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Strategies & Market Trends : Mish's Global Economic Trend Analysis

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From: regli	9/27/2006 4:01:26 PM
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Real Inflation safehaven.com by Stephen J. Church ... In our paper, "A Recipe for a Depression," we advanced the concept of real inflation. In this paper, we develop a formula for extracting monetarily-induced price change from total price change. We call monetarily-induced price change "real inflation." The popular description of monetary policy may be based on a faulty understanding of inflation. In order to evaluate monetary policy, it is important to understand that inflation is only one of the components of price change. Monetary policy targets price change as expressed by the CPI. It does not target inflation. ... Our expression of inflation identifies that the economics community does not appear to have adjusted its evaluation of monetary policy to be consistent with the mathematical transformation of the CPI. Economists are comparing real interest rates prior to 1998 with real interest rates after 1998 as if they are the same mathematical expression. This comparison is mathematically incorrect! Finally, our mathematical expression of inflation allows a re-interpretation of the monetary history. It shows that the Federal Reserve has historically been much more aggressive than previously interpreted. It shows that Chairman Volcker was the most conservative Chairman. It also shows that Chairman Greenspan was at least as aggressive during the last 7 years as Chairman Burns ever was during the 1970s. It appears that real inflation has been close to 8% per year during the last few years. Based on our calculations, real inflation only exceeded this level during the 1970s. Real interest rates based on real inflation have been lower during the last 7 years than at any other time during the last 50 years. This observation helps to explain why debt levels have risen as high and as fast as they have during the last few years. Since real interest rates based on this measure have not been lower, we would expect faster debt expansion than at any other time. Real inflation could provide an alternative analytical avenue for economists. It is easily converted into reliable statistics useful in developing robust economic analyses. In every way that we could determine, our statistic appears equal to or better than the CPI as an expression of inflation. ...

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