.

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VangelV, the productive capacity of an economy is simple to measure. For example, full employment is one measurement.

As I stated above, start with some microeconomic models, that firms use, for a basic understanding of the value of economics.

And Peter Schiff?:

The Emperor Schiff Has No Clothes
Wade W. Slome, CFA, CFP
September 7, 2009

"Let’s take a look at Mr. Schiff’s track record. Certainly Mr. Schiff was correctly bearish on the housing market, albeit about five years too early. I thought “timing is everything?” Apparently not for the media masses judging Peter Schiff’s track record.

Let’s take a look at the chief tea-leaf reader in 2002 when he was calling for NASDAQ to reach 500 and the Dow Jones Industrials to reach 2000.

The Dow didn’t ever come remotely close to collapsing from 10,000 to 2,000 and the NASDAQ didn’t plummet from 1,700 to anywhere near 500.

The significant percentage of the Fortune 500 he predicted to file bankruptcy never materialized either.

Rather the market proceeded to march upwards on a five year bull market run that led to a doubling in the S&P 500 index from the bottom in 2002.

Like a broken clock, if you stubbornly stick to one position, chances are you will eventually become right.

I am not the only person to question the accuracy of Mr. Schiff’s persistently bearish and often inaccurate calls.

For one, Mike Shedlock of Mish’s Global Economic Trend Analysis gave an incredibly detailed review of Schiff’s track record in an article titled, “Peter Schiff was Wrong.”

12 Ways Schiff Was Wrong in 2008

•Wrong about hyperinflation
•Wrong about the dollar
•Wrong about commodities except for gold
•Wrong about foreign currencies except for the Yen
•Wrong about foreign equities
•Wrong in timing
•Wrong in risk management
•Wrong in buy and hold thesis
•Wrong on decoupling
•Wrong on China
•Wrong on US treasuries
•Wrong on interest rates, both foreign and domestic

Todd Sullivan from Seeking Alpha wrote an equally scathing, although shorter, look at Mr. Schiff’s track record.

More recently the ever-bearish Schiff continues to call for a collapse in the U.S. dollar and economy but refuses to short the U.S. market because a hyper-inflationary period may ensue, driving U.S. index prices higher.

Wait a second; is he saying that buying U.S. equities would be a good hedge against rising inflation?

All this talking in circles is getting me dizzy. As for his position on gold, just last year he said gold would hit $2,000 per ounce by 2009 – well if it rises 100%+ in the next few months, then Mr. Schiff will be right on target.

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PeakTrader said...

"Better, Stronger, Faster: The Myth of American Decline and the Rise of a New Economy."

The new economy is worse, weaker, slower, and less efficient.

Per capita real GDP remains below the 2007 level, even after an additional $5 trillion in federal debt.

Further monetary stimulus is constrained by inflation and fiscal stimulus is constrained by budget deficits.

The U.S. economy is in a weakened position, where a significant shock will more easily cause a recession.

Most Americans understand government needs more revenues, much more in the future, from higher taxes, fees, fines, fares, tolls, etc.

Reshoring is not a manufacturing "renaissance." Instead, it makes the economy less efficient.

The U.S. already had its manufacturing renaissance, particularly from 2000 to 2007 when manufacturing employment fell 30%, as the U.S. offshored low-end manufacturing, imported those goods at lower prices and higher profits, and shifted resources into high-end manufacturing, information & biotech firms, and emerging industries.

Also, since the mid-2000s, the U.S. had to expend more resources in mining or oil extraction, which also makes the economy less efficient.

Over the past few years, the U.S. economy restructured into more regulations and a bigger government. The U.S. has been spending and squandering trillions of dollars to mostly spin its wheels.

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The U.S. needs to boldly deregulate, cut spending, and cut taxes to jolt the economy out of this depression.

When the expansion is underway, we can re-regulate and raise taxes to slow the expansion and maintain sustainable growth.

Output Gap:

http://stateofworkingamerica.org/charts/output-gap-real-gdp-compared-to-potential-gdp-2000-11/

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