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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Clarksterh who wrote (56442)	3/22/2006 12:40:30 AM
From: mishedlo	Read Replies (2) \| Respond to of 110194

I would suggest that you go too far in your search for the perfect inflation figure. Like it or not, if you want a new, cheap 4 wheeled transport mechanism you have to buy a 'car'. Thus, in practice, it is a valid measure consumer inflation to look at the price of the cheapest Ford of 20 years ago and the cheapest Ford currently. A somewhat more tenuous, but still quite reasonable argument can be made about healthcare, computers or even internet access. To attempt to tackle to most tenuous - if you have any kids in high school it is probably pretty apparent that you need the internet to efficiently do homework and 'compete' with the other kids. Clearly this is a long way from black and white, but to compare just commodity prices, which your methodology pretty much forces you to, probably makes significant errors in true cost of living within our society. Clark Finally a reasonable post to respond to. You are mistaken. I certainly am NOT saying the answer is to measure commodity prices. It is a seriously flawed way of measuring the CPI (which is consumer prices). It is a valid way of measuring the PPI (at least on a commodity to commodity basis). Picking a perfect commodity basket is not easy either but far easier than picking a consumer basket. You see, I am not looking for the perfect measure of inflation. It already exists. That measure is called the increase in money supply and credit. (Even that is probaly not perfect per se as there would be some debate as to how to measure even that, but it is a far easier and far more accurate thing to do than attempt to measure the result money supply has on prices). Look carefully at what I have been saying for something like forever. globaleconomicanalysis.blogspot.com globaleconomicanalysis.blogspot.com Here is a snip: Those things were not explained simply because they can not be explained. * Why should inflation be targeted at 2% and not 1% or 3%? * Why should any inflation be targeted at all? * Even if it was for some reason smart to target prices, can prices really be measured it accurately? * What do central banks do to overcome lag effects of monetary tightening and loosening? * Is this just blind faith "we know neutral when we see it"? The problem of course is targeting prices in the first place. Sometimes money flows into houses and stock and bonds instead of goods and services. Sometimes productivity improvements mask inflation. Sometimes falling commodity prices mask inflation. Of course I am talking about "real inflation" as measured by increases in money supply as opposed to hedonically adjusted price inflation as seen through the eyes of central bankers. The last paragraph is exactly what made a fool out of Greenspan. In the mid-to-late 1990's, "real inflation" (a rampant increase in money supply), was masked by productivity improvements, falling oil prices, and falling prices of goods from Asia. Greenspan called it a "productivity miracle". It was a "miracle" indeed. Rampant increases in money supply fueled the 2000 stock market bubble and spawned nonsensical talk about "new paradigms". Then in sheer panic "after the bubble pops" adjustments that he likes to make, Greenspan refused to allow a recession run its course. Instead he slashed interest rates to 1%, fueling the biggest housing bubble the world has ever seen. Here we are three short years later now facing a "new paradigm" in housing, with debt levels far worse at both consumer and governmental levels. When it comes to the CPI I am not as you say looking for a perfect measure. In fact I am saying that it does not exist at all. This debate should be proof enough. Everyone has a different basket and everyone has different measures about quality, and it even seems we have a violent disagreement as to whether or how to compare a stone house with Loewen windows to something with lesser windows, and/or whether or not it makes sense to adjust for quality. If windows matter in a house why do they not matter in a car? If windows do not matter in house, then why should granite, extra bathrooms, a deck, or brick vs vinyl. Obviously quality differences should be measured in houses. Is it logical to ignore the extra glass, copper, rubber, etc etc etc that goes into a car today vs one 45 years ago? Hopefully the obvious answer is no. To do so is asking for free commodities. Should one measure quality (windows, brick, vinyl etc) in a house but not cars? That is in effect what one is doing if they wnat to compare EXACT house resales over time to make sure the comparision is perfect, yet fail to do the same thing for cars. My position all along was that this is hopeless. I think price inflation is 4% (even though our personal price inflation is probably 2% or so per year), some others think it is 10% a year for 5 years, and others think it is negative and some think it is 2% and the FED is right. Is everyone right or is everyone wrong? Is it possible that everyone is both right and wrong? As dumb as that sounds it is possible that everyone is right about their personal inflation but wildly off on what the median and averages are. In this regard I have taken the middle ground actually. I will repeat my position on the CPI: The CPI is understated but not by as much as most people think. That puts me somewhere in the middle. I keep asking people what their basket is and no one has yet told me the makeup of it. I have also have claimed that there is no such thing as the ideal basket. It will always favor some people at other peoples expense. Does that mean we should not try? For SS payments we should try. For that purpose we probably should weight the basket towards the expenses of the average retiree (if there is such a thing), but at least it would not include the cost of baby food or diapers in that basket. As for setting economic policy? I do not think prices are a valid thing to measure. The grand experiment of ignoring the bubble nasdaq boom of the 90's should be proof enough as to the consequences of ignoring asset booms. Now we have another asset boom. This one in houses. How does one measure that? Everyone and I mean everyone has a different view of how much home prices have gone up. Those on variable rate mortgages have seen their payments go up. Now there is an interesing thought. If one's home payment goes up has inflation increased? If so, is the way to combat it to raise interest rates causing payments to rise yet again? Someone on a fixed rate mortage has no such pain. All of these are valid reasons why targeting prices is going to be doomed to failure. I will repeat myself. 1) Quality matters as does the increased components it takes to build the average car or the average house. How to measure quality it is very very problematic however. 2) The solution is not to measure just commodities. The reason I bring up commodities is simply because in general they can be easily compared to 30 years ago. 3) Food and enegy prices can also be measured. 4) Median home price comparisons are not a valid measure of inflation. 5) My position all along was that attempting to measure prices is hopeless because of all the factor mentioned above and elsewhere. 6) All of this bickering should do nothing but prove #5. Mish