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Strategies & Market Trends : US Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: gpowell who wrote (6)	8/10/2005 5:10:24 PM
From: gpowell	Respond to of 97

Most often the saving required to support new investment occurs well after that investment is made. Thus, a large part of savings comes from the foresight of entrepreneurs in correctly assessing the future demands of consumers. To expand upon this assertion. What this means is that in a complex economic society increases in investment come before the corresponding increase in savings required to make that investment profitable. Specially, as a result of an increase in capital investment (i.e. a delay in the output produced by that capital) the previously expected flow of output is reduced. If that flow is not met by an increase in savings by consumers, then relative prices and the general price level will change and there is no guarantee that the savings required to make the original investment profitable will exist when that output is produced. It should be clear then that not only is the stock of wealth subjective, but also the stock of capital – this means that there is no absolute measure of wealth, capital, savings, or investment. The main point to be taken from this is that economic fluctuations and changes in the price level are endongenous to a growing economy. Contrast this with a condition where the flow of pure and man-made resources is fixed at a constant level, any miscalculation by entrepreneurs will lead, as before, to a shift in relative prices and the price level, but eventually all fluctuations will die out as entrepreneurs will eventually match their schedule of output to the preferences of consumers. Thus through trial, error, and the information derived from changes in prices any complex economy will reach a stationary equilibrium, so long as the flow of wealth is constant (and assuming consumer preferences do not shift substantially between iterations). However, if stationary equilibrium existed no one would spend much time on SI, so we need not concern ourselves with it. I only mention it here because is seems some investors assume implicitly that stationary conditions would exist except for government involvement (either through fiscal expenditure or monetary intervention). Consider this post Message 21547164 Free market interest rates and no creation of money in excess of savings ? Sounds good to me. Your house would still sell for the same amount of money you paid for it in the 70's. If we consider that output, in terms of quality, quantity, and type, are, in the long-run, increasing why would the price of long-lived consumption items such as housing remain the same?

To: gpowell who wrote (6)	8/11/2005 2:55:20 PM
From: gpowell	Read Replies (2) \| Respond to of 97

All goods and services (henceforth the term output will be used) are produced from “pure” resources, such as land and labor. The output derived from pure resources can be augmented through man-made resources, sometimes referred to as “produced means of production”, more commonly known as capital, but more accurately termed non-permanent resources. It is through the growth in capital that the output produced from the pure resources has increased throughout human history and all capital growth (or more correctly per capita growth) is the result of advancing knowledge. Knowledge enables an increase in the yield produced from a given set of currently utilized pure resources, but it also allows previously valueless pure resources to yield valued output (e.g. uranium and oil). If we assume that we live in a closed system, then the amount of pure resources is fixed and thus the main constraint on output growth is the knowledge required to transform the pure resources into valued output. Given that knowledge constraints (i.e. total knowledge increases) are relaxed over time, per capita output consistently increases. What does that imply for relatively prices? Relative prices should change with every new product that comes to market. In other words, in a non-stationary economy, prices should be in constant flux – only products where changes in the marginal rate of substitution vis-à-vis all other goods (including newly emerged products) matches the changes in the opportunity costs of producing that good will remain unchanged. BTW, from time to time this thread will link to posts that exhibit common errors. The intent is not to embarrass anyone, but rather to use the post to illustrate constructs that are bound to lead to errors in portfolio allocation. Consider this post: Message 21544957 The substitution method of computing inflation is one of the dumbest ideas that government bureaucrats could come up with. To assert that the CPI should use fixed weight quantities, guarantees that price shifts due to changing opportunity costs, and relaxing knowledge constraints, will be recorded as inflation – and thus, the CPI will overstate inflation to a higher degree than it does already. Let’s assume for a moment that the CPI is understating inflation – perhaps due to government conspiracy, i.e. to mask monetary inflation. I can see two likely portfolio allocation errors that might result: an allocation towards precious metals and other hard assets (if one believes the financial structure might collapse), and taking on more debt than is prudent, i.e. thinking interest rates are artificially low. The bulk of the evidence suggest the CPI overstates inflation. Some studies suggest an overstatement of about 1% a year, while the most conservative estimate I've seen asserts a 0.34% overstatement. As previously posted this thread will use the trend in unit labor costs as an inflation measure.