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The Source of Killer Inflation: Services

The Source of Killer Inflation: Services

The soaring cost of services is driven by a number of factors.

What will the future bring: fire (inflation) or ice (deflation)? The short answer: both, but in very different doses. Goods that are tradeable and exposed to technologically driven commodification will decline in price (deflation) while untradeableservices that are difficult to commoditize will increase in price (inflation), generating a self-reinforcing feedback loop of wage-price inflation.

Gordon Long and I discuss these trends in our latest program The Supply-Demand Services Problem (YouTube).

The big difference between goods that drop in price (TVs, etc.) and services that are exploding higher (healthcare, childcare, elderly care, higher education, local taxes and fees, etc.) is the relative size each occupies in the household budget: a new TV is a couple hundred bucks and a once-every-few-years purchase, while all the services cost thousands of dollars annually– or even tens of thousands of dollars.

A new TV or electronic gew-gaw is signal noise in the household budget while services consume the most of what’s left after paying for housing and transport.

A 10% decline in the cost of a new TV is $25, while a 10% increase in annual tuition and college fees is $2,500. Add in thousands more for childcare, elderly care, local taxes and fees and healthcare, and the deflationary impact of tradeable goods is trivial compared to the increases in untradeable services.

Not all goods are declining in sticker price. vehicles are rising sharply in price, a fact that’s erased by hedonic adjustments in official inflation (the new car is supposedly so much better than the previous model that the “price” actually declines-heh).

Then there’s the inexorable shrinkage of quantity and quality. The package that once held 16 ounces now contains 13.4 ounces, and the appliance that once lasted for years now lasts a few months as the quality of components is reduced. 

 …click on the above link to read the rest of the article…

Will Your Retirement Efforts Achieve Escape Velocity?

Will Your Retirement Efforts Achieve Escape Velocity?

Sadly, most of us will outlive our savings

The concept of ‘retirement’, of enjoying decades of work-free leisure in your golden years, is a relatively new construct. It’s only been around for a few generations.

In fact, the current version of the relaxed, golfing/RV-touring/country club retirement lifestyle only came into being in the post-WW2 boom era — as Social Security, corporate & government pensions, cheap and plentiful energy, and extended lifespans made it possible for the masses.

But increasingly, it looks like the dream of retiring is fast falling out of reach for many of today’s Baby Boomers. Most will outlive their savings (if they have any at all).

And the retirement prospects look even worse for Generations X, the Millennials, and Gen Z.

A Bad Squeeze

While the US enjoyed a wave of unprecedented prosperity throughout the 20th century, the data clearly shows that halcyon era is ending.

Real wages (i.e., nominal $ earned divided by the inflation rate) for the average American worker have hardly budged since the mid-1960s:

Yet the cost of living has changed dramatically over the same time period. Note how the rate of increase in the Consumer Price Index (CPI) started accelerating in the late ’60s and never looked back:

Squeezed between stagnant wages and a rising living costs, perhaps it should be little surprise that so many Americans are having difficulty finding anything left over to save for retirement.

We’ve written about this extensively in our past reports, such as Let’s Stop Fooling Ourselves: Americans Can’t Afford The Future and The Great Retirement Con. But as a way of driving the point home, here are some quick sobering stats from the National Institute On Retirement Security:

  • The median retirement account balance among all working US adults is $0. This is true even for the cohort closest to retirement age, those 55-64 years old.

…click on the above link to read the rest of the article…

How Gibson’s paradox has been buried

How Gibson’s paradox has been buried

Until the 1970s, all recorded history showed that bond yields were tied to the general price level, not the rate of price inflation as commonly believed. However, since then, the statistics say this is no longer the case, and bond yields are increasingly influenced by the rate of price inflation. This article explains why this has happened, and why it is important today.

This paper is a follow-up on my white paper of October 2015.[i] In that paper I explained why, based on over two-hundred years of statistics, long-term interest rates correlated with the general price level, and not with the rate of inflation. I now take the analysis further, explaining why the paradox appears to no longer apply.

The two charts which illustrate the pre-seventies position are Chart 1 and Chart 2 reproduced below.

paradox 1

The charts take the yield on the UK Government’s undated Consolidated Loan Stock (Consols) as proxy for the long-term interest rate, and the price index and its rate of change (the rate of price inflation) as recorded in the UK. The reasons for using UK statistics are that Consols and the loan stocks that were originally consolidated into it are the longest running price series on any form of term debt, and during these years Britain emerged to be the world’s leading commercial nation. Furthermore, for the bulk of the period covered by Gibson’s paradox, London was the world’s financial centre, and sterling the reserve basis for the majority of non-independent foreign currencies.

The evidence from the charts is clear. Gibson’s paradox showed that the general price level correlated with long-term interest rates, which equate to the borrowing costs faced by entrepreneurial businessmen. 

…click on the above link to read the rest of the article…

The Idea That the Fed Is ‘Independent’ Is Absurd

President Donald Trump sparked controversy — as is his wont — when he recently told CNBC that he was “not thrilled” with the Federal Reserve’s announced hikes in short-term interest rates, which he claimed would hinder the economic expansion for which his administration had worked so hard. “I’m letting them [the Fed] do what they feel is best,” he added, but this assurance was not enough to prevent journalists and policy experts from pronouncing Trump’s remarks as unprecedented interference with the central bank’s independence.

It may be unusual for a president to openly voice such criticism, but it wouldn’t be the first time one has pressured the Federal Reserve for short-term political gain. In 1965, President Lyndon Johnson considered firing then-Fed Chairman William McChesney Martin, but upon learning this would probably be illegal, he opted instead to dress down the recalcitrant central bank chief at his Texas ranch. By Martin’s later account, a heated argument erupted that resulted in the president shoving him against a wall. According to financial journalist Sebastian Mallaby, as LBJ pushed Martin around the room, he yelled, “Boys are dying in Vietnam, and Bill Martin doesn’t care.”

Better known is President Richard Nixon’s tape-recorded collaboration with Fed Chairman Arthur Burns, Martin’s replacement, who maintained an easy-money policy to stimulate the economy before the 1972 election, which contributed to Tricky Dick’s landslide victory and fueled price inflation for the rest of the decade. In terms of the resulting capital destruction and economic dislocations, this episode is one of modern U.S. history’s greatest object lessons about the risks of executive power reaching beyond its constitutional authority.

…click on the above link to read the rest of the article…

Misleading with Numbers: It’s Worse When the Government Does It

Misleading with Numbers: It’s Worse When the Government Does It

numbers.PNG

Major international comparisons have long concluded that Americans’ ability to effectively utilize mathematics is inadequate. Such conclusions divide students, parents, teachers and administrators into camps that share little more than blaming others for the problems. However, it is unclear whether all the finger-pointing indicates a real desire to overcome our innumeracy. In fact, we systematically misuse numbers to distort reality because we want to fool ourselves, making our ineptitude no surprise.

One of today’s most obvious misleading number games is grade inflation. Teachers have accommodated student desires for higher grades to the point that the median GPA of graduating college seniors has risen around a full grade point since it was about 2.2 in 1965. At some schools, almost everyone now gets As and Bs, and who is valedictorian has become a question of how many “perfect” students will share that title. Students have also pushed to allow A+ grades that count more.

High schools have gone even further. Many make advanced placement or community college courses worth an extra grade point. This has created a competition among students to take as many such GPA-padding courses as possible, especially ones they discover are actually easier than the corresponding high school courses. These and other policies (e.g., statewide comparisons crafted to show that, as in Lake Woebegone, all children are above average) have, however, thrown away much of the useful information such evaluations once contained.

Price inflation is another form of ego-building by manipulating comparison numbers. For most of us, if we want to brag that, say, we make more than our parents did, enough years of inflation can make it so. On the other hand, older Americans use it to “prove” how much better things used to be (e.g., “I remember when bread was a nickel” or “I only paid $22,000 for my house”).

…click on the above link to read the rest of the article…

Visualizing Real Inflation – A Decade Of Grocery Prices For 30 Common Items

Over the span of 2000-2016, the amount of money spent on food by the average American household increased from $5,158 to $7,203, which is a 39.6% increase in spending.

Despite this, as Visual Capitalist’s Jeff Desjardins notes, for most of the U.S. population, food actually makes up a decreasing portion of their household spending mix because of rising incomes over time. Just 13.1% of income was spent on food by the average household in 2016, making it a less important cost than both housing and transportation.

That said, fluctuations in food prices can still make a major impact on the population. For lower income households, food makes up a much higher percentage of incomes at 32.6% – and how individual foods change in price can make a big difference at the dinner table.

Only prices of three items fell: chicken breasts (-6.4%), whole milk (-7.4%), and eggs (-14.9%).

However, the average price increase for all items was 22%, buoyed especially by meats like bacon (58.2%), ground beef (44.6%), top round steak (40.6%), frozen turkey (38.3%) and sirloin steak (35.2%).

THE FUTURE OF FOOD

As we’ve previously noted, technology is being applied to agriculture and food in really interesting ways – and the future of food could be very different than what we see today.

How will the grocery prices of everyday staples be affected by growth in automated vertical farms, aquaponics, in vitro meats, and artificial animal products?

With shifting consumer preferences towards more local and sustainable products, it will be interesting to revisit this data in the coming years.

How Uncle Sam Inflates Away Your Life

How Uncle Sam Inflates Away Your Life

“Inflation is always and everywhere a monetary phenomenon,” once remarked economist and Nobel Prize recipient Milton Friedman.  He likely meant that inflation is the more rapid increase in the supply of money relative to the output of goods and services which money is traded for.

As more and more money is issued relative to the output of goods and services in an economy, the money’s watered down and loses value.  By this account, price inflation is not in itself rising prices.  Rather, it’s the loss of purchasing power resulting from an inflating money supply.

Indeed, Friedman offered a shrewd insight.  However, he also accompanied it with an opportunist mindset.  Friedman saw promise in the phenomenon of monetary inflation.  Moreover, he saw it as a means to improve human productivity and economic growth.

You see, a stable money supply was not good enough for Friedman.  He advocated for moderate levels of monetary growth, and inflation, to perpetually stimulate the economy.  By hardwiring consumers with the expectation of higher prices, policy makers could compel a relentless consumer demand.

This desire to harness and control the inflation phenomenon has infected practically every government economist’s brain since the early 1970s.  Over the decades they’ve somehow come to a consensus that 2 percent price inflation is the idyllic rate for provoking economic nirvana.  The Fed even tinkers with its federal funds rate for the purpose of targeting this magic 2 percent rate of price inflation.

Shadow Stats

On Wednesday the Bureau of Labor Statistics (BLS) published its October Consumer Price Index (CPI) report.  According to the government number crunchers, consumer prices are increasing at an annual rate of 2 percent.  Of course, anyone who lives and works in the real world knows prices are rising much faster.

…click on the above link to read the rest of the article…

Austrian Monetary Theory vs. Federal Reserve Inflation Targeting

One of the leading policy guideposts for central banks and many monetary policy proponents nowadays is the idea of “inflation targeting.” Several major central banks around the world, including the Federal Reserve in the United States, have set a goal of two percent price inflation. The problem is, what central bankers are targeting is a phantom that does not exist.

Perhaps we can best approach an understanding of this through an appreciation of some of the writings by members of the Austrian School of Economics on matters of monetary theory and policy. Carl Menger (1840-1921), the founder of the Austrian School in the 1870s, had explained in his Principles of Economics (1871) and his monograph on “Money” (1892), that money is not a creation of the State.

Money Emerges from Markets, Not the State

A widely used and generally accepted medium of exchange emerged “spontaneously” – that is, without intentional government plan or design – out of the interactions of multitudes of people over a long period of time, as they attempted to successfully consummate potentially mutually advantageous exchanges. For example, Sam has product “A” and Bob has product “B”. Sam would be happy to trade some amount of his product “A” for some quantity of Bob’s product “B”. But Bob, on the other hand, does not want any of Sam’s “A”, due to either having no use for it or already having enough of “A” for his own purposes.

…click on the above link to read the rest of the article…

Helicopter Money “Not on the Table,” ECB Swears Furiously

Helicopter Money “Not on the Table,” ECB Swears Furiously

But it’s already here!

It has finally sunk in: what everyone really wants is helicopter money. Central banks, instead of transferring trillions of newly created dollars or euros or whatever to the banks should just hand them directly to the people, like dropping bank notes from a helicopter, so that these people can grab them and spend them all in one fell swoop, thereby creating sudden artificial demand, driving up inflation, and solving all economic problems of our times.

Instead of creating asset price inflation, as QE had done, it would create consumer price inflation. Wages would still remain stuck, and workers would soon not be able to buy the normal things at these inflated prices, but that wouldn’t matter because now they’re getting helicopter money, and companies could increase their sales, margins, and profits simply by raising prices without having to sell a single extra item.

Among economists, it’s the hottest idea of the century. But the ECB will have none of it. Or so it said today, on two different occasions, by two different officials, curiously using the same words.

“It’s not on the table,” ECB Executive Board member Peter Praet told a bunch of economists today who’d been pushing for an answer at a conference organized by the Center for Financial Studies in Frankfurt.

He hadn’t come to discuss helicopter money. His speech was all about rationalizing monetary policy measures that have become absurd to everyone except to those who’ve been drinking the Kool-Aid.

He was explaining how these measures — the negative interest rates, the more-than-free money where lenders pay borrowers, the purchases of bonds, including securities backed by Italian non-performing corporate debt, the whole schmear — would “ward off the risk of a too prolonged period of low inflation,” although low inflation benefits every worker in the Eurozone.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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