PeakTrader.com

[administrator]

PeakTrader said...

I think, some people underestimate the importance of productivity on inflation.

It's not just a coincidence the quantity and quality of goods & services increased when the Baby Boomers (born between 1946-64) began to enter prime-age around 1982, the U.S. started a period of disinflation, a structural bull market began in the stock market, and international trade, along with U.S. trade deficits, began to increase around 1982.

The U.S. was able to produce and consume more with less effort, since 1982, e.g. because of labor productivity and technological improvements.

The U.S. labor force is still most productive, which is disinflationary, because Americans haven't saved enough for retirement and are living longer.

******

It seems, some people don't understand what the CPI represents.

It's a price index of goods & services based on actual consumption. When a price rises, consumers slow or stop purchases, which tends to lower the price, and when a price falls, consumers speed-up or stock-up on purchases, which tends to raise the price.

There's much less actual consumer inflation than some people believe.

******

Also, I've had deflation with my health care, because my premiums and co-payments have been the same for years, while I'm sure the quality of health care increased.

******

Total medical care per person doesn't represent the CPI, and if the economy was static, then a static or "stable standard" CPI can be used.

******

Bart, I doubt it's that uncommon my premiums and co-payments for health care have been the same for years.

Also, it should be noted, government spends a lot on health care, there are private donations, foreigners buy U.S. health care, and much of U.S. health care is indirectly financed by foreigners through international trade (because the U.S. is able to maintain trade deficits in the long-run).

The actual "out-of-pocket" spending by consumers reflected in the CPI, and excluding taxes, is much smaller.

Moreover, the quality of U.S. health care hasn't been static. For example, there was a great deal of cancer research, in recent years, that resulted in effective, although expensive, treatments.

******

Sure, it makes as much sense as U.S. taxpayers actually paying the $5 trillion of additional federal debt over the past four years.

The $2.5 trillion U.S. health care industry is a high quality industry, like our new Information and Biotech industries, along with continued shifts into higher-tech manufacturing (Industrial Revolution) and farming (Agricultural Revolution):

Medical-industrial complex profits: benefit or bane?
April 2, 2012

"Not only does it create jobs, but the U.S. medical industry is very alluring too. Wente compares the Canadian and U.S. versions.

Upon visiting Chicago, Wente laments, “The city’s hospitals make our hospitals look like slums. They’re gleaming, spotless and staffed with friendly, smiling people who treat patients like hotel guests. There are only two patients to a room, and if you ask for something you can get it right away. Their hospitals seem to have twice as many nurses as ours do, and three times more computers.”

Of course, there is a price to pay, one that is twice the cost of Canada’s."

-------

http://www.blogger.com/comment.g?blogID=28997633&postID=5006607471665186974

-------

PeakTrader said...

Morganovich says: "if traffic is up 2.5% and sales up 13%, then 8-10% inflation fits quite well with the numbers."

Workers are satisfied with 3% raises, while inflation is "8-10%", and yet demand is up substantially?

Perhaps, Morganovich believes businesses should replace the existing workforce (e.g. with unemployed teens, high school dropouts, etc.), or just fire workers, because the employed are contracting the economy, by a huge margin each year.

******

Morganovich, obviously, consumers are finding bargains. That's why they're buying, even with low wage increases and high unemployment.

******

Also, Morganovich says: "how can you up money supply in the double digits to drive 2% real growth and 3% inflation? that's some pretty magical thinking."

Excess Reserves is high and Velocity of Money is low:

http://research.stlouisfed.org/fred2/series/EXCRESNS

http://research.stlouisfed.org/fred2/series/MZMV

Moreover, productivity growth is disinflationary.

http://research.stlouisfed.org/fred2/graph/?id=OPHNFB,

******

Morganovich says: "under estimate inflation, so you over estimate productivity which then gets used as an explanation for low inflation."

Are you saying prices rise only at the consumer level, but not at the producer level?

How do businesses underestimate input costs, i.e. costs of production they actually pay?

When productivity is positive, then output prices are lower, profits are higher, and/or both.

Also, when the velocity of money falls sharply, then the money supply has to rise sharply, just to neutralize the fall in velocity, because MV = PT.

******

Morganovich, productivity represents output per unit of input.

If a worker produces 10 units at the same cost as nine units, then productivity improved.

If input costs rise 3%, then the higher productivity means less than 3% rise in prices, more profits, or both. The output depends on the inputs.

In the equation MV = PT, when V falls in half, then M has to double, just to compensate for the fall in V.

Also, there are other factors, including foreigners absorbing dollars.

******

When consumer inflation accelerated in the 1970s, labor costs and cost of capital (the two biggest components of input costs) were also accelerating (moreover, oil was a bigger percentage of input costs).

******

Ron, the Fisher equation of exchange is incomplete. However, that doesn't mean it's not useful.

I've written before:

Changes in fiscal policy can change the velocity of money, MV = PT. However, in the long run, V and T are constant. So, M equals P.

If M and P are constant, then V = T, i.e. V, the velocity of money, or the number of times money is exchanged, equals T, the number of transactions, or the quantity of goods exchanged. T can be represented by real GDP.

The goal of monetary policy should be to keep actual GDP close to potential GDP, which smooths-out the business cycle creating optimal growth (since there's neither strain nor slack in the economy).

The fact that there are monetary tightening and easing cycles, to close output gaps, are attempts to smooth-out T in the short-run. V and T fluctuate in the short-run, which require adjustments in M to stabilize P and smooth-out T. For example, if people decide to hoard money, then V and T will fall (in the short-run). So, M needs to rise (higher than a constant growth rate).

******

Ron, I give you an example how MV = PT is useful and you say M = P, which is not working (unless you're Morganovich or VangelV).

******

Ron says: "If you're comparing my understanding of this topic to that of morganovich and VangleV, I'm flattered."

Don't worry. I have complete confidence Morganovich and VangelV are no better than you.

******

Money doesn't circulate at a constant rate, for whatever reason.

I stated above, in the equation MV = PT, when V falls, then M has to rise to compensate.

I also stated above there are other factors that influence the variables.

******

Ron, I stated above: "The velocity of money, or the number of times money is exchanged, equals T, the number of transactions, or the quantity of goods exchanged."

In the equation MV = PT, the appropriate choice when V falls is to raise M, which typically raises PT. So, V is raised and the appropriate choice is then to reduce M.

******

A fall in V can represent a credit freeze, economic shock, people hoarding money, etc..

******

VangelV, I never stated V is a dependent or independent variable.

Basically, I've stated when V falls and M is unchanged, from an output gap, then M needs to rise.

-------

http://www.blogger.com/comment.g?blogID=28997633&postID=5812315462415306923

-------

PeakTrader said...

If inflation has really been 6% to 12%, as the propagandists claim, the dollar burger at McDonalds would be smaller than a raisin, and dollar stores would be as obsolete as 10 cent phone booths.

******

Carter wasn't president when the Information Revolution accelerated after 1982.

The Baby-Boomers began to enter "prime-age" in 1982 and trade deficits became increasingly larger after 1982.

******

VangelV, your chart suggests U.S. real GDP growth has been zero.

Everyone knows U.S. living standards, labor standards, and environmental standards are much higher today than in the 1970s (see episode of Kojak).

******

Chart of Real Compensation Per Hour:

http://research.stlouisfed.org/fred2/series/COMPRNFB/

If you don't feel richer, maybe it's because government has driven-up the cost of health care.

******

VangelV, Americans were much poorer before WWII, and in the 1970s.

I stated before, a larger percentage of Americans can afford a new Ford F-150 today than a new Ford Pinto in 1980.

The Roaring Twenties

"Generally, groups such as African-Americans, women and farmers did not enjoy the prosperity of the Roaring Twenties. More than 60 per cent of Americans lived just below the poverty line."

Your StaticStats inflation data suggest the U.S. economy has been contracting for years or decades, even at full employment with high productivity.

******

"The clearest indicators of an improved standard of living are income levels and household expenditures.

Between 1901 and 2003, the average U.S. household’s income increased 67-fold, from $750 to $50,302. During the same period, household expenditures increased 53-fold, from $769 to $40,748.

Equally dramatic is that the $40,748 would have bought more than $2,000 worth of goods in 1901 prices, indicating a tripling of purchasing power."

http://www.bls.gov/opub/uscs/report991.pdf

******

Maybe, if you were an overpaid union worker, not an underpaid non-union worker.

Lower prices and interest rates induced demand. So, it was perfectly rational to spend and borrow.

******

VangelV says "...after the US went off the gold exchange standard (Bretton Woods) in 1971 the economy has been in a clear decline."

You're confusing poor government policies with improved economic policies, since the gold standard and fixed exchange rates.

******

Your chart doesn't reflect that union workers were grossly overpaid and non-union workers were grossly underpaid. That disparity is much smaller now.

Also, many more Americans have 401(k)s and other retirement accounts, and the homeownership rate is higher.

The anomaly could be between WWII and 1973 rather than after 1973, because the U.S. economy was relatively larger after WWII, while Europe and Japan rebuilt.

******

VangelV, the inflexibility of the gold standard is what caused the Great Depression initially. Why go backwards?

******

VangelV, Americans were much poorer in the past.

The gold standard caused boom/bust cycles in the macroeconomy, which slowed improvements in living standards. Periods of economic strain and slack are inefficient.

******

There has been little or no inflation, because the U.S. produces (and consumes) more output with fewer inputs, in the Agricultural-Industrial-Information Revolutions:

Michael Mandel
2012

"According to the Bureau of Economic Analysis, American manufacturing output was 16 percent higher in 2010 than it was a decade earlier, despite the devastating impact of the Great Recession and the virtual disappearance of some manufacturing industries.

Combined with the sharp plunge in employment, the BEA statistics imply that manufacturing productivity rose by a stunning 74 percent from 2000 to 2010.

Companies that distribute and sell these goods also seem to be enjoying sizable efficiency gains.

According to government data, wholesale and retail trade companies have seen a 20 percent increase in productivity since 2000, as information technology and the Internet enables them to deliver more goods with fewer people."

******

In the production function: y or i = t(l, k, r, e,...x), output or inflation is a function of technology or productivity on labor, capital, raw materials, energy, and other inputs.

The U.S. has a high level of labor productivity (the 35-54 age group is the most productive group and the 55-64 group is the second most productive group, based on education, experience, and training).

Capital is cheap from capital creation of U.S. firms and the global saving glut.

Technology or innovation is high, e.g. from the Information Revolution, along with a highly educated workforce and capital equipment expenditures.

******

Nominal GDP will likely be reported below 3% for the second quarter late next week (1% real growth and less than 2% inflation).

We need to expand the economy to absorb millions of unemployed and underemployed and raise nominal GDP to roughly 6%, through massive deregulation, spending cuts, and tax cuts by government. It should be easier for small businesses to start-up and expand.

******

Actually, we need to raise nominal GDP to 7% or higher initially and then maintain 6% nominal growth at full employment.

******

Yes, real GDP growth has been understated and inflation has been overstated.

If a worker can produce 50% more iPhones with the same effort, living standards rise, ceteris paribus (of course, iPhones didn't exist 10 years ago).

-------

http://www.blogger.com/comment.g?blogID=28997633&postID=1803981793721275415

-------