Believe those who are seeking the truth. Doubt those who find it. Andre Gide


Friday, April 29, 2011

Ron Paul on Bernanke's Press Conference

CNBC interview with Congressman Ron Paul yesterday (April 28, 2011); click here.

The interviewer begins by quoting a statement Paul made after Bernanke's news conference:
Bernanke continues to ignore his culpability for the inflation all Americans suffer due to the Fed's relentless monetary expansion.
Let's take a look at U.S. inflation since 2008. Here it is.


The average annualized rate of inflation over this time period is a dizzying 1.6%. Note the significant deflation experienced during the economic crisis. Ah, good times. The rate of return on your money was really high back then! I can recall clearly how savers were rejoicing...praising the Fed for the deflation.

PCE inflation measures the nominal price of a basket of consumer goods. You know, the stuff people buy to maintain their material living standards. This price index was actually falling in 2010. For better or worse, the Fed interprets "price stability" as 2% inflation. This explains QE2.

PCE inflation has recently jumped up to near 5%. This jump is attributable primarily to food and energy prices. Despite what some people like to believe, the Fed does not control food and energy prices (at least, not separately from other prices). Most economists attribute these relative price changes to geopolitical events and other temporary global shocks affecting the world supply and demand for food and energy.

It seems that what Congressman Paul means by inflation (judging by this interview) is "commodity price inflation." I think he must have in mind the price of commodities like gold. Why is the price of gold rising? Because people are dumping the USD and flocking to a "currency" they can trust.

Well, alright. There is probably something to this notion of currency substitution. If the Fed grows the money supply, its value must fall. The price of gold must rise. In the interview above, the Congressman claims that even grade schoolers can understand this (suggesting that Bernanke cannot).

Recent money supply and gold price dynamics seem to support Congressman Paul's hypothesis, which he states as some sort of obvious universal truth. But if this is so, then what explains the following data?


The graph above plots the price of gold and the (base) money supply over the 20 year period September 1980 to March 2001. As you can see, the Fed created a lot of money "out of thin air" over this 20 year period. The base money supply increased by over 300%.

Imagine that you are 50 years old in September 1980. Imagine that a trusted friend of yours--oh, let's say your doctor--convinces you to put all your savings into gold. The reason he offers is that the Fed is pursuing a policy of "relentless money expansion." He warns you that the money supply is set to grow by 300% over the next 20 years. So you listen to him.

You buy gold at $673 per ounce. And then you wait. You wait until you turn 70. And then you go to withdraw your savings. You discover that the gold price in March 2001 is $263 per ounce. That's a whopping rate of return of...wait for it... -60% over 20 years. That's a minus sixty percent.

All you kids understand now? Viva la gold standard! Class dismissed.

125 comments:

  1. http://www.indexmundi.com/commodities/?commodity=food-price-index&months=240

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  2. Anon: If you have a point to make, make it. A plot which shows an increase in the relative price of food is not very informative.

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  3. I'm sure a few employees, especially those in international demand, can go to their employers and ask to be paid in gold doubloons. Because the economy runs on gold, don't you know.

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  4. It would be helpful if Jesse would make his point as well. I've no idea what he is talking about.

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  5. I think Ron Paul is operating on the Rothbardian notion of inflation, which is any increase in the money supply. It's not a sensible position by any standard.

    What makes more sense is to define monetary inflation as an increase of money supply in excess of what's required to keep up with money demand increases - or decreases.

    If people decreased their desire to purchase, and thus were holding more money, the money production is inflationary and it will eventually show up in consumer prices. However the money must actually enter the economy somehow. Based on this table: http://www.federalreserve.gov/releases/h41/hist/h41hist1.pdf
    banks are continuing to hold dollars in their reserves. The money isn't entering the economy. Why should we expect any price inflation? It's nonsense - no new money circulating = no inflation.

    Nevertheless, there is the separate and also important issue of the exceptionally low fed funds rate. But that's a separate topic and I won't get into it here.

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  6. Rothbard is right.

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  7. I believe you will get a much better correlation when comparing the change in the gold price to real s.t. interest rates. These are, of course, determined by the Fed.

    Why should the gold price correlate with real interest rates? Pay someone nothing (or worse, penalize them) to save in your currency, and they will save in another. Why is this such a difficult concept to accept? Probably because economists are convinced savers will almost exclusively re-allocate to higher-yielding assets denominated in the same currency. Why they make this assumption is another question.

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  8. Great post. Also, the price of oil was $28.75 in 1984 and $14.87 in 1988. In 1985, Reagan devalued the dollar at the Plaza Accord. The dollar went from 128.4370 in March 1985 to 91.2507 in March 1988. According to Ron Paul's analysis, the dollar got stronger between 84 and 88 since the price of oil fell by 50%.

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  9. Another point, Ron Paul in an interview recently made reference to a quote by the CEO of WalMart who recently claimed he sees evidence of inflation since his customers are running out of money sooner each month. Most would realize that running out of money means inflation is less likely not more likely to happen. The CEO of WalMart has an obvious reason to desire a strong dollar policy. Still Ron Paul relies on the CEO's statement to inform the view that hyperinflation is just around the corner.

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  10. David, you know very well that the surplus money created by the Fed goes into differing things, creating not only general price inflation but changes in relative prices and bubbles (i.e. money is not super-neutral). In the 70s and today that money seems to be flowing into gold and other commodities (and yes, bank reserves). In the times you showed in the graph, it was clearly going into other things. In the 90s, tech stocks; in the 2000s, real estate, etc.

    Prof J is right: "What makes more sense is to define monetary inflation as an increase of money supply in excess of what's required to keep up with money demand increases - or decreases."

    monetary inflation=money surplus=quantity of money supplied is greater than quantity of money demanded at the given purchasing power of money
    monetary deflation=money shortage=quantity of money supplied is less than quantity of money demanded at a given purchasing power of money

    So what sort of institutions are better than centralized government monopolies at supplying quantities of a good tend toward quantity demanded?

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  11. Eitan, you're arguing that we're currently experiencing a gold bubble similar to the dot com bubble and the housing bubble. Ron Paul is not claiming that there is a gold bubble. He claims that gold has a stable value and a rise in the price of gold represents a decline in the dollar. He has claimed that oil would be $5 a barrel had we not gotten off Bretton Woods. He is not seeing a bubble, he is seeing a crash.

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  12. I didn't claim it's bubble, nor did Ron Paul claim it's a steady rise. Either might be true, it's hard to tell. The only thing we both claim is that it has to do with surplus money created by the Fed, which David and Bernanke seem to deny (or at least not answer directly).

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  13. "If the Fed grows the money supply, its value must fall."

    Not true. If the Fed issues another $2 Trillion in exchange for $2 Trillion of bonds, then the Fed is just like a firm that issues new stock in exchange for equal-valued new assets. The stock price won't change, and neither will the price of a dollar. If the new money is not wanted by consumers, the Law of Reflux comes into play, and the extra money simply refluxes to the Fed in exchange for the bonds.

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  14. Eitan:

    Prof J is right: "What makes more sense is to define monetary inflation as an increase of money supply in excess of what's required to keep up with money demand increases - or decreases."

    One is free to define inflation in this manner. The definition, however, relies on theoretical constructs. How do you propose to measure this notion of inflation in the data?

    The only thing we both claim is that it has to do with surplus money created by the Fed, which David and Bernanke seem to deny (or at least not answer directly).

    I'm not sure I understand. If the price of gold goes up, it is because of the surplus money created by the Fed. If the price of gold goes down by 60% even though the money supply increases 300%, well...that's because there was no surplus money created?

    David, you know very well that the surplus money created by the Fed goes into differing things, creating not only general price inflation but changes in relative prices and bubbles.

    Eitan, no I do not know this very well. Please provide me the evidence on which this belief of yours rests on.

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  15. David,

    Since I done said it, I might as well say how I figure on measuring it.

    Money supply has, as you know, many definitions. I like MZM, as calculated by the St. Louis Fed, but even better is just all money that can be used to immediately discharge any debt - cash, traveler's checks, checking accounts. I mapped this a while ago (can't find the graph now, naturally) but it is in between M1 and M2.

    Money demand is difficult to measure. I don't think I've seen a paper that isn't about estimating it from a model, so there is always the Roll critique: are you measuring money demand, or is your model introducing some artifact into the data?

    In the paper on inflation I wrote (which I still need to send to a journal... bah, too busy) I used the change in M1 and the change in MZM as measures of money supply changes and the change in nominal GDP as money demand changes. The problem, of course, is the underlying assumption that velocity was constant. Normally that might be okay, but during recessions that's probably not correct.

    Long and short - that's my starting point, with plenty of distance left to go between the theory and the measurable reality.

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  16. Prof J: Sure. There is nothing controversial in what you just said. It is, in fact, entirely conventional. I'm not sure what this has to do with the point of my post, however.

    I got raked over the coals by Ron Paul supporters for not understanding the impact of inflation (money growth) on savings. And now I present this evidence for them to ponder. The silence is deafening.

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  17. Oh, well, I rather thought I was speaking in support of your position, because Ron Paul (and his supporters) has an incorrect view on even the definition of inflation. The second bit was just a technical discussion. I'm pleased that it's conventional - indicates I'm not off my rocker.

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  18. "One is free to define inflation in this manner."

    I like to define inflation as a species of tomato that is indigenous to Costa Rica.

    This bit of making up definitions is fun.

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  19. David:

    "How do you propose to measure this notion of inflation in the data?"

    Again Prof J nails it. Money supply is the easy one to measure. In a free banking system, each note-issuing bank would measure the demand for its notes by the amount of reserves it has in excess of what it needs to clear its debts to customers redeeming for specie and other banks redeeming its notes that their customers deposited with them. The profit motive would then provide the incentive for banks to supply the right quantity of notes. In our system of central banking I don't think there is an accurate way to measure demand. That's why the Fed's task is an impossible one. It doesn't receive the signals it needs to determine demand for its product. Even if it could fairly accurately determine it based on some model, it would lack the proper incentive to act on it as well.

    "If the price of gold goes down by 60% even though the money supply increases 300%, well...that's because there was no surplus money created?"

    Well, perhaps, if it would have gone down by more than 60% otherwise. But no, what I am saying is that when there is a surplus of money, it doesn't always (only) cause a general rise in prices. If the surplus were given to each buyer and seller in the market in proportion to how much they buy and sell, then we would see something like a general rise in prices. But obviously, this isn't how the Fed spends its newly printed notes. Not only that, but those people who do get the surplus money first might spend them on different things at different times according to whatever predilections and prevailing interests they have. So in the 70s and now a lot of surplus money went into bidding up commodity prices. After the Fed started (relative) tightening under Volker, the commodity bubble burst and gold prices went into an extended bear market that your graph shows.

    This is all about non-neutrality of money which I seem to remember you acknowledging. I'm sorry if I misunderstood you.

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  20. "Money supply is the easy one to measure. In a free banking system ..."

    How is money supply defined in a monetary system that has been used in the last 140 years by any country with GDP greater than Iceland?

    "The profit motive would then provide the incentive for banks to supply the right quantity of notes."

    "Right" for what purpose?

    "But no, what I am saying is that when there is a surplus of money, it doesn't always (only) cause a general rise in prices."

    The great thing about your argument is that it is so flexible. Sometimes money causes inflation, sometimes it doesn't. Sometimes it changes relative prices -- maybe by provoking rebellion in North Africa? -- sometimes not. We can always decide later what monetary policy did. Super. I like it.

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  21. There is so much other stuff going in the US economy that is of concern other than inflation. Oh well.

    I guess it is time to thank the American people for making life sweet for net oil exporters. Thank you America!

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  22. David said... "A plot which shows an increase in the relative price of food is not very informative."

    David, if that's the case, then your chart showing the relative price of gold is "not very informative".

    For that matter, neither is your chart showing the relative price of a basket of consumer goods.

    In other words, your debating tack seems to be... "I can show you charts showing changes in relative value to prove my point but you can't show me charts showing changes in relative value that disprove my point." You should define the argument that would change your mind, otherwise this argument is a bit silly.

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  23. Eitan: The comment by anonymous at 4:07PM mirrors my own thoughts concerning your posts. And I'm not sure that appealing to Prof J should help your argument, judging by what he says above.

    JP Koning: Think, man. Listen to the RP interview. Listen to what he says. I am not claiming that my plots are informative. T am claiming that they are inconsistent with RP's claims and that he would be embarrassed if he had to stand in front of a group of students and explain it to them.

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  24. "How is money supply defined in a monetary system that has been used in the last 140 years by any country with GDP greater than Iceland?"

    Money supply is the nominal quantity of money. Like Prof J talked about there's a couple different ones depending on whether your counting base money, checking accounts, and in free banking, bank-notes. This is quite independent of GDP.

    ""Right" for what purpose?"
    I shouldn't have used such a normative word, sorry. I meant right for the purpose of matching the supply and demand for money.

    Like it or not, monetary inflation has more effects on the economy than just price inflation. I'm sorry if this makes my argument seem "flexible".

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  25. I figure the price of gold is mostly just a sort of perpetual Ponzi scheme. If people think the price is going up, they buy gold and the price goes up so they buy some more. Until the whole thing gets going the other way.

    What keeps the thing from going completely off the rails like dot com stocks or worthless mortgage-based securities is the fact that gold does have some real uses and real-world supply and demand have some effect.

    But I figure the price at some date in the future has a large component of complete randomness and looking for deep meaning in those fluctuations is a waste of time.

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  26. There's a difference between your graph and now David. Your graph shows the boom period. Now the money printing is during a bust period. You guys are trying to stem the tide and flatten it out when the markets need the correction still.

    During your graph everyone was chasing amazing tech investments and raking in huge profits. Why should they worry about dollar debasement when they can easily offset it with investment gains?

    See a lot of that going on right now? No? Where else can they stick their money and at least break even? Yup...

    Ron Paul started buying his gold at $35 an ounce. How's that investment doing?

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  27. Eitan:

    Like it or not, monetary inflation has more effects on the economy than just price inflation. I'm sorry if this makes my argument seem "flexible".

    It's not something we should like or dislike. I would just like to know what evidence you have to support this belief. Relative prices change all the time. Is there compelling evidence which suggests that these relative prices changes are signficant when inflation is running at 2%? What about higher inflation rates? Deflations? This is the second time I ask you for evidence. It will also be the last time I ask.

    Kyle: If you bought into IBM, Apple, etc., you'd be doing alright too. Maybe you'd like to look at this: http://andolfatto.blogspot.com/2011/02/is-gold-good-store-of-value.html

    But this is beside the point. What about my example of the 50 year old purchasing gold at its peak? And watching the money supply triple over the next 20 years? And then looking at his negative 60 percent return on gold...over 20 years. What's wrong, Kyle? Is this too much to face up to? I am reporting facts. And they contradict Paul's rash assertions.

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  28. There were significant relative price changes in the early 2000s in the real estate market. There are significant relative price changes in commodities now. Consumer price inflation was low and steady during these times, wasn't it?

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  29. Eitan:

    That's it?

    Surely you know that asset price boom/bust dynamics have been a feature of the economic landscape well before the invention of central banking?

    Btw, such dynamics can arise theoretically for entirely fundamental reasons; see: http://economics.huji.ac.il/facultye/zeira/jme99.pdf

    As I said, one would expect relative prices to change all the time in a market (now global) economy. I would expect this to happen even in a non-monetary economy.

    For you to persuade me of your view (and believe me, I remain open to persuasion), you will have to show me some evidence that links the pace of relative price change with inflation.

    I think that this might be possible, especially for episodes of hyperinflation. But, of course, even if this is demonstrated, you will have to convince me that the same thing is quantitatively important at 2-3% inflation. What is the evidence that weds you to this view of yours?

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  30. "Think man..."

    And I thought Canadians were supposed to be nice ;)

    I actually spend a fair amount of time in a non-zombie state. Note that I'm not a Ron Paulian nor am I trying to defend him nor gold as an investment. We can all agree that inflation is important and needs to be understood.

    "Relative prices change all the time. Is there compelling evidence which suggests that these relative prices changes are significant when inflation is running at 2%?"

    The 2% rate you're referring to I presume is a basket of consumer goods. This index made up of a number of "relative prices" (apples, gas, books) the sum of which is just one larger relative price. Apart from your consumer basket, there are all sorts of "relative prices" that can serve as destinations for a dollar's worth of spending including raw materials, producer goods, wholesale goods, equities, bonds, other currencies, bank deposits, debentures, preferreds, futures, gold, paintings, antiques etc.

    That's why I question the above statement of your's. It reads to me something like: "Is there compelling evidence which suggests that these relative prices changes are significant when another relative price has changed by 2%."

    You're relative price of choice, the CPI, is only one of many, as is Ron Paul's gold chart. To determine if inflation is happening (or isn't), we can't just cherry pick a few relative price charts. If the CPI relative price is flat but the prices of all other relative prices - raw materials, producer goods, wholesale goods, equities, futures, other currencies etc - are up, chances are you've experienced inflation, a decline in the purchasing power of a unit of money.

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  31. JP: Ha ha...sorry. :)

    That's why I question the above statement of your's. It reads to me something like: "Is there compelling evidence which suggests that these relative prices changes are significant when another relative price has changed by 2%."

    The statement that PCE inflation is 2% does not , in itself, imply anything about relative price changes. But you are right...it is conceivable, for example, that the price of capital goods is rising only by (say) 1%. Then we have a change in the relative price of consumption goods vis-a-via new capital goods. The question here would be whether this relative price change is related in any way to monetary policy.

    If the CPI relative price is flat but the prices of all other relative prices - raw materials, producer goods, wholesale goods, equities, futures, other currencies etc - are up, chances are you've experienced inflation, a decline in the purchasing power of a unit of money.

    JP, whenever a price goes up, the purchasing power of the numeraire has declined in relative terms. What if the price of all these objects are rising relative to real wages? Would you call this inflation?

    In any case, this discussion is peripheral to the point I am making here (in this post). Seems like people do not want to focus on the point. I wonder why. Well, not really. I suppose it makes sense for Ron Paul supporters to ignore inconvenient and embarrassing bits of evidence that contradict their preconceived notions.

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  32. " We can all agree that inflation is important and needs to be understood. "

    Yes we can agree but its also true that inflation is different for different people, hence the tension. Those that have money and are in control of it tend to see money primarily in its "store of value" role. They become obsessed with strong dollars.

    Those that dont have money tend to value it as a "medium of exchange" and will support policies which give them more income.

    Since debt contracts dont change during deflationary times and salaries do the medium of exchange people feel inflation when many official numbers say deflation.

    The store of value people resist policies which reverse deflation because they see more buying opportunities in deflationary times and feel inflation when all the assets they want to purchase are expensive.

    Both sides are correct within the paradigms they are operating. The truth is the rich and the not so rich have different uses for money and conflicting goals, especially in recessions.

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  33. "If the CPI relative price is flat but the prices of all other relative prices - raw materials, producer goods, wholesale goods, equities, futures, other currencies etc - are up, chances are you've experienced inflation, a decline in the purchasing power of a unit of money."

    JP Koning, do you know what a "relative" price is? Because the way you use the term makes me think that you don't.

    "The purchasing power" of money is not well defined except in terms of a basket of goods/services.

    Inflation is a sustained rise in the general price level of goods and services.

    Monetary policy does affect asset prices but the systematic effects are far, far smaller than those usually claimed by the Austrians.

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  34. "Seems like people do not want to focus on the point. I wonder why."

    I agree with much of what you have to say about Ron Paul, so I guess that's why I went off topic. It's not very much fun to agree ;) The more interesting aspects of your points were, to me at least, the use of relative prices in your argumentation.

    "'The purchasing power' of money is not well defined except in terms of a basket of goods/services."

    It's impossible to well-define it. Figuring out the direction and degree of a currency's price change is more art than science. Watching as many markets as possible probably helps - confine yourself to the CPI and you risk getting caught with your pants down.

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  35. JP: Yeah, I agree...no fun to agree...lol.

    There is a strong case to be made for focussing on consumer prices. It is the level of consumption that measures material living standards. But policymakers can and do look at a variety of price level indices.

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  36. "PCE inflation measures the nominal price of a basket of consumer goods. You know, the stuff people buy to maintain their material living standards."

    that's a little disingenuous. PCE is not a 'cost of living' index, it's an inflation index, and it presumably includes methodological features such as hedonic pricing and chain weighting to account for substitute goods. so it does NOT measure a basket of goods that "people buy to maintain their material living standards".

    i realize one can argue over the merits of hedonic pricing and all that, but it's just not how consumers view the world, so it's reasonable that there is a disconnect between the consumer's view of "inflation" and the fed's.

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  37. Anon: And so, let me hear the speech you would give as a Fed official.

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  38. "i realize one can argue over the merits of hedonic pricing and all that, but it's just not how consumers view the world, so it's reasonable that there is a disconnect between the consumer's view of "inflation" and the fed's."

    There are well known psychological biases in the way people view the world. Why do you always get in the slowest moving line at the grocery store? Why do prices always seem to rise faster than the CPI (or PCE or whatever)?

    The answers are that you don't always pick the slowest moving line but it seems to happen a lot because of how our minds work. Similarly, we always notice price increases but tend to dismiss price decreases, so people tend to overestimate inflation in their own minds.

    What is a central bank supposed to do about that?

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  39. "What is a central bank supposed to do about that?"

    how about creating a price index of "frequently purchased" items, as the european commission did, then letting the public compare it to CPI/PCE/GDP deflator/whatevs?

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  40. "how about creating a price index of "frequently purchased" items, as the european commission did, then letting the public compare it to CPI/PCE/GDP deflator/whatevs?"

    Great idea. How about if the price index weights items by the frequency and cost of the items? We could give higher weights to items to the extent that consumers spend money on them.

    We could update the weights periodically, as products change, according to current consumer expenditure patterns.

    Wait, that describes the CPI. Nevermind.

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  41. the frequently purchased price index is different from the european commission's HICP index: http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/HICP_-_Frequent_out-of-pocket_purchases.

    but don't let the facts get in the way of polluting the thread with a sarcastic comment.

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  42. Anonymous:

    As your link explains, your preferred index is an attempt to deal with the inflation perceptions of many consumers. There is no economic theory that would guide a central bank to make use of such an index, though there may be some psychological theory that does so.

    Do I understand your position correctly? You seem to be saying, to hell with actual inflation, it's the perception that matters. And as a central banker, you would focus on targeting the perceived (rather than actual) inflation rate.

    I do not think you will find very much support for this idea.

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  43. You misunderstood me, so let me clarify.

    What I am saying is that if the Fed wants to explain to the public why the public's perception of inflation is higher than the Fed's measure of inflation (something that is empirically demonstrable), one simple way to do that would be to construct a price index of frequently purchased items.

    It is not my "preferred index" of inflation nor what I suggest the Fed should target, it's a PR tool. That's all.

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  44. "But policymakers can and do look at a variety of price level indices."

    Yes, policy making is one perspective. There is also the investment-allocation perspective. By "getting caught with your pants down", I was referring to an inflation-wary speculator who only looks at the CPI.

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  45. Anon @ 7:10AM Oh, I see. Well, it's an interesting idea. Thanks for pointing it out to me; I will look into it.

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  46. David,

    I understand your problems with Ron Paul’s arguments, and he has made some bogus claims. I admit this and I am a supporter of his. That said, I think you really missed the mark with this post.

    When you discussed gold vs. money supply, you chose a very specific time frame, 1980 (gold top) and 2000 (gold bottom). How about the dollar vs. gold from 1970-2010 or 1913-2011? But you chose those dates to lets use them.

    I think you really missed the mark with the post because you ignored interest rates. The interest on 10 year Treasuries climbed to over 15% in 1980 and moved slowly down from there.
    http://research.stlouisfed.org/fred2/series/DGS10?cid=115
    That interest rate provides a huge incentive to save in the form of Treasuries. People who own gold (I am one) view it as a form of cash savings. At any point in time I keep 10-30% of my assets in cash. My favorite form of cash at the moment is gold. But make no mistake, if the Fed raised rates to 1980 levels, I would sell all my gold and transfer my savings to Treasuries. However, as long as real interest rates a negative, I will continue to hold my savings in gold.

    If inflation picks up and interest rates remain low, I expect to see many more people choosing to save in gold until real interest rates rise.

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  47. "But this is beside the point. What about my example of the 50 year old purchasing gold at its peak? And watching the money supply triple over the next 20 years? And then looking at his negative 60 percent return on gold...over 20 years. What's wrong, Kyle? Is this too much to face up to? I am reporting facts. And they contradict Paul's rash assertions."

    This is equal to "goldbugs" previous questioning of you.

    "and what about the 50 year old who chooses to save his dollars in a regular savings account? What about his negative 96% return over 97 years? What's wrong, David? Is this too much to face up to? I am reporting facts. And they contradict your assertions."

    You responded by asking "who saves in dollars?!", basically saying who'd be that stupid. Well, David, which 50 year old would be stupid enough to buy gold and lose 60% over 20 years? Tit for tat, sir.

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  48. "...what about the 50 year old who chooses to save his dollars in a regular savings account?"

    Every savings account that I have ever had pays interest. Checking accounts often don't pay interest; only idiots would choose to save in a checking account. They would be throwing money away -- no matter what the rate of inflation -- as they would always lose out on the interest.

    The analogy between buying gold and saving in a checking account is not useful because David never recommended saving in an interest-free account. In contrast, there are people who incorrectly believe that gold has magical properties as a store of value.

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  49. Edward:

    At first I thought your criticisms were completely off-base. But on reflection, there may be something to them. Let me first explain why you are off base.

    First off, I have described gold prices in relation to other asset prices for other time periods here: http://andolfatto.blogspot.com/2011/02/is-gold-good-store-of-value.html

    Second, yes I did ignore interest rates. I ignored everything else, in fact, apart from money supply growth. I did so because Ron Paul ignores all these other factors too. I am just trying to show that the simple relationships Paul keeps harping on are not so simple in reality.

    Third, I picked this up from a commentator on my post (via Economist's View):

    It should be pointed out that starting at September 1980 is in no way unfair, either, and that Ron Paul has actually been advocating the same position since that time. It was in 1981, at the beginning of the Reagan Administration, that Ron Paul along with Jesse Helms was successful in getting a U.S. Gold Commission established to study the issue. And in 1982, Ron Paul and Lewis Lehrman authored "The Case For Gold" their "Minority Report of the U.S. Gold Commission", which was published by the Cato Institute.

    These are the reasons I think you're off base in your criticism of this post.

    On the other hand, I agree with your assessment of the effect of tighter monetary policy on gold price dynamics subsequent to their peak. And I agree that one might want to hold gold (and other assets) as a hedge against future inflation. I'm just not sure what this has to do with the the particular point I was trying to emphasize in this short post.

    ReplyDelete
  50. Kyle Davidson: Do you ever take a moment to reflect on your thoughts before writing them? You should try it sometime.

    Just what "assertions" do you believe I have made in this post that are contradicted by your observations? Please be explicit. I am a simple man.

    ReplyDelete
  51. Hi David,

    Fair enough. When Ron Paul does interviews he harps on one simple talking point, the money supply. But in his books he does take the time to explain that it is not that simple. He discussing interest rates, misallocation of resources, etc.

    One other point, Paul's goal is not to "End the Fed," it is to End the Fed's monopoly. His actual policy is to have Congress remove all sales and capital gains taxes from precious metals so Americans can use them for tax free savings and as an alternate medium of exchange.

    Do you see a big problem with that objective?

    ReplyDelete
  52. One more quick point on your post about gold as a store of value. You compared gold to stocks. Even gold bugs such as myself know that in general, best investments are good companies that pay dividends.

    Gold is form of cash, so it would be better to compare it to interest paid on savings accounts or 10 year Treasuries. 1970-1980, gold was better than Treasuries. 1980-2000, Treauries were better than gold. 2000-2011, gold better. 1970-2011, gold was better again.

    ReplyDelete
  53. Edward:

    I have read End the Fed. He makes some good points. But mostly, I agree with Steve Williamson's review of it (see his blog).

    As for your question, consider what I said in my Out of Thin Air post:

    So, please, enough of this "out of thin air!" stuff. It's tiresome for those who know better, and distracting for those who do not. Let's divert attention to more substantive issues.

    For example, the Fed has a legislated monopoly over the supply of small-denomination paper. Is this a good idea? What if we keep the Fed as is and allow free-entry into the business of money creation? If an unfettered private money system works well enough, it might drive Fed notes out of circulation. On the other hand, perhaps the demand for Fed paper will remain. Government paper (in the form of US Treasuries) drove out private money (AAA tranches of MBS) in the repo market in the past financial crisis. Now, isn't that interesting?

    ReplyDelete
  54. Edward, the reason that people hold bonds/bills instead of all stocks is that they are concerned about the volatility of their portfolio's value.

    Gold is a very volatile investment so you should adjust for this volatility in comparing gold returns to bond/bill returns. On the other hand, gold does well during crises, which is a point in its favor.

    On balance, Eugene Fama and Ken French do not think that gold is an appropriate investment for a portfolio. http://www.dimensional.com/famafrench/2010/04/qa-does-gold-belong-in-my-portfolio.html

    ReplyDelete
  55. Excellent post. First time reader, like your stuff.

    "I am currently work..." This is from your brief bio. It is a little too brief, grammatically speaking!

    ReplyDelete
  56. Did I see something about holding gold as an inflation hedge? Say it ain't so!

    Gold, no matter it's merits, is not an investment asset.

    In the long run, nothing beats equity securities.

    ReplyDelete
  57. Proj J,

    I agree that good companies are the best investment, but people still hold cash savings. Right now, I think gold is a safer form of savings than dollars.

    If real interest rates rise, at that point dollars might be a better form of savings.

    What are your thoughts?

    ReplyDelete
  58. Edward,

    I'll tell you exactly what I'm doing. I maintain a sufficient cash cushion to guard against idiosyncratic volatility in my cash flows (sudden and frequent visits to the vet, like what just happened). All of my investments are in equities, predominantly foreign companies. I hold very few U.S. securities because I think prices are relatively too high right now.

    Gold has experienced a strong price run, and probably has a little juice left in it. It always has a price run in times of uncertainty. I do not recommend it as a long-run addition to a portfolio, because its real returns are -0.2%/year over the last 150 or so years.

    I don't think gold is necessarily safer, because it has a much greater possibility of sharp price drops than dollars. There is an argument the gold is less likely to drop in value in the near future. Market timing, though, is a mug's game.

    Let me know if anything is unclear.

    ReplyDelete
  59. Edward,

    P.S. Just looked at your profile - I see you are a Marine. That's very cool; I thank you for your service to the country. If you ever look at my blog, my co-blogger is a Marine (I'm not; I'm Canadian).

    Best,
    J

    ReplyDelete
  60. @Anon 8:11 -

    My bank is offering a savings interest rate of .10%. Anybody that doesn't have 100k to park somewhere is getting similar nothing returns. Why would anybody save in this environment at all? Thus, the artificially low interest rates creates malinvestment. People have to rush their money out into riskier and risker investments, trying to stay even or a bit ahead of inflaton. It seems fairly straight forward to me. Maybe I'm a simpleton.

    David -
    I'm making no assertions, this is your blog. I only pointed out that you basically make the same point as commenters did in previous posts, only in reverse. You replied to them with condescension. You failed to answer how the example of a person saving in dollars is different from the man losing 60% in 20 years buying gold. You also cherry picked the timing of your graph. Volker sent interest rates sky high in the 80's, and the 90's included the tech bubble. Of course people aren't buying gold at that time. Gold is not an investment; It's a store of wealth.

    Ron Paul is also speaking to the average person. He is a statesman, and not an economics professor or an economist. It's his job to wake people up to th ideas of individual liberty. He feels the Fed harms that. If his ideas were so marginal and false, how do you explain their popularity? Populism?

    I don't think of you as a simple man; You're a PHD economist working for the Fed. I've never taken advanced Econ courses, but I have done reading on my own of Rothbard, Mises, and Hazlitt. For that reason, I am having fun coming here and reading your thoughts. If you just want to be snarky and be a jerk, I'll find better reading to fill my time.

    Thanks.

    ReplyDelete
  61. David - Please check the memory hole again. Your site has issues with commenting, it seems. Maybe try changing it over to asking for approval for each one instead of the spam filter you seem to have on. Or just let it go free for all style.

    ReplyDelete
  62. Kyle:

    You are not reading what I am saying. I did not claim that you were making assertions. I am asking you to identify the assertions you claim I am making.

    Yes, I cherry picked the sample period. There is nothing wrong with this, given the purpose of my post. And it is a 20 year interval. The money supply expanded by over 300%. Gold prices returned -60%. Surely, this is something that the "average" person should be made aware of? Does this not suggest that things are a little more complicated than the way RP likes to sell things to the "average" person?

    Not sure what to do about the spam filter. I have checked the settings. I will ask around. Sorry for the inconvenience.

    ReplyDelete
  63. David and Proj J. and any others who want to respond,

    Here is a legal/economic question for you. Let's say the Fed's monopoly on paper money is ended and capital gains taxes on precious metals are abolished. Many banks start issuing their own paper and some choose to back it with physical gold or silver.

    Should precious metals banks be required by law to keep 100% reserves of on demand deposits?

    By this I mean that banks would only be able to loan out funds that have been put into CDs/time deposits. Any thoughts?

    ReplyDelete
  64. David -

    I made no statement that you're making assertions. You're comparison was just very familiar to those others made, which you didn't seem to think had much worth. That's all.

    The "average" person should be aware that gold is not a straight line to retirement. It's gone way up in the past few years, yes, but it is not an investment. They should equally know that inflation harms them. Regardless that direct taxation and deficit spending harms them more drastically, it should be known.

    Things are always complicated. This is exactly why all the equations and graphs in the world will never efficiently allocate resources.

    ReplyDelete
  65. Edward:

    I am not a lawyer, but I even wonder whether the current legal environment or corporate structure even allows banks to issue liabilities that are backed by specific assets.

    I wonder because I know that if a large corporations wants to deposit, say, $100 million into a bank, the bank is not permitted to earmark specific collateral (it may violate its existing debt convenants). Gary Gorton tells me this is one main reason why repo (shadow banking) became so popular.

    In any case, suppose they can issue paper notes backed by gold. I can think of no rationale for why one would want to impose reserve requirements. Just because a note is not backed by gold, does not mean it is not backed by some other asset (like somebody's home). Notes, and other liabilities, are ultimately backed by reputation.

    ReplyDelete
  66. Kyle said: "My bank is offering a savings interest rate of .10%. Anybody that doesn't have 100k to park somewhere is getting similar nothing returns. ... Maybe I'm a simpleton."

    Kyle, you should use a sophisticated financial instrument called "google" to find a better place to put your savings. Here are a bunch of places that offer about 1% with very low or no minimums.

    http://www.money-rates.com/savings.htm

    ReplyDelete
  67. Edward,

    Given the Scottish experience in fractional reserve banking, I would think a 100% reserve requirement would be unnecessary. Based on work by George Selgin and Larry White, it appears that Scottish banks banked note issues with about 2% gold reserves.

    I align myself with David's comments, and suggest a step further: people would have an interest in lending to banks that hold sound assets, so the due diligence would be an important constraint on banks. This could go a long way in reducing the proclivity of banks to purchase difficult-to-value or opaque assets.

    ReplyDelete
  68. Prof J:

    Agree with everything you said, except for the very last sentence!

    Banks are in the business of transforming illiquid (opaque) assets into liquid assets.

    If illiquid assets were liquid to begin with, we would not need banks; Arrow-Debreu securities markets would work fine.

    So why would one want to reduce the proclivity of banks to engage in the business of banking (liquidity creation)? It's their job!

    ReplyDelete
  69. Kyle:

    I made no statement that you're making assertions.

    I was referring to this, on your post dated May 03, 2011 @ 9:14PM:

    "and what about the 50 year old who chooses to save his dollars in a regular savings account? What about his negative 96% return over 97 years? What's wrong, David? Is this too much to face up to? I am reporting facts. And they contradict your assertions."

    I see now that you may have been quoting someone else. Nevertheless, you appear to agree, since you would not otherwise have posted it. In any case, there you have it. If you want the last word, I'll let you have it.

    ReplyDelete
  70. David,

    I'm going to agree with you and quibble at the same time.

    First quibble: valuing opaque assets and making a financing decision is the job of an intermediary, not just banks.

    Second: while opacity and liquidity are positively correlated, they are not the same thing.

    No markets are "liquid" in a binary sense. All securities are characterized by illiquidity to a greater or lesser degree, except cash and very short-term Treasury securities.

    Now, what I had in mind with the last sentence is that if banks go ahead and decide to take a highly risky asset position now, the only cost of capital effect is through the equity financing or long-term debt, which are relatively small positions as compared to the depositors' position. If depositors have an incentive to monitor (which they do not have now) banks may (operative word may) differentiate further in terms of taste for risk.

    I was definitely glib on my point, and still don't flesh it out fully. If I continue to be vague, let me know and I'll expand further.

    ReplyDelete
  71. Prof J:

    On your first quibble. Yes, it is the job of all intermediaries to value opaque assets. But only banks transform these assets into liquid liabilities (e.g., demand deposit liabilities). The state-contingent claims issued by insurance companies, for example, do not circulate.

    Your second quibble. I think you meant that illiquidity and opacity are not the same thing.

    OK, thanks for clearing up your last sentence. I reacted the way I did because I have been giving a lot of thought to these ideas lately.

    ReplyDelete
  72. @Anon 12:03

    "Kyle, you should use a sophisticated financial instrument called "google" to find a better place to put your savings. Here are a bunch of places that offer about 1% with very low or no minimums."

    1% eh? That enough to break even year over year against inflation? ACTUAL INFLATION?

    http://www.shadowstats.com/alternate_data/inflation-charts

    David -

    That quote was mostly yours, I changed a few words so as to give the goldbug side of it. I was trying to show my position that what you're saying has just as little worth as what they said to you, and which caused you to write the first Ron Paul rant in the first place.

    Anyway, I'll keep checking back occasionally. I'd enjoy a post explaining your thoughts on aggregate demand and whether or not QE is a proper policy right now.

    ReplyDelete
  73. Kyle:

    I am sorry, but I simply do not understand what point you were trying to make with that quote.

    In any case, my view on QE2 is that it is mostly innocuous. A case could be made that it did serve to reinforce the credibility of the Fed's 2% inflation target.

    My view on aggregate demand can be found here:
    http://andolfatto.blogspot.com/2010/12/deficient-demand-deflated-balloon.html

    ReplyDelete
  74. David,

    In this order: right. Right. No worries.

    ReplyDelete
  75. David:

    Why did you start the chart in 1980 and end it in 2000?

    That's really cherry pricking, isn't it and the only person I would expect that from is someone as intellectually dishonest as Paul Krugman.

    There is no guarantee that since gold has been demonetized after Nixon broke the link, people will flock to it when the money supply rises. They could also go into other assets, like real estate, stocks, other etc. What did they do during that period?

    Oh yea they went up.

    Please, stop being so silly.


    j

    ReplyDelete
  76. Anon:

    Let me try to explain it to you.

    Ron Paul likes to claim that THE reason we are seeing gold prices (and other commodities) rise is because of the Fed's "relentless" monetary expansion. If it is really as simple as this, then his simple-minded idea must apply to other time periods as well. Don't you think so?

    You call it cherry picking when I pick a 20 year sample period when gold prices fell while the Fed expanded the base money supply by 300%.

    Ron Paul chooses to ignore that 20 year correlation. What do you call that?

    ReplyDelete
  77. "Ron Paul chooses to ignore that 20 year correlation. What do you call that?"

    A buying opportunity ;)

    Do you believe Ron thinks other commodities don't rise for the same reason? Gold is just his example of choice. It seems to be his choice because of its history as a medium of exchange. It seems to have stood the test of time, compared to other mediums.

    When people have a chance to ride a bubble and make huge returns, they will. When they realize there is no bubble to ride they look to protect what they have at the moment. It bounces and falls in relation to their opportunities at the moment. Even if the dollar is getting debased, if they can make big returns, they will. Gold is only a holder of value.

    ReplyDelete
  78. "If it is really as simple as this, then his simple-minded idea must apply to other time periods as well. Don't you think so?"

    Yes it should, but there is no guarantee that the money supply increase will be felt in gold, stocks or real estate. That's my point.

    You can't predict which asset class will see people diving into.

    Gold wasn't the hot gal in that period , stocks and real estate certainly were though.

    j

    ReplyDelete
  79. Monetary expansions comes first.. then credit expansion and finally inflation. Always.

    The problem you seem to have is that you cannot believe inflation can exist unless it shows up in the CPI. That's basically the nonsense type of definition that came out in the 70's.

    However inflation has and always will be a increase in the general price level (note , not just goods and services) as a result of a material increase in the money supply.

    To imply that the money supply and inflation are not cause and effect is astonishing. It's almost like some modern day economists think the earth is flat.

    J

    ReplyDelete
  80. Anonymous:

    I see you are becoming braver; by revealing your initial. Well done.

    You can't predict which asset class will see people diving into.

    This statement reveals a possible source of your confusion. You do not know how to distinguish between relative price changes and an overall increase in the price-level (you pick your index).

    Now, you might retort that inflation causes (unpredictable) relative price changes. Sometimes gold goes up and oil goes down. Sometimes its the other way around.

    But, of course, one would expect these types of relative price changes even in a non-monetary economy. What is the evidence you bring to bear on this issue None. Just bald assertions.

    Monetary expansions comes first.. then credit expansion and finally inflation. Always.

    You are probably right. Show me the data you use to convince yourself of this. I will use it as teaching material (I am serious).

    There are likely exceptions to your observation. I wonder, for example, whether one saw credit expansion in Zimbabwe (proably no banking sector to speak of).

    The other thing you have to keep in mind is the role of the USD as the world's reserve currency, and UST as a worldwide store of value. The demand for these objects spiked during the recession (flight to quality) and the worldwide demand remains high (since otherwise, inflation would surely be skyrocketing).

    ReplyDelete
  81. "Yes it should, but there is no guarantee that the money supply increase will be felt in gold, stocks or real estate. That's my point....You can't predict which asset class will see people diving into."

    As I've pointed out before, this is the strong point of your theory. If gold rises, it is due to money supply increases; if house prices rise, it is due to money supply increases; if stocks rise, money again; bonds? money, of course.

    What if none of these happen? You aren't looking hard enough. It is always money doing something that we don't like. We just have to decide later what money did.

    That is a beautiful theory. More faith-based than the virgin birth but beautiful.

    ReplyDelete
  82. No David, you doofus , it isn't based on faith, it's based on fact. The fact that if we print more Greenbacks we have monetary expansion/credit expansion/inflation and one can't predict which prices or set of prices will rise. It's nothing to do with a change in relative prices.

    I know that's hard for you to understand because you're an academic economist and like all academic economists you live in an ivory tower of stupidity.


    You accuse me of being being selective in a way, yet you're the one who started this nonsense by choosing a 20 year history of gold cherry picked style.

    Let me ask you a pointed question.

    Are you actually trying to peddle the theory that demand supply curves don't slope downward, because if you are, which seems to be the case, you should not call yourself an economist.


    J

    ReplyDelete
  83. Instead of being selective on the period you've charted and the asset class (gold) and call it victory, do the honest thing. Widen both the selection of the asset class and bring the chart forward to the present.

    The best proxy would be the stock market (S&P) that contains every asset imaginable.


    That would be the best thing to do instead of playing games and attempting a poor man's version of Krugamn and his thorough dishonesty.

    J

    ReplyDelete
  84. Here.. even worked it out for you so thank me later.

    Since 1980 the S&P has earned a compound rate of 8.5%.

    The money supply according to your own chart has grown at a compound rate of 6.5%.

    And what do we see, we see a real rate of around 2% over the 30 year period.

    We can therefore safely say that the inflation rate as defined by professor J is around 6% of GDP over the long term.

    J

    ReplyDelete
  85. J:

    With respect to your post 7:57PM, I believe you meant to address it to the anonymous poster at 1:13PM.

    I cannot help but notice that you seem to be avoiding something. You stated:

    Monetary expansions comes first.. then credit expansion and finally inflation. Always.

    I replied:

    You are probably right. Show me the data you use to convince yourself of this. I will use it as teaching material (I am serious).

    I cannot help but notice that you chose not to provide any data.

    And you accuse me (but not yourself or others) of being selective in the choice of sample period. But of course, you did not read this:

    http://andolfatto.blogspot.com/2011/02/is-gold-good-store-of-value.html

    Since 1980, the return on equity has blown away the return on gold. I guess inflation did that.

    ReplyDelete
  86. "I cannot help but notice that you chose not to provide any data."

    Are you just obtuse?


    I suggested the S&P has been a great proxy for all asset classes and calculated the compound rate of return for the 30 year period using a 2% dividend. I also calculated for you the compound growth rate of the money supply and calcs for 30 years to the present.

    What else do you want me to do? I’m not an academic merely a money hedge fund trader. You have all the info so you tell us.

    "And you accuse me (but not yourself or others) of being selective in the choice of sample period."

    You were selective, whereas I wasn't. You chose one assets class (gold) and ran a chart from 1980 to 2000. I took your starting off period and ran it off to the present. Who is being more selective? Ummm

    “Since 1980, the return on equity has blown away the return on gold. I guess inflation did that. “

    Inflation did some of that as I suggested. That would be obvious to anyone that who understands that demand/supply curves are downward sloping.

    As I said earlier, gold has been a shitty investment since Nixon demonetized gold in the early 70’s. I am unable to always predict investor preferences so I can’t tell you where investors will pile into. The S&P, which holds pretty much all asset classes, is a far better proxy than anything else.

    J

    ReplyDelete
  87. J:

    You, apparently, are having some trouble with basic comprehension. Let me try again. More slowly this time.

    Monetary expansions comes first.. then credit expansion and finally inflation. Always.

    I asked for the data you used to support this claim. And your reply to me was:

    I suggested the S&P has been a great proxy for all asset classes and calculated the compound rate of return for the 30 year period using a 2% dividend. I also calculated for you the compound growth rate of the money supply and calcs for 30 years to the present.

    What else do you want me to do? I’m not an academic merely a money hedge fund trader. You have all the info so you tell us.


    Um, OK. You make an assertion. But you do not have the info. Gotcha. Signing out. Please come back when you have something useful to share.

    ReplyDelete
  88. You're an embarrassment to academia. No kidding.

    I gave you the best proxy to use : the S&P. Did the calcs and you still refuse to concede that I have offered you the information you require.

    You really need to apologize.

    j

    ReplyDelete
  89. Here

    What’s this done?

    Total bank lending

    http://research.stlouisfed.org/fred2/series/TOTBKCR?cid=49

    as MZM has increased


    http://research.stlouisfed.org/fred2/series/MZM?cid=48

    They are almost on the same trajectory


    Then let’s have a look at the trajectory of the S&P since 1980 again

    http://research.stlouisfed.org/fred2/series/MZM?cid=48


    MZM has increased for $906 billion to $9,947.5 billion.. 8% per year compounded (1980)

    All bank lending has increased from $1,119.6 billion to $9,161.1 billion. 7% compound (1980)

    And the S&P, as I said earlier has increased 8.5% compounded over that period (1980)

    You have that magical approx 2% real return which is about the right sort of return you would expect.

    I honestly don’t understand why it’s so hard for you, David? Who are you sucking up to, Krugman? It’s not worth it, as he’s a delusional lunatic.

    ReplyDelete
  90. J, three quick points:

    1) In your 7:57 post, you were responding to my comment on your theory being faith-based (I am the doofus) but you thought that you were responding to David. So you owe David an apology.

    2) One does not calculate real rates of return by subtracting money growth from nominal returns. Money growth has nothing to do with such calculations. So, your magic 2% "real" return comes from nonsensical calculations.

    3) I can't speak for David but I've no idea what your point is, other than to assert some relation between asset prices and money.

    ReplyDelete
  91. Anon

    Stop being a moron.

    The real return is the return after 6.5% inflation.

    You were told earlier that I agree with Prof J's definition of inflation. Consequently my assertion is correct and you're a fool.

    Don't speak for David. The points are quite clear and your attempt to obfuscate doesn't get you far.

    Anon, you really are a moron, so stay out of the discussion and stop poisoning it with bullshit.

    It's bad enough having to deal with david... A krugman mini me.

    ReplyDelete
  92. Anon 7:07, Please stop and shake the sand out of your panties. You are getting a bit peeved.

    Words have meanings. You don't get to redefine inflation in any way that you want. And you are not in agreement with Prof J, who was careful to define inflation as "excess" money creation. That is, it is money creation that leads to rising consumer prices. In other words, Prof J uses approximately the conventional definition as far as I can see.

    If you think that David is a Krugman mini-me, you are even more ignorant of economics than I thought.

    And you still make no understandable point.

    ReplyDelete
  93. Anon@ 8.37

    You're an imbecile. You now dispute my acceptance of Prof J's definition of inflation even though I accepted it in totality without qualifiers.



    Of course David is Krugman's mini-me. He's playing this game like the Krug does. He has a fixed ideological position. Despite acting all open and accepting of other other points of view and possible validity he plays words games and cherry picks data to support his simplistic position in addition to being rude and objectionable.


    You and David are screwed up in the head. If you loons think quantity of money doesn't have any effect on the economic structure you ought to stop pretending you're economists and go clean toilets because you not good for anything else.

    This is truly fucking stupid and deranged behavior. David sticks up a chart on on gold and thinks that tells us any story about monetary economics and what happens with infusions to the money supply over and above what is needed to cater for additional economic growth.

    madness.


    J

    ReplyDelete
  94. J is an incredible moron. I especially love the part where he asserts that "supply/demand curves slope downward." Both of them? At the same time?

    Leave economics to people smarter than you. Like David. Try bocci, it will tax your brain less.

    Dick.

    ReplyDelete
  95. Alright gentlemen...may I suggest that we redirect our attention to discussing substantive arguments, and that we refrain from the name calling? Much appreciated. (Personally, I did find you both to be highly entertaining, but enough is enough.)

    ReplyDelete
  96. David, if I knew what J's point was, I'd be able to evaluate its merits. That is what I originally asked J to clarify.

    It would also be nice if J actually used the definition of inflation that he to embrace. Of course, real returns would still be defined by relative changes in asset prices / the price level, not / the money supply.

    Unfortunately, J seeems to be a bit of a potty mouth... and he still makes no point.

    ReplyDelete
  97. David,

    What kind of trendline did you use for your Monthly PCE Inflation graph? (first graph of the post). Thanks.

    --Josh

    ReplyDelete
  98. Don

    you are unable to follow blog comments and seem to lack the intellectual depth to be able to continue. Your ability to understand what is said to you in clear English is limited so there is no point in going on.

    I have explained three times that I am more than happy using Prof J's definition of inflation because that is the same definition I believe in, yet you persist in saying you don't know what I am using.

    So the argument is pointless.

    J

    ReplyDelete
  99. J,

    What a shame that you have to go so soon. And I was so enjoying our conversation.

    I kept hoping that you'd try to make some coherent argument.

    Have fun at prom.

    ReplyDelete
  100. Hello, this is David's RA. Josh had asked about the type of trend used in the first figure. That would be a simple exponential smoothing trend with a smoothing factor (alpha) equal to 0.10.

    ReplyDelete
  101. Thanks to David's RA.

    ReplyDelete
  102. David wrote: "Anon: And so, let me hear the speech you would give as a Fed official. May 2, 2011 9:08 AM"

    no time to write a speech but here are some talking points:

    1) consumers' perceptions of inflation vs. the Fed's preferred measure of inflation. i commented on this already with the 'frequently purchased...' index

    2) create a diffusion index for CPI or PCE to demonstrate that rises in prices are limited to a relatively narrow subset of the consumption basket (if this is in fact true - i haven't checked)

    3) create indices of tradables and non-tradables inflation (like the RBA does) to show how inflation in tradables is (partially) determined outside of the US and while the Fed could reduce this, the cost viz lost output would be extremely high

    4) emphasize that the fed is targeting inflation over the medium term (as the ECB does)

    5) blame foreigners. there is a coordination problem in central banking, globally, and the fed can't do much about EM Asia running inappropriately loose monpol

    ReplyDelete
  103. David,

    Just started reading your blog as of this evening. I'll admit that I've been going the way of thinking of Ron Paul as a prophet (though admittedly not having spent much time actually researching his message, which I know I should do) and surrendering to the Zeitgeist view of the Fed being the Devil in disguise (conspiracy theories are just so entertaining!). Your blog will hopefully serve as a counterpoint to keep me from embracing those views too quickly without critical thought or analysis, as I already worry I'm guilty of "drinking the kool-aid" so to speak.

    With all that said, I am right in summerizing this blog post to be that in your opinion Ron Paul makes large claims based on over-simplified examples, and that you can do the same (and disprove his theories) by using the 20 year example you've identified?

    If that is correct, then I would say you are successful in showing that Ron Paul is guilty of specious reasoning. But to assume Ron Paul's assertions about monetary expansion are incorrect based on your example would be just as specious, would it not?

    I got the feeling from reading some of more "heated" comments that some of you readers may have thought that you were suggesting Ron Paul's views are wrong simply because you found an example of when his views do not stand up to scrutiny, when in fact you were illustrating the danger of making broad assumptions based on generalities.

    If I misunderstood the point of what you were trying to suggest in regards to Ron Paul, I apologize. Also, I look forward to your responses as I'm sure they will challenge my understanding (and beliefs) of our current economic environment as well as the successes/failures of central banking.

    -B

    PS - I'm a Canadian too, and I'll do my best not to hold it against you that you come from one of the most marijuana-friendly provincies and studied at what is considered a notorious "party school" in Southern Ontario... jokes :)

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  104. Anon @8:19

    With all that said, I am right in summerizing this blog post to be that in your opinion Ron Paul makes large claims based on over-simplified examples, and that you can do the same (and disprove his theories) by using the 20 year example you've identified?

    Correct.

    If that is correct, then I would say you are successful in showing that Ron Paul is guilty of specious reasoning. But to assume Ron Paul's assertions about monetary expansion are incorrect based on your example would be just as specious, would it not?

    I did not mean to say that Ron Paul's assertions are "incorrect" per se. I mean to say that the issues are more complicated than he makes them out to be. He simply picks and chooses data that supports his philosophical predispositions. That's fine; he is a politician, after all. But I think it's my job to alert people to the flaws in his arguments.

    I got the feeling from reading some of more "heated" comments that some of you readers may have thought that you were suggesting Ron Paul's views are wrong simply because you found an example of when his views do not stand up to scrutiny, when in fact you were illustrating the danger of making broad assumptions based on generalities.

    Bingo.

    Thanks, B. I think you hit the nail on the head here. And I think you've summarized things much better than I could have. Much appreciated.

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  105. re: BC's "budding" entrepreneurs...

    http://economistsview.typepad.com/economistsview/2007/11/marijuanomics-1.html

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  106. No real reason to argue about some of this, the Fed has the power.

    Logical debates won't change this or convince a corrupt congress to take it away. Logical debates didn't give the Fed the power in the first place, active scheming and lobbying by big banks gave it the power.

    As David argues, inflation is good as long as the wages stay stagnant, because this can help our stock and commodity investments. So we just need get the masses scared about deflation again and then jump on the ride in asset prices when the inflationistas are shouted down.

    I am for QE3...and a continuation of the commodity boom... with the recent worrise about the end of QE2 causing commodity prices to drop and the equity market to soften...I am happy to see that Bernanke's claim of "transitory" price increases to gain credibility among more people.


    Do you think it is safe to expect the Fed to continue to monetize the debt(and hand the primary dealers lots of money for nothing) after June yet?...or do we need the DOW to drop 5%, 10% or 20%?

    Of course we know that if the Fed really stopped purchasing 70% of the countries new debt issues that the interest portion of our budget would explode unacceptably and this is just not politically feasible...so my main questions of a fed insider are all along the lines of how/when will the Fed announce QE3? and what monikers, euphimisms and PR strategies will use for the continued monetizations of debt. We know they will want to have QE3 while also attempting to control "expectations" about inflation by those of us who try invest so that we get real returns on our investments.

    So what lies/half truths/misdirection will the fed use to attempt to control our expectations? and how much suffering are they willing to create before endeavoring on their next round of bubble making?

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  107. David, ever do much research on methods for controlling the stupid masses(people like me) expectations?

    When I read Bernanke/Mishkin books and research/publications they seem to be pretty honestly saying that they think this is an important aspect of conducting central banking operations.


    Do you think it hinders the Fed policy options if there are a couple hundred billion in assets that pile into levered commodity inflation bets every time the stock market has a big correction and it looks like the Fed is engaging in more monetary expansion?

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  108. Gabe is too stupid for anyone to control his expectations.

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  109. It is now June6th. T think we can get another 5%-10% market drop due to the continuing horror show of economic data and the pleas for QE3 will be answered and then praise the Fed we can party in the commodity markets again. Of course, the drop could be steeper than I am expecting. Please do let me know what the smart people here think.

    I'd be particularly interested if you have a bullish view on stocks in the case that the Fed DOES stop monetizing 80% of the countries debt and doesn't engage in anything like QE3. I find it humourous that some of the "educated" folks think sem to think we are in a legit recovery. Mostly the same people who thought real estate in this country could never decline(Yay Bernanke).

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  110. Are the professors here going to start buying more US bonds when the Fed stops?

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  111. "As David argues, inflation is good as long as the wages stay stagnant, because this can help our stock and commodity investments".

    Nonsense. Wages basically stagnated for good parts of the 70's stagflation and inflation was extremely high.

    David has an agenda and despite his attempt to present objectivity his has no intention of ever doing so.

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  112. Two comments:

    First, Gabe is a moron.

    Second, Ron Paul wants to audit Fort Knox now. Is there no end to this idiocy?

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  113. Two comments:

    First, anonymous is a pinhead.

    Second, what is idiotic about auditing Fort Knox? It hasn't been done in decades.

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  114. Gabe: "It is now June6th. T think we can get another 5%-10% market drop due to the continuing horror show of economic data and the pleas for QE3 will be answered and then praise the Fed we can party in the commodity markets again. Of course, the drop could be steeper than I am expecting. Please do let me know what the smart people here think."

    As of July 1, the S&P 500 has risen by about 2.7% since June 6. Great call, Gabe. You are genius.

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  115. No new threads/articles since April?

    :(

    -B

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  116. Yep I was wrong again, the economy is awesome now. It is 12 days after the end of qe2...and the economy is clearly In a strong recovery. The stock market being up over the last two weeks prove that central planning of the monetary supply and inflaming moral hazard is great policy.

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  117. Great article - thanks. Would you recommend converting some assets into gold in the future for economic safety? I know a lot of people are doing that but I wasn't sure if it was really a great idea or not!

    -Sandy

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  118. There sure are a lot of interesting things to discuss in the world, assuming someone has a true interest in macroeconomics. I was always surprised at how distant people at the Fed seemed to be from actually discussing monetary polciy issues...like how far would the Dow 30 have to drop from here to spur another round of emergency easing? 15% in a month, 40% in a month?

    It seems that we taxpayers are paying a lot of fed employees who either have little interest in discussing monetary policy witht he public or are told not too...and then create blogs to throw dirt at opponents of the FEd like Ron Paul.

    This blog doesn't discuss Scott Sumners proposals or talk about the endgame of what is happening during the current economic collapse...it only pipes up every few months to make weak attacks on Ron Paul.

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  119. Progress, between Ron Paul, Rick Perry, now Michele Bachmann outing the non-transparent, non-accountable, non-elected Central Economic Collectivist Federal Reserve.

    SPARTANBURG, South Carolina Tue Aug 16, 2011 5:24pm EDT (Reuters) - Michele Bachmann took aim at the Federal Reserve Tuesday, after rival candidate Rick Perry caused a storm with fierce criticism of Fed chairman Ben Bernanke.

    "I've been fighting on that issue since I came into Congress," Bachmann told reporters after a stump speech to about 300 people at a drive-in restaurant in South Carolina.

    "The Federal Reserve is not subject to transparency. The Federal Reserve has made terrible, grievous errors," she said, criticizing the central bank's quantitative easing programs of buying government bonds to lower interest rates and boost the economy.

    "I wrote letters to Secretary of the Treasury Tim Geithner and to Federal Reserve Chair Ben Bernanke and called on them not to release that money," Bachmann said. "The president has reduced the soundness of the dollar and the dollar has lost 12 percent of its value, according to experts, since President Obama came into his position."

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  120. To be perfectly honest as a tax-paying, hard-working adult in the US my financial knowledge is seriously lacking. Yes I was taught politics and inflation and Economics and such in high school but I have no stocks, I live almost paycheck to paycheck and I pretty much still vote for whoever my parents tell me to vote for (but we do have similar opinion so I do trust them for the most part). Reading articles like this scare me, because as uneducated as I am in this subject aren't the people running the show as knowledgeable as possible about all of this? How are we in such massive debt? Why are there so many differences of opinion on currency, gold, etc etc. I just chalk it up to selfish politicians not caring if they screw over the country. Am I just totally, disgustingly ignorant?

    -Rosie

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  121. I love how the chart is cut off at the year 2000. Sure wraps up your cherry-picked data in a nice little package, doesn't it?

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  122. It's misleading for the graph comparing gold price to money supply to be cut off at the year 2000. The price of gold shoots up dramatically in the decade that follows, completely destroying the point of your article.

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  123. Gold. Price. Suppression.

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