Is this quote woo or true? (about the Fed)

[kellyb]

The Federal Reserve cannot come out and say it directly, but the main reason policymakers want to restrain economic growth is to loosen up the labor markets. To admit that would be political suicide. But the Fed knows that, with markets already so tight, job growth must slow if the economy is to avoid a surge in wages that could trigger a rise in inflation

It's supposedly from July 1999, Business Week.

Is the idea that the Fed has manipulated interest rates to keep unemployment "relatively" high and thus "wage inflation" low woo or true?

[Alan]

Articles from Business Week from that time are archived on Google News. I set Google News up to get results from Business Week from July 1999, and "Federal Reserve cannot" came back with zero results.

EDIT: I found this book: http://books.google.com/books?id=UF3r-dIWeUcC&pg=PA51&lpg=PA51&dq=%22main+reason+policymakers+want+to+restrain%22&source=bl&ots=GiwElvapxn&sig=BcMjinXg0ZWFRQfvb_j99x9T7Cw&hl=en&ei=rbEmTYzmFY-0vgOr28zgBA&sa=X&oi=book_result&ct=result&resnum=2&sqi=2&ved=0CBgQ6AEwAQ#v=onepage&q=%22main%20reason%20policymakers%20want%20to%20re strain%22&f=false

[kellyb]

Articles from Business Week from that time are archived on Google News. I set Google News up to get results from Business Week from July 1999, and "Federal Reserve cannot" came back with zero results.

So you think it's a fake quote?

[kellyb]

The name of the article is supposedly "Good News about Jobs Is Bad News to the Fed”.

I think this might be it?

http://www.businessweek.com/1999/99_29/b3638116.htm

The Federal Reserve cannot come out and say it directly, but the main reason policymakers want to restrain economic growth is to loosen up the labor markets. To admit that would be political suicide. But the Fed knows that, with markets already so tight, job growth must slow if the economy is to avoid a surge in wages that could trigger a rise in inflation.

[kellyb]

More from the same article...

The Fed's worry is that the U.S. is near the point where the labor markets become so tight that pay gains begin to outstrip even the recent strong productivity advances. Nonfarm hourly pay rose 3.6% in the year ended in the second quarter, down from 4.3% in the spring of 1998. But as long as businesses face a shrinking pool of available labor, wage acceleration remains a long-term threat to this expansion. Indeed, yearly wage growth in manufacturing, which had slowed to 1.8% at the end of last year, has accelerated to 2.9% as of June. As Fed Chairman Alan Greenspan has said, the laws of supply and demand in the labor markets have not been repealed.

[tkmikkelsen]

Hmm, it does smell a little bit of conspiracy theory.
Sometimes governments will do preventive things to combat a runaway inflation that I guess could have an effect similar to the one described, but we would need someone with insight into social economics in order to explain if that is true.

What we have learned so far is that google news does not have articles from Business Week dated July 19, 1999. :)

[kellyb]

What we have learned so far is that google news does not have articles from Business Week dated July 19, 1999. :)

Yes. :)

More from the article:

To keep the economy from overheating, the Fed would like to curtail demand for autos and a host of other goods and services. When businesses see demand ebbing, they will rethink their hiring plans. Job growth will cool and so will pay demands.



How does that work?

[Alan]

There are other articles from BusinessWeek that year, dating earlier. Oh well.

[kellyb]

It took a LOT of digging to find an active link (on my end).

[Puppycow]

So, in answer to the original question, I think it's probably actually at least partly true, according to certain schools of economic thought. I wouldn't call it woo. It is perhaps debatable, as much in economics is.

Remember that in early 1980s, the Fed under Volker jacked up interest rates to cause a recession and thereby get inflation under control.

It's all a matter of what do you think is more important: unemployment or inflation? Standard economic theory is that there is a trade-off in the short-run. The Fed would never say that they want to "restrain economic growth" (I think) but they would say that they want to control inflation. And to do that, it may sometimes be necessary to raise interest rates, which is thought to restrain economic growth.

[Tippit]

It's supposedly from July 1999, Business Week.

Is the idea that the Fed has manipulated interest rates to keep unemployment "relatively" high and thus "wage inflation" low woo or true?

The premise of the article, which is that rising wages cause inflation, is a lie. The price of labor is like any other price, and the true case of inflation is the Federal Reserve. This theme is a holdover from a paradigm in which workers and high employment rates were to be blamed for inflation. I don't think anyone believes this anymore. Are workers to blame for the housing bubble, or the current bubble in US government bonds, both consequences of monetary inflation? Of course not.

It's important to understand that the Fed manipulates interest rates for its benefactors, namely Wall Street bankers, and politicians. It's also important to understand that interest rate policy isn't the sole method it has to affect the money supply, witness "quantitative easing".

It is true, however, that by making money more scarce, that is by raising rates, it will raise unemployment rates by virtue of their being less capital available overall. It is also true that by keeping money artificially abundant, it will result in the creation of asset bubbles, non-productive jobs, and malinvestment, such as in the building of an excess inventory of homes that are not needed. When these dislocations are manifest, they will necessarily result in widespread unemployment.

The Fed's manipulation of the money supply, through its interest rate policy, QE (open market activity), or altering the reserve requirement ratio, are detrimental to the vast majority of us who aren't connected insiders.

[drkitten]

The premise of the article, which is that rising wages cause inflation, is a lie.

No, of course. Rising prices are completely unrelated to inflation.

... in Tippit-world.

Inflation is only caused by money that isn't based on pocket lint or gold or some other currency, which is why we're in the middle of a ferocious inflationary period right now despite prices being largely stable, and why a rising price of labor is irrelevant.

In case you're wondering, Tippit, we're not laughing with you.

[Tippit]

No, of course. Rising prices are completely unrelated to inflation.

... in Tippit-world.




That wasn't the question, the question was whether higher wages are the cause of inflation, and whether the Fed has an apparent conflict of interest. Rising wages are of course, a symptom, or effect, of monetary inflation as a result of endless Fed funny money. Do you believe otherwise?



Inflation is only caused by money that isn't based on pocket lint or gold or some other currency, which is why we're in the middle of a ferocious inflationary period right now despite prices being largely stable, and why a rising price of labor is irrelevant.

In case you're wondering, Tippit, we're not laughing with you.

I'm pretty sure the people who are economically devastated as a result of the Fed's machinations aren't laughing at all, actually. And yes, we have lots of inflation. It's reflected in the prices of assets that otherwise would be worth next to zero. It's reflected in a bond market that is in a bubble of monsterous proportions. It's reflected in the fact that the CPI and PPI are manipulated using hedonics, and don't reflect a practical metric. That is where the inflation is. Your flawed perception which is due to your insufficient definition of what "inflation" is doesn't change reality one bit. Quantitative easing did and is doing something, you're just utterly clueless as to what it is, and what the consequences ultimately will be.

[kellyb]

It seems like we don't have inflation at the moment because there are genuine and powerful deflationary pressures at work. And speculative bubbles are not the same thing as inflation as it's traditionally been understood, as far as I know.

[NoCoPilot]

It's all a matter of what do you think is more important: unemployment or inflation? Unemployment hurts the poor. Inflation hurts the rich.

You do the math.

[gabeygoat]

wait, is capitalism not uber perfect?

[kellyb]

Unemployment hurts the poor. Inflation hurts the rich.

You do the math.

That's kind of where I'm at, except social security currently isn't enough to let seniors live comfortably, which means that inflation would hurt a lot of non-rich seniors who did everything right and saved for retirement.
Unless I'm given some sort of blueprint on how inflation won't hurt seniors, I can't endorse it in good conscience.

[Skeptic Ginger]

No, of course. Rising prices are completely unrelated to inflation.

... in Tippit-world.

Inflation is only caused by money that isn't based on pocket lint or gold or some other currency, which is why we're in the middle of a ferocious inflationary period right now despite prices being largely stable, and why a rising price of labor is irrelevant.

In case you're wondering, Tippit, we're not laughing with you.
Tippit: rising WAGES
drkitten: rising PRICES

Clearly not the same thing.

Right now rising wages would do wonders for the economy.

[BobTheCoward]

That wasn't the question, the question was whether higher wages are the cause of inflation, and whether the Fed has an apparent conflict of interest. Rising wages are of course, a symptom, or effect, of monetary inflation as a result of endless Fed funny money. Do you believe otherwise?


That seems a good capture for higher wages and inflation. Here is another proposal:

Inflation is a word that describes general wages rising.

[kellyb]

Tippit: rising WAGES
drkitten: rising PRICES

Clearly not the same thing.

Right now rising wages would do wonders for the economy.

I'm pretty sure the guys at the Fed still believe low (under 4%) unemployment = inflation. They're doing QE only because unemployment is so high (over 9%). They're also readjusting what they consider to be the "natural" rate of unemployment upwards, to around 6% (Norway's unemployment is 3%, btw).

The idea behind controlling the unemployment rate appears to be that if corporations start being in need of workers, workers might start demanding better wages. This would hurt profits/CEO pay/shareholders, etc. So unemployment needs to stay high. If CEO/upper management pay gets cut into, it gets passed onto the consumer, instead. Inflation.

I don't really understand this stuff, so I might be wrong. I'm just trying to understand it.

[Tippit]

I'm pretty sure the guys at the Fed still believe low (under 4%) unemployment = inflation. They're doing QE only because unemployment is so high (over 9%). They're also readjusting what they consider to be the "natural" rate of unemployment upwards, to around 6% (Norway's unemployment is 3%, btw).

The idea behind controlling the unemployment rate appears to be that if corporations start being in need of workers, workers might start demanding better wages. This would hurt profits/CEO pay/shareholders, etc. So unemployment needs to stay high. If CEO/upper management pay gets cut into, it gets passed onto the consumer, instead. Inflation.

I don't really understand this stuff, so I might be wrong. I'm just trying to understand it.

QE is propping up phony stock and bond prices, subsidizing artificially low interest rates, and transferring hard-earned purchasing power from everyone else to bankers, bond holders, and government pimps. I don't understand how this helps the unemployed, either. I'm sure drkitten will explain everything. Perhaps it's some kind of trickle-down theory, where exhorbitant bond profits will be spent on yachts, mansions, and high-end sports cars, creating an abundance of new jobs in these important sectors.

[kellyb]

QE is propping up phony stock and bond prices, subsidizing artificially low interest rates, and transferring hard-earned purchasing power from everyone else to bankers, bond holders, and government pimps.

From what I understand (my source being Michael Hudson...I've read others, but his interpretation makes the most sense to me) QE is intended to re-inflate the housing bubble. Without a housing re-inflation, the banks will look/be insolvent again. Also, QE is a godsend for the international currency speculators.

I don't understand how this helps the unemployed, either.
According to Dean Baker, it devalues the dollar, which makes US exports more competitive internationally, which creates US jobs.

[lomiller]

The Fed manages inflation and thereby unemployment as part of its mandate. At the 10000 foot level they try to keep unemployment as low as possible while maintaining a stable, predictable, but relatively low level of inflation. As a precaution against deflation they usually try to keep inflation a couple % points above zero.

When they judge the risk to be on the side of inflation they tighten the money supply which has the inevitable effect of increasing unemployment. When they judge the risk to be on the side of unemployment with little inflation they loosen the money supply which has the effect of increasing inflation and unemployment.

Right now, however they are (and should be) keeping money supplies lose in order to a) get inflation above zero, b) decrease unemployment.
It seems like we don't have inflation at the moment because there are genuine and powerful deflationary pressures at work. And speculative bubbles are not the same thing as inflation as it's traditionally been understood, as far as I know.

One of the issues with deflation is that its self sustaining. In a deflationary economy money that sits idle increases in value while investments decrease in value. This means people hold onto money, which reduced demand, which creates even more downward pressure on prices and an even stronger incentive to hold onto cash.

[lomiller]

Unemployment hurts the poor. Inflation hurts the rich.

You do the math.

Inflation hurts lenders, deflation hurts borrowers. Poor/rich doesn’t matter so as much as how much you have borrowed. If you are rich but highly leveraged deflation can wipe you out, likewise if you are poor and in debt deflation can be a serious issue.

[drkitten]

I don't understand how this helps the unemployed, either. I'm sure drkitten will explain everything.

I'll be happy to.

Tippit is wrong. Again. About literally everything.

So naturally he doesn't understand a thing. Again. About literally anything.

[drkitten]

The idea behind controlling the unemployment rate appears to be that if corporations start being in need of workers, workers might start demanding better wages.

Yeah, that's basically it. Except that it's not even that "workers might start demanding better wages"; it's more that employers will start bidding against each other to obtain the workers that they need. That's why you see wage increases in times of low unemployment even among non-unionized workers. Think about how much you needed to pay for a web programmer in 1999, a notoriously ununionized job -- but everyone needed one, and they were in short supply, and therefore expensive.

This would hurt profits/CEO pay/shareholders, etc. So unemployment needs to stay high. If CEO/upper management pay gets cut into, it gets passed onto the consumer, instead. Inflation.

Again, this is mostly correct but needlessly conspiratorial; if your labor expenses go up, you'll need to raise consumer prices, even if the CEO is making a dollar a year.

Essentially, wages are the price of labor. If the price of wheat goes up, so will the prices of bread. But if the price of skilled bakers goes up, so will the price of bread.

[drkitten]

From what I understand (my source being Michael Hudson...I've read others, but his interpretation makes the most sense to me) QE is intended to re-inflate the housing bubble. Without a housing re-inflation, the banks will look/be insolvent again. Also, QE is a godsend for the international currency speculators.

Er, no. Perhaps even :notm. Any sort of inflation will help the banks bottom line, because people will be better able to pay off their debts (or the bad debts that are written down will be less in terms of effective purchasing power). "Reinflating the housing bubble" is conspiracy theorizing.



According to Dean Baker, it devalues the dollar, which makes US exports more competitive internationally, which creates US jobs.

That's part of it. It's also supposed to break the deflationary cycle that discourages investment and growth.

[lomiller]

According to Dean Baker, it devalues the dollar, which makes US exports more competitive internationally, which creates US jobs.

That is more of a secondary effect. In a normal economy increasing the supply of money available gives people more money to spend/invest which increase demand for most items. With more money chasing a fixed number of items you get inflation but you also get an incentive to produce more items and more capital to undertake the expansion.

This puts more people to work producing these goods and services, which puts more people to work, which increases demand even more. This cycle continues until there are no more suitable workers to hire which limits the amount of additional items companies can produce. With supply limited by available workers prices will begin to rise unless the Fed cuts back the available money.

If the Fed doesn’t act at this point unemployment won’t really drop any farther but inflation will eat up any wage increases, the value of savings will decline in relative terms, etc. As the economy gets increasingly overheated it heads towards an inevitable crash, so the Fed will “take away the punchbowl” to cool down the economy, but the real point is to prevent the crash that would follow.

[drkitten]

Inflation hurts lenders, deflation hurts borrowers. Poor/rich doesn’t matter so as much as how much you have borrowed. If you are rich but highly leveraged deflation can wipe you out, likewise if you are poor and in debt deflation can be a serious issue.

Unless we get to a point where deflation hurts the lenders as well because the borrowers are defaulting on their loans.

Which is basically where we were two years ago, which is what the various Fed policies are trying to address.

It doesn't matter whether the value of a dollar is rising or falling if I don't have any and can't pay the bank. But by the same token, if the bank expects my dollar and doesn't get it, it doesn't matter if the value is rising or falling.

[The Central Scrutinizer]

It's supposedly from July 1999, Business Week.

Is the idea that the Fed has manipulated interest rates to keep unemployment "relatively" high and thus "wage inflation" low woo or true?

Any quote that starts with "The Federal Reserve cannot come out and say it directly..." is almost certainly consipracy nonsense.

[CORed]

wait, is capitalism not uber perfect?

Not even close. It is, however, considerably less imperfect than centrally planned economies.

[lomiller]

It is, however, considerably less imperfect than centrally planned economies.

And of course both are considerably less imperfect then a well regulated market economy.

[Tippit]

From what I understand (my source being Michael Hudson...I've read others, but his interpretation makes the most sense to me) QE is intended to re-inflate the housing bubble. Without a housing re-inflation, the banks will look/be insolvent again. Also, QE is a godsend for the international currency speculators.



How does subsidizing higher US government bond prices (which is exactly what the Fed is doing) necessarily "re-inflate" the housing bubble, and why do you presume that "re-inflating" the housing bubble is a good thing? In a capitalistic system, losers, including big rich bankers, need to take their losses, not socialize their losses after they've been privatizing their gains for decades. Why should the Fed favor international currency speculators, like George Soros, at everyone else's expense? I don't think this is the case, however, as it's not currency speculators they favor.



According to Dean Baker, it devalues the dollar, which makes US exports more competitive internationally, which creates US jobs.

Devaluing the dollar (or making cash worth less by printing more monopoly money) in order to prop up financial assets, is a regressive form of taxation. That means it hits the poor the hardest. They don't have any financial assets, only that which is being devalued - cash. If we want to fix the trade deficit, we might consider pursuing policies that don't result in our manufacturing base being gutted and shipped overseas. Using confiscatory monetary policy as a guise for trade policy is not the solution.

[drkitten]

Devaluing the dollar (or making cash worth less by printing more monopoly money) in order to prop up financial assets, is a regressive form of taxation. That means it hits the poor the hardest. They don't have any financial assets, only that which is being devalued - cash.

Evidently in Tippit-world, future revenue streams aren't assets.

Of course the poor have financial assets; they have the expectations of their future earnings (which any financial planner will tell you is the greatest asset that 90% of us have). That's also the only reason that unsecured loans like signature loans or credit cards can exist in the first place, and why credit card applications ask for your income (and in some cases, ask for proof of employment, pay stubs, income tax returns, and whatnot to demonstrate income).

In an inflationary era, wages rise as well as prices -- which makes sense, because wages are just the price of labor. So a wage-earner can expect generally rising wages during an inflationary period, which means that a fixed nominal debt actually gets cheaper. This is true for both rich and poor; if I make $300 a week, and I pay $100/week in a car payment, then if inflation pushes my wages up to $400 a week (33% inflation), I'm still better off. I used to have $200/week after debt service, now I have $300/week after debt service. My after-service pay has gone up by 50%, while prices have only risen by 33%, so I'm 17% better off.

And, of course, the same would apply if I made $3000 a week, with $1000/week mortgage. Or $30,000 a week, with a $10,000/week mortgage. I'm still better off after the inflation because my wages go up, but my debt doesn't.

Which is another way of saying that inflation benefits debtors, as was already said. The flip side of that, of course, is that if I'm the creditor, collecting a nominal $100/week, (from three different people, presumably) I'm actually losing money from inflation as my fixed $300 nominal dollars now only buys about $225 worth of stuff.

The summary of that summary is, of course, that Tippit has no idea how inflation works. And as a result is once again wrong.

[drkitten]

Evidently in Tippit-world, future revenue streams aren't assets.

Further to above. This actually explains quite a bit about Tippit's lunacy, now that I consider it further. In particular, it explains why he's a goldbug; he doesn't regard, for example, the dividend yield from a share of stock, the interest from a certificate of deposit, or the coupons from a bond, as "assets."

Since the only thing that counts is the value today, there's no difference between buying $300 worth of gold, $300 worth of JNJ, or $300 worth of Boston lettuce. The idea that five years from now, the gold will be worth the spot price of the gold, the lettuce will be worthless, and the JNJ will be worth the spot price of the shares plus the income generated from the dividend is completely outside his worldview.

And so obviously, anyone who invests in a productive environment (i.e. not gold) is a fool, because the rational expectation of future money doesn't exist.

[kellyb]

Er, no. Perhaps even :notm. Any sort of inflation will help the banks bottom line, because people will be better able to pay off their debts (or the bad debts that are written down will be less in terms of effective purchasing power). "Reinflating the housing bubble" is conspiracy theorizing.





Heh.

Yeah, it is conspiracy theorizing. Dean Baker's a conspiracy theorist, too, though.

http://www.guardian.co.uk/commentisfree/cifamerica/2010/aug/16/ben-bernanke-banks-unemployment

Its chairman, Ben Bernanke, even knows exactly what needs to be done, as the Wall Street Journal recently reminded us. He wrote a paper back in 1999 about Japan's stagnant economy and mild deflation. Following a recommendation by Paul Krugman, he urged Japan's central bank to target an inflation rate in the range of 3-4%.

A rate of inflation in this range would substantially reduce real interest rates, giving firms a powerful incentive to invest. It would mean, for example, that if they built a factory this year, the goods it produces would be selling for 15-20% more in five years. This modest level of inflation would also go far in reducing the debt burdens of households. The burden of their mortgages and other debt would be eroded as wages rise roughly in step with inflation, while the size of the debt remains fixed.

In spite of knowing exactly what needs to be done, Bernanke and the Fed show no inclination of moving in this direction. Instead, the Fed seems prepared to ignore its legal mandate to promote full employment.

The explanation for this incredible policy failure is straightforward. The people that Bernanke must answer to are the Wall Street bankers, not Congress and the public. The Wall Street bankers are not troubled by 9.5% unemployment. Their profits are back to pre-recession levels and bonuses are again hitting record levels.

For the Wall Street bankers, everything is just fine now. If Bernanke were to pursue a policy of targeting 3-4% inflation, it could erode the real value of many of their assets. These banks own mortgage debt and other assets whose value would be reduced by even modest rates of inflation. While targeting a slightly higher rate of inflation may be a no-brainer from the standpoint of workers and most of the country, it is not good for Wall Street – and this is who our supposedly independent Fed is answering to.

This is not the first time that Bernanke has done Wall Street's bidding. When Goldman, Citigroup and the rest were on the edge of bankruptcy, Bernanke deliberately misled Congress to help pass the Troubled Asset Relief Program (Tarp). He told them that the commercial paper market was shutting down, raising the prospect that most of corporate America would be unable to get the short-term credit needed to meet its payroll and pay other bills.

Bernanke neglected to mention that he could singlehandedly keep the commercial paper market operating by setting up a special Fed lending facility for this purpose. He announced the establishment of a lending facility to buy commercial paper the weekend after Congress approved Tarp.

Economics often tends to boil down to dueling conspiracy theories.

[drkitten]

Economics often tends to boil down to dueling conspiracy theories.

Not if done properly. One of the problems that a lot of the conspiracy theorists have is a failure to separate economics from politics.

E.g., economics answers the question "what will happen if?" What will happen, for example, if the Fed raises interest rates by a percent? What will happen if the Fed keeps interest rates at their current level, but buys an addition zillion dollars in bonds as part of QE3? What will happen if Congress mandates that the US go on the gold standard? These are all relatively objective questions with relatively straightforward answers, that we could answer definitively if we only had a control universe to test against.

Politics, of course, is the question of "is this a good thing"? Once we've established, for example, that going on the gold standard would result in massive deflation, it becomes a political question as to whether we -- or more accurately, the people who would make that decision -- want massive deflation. I'd like to think the answer is no, but,....

The problem is that the various conspiracy theorists can't separate these. They think, for example, that because the Fed is controlled by Evil Jewish Reptoids, this means that any action they take will result in the exclusive benefit of Evil Jewish Reptoid-ism and the destruction of All We Hold Dear. Once you've decided that fiat money is evil, obviously going on the gold standard must be good, which means that therefore it couldn't possibly produce negative consequences.

This is backwards reasoning.

And it's wrong.

Just to focus on the bit you cited,... Bernanke would love to raise inflation to the 3-4% range. The problem is, he can't. From a technical standpoint, interest rates are already at zero (for all intents and purposes); the usual way to produce an inflationary environment is to reduce inflation rates -- but they're already pegged at the floor. So the "standard" measures won't work.

And, while he's the Fed chairman, he's not Stalin. He still needs to work with the rest of the committee, many of whom don't agree with Krugman (they're wrong, but that's a risk of committees) and with Congress (who needs to authorize extraordinary measures like QE2). There's a good sporting chance that come March, he (Bernanke) won't be able to do anything because the Federal government will have hit its debt ceiling, and unless Congress raises it, he won't have any money left to pump into the economy.

I think Bernanke's doing what he can, in a very hostile political environment, and with no road map to guide the programs. That's not the same as "Bernanke must answer to [...]the Wall Street bankers, not Congress and the public."

[Tippit]

Evidently in Tippit-world, future revenue streams aren't assets.

Of course the poor have financial assets; they have the expectations of their future earnings (which any financial planner will tell you is the greatest asset that 90% of us have). That's also the only reason that unsecured loans like signature loans or credit cards can exist in the first place, and why credit card applications ask for your income (and in some cases, ask for proof of employment, pay stubs, income tax returns, and whatnot to demonstrate income).



Way to create a strawman, and then knock it down. First of all, I was talking about securitized financial assets that pay unearned income - typically stocks and bonds. Second of all, when I said the poor don't have any assets, "any" is a generalization applying to most of the poor. Third, declaring unsecured future earned income as an "asset" is questionable, at best. If you have a contract that pays you, or if you have a loan, those are assets. Your ability to work and generate earned income is only an asset in the most general sense, and I think you know that.


In an inflationary era, wages rise as well as prices -- which makes sense, because wages are just the price of labor. So a wage-earner can expect generally rising wages during an inflationary period, which means that a fixed nominal debt actually gets cheaper. This is true for both rich and poor; if I make $300 a week, and I pay $100/week in a car payment, then if inflation pushes my wages up to $400 a week (33% inflation), I'm still better off. I used to have $200/week after debt service, now I have $300/week after debt service. My after-service pay has gone up by 50%, while prices have only risen by 33%, so I'm 17% better off.



That isn't true. Wages tend to be "sticky", that is, employers don't tend to offer raises until they risk losing talented employees, and employees usually don't accept paycuts if they have other options. It is well known that the price of labor lags the general price level, and in particular union contracts, or government cost-of-living allowances. Most people experience rising prices before they experience a substantial raise, the process is insidious, and coupled with the burden to the employer's cost structure they may simply be laid off.



And, of course, the same would apply if I made $3000 a week, with $1000/week mortgage. Or $30,000 a week, with a $10,000/week mortgage. I'm still better off after the inflation because my wages go up, but my debt doesn't.

Which is another way of saying that inflation benefits debtors, as was already said. The flip side of that, of course, is that if I'm the creditor, collecting a nominal $100/week, (from three different people, presumably) I'm actually losing money from inflation as my fixed $300 nominal dollars now only buys about $225 worth of stuff.

The summary of that summary is, of course, that Tippit has no idea how inflation works. And as a result is once again wrong.

I understand all too well how inflation works, and how it functions as a regressive tax. It is true that inflation benefits debtors by reducing the real value of their debt, as it hurts creditors, and creditors aren't typically poor (although neither are debtors, in terms of earned income). What is interesting to note is that the shadowstats alternate CPI (http://www.shadowstats.com/alternate_data/inflation-charts) is running about 8.5%, versus the government CPI-U at about 1.5%. The difference is attributable to the hedonic manipulation that the government uses to understate and deflate the general price level. But the real action isn't in the general price level, it's in the asset bubbles forming in stock and bond markets. It's important to understand that the 8.5% inflation the poor endures is a direct transfer of wealth to financial asset holders that the Fed is subsidizing with QE. While the prices of the things they may buy from day to day aren't skyrocketing, they are falling FAR behind in terms of the ability to purchase inflated financial assets and escape the grind of poverty. The rich bondholders who are selling their US bonds, or riding the bubble are becoming vastly wealthy at the direct expense of the poor who can barely afford to put food on the table, let alone purchase bonds. This is the inherent unfairness of the system.

Why do we allow the Fed to manipulate the bond market, under the ridiculous pretense that they care about unemployment, or inflation (other than creating lots of it)?

[Tippit]

Further to above. This actually explains quite a bit about Tippit's lunacy, now that I consider it further. In particular, it explains why he's a goldbug; he doesn't regard, for example, the dividend yield from a share of stock, the interest from a certificate of deposit, or the coupons from a bond, as "assets."

Since the only thing that counts is the value today, there's no difference between buying $300 worth of gold, $300 worth of JNJ, or $300 worth of Boston lettuce. The idea that five years from now, the gold will be worth the spot price of the gold, the lettuce will be worthless, and the JNJ will be worth the spot price of the shares plus the income generated from the dividend is completely outside his worldview.

And so obviously, anyone who invests in a productive environment (i.e. not gold) is a fool, because the rational expectation of future money doesn't exist.

Are you reduced to quoting yourself now? I find all of the above very funny, since I've studied and applied equity valuation in depth to my gain. I used entity DCF to make a fortune in stocks during the 90s, before liquidating much of my portfolio to get in precious metals shortly after the Bank of England advertised loudly how much gold they were selling, around early 2000. I've probably forgotten more about CAPM and equity valuation than you have known. If i recall, you had problems in a prior post on this forum with the simple NPV formula. I can dig up the post...

The nutty thing about your banal and constant disparagement of gold, is that in order to do so you must banish the thought of owning any non-financial assets that don't generate dollar denominated returns. This rules out real estate, and any commodity. I can assure you that the value of owning precious metals is completely lost on you, not least of which is the idea that gold represents honest money, which certainly explains why you run from it like a vampire runs from holy water. That you can label others on this forum who have made substantial profits in gold and silver "idiots", is a testament to your ostrich-like mentality.

[kellyb]

Not if done properly. One of the problems that a lot of the conspiracy theorists have is a failure to separate economics from politics.
I don't think it's a coincidence that Ayn Rand fan Greenspan is a neoliberal economist, " US political liberals" Krugman and Baker are neo Keynesians, and socialist Hudson is a Marxist/classical liberal hybrid.



E.g., economics answers the question "what will happen if?" What will happen, for example, if the Fed raises interest rates by a percent? What will happen if the Fed keeps interest rates at their current level, but buys an addition zillion dollars in bonds as part of QE3? What will happen if Congress mandates that the US go on the gold standard? These are all relatively objective questions with relatively straightforward answers, that we could answer definitively if we only had a control universe to test against.

Absolutely true, but "what will happen if" answers depend on the psychology and beliefs and knowledge of the populations being managed. Economics is not a hard science. It's not physics. It's a lot like psychology, probably because it involves a lot of psychology.

Politics, of course, is the question of "is this a good thing"? Once we've established, for example, that going on the gold standard would result in massive deflation, it becomes a political question as to whether we -- or more accurately, the people who would make that decision -- want massive deflation. I'd like to think the answer is no, but,....

I agree that going back on the gold standard would be bad, because such an extreme move eclipses the psychological issues with currency.



The problem is that the various conspiracy theorists can't separate these. They think, for example, that because the Fed is controlled by Evil Jewish Reptoids, this means that any action they take will result in the exclusive benefit of Evil Jewish Reptoid-ism and the destruction of All We Hold Dear. Once you've decided that fiat money is evil, obviously going on the gold standard must be good, which means that therefore it couldn't possibly produce negative consequences.

Yeah. I don't disagree with that.

This is backwards reasoning.

And it's wrong.

Just to focus on the bit you cited,... Bernanke would love to raise inflation to the 3-4% range.

How do you know this? How do you know his primary enlightened-self-interest isn't in staying part of the golden revolving door between the gov and Goldman Sachs, etc? How do you know that he doesn't believe (an alternative hypothesis), like Greenspan, that what's good for Wall Street is good for America? For some reason, he couldn't see the 8 trillion dollar housing bubble. Baker and Hudson were screaming about it. Why should his economic belief system be given the benefit of the doubt?


The problem is, he can't. From a technical standpoint, interest rates are already at zero (for all intents and purposes); the usual way to produce an inflationary environment is to reduce inflation rates -- but they're already pegged at the floor. So the "standard" measures won't work.

Then why hasn't he ever said so?

And, while he's the Fed chairman, he's not Stalin. He still needs to work with the rest of the committee, many of whom don't agree with Krugman (they're wrong, but that's a risk of committees) and with Congress (who needs to authorize extraordinary measures like QE2). There's a good sporting chance that come March, he (Bernanke) won't be able to do anything because the Federal government will have hit its debt ceiling, and unless Congress raises it, he won't have any money left to pump into the economy.

Then why doesn't he make any effort to gain support for what he really thinks should happen? Greenspan was evangelical about most of his beliefs regarding economics.



I think Bernanke's doing what he can, in a very hostile political environment, and with no road map to guide the programs. That's not the same as "Bernanke must answer to [...]the Wall Street bankers, not Congress and the public."

I don't know what's going on. I know economics is a soft science. Krugman is a conspiracy theorist in that he thinks China is being dishonest and/or overly competitive about their currency value.

http://michael-hudson.com/2010/11/krugman-china-and-the-role-of-finance/

I don't know who's right. I'm not inclined to take a default position of "Krugman is right and its EVERYONE ELSE who's a conspiracy theorist!" , tho.

I will say that the CPI really, honestly, does appear to be a good indicator of actual inflation as it's traditionally been understood. And people who deny deflationary pressures and the threat of deflation seem kind of nutty.

[The Central Scrutinizer]

I used entity DCF to make a fortune in stocks during the 90s, before liquidating much of my portfolio to get in precious metals shortly after the Bank of England advertised loudly how much gold they were selling, around early 2000.

As a wealthy person once said, "Those who talk the most have the least".

[psionl0]

"Those who talk the most have the least".I thought it was "Those who talk the most do it the least".

[drkitten]

How do you know this? How do you know his primary enlightened-self-interest isn't in staying part of the golden revolving door between the gov and Goldman Sachs, etc?

Because I'm not a conspiracy 'tard?

And because he was an academic economist for a hundred zillion years, which is a lousy path to the "golden revolving door." If he wanted to be a GS partner, why did he stay at Princeton.

And because, as an academic economist, he's got a paper trail, and we can see exactly what his economic theories are. And he's not a Greenspan devotee, as you can see by his relentless criticism of the free market approach to Depression economics.



Then why hasn't he ever said so?

He has, but it's been very carefully guarded because he doesn't want to spook people.



Then why doesn't he make any effort to gain support for what he really thinks should happen? Greenspan was evangelical about most of his beliefs regarding economics.

For his beliefs, but not for his policies, and for the same reason. The Fed has to play its policy cards close to its vest, especially if it's trying some tricky market manipulation moves.




I don't know what's going on. I know economics is a soft science. Krugman is a conspiracy theorist in that he thinks China is being dishonest and/or overly competitive about their currency value.

That's not "conspiracy theory"; that's ordinary politics and out in the light of day. The conspiracy theory comes in when you start suggesting that Bernanke is manipulating the market to his own private good because he wants a job at Goldman Sachs.




I don't know who's right. I'm not inclined to take a default position of "Krugman is right and its EVERYONE ELSE who's a conspiracy theorist!" , tho.

I'm not asking you to. There's room for rational debate even in the economic side of things (e.g. is China's currency really overvalued or not, and what are the likely consequences?), and there's always room for debate on the political side, especially if we're trying to decide (politically) what the best policy to take with China is.

But the idea that Bernanke is trying to line GS's pockets with public money because he wants a job there later is about as silly as Tippit's often-expressed dogma that wages don't rise during inflationary times.



I will say that the CPI really, honestly, does appear to be a good indicator of actual inflation as it's traditionally been understood. And people who deny deflationary pressures and the threat of deflation seem kind of nutty.[/QUOTE]

[kellyb]

The Fed has to play its policy cards close to its vest, especially if it's trying some tricky market manipulation moves.





Why?

Also, is this conspiracy theorizing, too?

http://online.wsj.com/article/SB10001424052748704648604575621093223928682.html


The 2009 quantitative easing lowered mortgage rates and helped home prices rise for a while. But last month housing starts plunged almost 12%. And in September, according to Core-Logic, home prices dropped 2.8% from 2009. Commercial real estate values are driven by job-creation and vacancy rates, both of which are heading the wrong way.

Because of unexpectedly bad construction loans, the staid Wilmington Trust was sold to M&T Bank earlier this month in a rare "takeunder"—what Wall Street calls a deal done below a company's stock value, in this case by 40%.

In other words, real estate is at risk again. But Mr. Bernanke would create a panic if he stated publicly that, if not for his magic dollar dust, real estate would fall off a cliff.

You're right that I shouldn't have jumped to personal gain as being the primary motive for Bernake's actions. It seems like the bond traders might be able to hold the economy hostage.

http://nymag.com/nymetro/news/bizfinance/columns/bottomline/199/

Hard as it may be to believe right now, the most important thing Bill Clinton ever said was not "I did not have sexual relations with that woman." Although that statement did have the virtue (from the perspective of memorability) of being, well, a bald-faced lie, there's nothing especially profound about it. Consider, by contrast, the passage from Bob Woodward's The Agenda in which Clinton asks the rhetorical question "You mean to tell me that the success of the economic program and my re-election hinges on the Federal Reserve and a bunch of *********** bond traders?"

[drkitten]

Why?

Because foreknowledge of market moves can lead to market manipulation.

And is illegal, besides.



Also, is this conspiracy theorizing, too?

Some of it, yes. The idea that "real estate is at risk again" is ludicrous; when was real estate ever not at risk? The idea that the entire real estate market can be summarized by a single bank is equally ludicrous.

But the idea that a herd of spooked investors can lead to a market panic and the failure of an objectively sound bank (or economy) shouldn't be that surprising. People act based on how they expect the market to perform; if Bernanke says something that causes people to believe that he expects major losses in the real estate market, some people will believe him and start selling, which will depress prices and causes losses, which will cause more people to expect major losses and start panic selling, et cetera.

And this could be happen even if Bernanke never said anything in the first place, but were merely reported to have said something by a Fox news commentator. Such is the power of market expectations. Which is why the Fed plays its cards so tightly.


You're right that I shouldn't have jumped to personal gain as being the primary motive for Bernake's actions. It seems like the bond traders might be able to hold the economy hostage.

Only in the short run. Look at Soros' engineered run on the pound for what bond traders can typically do. The problem from a political perspective is that politics is almost all short-term.

... which is why the Fed is set up to be as independent as it is, so that politicians seeking re-election don't screw with the economy for short-term gains.

[gnome]

The claim that wages are the primary driver of inflation is equivalent to claiming that there can be no movement in income levels: if more people earn enough to escape poverty, inflation will reduce the value of their wealth until they're below the poverty line again.

Doesn't this fly in the face of actual observation?

[drkitten]

The claim that wages are the primary driver of inflation is equivalent to claiming that there can be no movement in income levels: if more people earn enough to escape poverty, inflation will reduce the value of their wealth until they're below the poverty line again.

No. A lot of what drives poverty is lack of wages, such as that produced by 10% unemployment levels. Or of people living on things like pensions or savings that are paid in fixed nominal dollars and that aren't indexed to inflation. That's one of the reasons that the elderly are historically among the groups with the largest percentage in poverty; the elderly don't have wages and most pensions aren't index-linked. (And social security isn't all that generous.)

So, basically, in good times, the elderly start to dominate the poverty rolls; in bad times, the unemployed and underemployed do.

[kellyb]

But the idea that a herd of spooked investors can lead to a market panic and the failure of an objectively sound bank (or economy) shouldn't be that surprising. People act based on how they expect the market to perform; if Bernanke says something that causes people to believe that he expects major losses in the real estate market, some people will believe him and start selling, which will depress prices and causes losses, which will cause more people to expect major losses and start panic selling, et cetera.

And this could be happen even if Bernanke never said anything in the first place, but were merely reported to have said something by a Fox news commentator. Such is the power of market expectations. Which is why the Fed plays its cards so tightly.





How does that intersect with the possibility/probability that the housing bubble is still deflating?

http://www.cepr.net/index.php/data-bytes/housing-market-monitor/2010-11

New Home Prices Plunge in October

November 30, 2010 (Housing Market Monitor)


The Census Bureau reported last week that the median price for a new home fell from $226,300 in September to $194,900 in October, a one-month decline of 13.9 percent. While new home sales prices are always erratic and the October data were pushed downward in part by a relative increase in sales in the low-cost South region, this is the lowest reported price since October of 2003, when the median price was $194,100. The October data suggests that house prices may again be falling rapidly.





By contrast, the new home sales data reflect contracts that were actually signed in October. For this reason, it gives a much more up-to-date picture of the state of the market. It is likely that with homes sitting unsold for many months, and little prospect for new government assistance in sight, sellers are now cutting prices in a desperate effort to unload their homes. This could mean another period of rapid price declines as the bubble completes its process of deflation.

[gnome]

No. A lot of what drives poverty is lack of wages, such as that produced by 10% unemployment levels. Or of people living on things like pensions or savings that are paid in fixed nominal dollars and that aren't indexed to inflation. That's one of the reasons that the elderly are historically among the groups with the largest percentage in poverty; the elderly don't have wages and most pensions aren't index-linked. (And social security isn't all that generous.)

So, basically, in good times, the elderly start to dominate the poverty rolls; in bad times, the unemployed and underemployed do.

I'm not sure if you're agreeing or disagreeing. I dispute the claim I was referencing in my post because it seems absurd on its face.

[lomiller]

The claim that wages are the primary driver of inflation is equivalent to claiming that there can be no movement in income levels: if more people earn enough to escape poverty, inflation will reduce the value of their wealth until they're below the poverty line again.

Doesn't this fly in the face of actual observation?

I suspect that if there are no productivity gains any wage increases will indeed get eaten up by inflation. This is for people with jobs of course.

[drkitten]

How does that intersect with the possibility/probability that the housing bubble is still deflating?

http://www.cepr.net/index.php/data-bytes/housing-market-monitor/2010-11

I'm not entirely sure I understand your question. No one knows whether the housing market has actually hit a bottom, in part because foretelling the future is hard ("Always in motion the future is"), and in part because there are a lot of political decisions still to be taken that could affect the question -- and there are more wrong decisions than right ones, of course.

But it's also easily possible for Bernanke to trigger a further fall in the housing market -- for example, by shooting his mouth off at the wrong time with some unguarded remarks, which would arguably be one of those wrong decisions I mentioned. The herd is skittish right now (justifiably) and will spook easily.

And the herd can easily be spooked by things that aren't actually true, but will become true in self-reinforcing way.

[drkitten]

I'm not sure if you're agreeing or disagreeing. I dispute the claim I was referencing in my post because it seems absurd on its face.

I don't see why. Inflation won't turn an unskilled laborer into a neurosurgeon, nor will it turn a neurosurgeon into an unskilled laborer. If you have valuable skills when inflation is 1%, you'll still have those skills -- and those skills will still be valuable -- when inflation is 12%.

[kellyb]

I'm not entirely sure I understand your question. No one knows whether the housing market has actually hit a bottom, in part because foretelling the future is hard ("Always in motion the future is"), and in part because there are a lot of political decisions still to be taken that could affect the question -- and there are more wrong decisions than right ones, of course.

True, but if you look at this chart:
http://static.seekingalpha.com/uploads/2009/1/30/saupload_case_shiller_chart_updated.png

...and consider that this is the worst recession since the great depression, and factor in the fact that decades of sprawl plus the bubble boom created an even greater excess in houses...it seems (to me, at least) more likely than not that there's still a ways down to go (for a while...an improved economy would change things.)




But it's also easily possible for Bernanke to trigger a further fall in the housing market -- for example, by shooting his mouth off at the wrong time with some unguarded remarks, which would arguably be one of those wrong decisions I mentioned. The herd is skittish right now (justifiably) and will spook easily.

And the herd can easily be spooked by things that aren't actually true, but will become true in self-reinforcing way.

I'm not sure extremely affordable housing is or needs to be a bad thing for people other than the bankers. I don't think going into a lifetime of mortgage debt to own a home necessarily makes sense or is desirable. The house I live in cost $8K in 1950, and was paid off in about 10 years. And it was a new house at the time in a good neighborhood. Now, houses similar to mine in this neighborhood (which is now a "bad neighborhood") are selling for $10-$15K. They were selling for $70K when the bubble peaked around here. I haven't seen anyone report on this, but I'm (anecdote alert!) seeing my formerly blighted neighborhood being repopulated with new homeowners and renters as a result.

Houses like this:
http://www.crye-leike.com/main/browsedetail.php?region=West+Tennessee&description_search_type=3&zips=38112&mgrp=34&sm=1&ln=2&tid=memphis&mlsnum=3209569&ltb=1

Go fast around here.
(and you can see here what the same house cost in the past)
http://www.assessor.shelby.tn.us/PropertySearchSales.aspx?id=037019%20%2000016&ReturnUrl=http%3a%2f%2fwww.assessor.shelby.tn.us%2 fPropertySearch.aspx%3fStreetNumber%3d463%26Street Name%3dcarpenter%26FirstName%3d%26LastName%3d%26Pa rcelID%3d%26Business%3d

I don't know if the link will hold, but hopefully you can play around with the mortgage payment here:
http://www.crye-leike.com/main/mortgage.php?region=West+Tennessee&description_search_type=3&zips=38112&mgrp=34&sm=1&ln=2&tid=memphis&mlsnum=3209569&ltb=1

On a 15 year loan, it's only ~$50 a month. :eye-poppi

I'm not sure the housing market being "crappy for sellers" as a long term trend is a bad thing for a vast majority of the population.

ETA:
I didn't mean to not answer this:

I'm not entirely sure I understand your question.

I guess my question was, are investors "spooked" if the reality is that the bubble still has a ways to go in deflating? How do you draw the line between "irrational panic" and panic induced from understanding something "real" and more or less inevitable? Or can they be the same thing? or can you only tell in retrospect? Or is even hindsight tainted by the possible presence of "irrational exuberance" or lingering panic/pessimistic expectations?

[gnome]

I don't see why. Inflation won't turn an unskilled laborer into a neurosurgeon, nor will it turn a neurosurgeon into an unskilled laborer. If you have valuable skills when inflation is 1%, you'll still have those skills -- and those skills will still be valuable -- when inflation is 12%.

I'm not sure if we're quite communicating. I agree with your point, but I don't see how it contradicts mine.

The claim I dispute is that increased wages cause inflation (thus theoretically losing all gains for those whose wages increased). While wages can be a factor I don't agree with the idea that higher wages = higher inflation = didn't help anyone.

[drkitten]

True, but if you look at this chart:
http://static.seekingalpha.com/uploads/2009/1/30/saupload_case_shiller_chart_updated.png

...and consider that this is the worst recession since the great depression, and factor in the fact that decades of sprawl plus the bubble boom created an even greater excess in houses...it seems (to me, at least) more likely than not that there's still a ways down to go (for a while...an improved economy would change things.)


That is, of course, your opinion; I don't have an opinion on the subject myself.




I'm not sure extremely affordable housing is or needs to be a bad thing for people other than the bankers.

But this is where you start to verge into conspiracy theories. Who are "the bankers"? I mean, one of my closer friends (we get together fairly regularly for an evening of board games, or did until he found a New Girlfriend that has eaten his time) works as a loan officer at the local bank. Your mortgage may well pay a fraction of his salary, and if you and enough of your friends default on your loans, he's going to be out of a job.

I don't see any reason why your "affordable housing" should cost him his job and his house.

Similarly, another friend of mine is a small businessman; he's negotiating with various banks for startup funding that will create three more jobs in he local community if he can pull it off. The banks can't loan money they don't have -- is your ability to afford a house more important than that of the three unemployed people he may be able to put back to work?

And while I don't claim to be a paragon of moral virtue, I do like being able to afford MY house, which I pay for with the salary I draw as a college professor. Which, in turn, is largely paid for by student loans, granted by banks to the students that I teach.

I don't think going into a lifetime of mortgage debt to own a home necessarily makes sense or is desirable.

Then don't do it. Rent until you have cash enough to buy a house, or scale back the house you do buy. I don't recall any reports of people being forced at gunpoint to take out excessive mortgages.

Having said that, historically houses have been quite good investments, and a very tax-efficient way to store value; nearly as good as IRAs and more widely accessible.


I'm not sure the housing market being "crappy for sellers" as a long term trend is a bad thing for a vast majority of the population.

It's not. But you're still missing the point that it's not about "reinflating the housing bubble." The stimulus is about creating a favorable investment climate, by making it cheap to borrow money and either spend it (creating consumer demand) or invest it (and create infrastructure and jobs). Yes, real estate is an investment, and a more favorable climate for investment in generate would make it more favorable for real estate in particular.

But more importantly, a more favorable environment for investment in general would also make it more favorable for investment in capital improvement that will create jobs, which would help address one of the worst weaknesses of the current economy.

If you can figure out a way to put money into the hands of the general public that doesn't include putting it into real estate (which the general public, especially the newly foreclosed upon, want to buy) and the bankers (which are not only a part of the general public, but are also a part of the public that provide a critical service upon which the economy depends), then you're more creative than I am. But it seems a needless task. Bankers are human too, and they spend money just like everyone else. The local guy at the deli doesn't care whether he sells his roast beef sandwiches to me, the college professor, or to my friend the banker. He just wants us all to have jobs that pay well enough that we can eat at the deli instead of brown-bagging it, because that's how he affords his housing.

[drkitten]

The claim I dispute is that increased wages cause inflation (thus theoretically losing all gains for those whose wages increased). While wages can be a factor I don't agree with the idea that higher wages = higher inflation = didn't help anyone.

Well, what do you do when your labor force costs 5% more than it did last year?

You have three choices.

1) Cut staff (or see them cut themselves by moving to greener pa$ture$ at your competitors), which means cutting production
2) Cut your profit margin
3) Raise your prices.

Of course, if wages are rising in general, then people including your customers have more money in their pocket and can afford higher prices for your product, so #3 is a fairly painless choice. Cutting staff isn't really an option because the reduced production means fewer sales and even less revenue, which produces a death spiral. You can cut your profit margin, but that's money out of YOUR pocket, and unless you're willing to forego eating and run the business at a loss, you can only go so far with that.

Of course, if your production costs go up for other reasons (for example, if the cost of the raw materials goes up), you've got the same choices, but in that case, in a non-inflationary environment, choice #3 is much harder (because raising prices will result in lower sales). Which is why resource shocks are potentially inflationary, but are actually much more likely to result in recessions as businesses fail because they can't raise prices to compensate.

(This is the point where some CT types point out there's actually a fourth choice, which is to improve production efficiency to the point where you need less labor or resources. While it's certainly true that increased efficiency can have that effect, the idea that you can conjure efficiency improvements on demand is of course ludicrous. Research is hard and uncertain, and new infrastructure is expensive, and it's precisely when costs are going up that you have little available for new infrastructure. So we're really back to choices 1-3.)

[drkitten]

I guess my question was, are investors "spooked" if the reality is that the bubble still has a ways to go in deflating?

Yes.

Among other things, it's the difference between "real estate isn't a good investment right now" and "OMG WE NEED TO SELL THE HOUSE NOW!!!11!!eleven!"

How many people will be stampeded into selling their house because they think it will "lose" even more value? Market timing doesn't work with stocks, and it works even less well with real estate. If you don't need to sell your house, and you can afford to live in it, you shouldn't let yourself be panicked into selling just because "OMG THE AIR IS COMING OUT OF HTE BUBBEL!!!11!!1!eleven!"

If you have to move because you just got transferred to the New York office, obviously you have to sell -- or maybe you could rent out your current place, and use the rental to offset the mortgage and maintenance and try selling in five years when the market stabilizes. But the house isn't going anywhere. And it's just as nice a spot to live today as it was in 2006.

How do you draw the line between "irrational panic" and panic induced from understanding something "real" and more or less inevitable?

"Panic selling" is a pretty good line.

[drkitten]

Duplicate post. God bless flakey web browsers.

[kellyb]

That is, of course, your opinion

As I said, when I said "it seems (to me, at least)"

But this is where you start to verge into conspiracy theories. Who are "the bankers"? I mean, one of my closer friends (we get together fairly regularly for an evening of board games, or did until he found a New Girlfriend that has eaten his time) works as a loan officer at the local bank. Your mortgage may well pay a fraction of his salary, and if you and enough of your friends default on your loans, he's going to be out of a job.

I don't see any reason why your "affordable housing" should cost him his job and his house.

I don't have a mortgage. We inherited this house. My sympathies just lie with the majority of the Americans out there who are expected to go into a lifetime of debt to own a home.

Regarding "the bankers", I mean the big wigs, CEOs, etc. Not sure what makes this part of my position the defining point in my veering into CTs.

Similarly, another friend of mine is a small businessman; he's negotiating with various banks for startup funding that will create three more jobs in he local community if he can pull it off. The banks can't loan money they don't have -- is your ability to afford a house more important than that of the three unemployed people he may be able to put back to work?



I got a house for free. I'm only thinking of all the other people who have been expected to go into a lifetime of debt to own a home. Do you have any evidence that in order for unemployment to improve, "everyone" needs to go into a lifetime of mortgage debt if they also want to own a house? This seems like a false dilemma.

And while I don't claim to be a paragon of moral virtue, I do like being able to afford MY house, which I pay for with the salary I draw as a college professor. Which, in turn, is largely paid for by student loans, granted by banks to the students that I teach.

Err..ok? I'm not sure how that follows. I think everyone should be paying less for housing. None of us should face a lifetime of mortgage debt to own a home if it's not necessary.

Then don't do it.
I'm not. I inherited a house.

Having said that, historically houses have been quite good investments, and a very tax-efficient way to store value; nearly as good as IRAs and more widely accessible.

If housing/land prices go down, you can have a cheap (for "you") place to live, gather some modest equity on it, and invest in other stuff, too with your extra cash you're not paying in for a place to live.

It's not. But you're still missing the point that it's not about "reinflating the housing bubble."
I'm not missing it; I'm undecided (and probably will never know.)

The stimulus is about creating a favorable investment climate, by making it cheap to borrow money and either spend it (creating consumer demand) or invest it (and create infrastructure and jobs). Yes, real estate is an investment, and a more favorable climate for investment in generate would make it more favorable for real estate in particular.

Isn't, like, 75% or more of lending from banks to "average folks" for mortgages?

But more importantly, a more favorable environment for investment in general would also make it more favorable for investment in capital improvement that will create jobs, which would help address one of the worst weaknesses of the current economy.


I agree.

If you can figure out a way to put money into the hands of the general public that doesn't include putting it into real estate (which the general public, especially the newly foreclosed upon, want to buy) and the bankers (which are not only a part of the general public, but are also a part of the public that provide a critical service upon which the economy depends), then you're more creative than I am. But it seems a needless task. Bankers are human too, and they spend money just like everyone else. The local guy at the deli doesn't care whether he sells his roast beef sandwiches to me, the college professor, or to my friend the banker. He just wants us all to have jobs that pay well enough that we can eat at the deli instead of brown-bagging it, because that's how he affords his housing.



Well, if housing prices keep going down, there will be a lot more money in most people's pockets to buy deli sandwiches.

[kellyb]

Yes.

Among other things, it's the difference between "real estate isn't a good investment right now" and "OMG WE NEED TO SELL THE HOUSE NOW!!!11!!eleven!"

How many people will be stampeded into selling their house because they think it will "lose" even more value? Market timing doesn't work with stocks, and it works even less well with real estate. If you don't need to sell your house, and you can afford to live in it, you shouldn't let yourself be panicked into selling just because "OMG THE AIR IS COMING OUT OF HTE BUBBEL!!!11!!1!eleven!"

If you have to move because you just got transferred to the New York office, obviously you have to sell -- or maybe you could rent out your current place, and use the rental to offset the mortgage and maintenance and try selling in five years when the market stabilizes. But the house isn't going anywhere. And it's just as nice a spot to live today as it was in 2006.



Honest question: Is there evidence that most people act that way with their homes? I know a lot of people in multiple "classes", and I don't know of anyone who goes "OMG we have to sell our home NOW because prices are falling!!11!"

Folks want to stay where they are if possible, in my anecdotal experience. The exceptions are renters who want to own (especially if owning is way cheaper) and people who are mildly desperate to get into a better neighborhood, and falling housing prices put that dream within reach. The rest are content to hang tight.
I'm honestly open to evidence that my perception isn't representative of reality, though.

[gnome]

Well, what do you do when your labor force costs 5% more than it did last year?

You have three choices.

1) Cut staff (or see them cut themselves by moving to greener pa$ture$ at your competitors), which means cutting production
2) Cut your profit margin
3) Raise your prices.

Of course, if wages are rising in general, then people including your customers have more money in their pocket and can afford higher prices for your product, so #3 is a fairly painless choice. Cutting staff isn't really an option because the reduced production means fewer sales and even less revenue, which produces a death spiral. You can cut your profit margin, but that's money out of YOUR pocket, and unless you're willing to forego eating and run the business at a loss, you can only go so far with that.

Of course, if your production costs go up for other reasons (for example, if the cost of the raw materials goes up), you've got the same choices, but in that case, in a non-inflationary environment, choice #3 is much harder (because raising prices will result in lower sales). Which is why resource shocks are potentially inflationary, but are actually much more likely to result in recessions as businesses fail because they can't raise prices to compensate.

(This is the point where some CT types point out there's actually a fourth choice, which is to improve production efficiency to the point where you need less labor or resources. While it's certainly true that increased efficiency can have that effect, the idea that you can conjure efficiency improvements on demand is of course ludicrous. Research is hard and uncertain, and new infrastructure is expensive, and it's precisely when costs are going up that you have little available for new infrastructure. So we're really back to choices 1-3.)

I'm still with you but still not seeing where it's going. Let's get a little more basic. Are you even disagreeing with me? Would you literally say that wage gains are always erased by the inflation they cause?

[lomiller]

I'm still with you but still not seeing where it's going. Let's get a little more basic. Are you even disagreeing with me? Would you literally say that wage gains are always erased by the inflation they cause?

That’s not “getting more basic” it’s moving the goalpost.
Getting a job when you didn’t have one before, moving to a new higher skill job; getting better at your existing job, using new equipment that allows you to get more work done; no one doubts that wage increase resulting from things like these may not result in inflation.

What we are talking about is higher wages for the same job and same output. If there is no more “stuff” being produced how can raising peoples wages allow them to buy/have more stuff? If you try for a general wage increase without making more stuff all that will happen is prices will rise and everyone will buy the same stuff they did before.

Of course that’s the greatly simplified, in all likelihood oversimplified way to look at it, but the bottom line is wage increase for their own sake won’t do much they need to be tied to productivity increases which are not always easily obtained. Going from no job to having a job is low hanging fruit but once that pool of unemployed starts to dry up it gets harder.

[drkitten]

Honest question: Is there evidence that most people act that way with their homes? I know a lot of people in multiple "classes", and I don't know of anyone who goes "OMG we have to sell our home NOW because prices are falling!!11!"

Well, do you remember all the people panicking because they are "underwater" on their mortgages? Or all the people who overextended themselves on home equity loans, which raised the debt level to the point where they can't/couldn't take out the expected refi? For that matter, the people who took out balloon-style loans or teaser ARMs with the expectation of refinancing at the end of the trial period.

[drkitten]

I'm still with you but still not seeing where it's going. Let's get a little more basic. Are you even disagreeing with me?

Yes, I'm disagreeing with you.

Would you literally say that wage gains are always erased by the inflation they cause?

"Always"? No. Personal wage gains due to personal improvement are likely to not be washed out. For example, if I go back to school and get a law degree, my salary can go from college-professor to corporate-lawyer, which might well double it. If you run for US Senator and win, you're likely to see a substantial wage increase.

But that's not "wage increases" in a macroeconomic sense; "wage increases" at that level are when wages go up for a large class of people for reasons other than individual personal improvement. For example, if new home sales go up, there will be more demand for people in the home sales industry -- everyone from agents and inspectors to decorators and landscapers -- which means that everyone will want to hire more staff, and they'l have to offer more to get them. But at the same time, they'll have more business to handle, which means they can raise the prices they charge for service.

So the money goes from the general homebuying public to the people working in that industry,... who then go out and spend their windfall on nearly everything, raising the demand for consumer goods generally, and wages and prices increase across the board.

[gnome]

That’s not “getting more basic” it’s moving the goalpost.
Getting a job when you didn’t have one before, moving to a new higher skill job; getting better at your existing job, using new equipment that allows you to get more work done; no one doubts that wage increase resulting from things like these may not result in inflation.

What we are talking about is higher wages for the same job and same output. If there is no more “stuff” being produced how can raising peoples wages allow them to buy/have more stuff? If you try for a general wage increase without making more stuff all that will happen is prices will rise and everyone will buy the same stuff they did before.

Of course that’s the greatly simplified, in all likelihood oversimplified way to look at it, but the bottom line is wage increase for their own sake won’t do much they need to be tied to productivity increases which are not always easily obtained. Going from no job to having a job is low hanging fruit but once that pool of unemployed starts to dry up it gets harder.

That was my goalpoast in the first place. We might be closer to something then.

If it's about productivity, what happens when wages decrease and productivity increases?

[Chaos]

So in short, when wages increase across the board, this increase is wiped out by the resultant rising prices.

More or less, at least. Prices in less labor-intensive sectors will not rise as much, since the smaller part of costs being wages means that rising wages don´t drive cost up as much. The opposite of course is true for more labor-intensive sectors.

[gnome]

Yes, I'm disagreeing with you.



"Always"? No. Personal wage gains due to personal improvement are likely to not be washed out. For example, if I go back to school and get a law degree, my salary can go from college-professor to corporate-lawyer, which might well double it. If you run for US Senator and win, you're likely to see a substantial wage increase.

But that's not "wage increases" in a macroeconomic sense; "wage increases" at that level are when wages go up for a large class of people for reasons other than individual personal improvement. For example, if new home sales go up, there will be more demand for people in the home sales industry -- everyone from agents and inspectors to decorators and landscapers -- which means that everyone will want to hire more staff, and they'l have to offer more to get them. But at the same time, they'll have more business to handle, which means they can raise the prices they charge for service.

So the money goes from the general homebuying public to the people working in that industry,... who then go out and spend their windfall on nearly everything, raising the demand for consumer goods generally, and wages and prices increase across the board.

This seems to propose a pendulum that can only swing one way. Wages decrease and workers are less well off. Wages increase and workers are no better off. Is there some kind of entropy in effect here?

[drkitten]

So in short, when wages increase across the board, this increase is wiped out by the resultant rising prices.

More or less, at least. Prices in less labor-intensive sectors will not rise as much, since the smaller part of costs being wages means that rising wages don't drive cost up as much.

That's phase 2. If you're not in a labor-intensive sector, you're probably in a resource-intensive sector; the rising prices of the resources you need will drive up your prices as well.

E.g. being a goldsmith or jeweler is resource-intensive; it costs $50 in labor to put a $10,000 diamond in a $2000 gold ring. But gold and diamonds are extremely labor-intensive to mine.

[drkitten]

This seems to propose a pendulum that can only swing one way. Wages decrease and workers are less well off.

Until the resulting depression causes deflation and prices fall again.


Wages increase and workers are no better off. Is there some kind of entropy in effect here?

Not entropy, but there's a ratchet effect in increasing wealth inequality. If wages fall but prices remain stable, the additional money goes into the pockets of the owners, who invest it instead of spending it, which doesn't have as much effect on consumer prices.

[lomiller]

That was my goalpoast in the first place. We might be closer to something then.

If it's about productivity, what happens when wages decrease and productivity increases?

The same thing that happens if productivity increases and wages stay the same, which is the same as when productivity increases and wages increase. Unless your gaol is to increase Peter’s situation by lowering Paul’s wages by themselves are not going to change anyone’s real purchasing power.

[drkitten]

The same thing that happens if productivity increases and wages stay the same, which is the same as when productivity increases and wages increase. Unless your gaol is to increase Peter’s situation by lowering Paul’s wages by themselves are not going to change anyone’s real purchasing power.

That's a bit disingenuous, I think.

If productivity increases, then everyone in society has more wealth. The rich are richer in terms of standard of living, the poor are "less poor." This is why even poor people in the United States today have meat to eat at every meal and fresh fruits and vegetables in the winter, because decent food can be produced so easily and cheaply.

But the rich will still have more meat and more fresh fruits than the poor.

[lomiller]

That's a bit disingenuous, I think.

If productivity increases, then everyone in society has more wealth. The rich are richer in terms of standard of living, the poor are "less poor." This is why even poor people in the United States today have meat to eat at every meal and fresh fruits and vegetables in the winter, because decent food can be produced so easily and cheaply.

But the rich will still have more meat and more fresh fruits than the poor.

Keep in mind I wasn’t addressing the specific effects of productivity gain, just noting that with any given productivity gain it doesn’t matter all that much if wages go up, stay the same or go down. Nor was I trying to address the desirability of raising someone’s wages relative to someone else’s. (I’m also not suggesting that there may not be other reasons why some of these would be more desirable)

Something that doesn’t sit quite right with me in your example is that if you are already rich the chances are you have all the meat and fruit you desire. While I’m not rich by any means I suspect my income would need to go up or down by quite a lot to make any meaningful difference in how I live so what would really be at stake is how much I save. While this may not be true of everyone I suspect it’s far more common among the rich.

[drkitten]

Something that doesn’t sit quite right with me in your example is that if you are already rich the chances are you have all the meat and fruit you desire. While I’m not rich by any means I suspect my income would need to go up or down by quite a lot to make any meaningful difference in how I live so what would really be at stake is how much I save. While this may not be true of everyone I suspect it’s far more common among the rich.

Shrug. Oversimplified example is oversimplified.

While you have all the meat and fruit you desire, if you spend less on the meat and fruit you desire, that gives you more money to spend on other purposes. Unless you're so wealthy that you can literally fulfill your every whim, you'll probably appreciate more discretionary income because you can fill your house with more anime DVDs or collectable coins.

You personally may, of course, be so virtuous that if you got an extra $1000 in the mail, it would just go straight into the bank. Most people aren't that virtuous; indeed, they've probably already spent that $1000 on the credit card and it would go straight to the VISA company. (That's what happened with Bush's stimulus checks, which is why it didn't work well as a stimulus...)

[Tippit]

Regarding "the bankers", I mean the big wigs, CEOs, etc. Not sure what makes this part of my position the defining point in my veering into CTs.



Merely questioning, let alone criticizing the status quo makes you a CT. Welcome to the club.



I got a house for free. I'm only thinking of all the other people who have been expected to go into a lifetime of debt to own a home. Do you have any evidence that in order for unemployment to improve, "everyone" needs to go into a lifetime of mortgage debt if they also want to own a house? This seems like a false dilemma.



This is an important, and often misunderstood point. While general price inflation is typically perceived to be "bad", asset inflation, such as stocks, bonds, and real estate, has no such stigma (least among those who own lots of assets, not surprisingly!) Of course, this has its root in the common definition of inflation as being a rise in the general price level, as usually measured by some government index that doesn't include assets. Inflation is, however, always and everywhere a monetary phenomenon. It's driven ultimately by the supply of money, and more often than not, that money winds up first in US government bonds, then stocks, and sometimes real estate.

Where does the money come from? It comes from an electronic checkbook entry at the Fed, similar to how, if you were the banker in a game of Monopoly and you wanted to cheat, would simply purchase Park Place with the bank's money instead of your own allotted $1500. This causes the prices of all the other properties on the board to be bid up higher than they otherwise would have, and more importantly, it represents a transfer of wealth to you, the banker.

The effect of rising asset prices is to effectively price the poor (those who don't have assets) out of them. So much so that the only hope they have of obtaining them is to take on an inordinate amount of debt, with poor terms.




Err..ok? I'm not sure how that follows. I think everyone should be paying less for housing. None of us should face a lifetime of mortgage debt to own a home if it's not necessary.



If you owned a house for sale, you might not necessarily think that. Of course, if you had the good fortune to buy a house before or during the Fed's creation of the housing bubble, you were the arbitrary beneficiary of the side effect of the Fed's monetary largess. Congratulations. Didn't buy a house then? Tough luck. Life with the Fed is a game of musical chairs, or, whack-a-mole if you prefer.



Well, if housing prices keep going down, there will be a lot more money in most people's pockets to buy deli sandwiches.

Of course, the reality is that some of the things you own are deflating, and some of the things you need are inflating, specifically food. So your deli sandwich costs more. I realize this makes me sound "nutty" to you. So here is some more nuttiness for your consideration:

USDA: Food inflation to accelerate into 2011 (http://www.marketwatch.com/story/usda-food-inflation-to-rise-into-2011-2010-10-25)

[kellyb]

For example, if new home sales go up, there will be more demand for people in the home sales industry -- everyone from agents and inspectors to decorators and landscapers -- which means that everyone will want to hire more staff, and they'l have to offer more to get them. But at the same time, they'll have more business to handle, which means they can raise the prices they charge for service.

So the money goes from the general homebuying public to the people working in that industry,... who then go out and spend their windfall on nearly everything, raising the demand for consumer goods generally, and wages and prices increase across the board.

Are you sure there's not more elasticity in the system than that? It seems like (depending on the economy, maybe) there's generally room for a certain amount of higher demand to lower prices, because the volume increases profits, allowing for more competition in pricing and profits.

Wage inflation is happening in China right now, though.

It looks like the Chinese gov is trying to just keep wages escalating faster than inflation, though, and instituting price controls.

http://moslereconomics.com/2010/12/29/beijing-city-to-raise-minimum-wage-21/

Every province and municipality in China has announced a rise in its minimum wage this year, with increases ranging from 12 per cent to Beijing’s rise.


The official measure of annual consumer price inflation in China hit 5.1 per cent in November, up from 4.4 per cent in October, with food prices rising 11.7 per cent in November from a year earlier.

The increase, which will come into effect on New Year’s day, raises the statutory minimum monthly wage in the Chinese capital to Rmb1,160 ($175) and the hourly rate to Rmb6.7. It follows a 20 per cent rise in June.

“While China’s living standards have dramatically risen over the past 30 years, the gap between rich and poor has sharply widened,” Yu Yongding, an influential former adviser to China’s central bank, wrote in a newspaper article last week. “With the contrast between the opulent lifestyles of the rich and the slow improvement of basic living conditions for the poor fomenting social tension, a serious backlash is brewing.”


Nationwide increases in minimum wages are part of the government’s plan to reduce income disparity and the Chinese economy’s heavy reliance on investment and promote greater consumption by middle- and low-income households.


But with many businesses already being squeezed by rising input costs, wage increases come at a difficult time and are likely to lead to higher overall inflation.


“In just the last three months we’ve already had to raise entry-level starting wages 60 per cent just to get people to come to a job interview,” said Jade Gray, chief executive of Gung Ho Pizza, a Beijing-based gourmet pizza delivery service. “With rising rents, the much higher cost of ingredients and now wage inflation, many businesses in the services industries are going to find it impossible not to pass on much higher costs to consumers.”

It'll be interesting to watch how it all unfolds.

[drkitten]

Are you sure there's not more elasticity in the system than that?

The amount of elasticity in the system varies from situation to situation, of course. For software production, for example, the marginal costs of increased production are almost nil, while the margins in grocery stores are razor thin and there's little elasticity at all.

It seems like (depending on the economy, maybe) there's generally room for a certain amount of higher demand to lower prices, because the volume increases profits, allowing for more competition in pricing and profits.

Um,... what? Higher demand results in lower prices?

This is situational; if higher demand allows you to cross some sort of production Rubicon, such as bringing previously idle machinery back on line or something,


Wage inflation is happening in China right now, though.

It looks like the Chinese gov is trying to just keep wages escalating faster than inflation, though, and instituting price controls.

Right. China's actually a good example; wage inflation has been happening because the government has done a good job of developing external markets, which brings more money into the economy; corporations need to raise production to meet the demands of the market, which means they need to compete for the workers with the skills they need, which in turn means wage inflation.

And, just as I predicted would happen, and Tippit predicted would not, the higher wages are driving general economy-wide inflation in China. The government doesn't like this (inflation would weaken the currency, which would drive export prices up and reduce the external markets), but it's having quite a difficult time doing it. I believe the Chinese just had a bond sale fail, precisely because the interest rates they were offering weren't enough to offset the inflation that's already happening, let alone the inflation everyone is predicting. The solution of price controls won't work, because that will simply make domestic goods uneconomic to produce, so the Chinese will need to find some way to get wage inflation under control.

I.e., it's unfolding exactly as classical economic theory says it should, and Tippit is 100% wrong about everything again.

Your own sources describe the process:


“In just the last three months we’ve already had to raise entry-level starting wages 60 per cent just to get people to come to a job interview,” said Jade Gray, chief executive of Gung Ho Pizza, a Beijing-based gourmet pizza delivery service. “With rising rents, the much higher cost of ingredients and now wage inflation, many businesses in the services industries are going to find it impossible not to pass on much higher costs to consumers.”

... and note that this is market-driven wage inflation, not an arbitrary government increase in the minimum wage. The "gourmet pizza delivery service" can only exist because people have enough disposable income to buy gourmet pizzas, so obviously rising food prices aren't the issue. But precisely because people have that much money, they can afford the higher food prices and the higher rents, which means that "to get people to come to a job interview" the company needs to increase it's offer, which they will eventually pass on in the form of higher consumer prices.


It'll be interesting to watch how it all unfolds.

Definitely.

[Tippit]

And, just as I predicted would happen, and Tippit predicted would not, the higher wages are driving general economy-wide inflation in China. The government doesn't like this (inflation would weaken the currency, which would drive export prices up and reduce the external markets), but it's having quite a difficult time doing it. I believe the Chinese just had a bond sale fail, precisely because the interest rates they were offering weren't enough to offset the inflation that's already happening, let alone the inflation everyone is predicting. The solution of price controls won't work, because that will simply make domestic goods uneconomic to produce, so the Chinese will need to find some way to get wage inflation under control.

I.e., it's unfolding exactly as classical economic theory says it should, and Tippit is 100% wrong about everything again.



Except, higher wages aren't "driving" inflation in China, higher wages are the effect of workers demanding higher paying jobs to offset the rising costs of putting food on the table. Any policy that seeks to keep the price of labor artificially low in contrast to a rising general price level is an inequitable "blame the worker" policy. You claim that China doesn't like inflation or a weaker currency, yet it's the Bank of China that is responsible for the supply of currency that is causing the inflation in the first place! The Chinese worker is stuck between a rock and a hard place, yet we are to believe the worker is to blame, and that China is fighting a policy of it's own making, according to you, and contemporary intellectually bankrupt economists.

[drkitten]

Except, higher wages aren't "driving" inflation in China, higher wages are the effect of workers demanding higher paying jobs to offset the rising costs of putting food on the table.

... in Tippit-land. Kelly and I were talking about the real China, the one you can get to by plane instead of by magical wardrobe.

[kellyb]

Um,... what? Higher demand results in lower prices?

This is situational; if higher demand allows you to cross some sort of production Rubicon, such as bringing previously idle machinery back on line or something,




I'm thinking of the price of bread in three locations: neighborhood "corner groceries", chain "convenience store" gas stations, and regular grocery stores. The bigger the volume of the bread being sold, (demand at the location) the lower the price. I'm guessing it has to do with bulk discounts on goods being re-sold.

[kellyb]

Except, higher wages aren't "driving" inflation in China, higher wages are the effect of workers demanding higher paying jobs to offset the rising costs of putting food on the table.
Are you arguing that labor shortages won't result in wage increases?

[drkitten]

I'm thinking of the price of bread in three locations: neighborhood "corner groceries", chain "convenience store" gas stations, and regular grocery stores. The bigger the volume of the bread being sold, (demand at the location) the lower the price. I'm guessing it has to do with bulk discounts on goods being re-sold.

More that there are different overhead structures. The supermarket has ten clerks and a manager and sells a thousand loaves of bread a day. The corner grocery has two clerks and sells ten loaves of bread a day. The gas station has a single clerk and sells one loaf of bread a day.

That's kind of what I was talking about with crossing a production Rubicon; if you are making enough sales that you can afford a second cash register, you can make twice as many sales in a given time while maintaining essentially the same footprint, warehouse, distribution, et cetera. In broad terms, this comes under the heading of "increased efficiency"; a supermarket sells groceries much more efficiently than the local stop-and-rob.

But efficiency is not tied to inflation either of wages or of consumer prices; a rise in the costs of labor or in the cost of the bread as it comes from the baker will not affect the fact that the supermarket has a more efficient business model.

[Tippit]

Are you arguing that labor shortages won't result in wage increases?

Of course not. Ceteris paribus, labor shortages will result in wage increases. But the equilibrium price of labor is based on the supply of and demand for money, just as much as it is based on the supply of and demand for labor. The reciprocal of the price of labor, is the price of money, in labor. The biggest variable in the equation is the supply of money, because perpetually issuing checkbook money is a lucrative form of taxation. This new money is the basis for asset inflation and/or of the general price level, which in turn forms the basis for employees to demand higher wages in response to higher prices in general.

Once, again, higher wages are not the cause, they are the effect. If you are told that the cause of inflation is simply workers demanding higher wages out of the blue, you are being lied to.

[kellyb]

Ok, let's suppose you own a landscaping company and pay 10 workers $10 an hour to mow people's grass and stuff. Suddenly there's a labor shortage and you can't get anyone to do the job for less than $20 an hour.

How do you stay in business?

If you are told that the cause of inflation is simply workers demanding higher wages out of the blue, you are being lied to.

I don't think it's THE cause, but I can't see how it can't sometimes be A cause.

[The Central Scrutinizer]

Ok, let's suppose you own a landscaping company and pay 10 workers $10 an hour to mow people's grass and stuff. Suddenly there's a labor shortage and you can't get anyone to do the job for less than $20 an hour.

How do you stay in business?

Pay them the $20 and raise your prices.

[Tippit]

Ok, let's suppose you own a landscaping company and pay 10 workers $10 an hour to mow people's grass and stuff. Suddenly there's a labor shortage and you can't get anyone to do the job for less than $20 an hour.

How do you stay in business?



Some pareto-optimal combination of raising my landscaping prices, accepting a lower margin, and extracting more productivity from my existing workforce.

What were the circumstances of the price of labor doubling? The commonly accepted definition of inflation is a rise in the general price level, which doesn't include sector-level price changes which are offsetting. If some of my workforce leaves because the government starts paying people $15 to make faces on streetcorners, then this will offset wage increases in landscaping to the extent that taxes have to first be collected to pay for this.

Inflation is, always and everywhere, a monetary phenomenon. If wages rise for some other reason, then it isn't inflation.



I don't think it's THE cause, but I can't see how it can't sometimes be A cause.

Inflation is too much money chasing too few goods. Thus, the cause is some combination of an increase in the supply of money, and/or a decrease in the production of goods.

[drkitten]

Some pareto-optimal combination of raising my landscaping prices, accepting a lower margin, and extracting more productivity from my existing workforce.

And there you have the driver of rising labor costs producing general inflation. What's true for the landscaping business would be true for any other business as well.

What were the circumstances of the price of labor doubling?

The circumstances are irrelevant.

The commonly accepted definition of inflation is a rise in the general price level, which doesn't include sector-level price changes which are offsetting.

And the whole point is that unless you can find a sector -- actually, a substantial set of sectors, since a single flat sector wouldn't overcome general inflation in the stats -- that doesn't pay labor costs, increased price of labor will be an almost unavoidable driver of general inflation.


Inflation is, always and everywhere, a monetary phenomenon.

And you stick to this horsefeathers when even your own analysis proves you wrong.

[drkitten]

Some pareto-optimal combination of raising my landscaping prices, accepting a lower margin, and extracting more productivity from my existing workforce.

@kellyb,

I should also point out that if there were any doubt remaining that Tippit is just using buzzwords that he doesn't understand, this sentence would have settled it.

There is no such thing as "a pareto-optimal combination of raising [his] landscaping prices, accepting a lower margin, and extracting more productivity from his existing work force."

Pareto efficiency refers to the concept of finding a new configuration where at least one person is better off, and no person is in any way worse off. If no such configuration exists, the system is already Pareto-optimal and you're as good as you can get in terms of Pareto comparisons. For example, if I were to charge 10% more than I needed, but then burn the excess bills in the fire, I could improve the Pareto efficiency by not burning the bills (because that would make me better off without affecting the prices the customers paid).

But we'll assume I'm not an idiot, and I'm not deliberately wasting money. But if I raise my prices, that's not a Pareto improvement, because my customers are worse off. If I lower my margin, that's not a Pareto improvement, because I'm worse off. And if I demand more work from my work force, that's not a Pareto improvement, because my employees are worse off.

So, basically, Tippit is suggesting he can, as a matter of routine, reach into his magic bag of fairy dust and find a way to lower costs while raising revenue. This is of course absurd; while such improvements are sometimes possible, to rely on such improvements is a form of Underpants Gnome business planning.

[Tippit]

And there you have the driver of rising labor costs producing general inflation. What's true for the landscaping business would be true for any other business as well.



Only in your meaningless hypotheticals, that depend on a labor shortage in one sector equalling a labor shortage in all.



The circumstances are irrelevant.



The circumstances are always relevant in economics, because it's an open system.



And the whole point is that unless you can find a sector -- actually, a substantial set of sectors, since a single flat sector wouldn't overcome general inflation in the stats -- that doesn't pay labor costs, increased price of labor will be an almost unavoidable driver of general inflation.



Of course, without increasing the supply of money, or the presence of some exogenous supply shock, you will always find prices offsetting each other from economic sector to sector, which is NOT characteristic of price inflation. In fact, in a steadily growing economy, unless you debase the currency, you will have deflation. The banksters who get to spend/invest the funny money first love this.



And you stick to this horsefeathers when even your own analysis proves you wrong.

My analysis is fine, you fail to comprehend the difference between a price change, and general price inflation.

[Tippit]

@kellyb,

I should also point out that if there were any doubt remaining that Tippit is just using buzzwords that he doesn't understand, this sentence would have settled it.

There is no such thing as "a pareto-optimal combination of raising [his] landscaping prices, accepting a lower margin, and extracting more productivity from his existing work force."

Pareto efficiency refers to the concept of finding a new configuration where at least one person is better off, and no person is in any way worse off. If no such configuration exists, the system is already Pareto-optimal and you're as good as you can get in terms of Pareto comparisons. For example, if I were to charge 10% more than I needed, but then burn the excess bills in the fire, I could improve the Pareto efficiency by not burning the bills (because that would make me better off without affecting the prices the customers paid).

But we'll assume I'm not an idiot, and I'm not deliberately wasting money. But if I raise my prices, that's not a Pareto improvement, because my customers are worse off. If I lower my margin, that's not a Pareto improvement, because I'm worse off. And if I demand more work from my work force, that's not a Pareto improvement, because my employees are worse off.

So, basically, Tippit is suggesting he can, as a matter of routine, reach into his magic bag of fairy dust and find a way to lower costs while raising revenue. This is of course absurd; while such improvements are sometimes possible, to rely on such improvements is a form of Underpants Gnome business planning.

As a business owner, absent coercion or some other form of manipulation, you will always strive for pareto-optimization, because the owner of a business has the only balanced claim as a stakeholder. If you forsake your customer with high prices, you will lose customers. If you forsake your employees, your business will become unprofitable as you lose talent. If you forsake fellow shareholders, your financing will dry up.

The idea that if your labor costs doubled overnight that you could simply raise prices to reflect the new cost structure without losing customers, is ridiculous.

The really important thing here, is that you actually believe that workers demanding higher wages is the cause of inflation, and not monetary debasement. Suppress those wages! Or not.

[kellyb]

The really important thing here, is that you actually believe that workers demanding higher wages is the cause of inflation, and not monetary debasement. Suppress those wages! Or not.

You're the only person in this thread talking about "THE" cause of inflation, as if there can be only one cause. You're implying that drkitten doesn't believe that printing money can cause inflation, which is a huge straw man.

I share your dislike of Bernake (dude couldn't even see an 8 trillion dollar housing bubble? Really? But he's more competent to run the Fed than all of the economists that could?) but your thinking about stuff like this makes me believe you're just opinion mooching off of someone else.

[Sceptic-PK]

I share your dislike of Bernake (dude couldn't even see an 8 trillion dollar housing bubble? Really? But he's more competent to run the Fed than all of the economists that could?)

There were few people better equipped to deal with the GFC then Bernanke. Nobody predicted every contributor to the collapse either.

[kellyb]

There were few people better equipped to deal with the GFC then Bernanke. Nobody predicted every contributor to the collapse either.

In what way is Bernake more qualified than, say, Krugman?

Yes, the fraud aspects of the subprime crisis weren't known, because the books were cooked, and the regulators didn't/don't believe in regulating (policing fraud).

But how in the world can someone who can't see an 8 TRILLION DOLLAR HOUSING BUBBLE be qualified to run the Fed? Krugman, Baker, Hudson, and many, many other economists predicted some flavor of disaster whilst Greenspan and Bernake were seeing the the biggest speculative bubble in known world history as Wall Street "wealth creation". :boggled:

Dude is a libertarian Republican.

http://money.cnn.com/magazines/fortune/fortune_archive/2005/05/02/8258489/index.htm

Fed vice chairman Alan Blinder. "I worked with him for years before I even knew he was a libertarian-leaning Republican."

Probably not quite as bad as Greenspan, but still a doosh.

[Chaos]

If you are told that the cause of inflation is simply workers demanding higher wages out of the blue, you are being lied to.

Except that drkitten has spent a lot of time explaining that it is not "out of the blue", which you keep ignoring.

Really... what does it say about your claims that you can´t keep them up without being dishonest?

[Tippit]

You're the only person in this thread talking about "THE" cause of inflation, as if there can be only one cause. You're implying that drkitten doesn't believe that printing money can cause inflation, which is a huge straw man.



There isn't one, but two causes of inflation, which was already discussed. Increasing the money supply, or producing fewer goods and services. To assign blame or cause for inflation to wages, just another price in a market of prices is to completely and utterly misunderstand cause and effect.



I share your dislike of Bernake (dude couldn't even see an 8 trillion dollar housing bubble? Really? But he's more competent to run the Fed than all of the economists that could?) but your thinking about stuff like this makes me believe you're just opinion mooching off of someone else.

Bernanke created the housing bubble, he saw it. He also created the current bond bubble, and he knows the endgame. I don't dislike Bernanke, in as much as I want the Federal Reserve abolished, along with the fractional reserve banking scam. It is a usurious cartel that is against the public trust. The problem is systemic, not one of personel.

[Sceptic-PK]

In what way is Bernake more qualified than, say, Krugman?

Bernanke was a student of the Depression. I'd posit that an expert on this particular failure was in an excellent position to avoid the same mistakes. I think that opinion is supported by the last few years. Sure, we could argue about the Fed's slowness to react, but I hardly see this as Bernanke's sole responsibility, he was hardly the only one that missed the signs leading up to it.


But how in the world can someone who can't see an 8 TRILLION DOLLAR HOUSING BUBBLE be qualified to run the Fed? Krugman, Baker, Hudson, and many, many other economists predicted some flavor of disaster whilst Greenspan and Bernake were seeing the the biggest speculative bubble in known world history as Wall Street "wealth creation". :boggled:

I don't see how being imperfect makes him unqualified at all. Economists of all varieties are always predicting the next great catastrophe. The fact remains that none of them actually did it properly in this instance; some of them saw small pieces but nobody was putting them all together. I think Bernanke should be judged by how he handled the crisis rather than being part of the majority who didn't necessarily see it coming. I mean, what should he have done had he had a crystal ball? What steps do you think he should have taken once becoming Chairman?


Probably not quite as bad as Greenspan, but still a doosh.

Do you actually have anything substantive to say, other than to blame him for not seeing the crisis as soon as others supposedly did?

[lomiller]

You're the only person in this thread talking about "THE" cause of inflation, as if there can be only one cause. You're implying that drkitten doesn't believe that printing money can cause inflation, which is a huge straw man.

Keep in mind Tippet doesn’t think printing money “causes” inflation he thinks printing money *is* inflation. His personal definition of inflation doesn’t involve increasing prices, rather he uses the term to describe an increase in the size of the money supply. In his world therefore crating money really is the only thing that can “cause inflation” (increase the money supply.

Naturally this means you can’t really hold a conversation on this topic with him because his is talking about something completely different then what his words say. (and still wrong)

[drkitten]

Keep in mind Tippet doesn’t think printing money “causes” inflation he thinks printing money *is* inflation. His personal definition of inflation doesn’t involve increasing prices, rather he uses the term to describe an increase in the size of the money supply. In his world therefore crating money really is the only thing that can “cause inflation” (increase the money supply.

Which is why, for instance, he doesn't understand the role that the velocity of money has on "inflation" as measured prices, and can cheerfully tell us about the inflation caused by the stimulus measures at the same time that the CPI measures an actual decrease in consumer prices.

[gnome]

The same thing that happens if productivity increases and wages stay the same, which is the same as when productivity increases and wages increase. Unless your gaol is to increase Peter’s situation by lowering Paul’s wages by themselves are not going to change anyone’s real purchasing power.

I'm not sure how that can be quite true.

Let me propose a scenario:

A key labor regulation is altered in favor of employers. Across the board employees have less bargaining power relative to employers as a result, and wages drop overall.

You're arguing that purchasing power of the employees won't change? And furthermore, if that law is reverted a year later the wages cannot recover without inflation erasing the gains?

Some of this seems like an argument to stop worrying about wage decline, since it doesn't hurt you and can't be fixed anyway.

[drkitten]

I'm not sure how that can be quite true.

Let me propose a scenario:

A key labor regulation is altered in favor of employers. Across the board employees have less bargaining power relative to employers as a result, and wages drop overall.

You're arguing that purchasing power of the employees won't change?

In the long run, no.

The employer will pocket a short-term windfall, but unless he turns around and increases his personal purchases of the products that he makes, this law has greatly reduced the ability of the general public (which is primarily made up of wage earners) to buy stuff, including the stuff he makes and sells.

So he'll see his sales drop, possibly (depending upon demand elasticity) by more than he saw his costs drop -- so this could end up costing him more money. The only way to restore his sales will be to lower his prices, and we're right back to square one.

[kellyb]

In the long run, no.

The employer will pocket a short-term windfall, but unless he turns around and increases his personal purchases of the products that he makes, this law has greatly reduced the ability of the general public (which is primarily made up of wage earners) to buy stuff, including the stuff he makes and sells.

So he'll see his sales drop, possibly (depending upon demand elasticity) by more than he saw his costs drop -- so this could end up costing him more money. The only way to restore his sales will be to lower his prices, and we're right back to square one.

Do you think minimum wage laws are pointless, then?

[kellyb]

In the long run, no.

The employer will pocket a short-term windfall, but unless he turns around and increases his personal purchases of the products that he makes, this law has greatly reduced the ability of the general public (which is primarily made up of wage earners) to buy stuff, including the stuff he makes and sells.

So he'll see his sales drop, possibly (depending upon demand elasticity) by more than he saw his costs drop -- so this could end up costing him more money. The only way to restore his sales will be to lower his prices, and we're right back to square one.

Thinking about this some more...

Couldn't he also raise prices and let his product become a niche market item? This seems to be what has happened with new, large kitchen appliances in recent years. The upper middle class buy new washing machines, etc, and the lower income folks buy them used. It seems (I might be wrong) in the 60's, in the era of unions, pensions, etc. that the working class was able to afford a new oven.

Part of the collective rise in living standards was a matter of national luck (Europe still being rebuilding from WWII) but I'm not sure some of it wasn't also from the reduced inequality organized labor created.

[drkitten]

Do you think minimum wage laws are pointless, then?

No, but I think their effectiveness is overstated.

One of the frequent criticisms is that minimum wages laws can actually reduce employment; if I have a job that's worth $3/hr to do, but I have to pay $6/hr, I'm simply not going to hire anyone to do that job.

This argument fails in many cases because wage negotiations at that level are essentially contracts of adhesion; the power differential prevents there from being actual negotiations and a meeting of the minds. Essentially, minimum wage laws have the effect of unionization for the group of people who are too large to effectively act in concert.

The main effect of minimum wage laws is to offset the ratchet effect I described in post #69; where the owner may be able to use his monopolistic power of employment to force wages down and pocket a temporary windfall, the workers can use their tyranny-of-the-majority to force wages up. In either case, the effect is temporary as increased wages or decreased sales is likely to move towards equilibrium again.

[drkitten]

Couldn't he also raise prices and let his product become a niche market item?

That's a very risky path; the problem is that niche markets, by definition, are small and there's not enough space for all the manufacturers. Most of them will go out of business rather than make that transition.

This seems to be what has happened with new, large kitchen appliances in recent years. The upper middle class buy new washing machines, etc, and the lower income folks buy them used. It seems (I might be wrong) in the 60's, in the era of unions, pensions, etc. that the working class was able to afford a new oven.

Is that really what's happening? Given that Wal*Mart carries washing machines, (and ranges, and dryers, and refrigerators) and it's hard to find a more iconic "lower income folks" store, I think you're reading a class difference where there isn't one.

[kellyb]

Is that really what's happening? Given that Wal*Mart carries washing machines, (and ranges, and dryers, and refrigerators) and it's hard to find a more iconic "lower income folks" store, I think you're reading a class difference where there isn't one.

I think Walmart's kind of an "almost everyone" store. I mean, they also sell $800 Bonzai water slides, which most US parents can't afford.


ETA:
And I'm looking at the Walmart website, and it looks like even the Walmart way out in the burbs sells washers or dryers here in west TN. Might be a regional thing...

[kellyb]

oops

[drkitten]

I think Walmart's kind of an "almost everyone" store. I mean, they also sell $800 Bonzai water slides, which most US parents can't afford.

Kmart, then? (http://www.kmart.com/shc/s/c_10151_10104_Appliances_Washers+%26+Dryers)

[kellyb]

Kmart, then? (http://www.kmart.com/shc/s/c_10151_10104_Appliances_Washers+%26+Dryers)

We only have one Kmart left in my county, and I checked the store availability, and it looks like washers aren't sold in the store there, either. (but you can buy one online and have it shipped to the store for pick-up.)

It doesn't really matter, though. I can't find any data to prove it, but even if I could prove that the market for used large appliances has exploded over the past 20-30 years, it probably has to do with the decline of those items as "status items". I think a shiny new washing machine might have been the girl version of a new car in the 60's. Used washers were also probably pretty scarce for a couple of decades. There's also been some "anti-consumerism" overall cultural shifts in recent decades de-stigmatizing the purchase of used items.