How do you borrow 1.75 trillion?

[dahduh]

I'm not an economist and maybe I'm being ignorant or naive; but why is it that you don't find various groups building gigantic computer codes modeling the world's economy?

Of course the economy is complex and and there appears to be as many theories as there are economists; but to a degree the same is true of something like the planet's weather and climate. Here at least the underlying physics is known, but there are still many questions surrounding things like pollution albedos and the effects of cosmic rays on cloud seeding: and of course specific features of the planet like continents and land elevations and oceanic currents. Complicated but tractable, and different models built by different groups are regularly compared to one another and actual data to tease out what is important and what is not, and which models work well and which don't.

So: why not the same for economics? Why can't I find lots of economic projections based on hard modeling, rather than just a lot of oh-so-plausible hand-waving?

 

[Skeptic Ginger]

I was just thinking that the thread was missing some about-backwards crackpot analysis . Of course, the reverse is true--allowing deflation to propagate via lending curtailment and destruction of enterprise value and avoidable layoffs etc. is what is immoral. The reason why is that it is contrary to, and negligent of a central bank's mandate which is a publicly enshrined directive set up in the interests of the society. ....

Thus, standing aside and allowing deflation to propagate is a gross dereliction of duty on the part of a monetary authority and fits any definition of immoral.

If they fired the aholes at the top, instead of caving the the nonsensical claim no one else could do the job, instituted reforms that prevented the banks profiting from bad loans and other scams, increased the scrutiny of the millionaire ponzi schemers and other predators, including making the criminal penalties the same as it would be for any repeat offender thief, taxed the richest btards, and gave some of it back to the smaller shareholders who were not in on the insider trading or money grabbing, I might actually agree with you on this one.

...As you know from previous discussions which you were compelled to agree with eventually

I wonder if this is true since I've seen you fantasize that I've been convinced by your arguments even when I've directly said I was not.

 

[Francesca R]

Those may be the 'official' prices counted, but so what?

The prices of capital goods are generally absent from consumer price index baskets because they are capital goods and not consumption goods. They are not part of everyday spending. Stocks and shares and property rights in real estate are not things that anyone consumes.

When one speaks of "price deflation" is usually is taken to mean consumer price deflation. Not household net worth changes (which, of course are negative)

Are we puppets which follow the string holders or can we not look and see the world for ourselves?

It may help to understand what you are looking at, and what a CPI is--and is stated to be--before you judge whether the clarity of your vision is impacted by someone else's "strings" or by your own powers of apprehension.

As for the housing prices not being consumption, sure they are, because it affects all the building materials that go into new homes.

A property right in a house is not consumption. Capital expenditure (improvements, building) is not consumption. Rent or mortgage interest is the value of consumption of "housing services".

 

[Skeptic Ginger]

I'm not an economist and maybe I'm being ignorant or naive; but why is it that you don't find various groups building gigantic computer codes modeling the world's economy?

Of course the economy is complex and and there appears to be as many theories as there are economists; but to a degree the same is true of something like the planet's weather and climate. Here at least the underlying physics is known, but there are still many questions surrounding things like pollution albedos and the effects of cosmic rays on cloud seeding: and of course specific features of the planet like continents and land elevations and oceanic currents. Complicated but tractable, and different models built by different groups are regularly compared to one another and actual data to tease out what is important and what is not, and which models work well and which don't.

So: why not the same for economics? Why can't I find lots of economic projections based on hard modeling, rather than just a lot of oh-so-plausible hand-waving?

My son is currently getting an economics/math degree and being the evidence grounded research person I am, I asked him the same thing. It drives me crazy to hear the right and left political pundits insist like a dogmatic religion they know what is needed. What does the evidence say?

Problem is, the data isn't that easy to collect. By the time one course of action fails or succeeds, the world's economic conditions have changed and it no longer applies. The current global economy differs from the economy of decades past.

I will say though, the evidence is pretty compelling that the NeoCons and those with similar viewpoints are disingenuous. They have no objections to as much military spending as can be accomplished while they call spending on education, health and infrastructure wasteful. Billions in subsidies to the richest corporations in the world are ignored while a progressive tax is whined about.

Bloomberg said, "One percent of the households that file in this city pay something like 50 percent of the taxes. In the city, that's something like 40,000 people," as evidence the rich are taxed enough. Well you can look at those numbers in a different light and see something else. That 1% undoubtedly own vastly more than 50% of the wealth. So do you count heads or count wealth?

From wiki:

The New Yorker who is listed as the richest individual, oil magnate David H. Koch, was worth an estimated $17 billion in October 2007.[38] The poorest New Yorkers, 1.5 million people with incomes below the poverty line, are collectively worth less than Mr. Koch's net worth. Of Forbes Magazine's 400 richest Americans, 72 live in New York City, and they are each worth at least $1 billion.[38] New York City's present mayor, Michael Bloomberg, is himself one of the nation's richest men. After Moscow, New York City has the highest amount of billionaires.

Interesting Bloomberg sees himself among the victims of the supposed tax burden. And here the richest one person has the equivalent wealth of 1.5 million of the poorest. What is that ratio?

 

[Skeptic Ginger]

The prices of capital goods are generally absent from consumer price index baskets because they are capital goods and not consumption goods. They are not part of everyday spending. Stocks and shares and property rights in real estate are not things that anyone consumes.

When one speaks of "price deflation" is usually is taken to mean consumer price deflation. Not household net worth changes (which, of course are negative)

It may help to understand what you are looking at, and what a CPI is--and is stated to be--before you judge whether the clarity of your vision is impacted by someone else's "strings" or by your own powers of apprehension.

A property right in a house is not consumption. Capital expenditure (improvements, building) is not consumption. Rent or mortgage interest is the value of consumption of "housing services".

I'm not arguing with you about the 'official' values nor why one counts this or that. The discussion was about the money supply and the value of the dollars when more or less were pumped into the system. You can count the value of those dollars in many different ways.

If the things people consume cost less, that is deflation, if they cost more that is inflation. The CPI is a nice little number for calculating the buying power of a certain component of M1. But it by no means reflects the value of the entire money supply. And that was what the discussion was about.

 

[Skeptic Ginger]

Skeptigirl I think that's better in a new thread . . .

So if the answer to how do you borrow 1.75 trillion is, you don't, you print it, you'd rather not discuss it here? Interesting.

 

[Francesca R]

I'm not arguing with you about the 'official' values nor why one counts this or that.

I, however, am arguing that when you say "Deflation has already occurred." and are including housing and equity prices to draw this conclusion, you are going against definitions of consumer price deflation, and it would be erroneous to think otherwise, or that houses were consumption goods. It would be unhelpful if your comments were left uncorrected for that.

The discussion was about the money supply and the value of the dollars when more or less were pumped into the system. You can count the value of those dollars in many different ways.

If the things people consume cost less, that is deflation, if they cost more that is inflation. The CPI is a nice little number for calculating the buying power of a certain component of M1. But it by no means reflects the value of the entire money supply. And that was what the discussion was about.

I have no idea what you mean with any of this. Maybe someone else does.

 

[Ivor the Engineer]

The BBC Radio 4 programme 'More or Less' had an interesting article on the various methods used to calculate inflation and why it is nonsensical to claim it has any one particular value.

http://news.bbc.co.uk/2/hi/programmes/more_or_less/7358928.stm

(Click 'Listen to programme' to hear the article)

Are we being hoodwinked into thinking that inflation is lower than it really is?

British newspapers and supermarkets are starting to publish their own inflation rate checkers and this has got us thinking.

The government's headline measure of inflation, the Consumer Price Index, is 2.5% but Asda supermarket has estimated that for their average shopper the cost of living is rising at over 5%.

More Or Less presenter Tim Harford points out that actually Asda has produced an estimate of how much cash a typical family has left after buying essentials, not a rate of inflation.

So the Office for National Statistics is not falling over itself to copy the Asda methodology.

Tim chats to economic statistician Michael Ward who points out that the measure of inflation that the prime minister tends to quote - the Consumer Price Index - is much lower than the traditional measure, the Retail Price Index.

Paul Dales at Capital Economics tells us that, in reality, it is an impossible mission to find an exact rate of inflation.

So Tim went to the pub instead, with the consolation that you can measure your own personal inflation rate by clicking on the Office of National Statistics website or the Capital Economics website.

 

[Puppycow]

http://www.forecasts.org/inflation.htm

According to this forecast the CPI is projected to dip to about -3.3% in the middle of 2009. (yes, there are other measures of inflation, but this is a pretty standard one).

 

[Francesca R]

why it is nonsensical to claim it has any one particular value.

It doesn't have "one value". But central banks generally have one target index. If they had several then their job is generally believed to be rendered less accountable.

Tim chats to economic statistician Michael Ward who points out that the measure of inflation that the prime minister tends to quote - the Consumer Price Index - is much lower than the traditional measure, the Retail Price Index.

One reason why the PM refers to the CPI is that the CPI is the index that the Bank of England's inflation target is calculated from, since at least five years ago. And it isn't lower any more.

The RPI includes mortgage interest payments and VAT among other things. Those are absolutely valid measures of the cost of living--but they are rendered less useful in an inflation target. The main reason for that is that central bank interest rates have a correlated effect on mortgage rates (so if RPI inflation was too high and the monetary policy committee was inclined to increase the bank rate . . . the action of increasing the bank rate would likely lead to mortage rate hikes from home lenders which would actually cause RPI inflation to rise more). Also, indirect taxes are controlled by government fiscal policy and not responsive to interest rate changes, hence inflation targets generally use a measure of inflation that excludes sales tax. Nonetheless, the UK government agency publishes both measures.

The CPI is additionally comparable with the primary inflation measurement used in other countries, facilitating comparison of inflation across borders, such as in this table

The government's headline measure of inflation, the Consumer Price Index, is 2.5% but Asda supermarket has estimated that for their average shopper the cost of living is rising at over 5%.

More Or Less presenter Tim Harford points out that actually Asda has produced an estimate of how much cash a typical family has left after buying essentials, not a rate of inflation.

So the Office for National Statistics is not falling over itself to copy the Asda methodology.

This is slightly entertaining--it almost paints ASDA (a profit-seeking corporation, owned by WAL*MART which is the worlds largest retailer) as the guardian of public interest and the government as the bad guy. I content that ASDA is unlikely to want to generate publicity saying: "We are hiking our prices more than 5% a year". Maybe this is simply alternative calculations and no nefarious agenda.

The National Stats Office is very transparent about how it calculates inflation. Conspiracy theories might be fun to advance but like most woo, they don't amount to a row of beans.

 

[Ivor the Engineer]

Listen to the article in the programme, Francesca.

No conspriacy theories are put forward, just facts about why the rate of inflation you experience may be very different to the rate of inflation I experience.

Where it gets really complicated is if the prices of particular goods or services increase, we may switch our spending to other things, the prices of which may be changing in a very different way to those things we previously spent our money on.

 

[Francesca R]

I can't right now (this is from a mobile phone). I wouldn't have thought a BBC programme would advance a conspiracy beyond the general truism that the government will want to market its policies as a success, which Jane and Joe Rational are pretty aware of.

Does it mention what I did above regarding the difference between RPI and CPI and why we have both and why the CPI is officially used for policy setting?

 

[Ivor the Engineer]

<snip>

Does it mention what I did above regarding the difference between RPI and CPI and why we have both and why the CPI is officially used for policy setting?

The programme explains about harmonising the method of calculating inflation with other European countries, but does not explain the rationale for central banks using CPI rather than RPI.

 

[Francesca R]

OK. Even when the BOE had an RPI target (and ever since the monetary policy committee was established as independent in 1997) it was "RPIX" which was also known as "underlying" inflation and specifically excluded VAT and mortgage interest payments. There was an "RPIY" measure too but I forget what it was for and what else it left out. Maybe all indirect taxes.

"Core" (blimey) inflation misses out food and energy prices, and is important (food and energy is also often deemed to be beyond the scope of central bank policy to influence--hence represents "noise" to their actions even though it is again certainly part of the cost of living). But policy targets usually include food and energy prices.

Then there is "RPI ex all prices" which is always well-behaved.

 

[Tippit]

Here's a short but in depth review of Zarlenga's views:
Review of Stephen Zarlenga's The Lost Science of Money. He ends with the following criticism:

The proposals here would be vastly preferable to the existing system. In fact it is essentially the same as the Monetary Reform Act, endorsed by none other than Milton Friedman. Friedman was also in favor of limiting money supply growth by statute, such as a flat 3% rate of monetary inflation.

I'm skeptical of this scheme because the temptation to issue fiat money is too powerful, especially in the contexts of war or economic calamity. Despite our so-called democracy I'm also skeptical of how accountable government is to me, personally. My choices of presidential candidates being limited to John McCain and Barack Obama, and major flaws in plurality voting and the two-party system are evidence of this limited accountability. I'm convinced that the same people would, more or less, decide where the money is spent. The distinction between politicians and bankers is lost on me.

It is for these reasons that I reject all fiat money and fractional reserve regimes, and advocate the reforms of people like Edwin Vieira. While enacting the Monetary Reform Act would raise awareness of and create transparency for the issue, shifting the monopoly of money creation from bankers to politicians is no solution at all.

 

[oggiesnr]

The Government used CPI because it excluded things that it thought would push up the index (mortagage costs, council tax etc).

The basket of goods used for the indexes is spurious and does not reflect normal spending (when did you last buy a guitar or a widescreen TV and how often?).

Spending patterns are odd and vary a huge amount depending on local circumstances. People appear not to spending on big ticket items (cars, house improvements, white goods) and the latter is epecially prone to th "it'll be cheaper tomorrow" argument. Conversely if you have something different or keenly priced to sell then you may be OK but you won't show up in the CPI, RPI or even the retail statistics. 'Tis a strange, strange world but at least my bank manager can take comfort from the fact that I'm 50% up on sales (and profit) from last year!

Steve

 

[bobrayner]

The Government used CPI because it excluded things that it thought would push up the index (mortagage costs, council tax etc).

Even if the government were so devious, it's strange that RPI continues to be published. Plus, RPI is currently lower than CPI. It's pretty poor as conspiracy theories go.

National Statistics - which is independent from the government - gives different reasons:
http://www.statistics.gov.uk/elmr/07_08/downloads/ELMR_Jul08_Pike.pdf

Even the BBC has a good summary:
http://news.bbc.co.uk/1/hi/business/6356475.stm

The basket of goods used for the indexes is spurious and does not reflect normal spending (when did you last buy a guitar or a widescreen TV and how often?).

The basket of goods & services is based on a well-established survey of what people actually buy. Needless to say, it's impractical to have a basket of goods that actually contains everything bought by every member of the population, so they have to make some careful choices to "boil it down", so to speak. It doesn't assume that everybody buys a guitar and a flatscreen TV every month; I hope you weren't trying to imply that but it's difficult to interpret your post otherwise. Would you like to learn more about how CPI and RPI are measured?

If you seriously believe guitar prices significantly distort inflation metrics, I'd love to see your calculation.

Spending patterns are odd and vary a huge amount depending on local circumstances. People appear not to spending on big ticket items (cars, house improvements, white goods) and the latter is epecially prone to th "it'll be cheaper tomorrow" argument.

These items are in the CPI, with a reasonable weighting. Non-big-0ticket items are also in the CPI, with a reasonable weighting. What, exactly, are you complaining about?

Conversely if you have something different or keenly priced to sell then you may be OK but you won't show up in the CPI, RPI or even the retail statistics.

Really? If you have anything popular to sell, chances are it is already in the statistics; or if it's relatively unusual, a good proxy will probably be in there instead (ie. some other purchase whose prices tend to behave similarly).

Of course, if you have any specific examples of purchases, please say; and we can investigate and see whether or not CPI is fair.

 

[lomiller]

I'm not an economist and maybe I'm being ignorant or naive; but why is it that you don't find various groups building gigantic computer codes modeling the world's economy?

Of course the economy is complex and and there appears to be as many theories as there are economists; but to a degree the same is true of something like the planet's weather and climate. Here at least the underlying physics is known, but there are still many questions surrounding things like pollution albedos and the effects of cosmic rays on cloud seeding: and of course specific features of the planet like continents and land elevations and oceanic currents. Complicated but tractable, and different models built by different groups are regularly compared to one another and actual data to tease out what is important and what is not, and which models work well and which don't.

So: why not the same for economics? Why can't I find lots of economic projections based on hard modeling, rather than just a lot of oh-so-plausible hand-waving?

Physical models like climate build up from well understood unchanging physical principles.

You can’t do this in economics because you can’t model a person, the best you can do is to come up with a statistical profile for how people act based on past actions. This is what’s commonly called a statistical model, because instead of being built from underlying principles, it’s based on a statistical fit to past behaviors. This statistical fit is problematic because you have too many degrees of freedom. You can always come up with a statistical fit to past behavior if you look at enough metrics, even completely random metrics unrelated to the economy. I.E. you can always match the past, so there is no way to know if the model has predictive power.

The other issue is that people’s behavior can change, invalidating the entire model even if it was sound to begin with it could be invalidated as the underlying behavior changed.

 

[kevinquinnyo]

I see, getting the money to circulate is the problem.
Thank you, I knew there was some problem with deflation, just didn´t know it.

Also, I think I said this before, when there's deflation, it makes debt harder to pay off. If you are paying off a 100,000 dollar loan, and the dollar tomorrow becomes worth 10,000 of yesterday's dollars, then that's now the equivalent of paying off a 1 billion dollar loan. (because the debt is a fixed number, your income isn't) If you make 5,000 a month, you would be getting paid 5 cents a month, but still have a 100,000 dollar loan.

So when there's a threat of a deflationary spiral, pay off your debt as fast as you can.

 

[Toke]

Right now I am waiting for the prices to drop enough for me to buy an apartment in Copenhagen cash.