bubbles and inflation

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kiryan
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bubbles and inflation

Postby kiryan » Fri Dec 05, 2008 6:14 pm

I just finished reading a GREAT article on the bailouts by Jubak, but after I finished reading it, it disappeared... Heres the link, but when you click full story, you get a page not found.

http://articles.moneycentral.msn.com/Ne ... d=15302724

Anyhow to sum it up, government has been cooking the books on inflation, real inflation is at least .5% if not 1% higher (some say 5-8%). They do this by making some adjustments to the formula like saying if meat goes from $2 a pound to $5 a pound people eat chicken for $2 a pound instead. And house price appreciation is offset by rent appreciation so if a house goes up 15% but rent in the area goes up 15%, then there was no inflation.

Because the official inflation number is understated, and the FEDs two jobs are keep inflation low and keep the economy growing, the FED doesnt do anything to curb inflation and might even lower rates to stimulate the economy which causes more inflation... which likely leads to bubbles.

Furthermore, the FED doesnt look at all at asset prices (other than homes) in their inflation calculations so if the stock market goes up 50% it has no bearing on fed policy even though there is conceivably a lot more money in the market noting that this money often comes from overseas. This can lead to a potential asset inflation bubble, but the FED wouldn't do anything because inflation is officialy under control and the economy is growing...

really great article.

Also includes a small jab at China. Paulson criticized them on not letting their currency appreciate faster so they lowered it. Now it could've been just to combat the weakening export market, but it could also be a veiled threat not to try and push us around. I think China has played a masterful game in the past 10 years.
Corth
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Re: bubbles and inflation

Postby Corth » Sat Dec 06, 2008 12:11 am

The problem is that most people, including a lot of economists, fail to define inflation properly. CPI does not measure inflation. It measures the cost of a basket of goods over time. And a poorly chosen/balanced basket of goods at that. The CPI "inflation" figures underreported true inflation because it was asset prices that were inflating, not consumer goods or staples.

A better way to measure inflation is the rate of growth in money supply. Likewise, the best way to measure deflation is the rate of decrease of money supply. Like right now, money is disapearring as credit is destroyed, probably at a faster rate than that of government creating money, so you have a deflationary situation. Prices are decreasing, particularly in assets such as real estate and stocks, etc. Price decreases are a symptom of deflation (but again, not the proper definition).

Was the government underreporting inflation? Of course. It ridiculously underreported it. A conspiracy theory minded person might suggest that part of the reason this was allowed was to minimize cost of living increases for social security and employment purposes. I don't necessarily believe that to be the case, but its very convenient.

The problem with Jubak's article - and btw I'm a big fan of his, is that he is trying to suggest a different way of balancing the CPI, when really what needs to happen is a rejection of the CPI or any similar index, as a way of properly measuring inflation.
Last edited by Corth on Sat Dec 06, 2008 12:16 am, edited 1 time in total.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth

Goddamned slippery mage.
Lathander
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Re: bubbles and inflation

Postby Lathander » Sat Dec 06, 2008 12:15 am

Actually, CPI doesn't look at home prices going up or down. It looks at "rental equivalence" or "equivalent rent" which is quite different than a home's value.

Also, minimizing it helps with the cpi interest portion on TIPS and I Bonds.
daggaz
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Re: bubbles and inflation

Postby daggaz » Sat Dec 06, 2008 12:47 pm

Well, the "money" that is disappearing right now is just credit, its not real money. Its just how much banks are willing to leverage against their assets. And there are two main problems with those assets, one of which is now common knowledge.

A) those assets were highly overpriced, to the point where one could push for fraud convictions. Subprime mortgages a case in point, but that is hardly the limit of the depth of this problem.

B) the cash assets of banks are also highly over-leveraged, in that the dollar is a fiat currency with absolutely no real-world backing other than market confidence, which is crashing as we speak. In otherwords, there is no gold, not even petrolium, to back the dollar's worth. And that is at the top of the foodchain, with the Federal Reserve. All the little banks play with fractional reserve rules, which say they can legally lend out 90% of their assets with only 10% to back it up. So the credit crunch is really a collapsing credit bubble. All that so called credit was created out of, and backed up by, thin air.

And this takes us straight to the really scary part of the system, which is the inflation which the Fed is forcing down everybodies throats. They run those printing presses, and there is nothing to back it up, and they are inflating the money-supply, or deflating the value of your savings. And this has been going on for decades, but they really started going nuts in the 90's. And with the onset of the Bush administration, and the wars that were spawned, printing new currency hit exponential records. And what was Bush's answer? Get rid of the M3 index (it was too ineffective, too expensive, it was redundant, blah blah blah) which was the ONLY government index which included all of the necessary statistics with which to effectively track the total amount of the money supply. In otherwords, we lost the only oversight we had over true inflation.

And right now, at this minute, those printing presses are running at full tilt, to fund those trillions of dollars of 'bail-out' money. Money which is being handed out with little to no oversight. Money which will have a profound effect on global, but especially American standards of living, once the inflationary effects have settled in. There is a time-lag on that one, the first people to spend counterfit money have no trouble, its only once the system is flooded with fake bills that the market corrects itself.

So yeah, right now we are seeing two effects fighting simultaneously. One of them is deflation. Housing prices, hard industrial commodities (steel, lead, copper), automobiles, electronics, these things are deflating as the credit bubble collapses and they are no able to support themselves. But food prices have been inflating for months, the cost of actually living is going up around most of the world, and you are a fool if you believe bio-fuel industry and commodities players are the main source of nearly world-wide doubling and tripling in prices.

It will be interesting to see if the elite players who run the Federal Reserve get their endgame they keep pitching for. "A new economic world order," as Obama puts it. I take a bit of solice in the fact that 3rd world players are suddenly gaining a voice among the G8, but either way, the American middle class, the so called American Dream, has already been definitively crushed. Most people in the states just dont realize it yet, or refuse to accept even the possibility.

God bless transnational capitalism, the new world order, and the birth of a whole new generation of wage slaves.

PS: The most insidious part of this whole system is that Americans -and by proxy the rest of the world, are actually paying interest to the guys who are destroying the value of their savings! It costs billions of dollars to borrow that false money from the FED, at a time where none of it is affordable, and that cost will be handed down for generations. Its like making downpayments for the chains and shackles you and your children and your grandchildren will be wearing.
Corth
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Re: bubbles and inflation

Postby Corth » Sat Dec 06, 2008 3:43 pm

Pretty good summary of why I am buying commodities. We're in the midst of the type of asset deflation you see a couple times a century.. but as we speak the government is radically expanding money supply, dilluting the value of our dollars. So why would anyone want to hold onto dollars right now? Best bet is to use them to buy things that will hold their value as dollars become dilluted. Meaning commodities.. which luckily are ultra cheap right now because of asset deflation! And beside all of that, peak oil is right around the corner.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



Goddamned slippery mage.

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