tag:blogger.com,1999:blog-11719208.post8828871613520178889..comments2023-11-05T04:36:14.223-08:00Comments on The Mess That Greenspan Made: A tale of two inflationsTimhttp://www.blogger.com/profile/16530974968126497397noreply@blogger.comBlogger11125tag:blogger.com,1999:blog-11719208.post-19956394433427073492009-09-11T03:24:42.373-07:002009-09-11T03:24:42.373-07:00Banks fear default above all else. By not letting ...Banks fear default above all else. By not letting the CPI fall slowly in response to imports (and accepting a slightly higher consumer loan default rate), the banks created a huge leveraged asset default problem for themselves.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-11719208.post-34368787640264883712009-09-10T19:24:20.568-07:002009-09-10T19:24:20.568-07:00You're welcome - about a month ago, I started ...You're welcome - about a month ago, I started doing these lengthy posts once a week and I'm glad I did.Timhttps://www.blogger.com/profile/16530974968126497397noreply@blogger.comtag:blogger.com,1999:blog-11719208.post-37748934247890145692009-09-10T18:30:01.700-07:002009-09-10T18:30:01.700-07:00Tim, thanks so much for the considerable effort th...Tim, thanks so much for the considerable effort that goes into a post like this. I have followed for years where you were the first to strip out OER and show what inflation really was.<br /><br />And this corresponds with my stand on the inflation/deflation controversy. We will have deflation in the things we *don't* need, like faster laptops and TVs, and inflation in the things we can't do without, like food, health care, and energy.<br /><br />Inflation? Deflation? You decide.<br /><br />actually, I'm Marku, but blogger has lost my password. SnarlAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-11719208.post-73305156442774754812009-09-10T11:30:51.215-07:002009-09-10T11:30:51.215-07:00Responses to a couple questions:
Clarissa Alverso...Responses to a couple questions:<br /><br /><em>Clarissa Alverson said...<br /><br />...what happens if the domestic economy is still slumping over the next few quarters and there's rampant domestic deflation, but it gets cancelled out in the CPI by import inflation caused from the weakening US dollar? Does the Fed end up tightening too soon and killing any chance of recovery? Would you predict that's a likely scenario given what you've shown here?</em><br /><br />No, I don't see rampant domestic deflation as a real possibility and only a small portion of exchange rate differences are passed through on import prices. <br /><br />ScottB said...<br /><br /><em>... you include transportation and home heating as domestic items. How much of the price swing that you show (excluding the Enron swindle) for these items is due to changes in the cost of imported petroleum? My guess is that your case is a bit overstated here.</em><br /><br />Since household fuel in the CPI is primarily piped gas (domestic), I don't think there's any problem there. But, imported oil is obviously a combination of imports and domestic production (around a 50-50 split) so, as you noted, the case is a bit overstated there, but, imported oil only accounts for about one-tenth of the weight in the CPI than all the other imported items that I broke out into the "imported inflation" group, so I didn't think it would be a big deal to exclude it (though I probably should have explained that).<br /><br /><em>Third, we can agree to disagree about how housing prices are dealt with in the CPI, but for the sake of discussion, what would you propose as a substitute, and do you think that substitute would have looked much different? I would argue that housing costs may actually have been decreasing through much of, say, the 1990s, as mortgage owners refied and lowered their monthly housing payments. Separating actual housing payments from refis that were then spent on Caribbean cruises or college tuition would be a challenge.<br /><br />Any cost of housing index (for the purely housing part, not related expenses) would have to be weighted to include the large number of homeowners who have paid off their mortgage, homeowners who reduce costs through refis (as well as those who now are about to get socked with an ARM), etc. Simply substituting the Case-Shiller index is completely inappropriate.</em><br /><br />I don't know. What we have not only doesn't work but helps to foster bubbles. On the other hand, if you include true mortgage costs, then the Fed lowering interest rates affects the rate of inflation directly, so that doesn't make sense either. <br /><br />A lot of people finance cars and refrigerators and then own them as long as many people own homes, yet we count those prices directly...Timhttps://www.blogger.com/profile/16530974968126497397noreply@blogger.comtag:blogger.com,1999:blog-11719208.post-83659577451716311042009-09-10T10:08:27.514-07:002009-09-10T10:08:27.514-07:00Thank you for a thoughtful post. And please take ...Thank you for a thoughtful post. And please take my questions and disagreements below as a compliment.<br /><br />First, you state that the Fed wasn't aware of the impact of cheaper imports on inflation. This is not true. Greenspan bucked the inflation hawks in the mid-1990s, keeping interest rates low to stimulate the economic (close brush with a recession in 1995) knowing precisely that cheaper imports would keep overall prices down. One of the reasons he kept rates low, by the way, was to stimulate hiring after TANF came into effect, to maximize the number of welfare clients being absorbed into the labor market (and please, I'm not a Greenspan fan, I'm just stating that these were conversations going on at the time that I wrote about in my monthly newsletter).<br /><br />Second, you include transportation and home heating as domestic items. How much of the price swing that you show (excluding the Enron swindle) for these items is due to changes in the cost of imported petroleum? My guess is that your case is a bit overstated here.<br /><br />Third, we can agree to disagree about how housing prices are dealt with in the CPI, but for the sake of discussion, what would you propose as a substitute, and do you think that substitute would have looked much different? I would argue that housing costs may actually have been decreasing through much of, say, the 1990s, as mortgage owners refied and lowered their monthly housing payments. Separating actual housing payments from refis that were then spent on Caribbean cruises or college tuition would be a challenge.<br /><br />Any cost of housing index (for the purely housing part, not related expenses) would have to be weighted to include the large number of homeowners who have paid off their mortgage, homeowners who reduce costs through refis (as well as those who now are about to get socked with an ARM), etc. Simply substituting the Case-Shiller index is completely inappropriate.ScottBhttps://www.blogger.com/profile/08616612545162771857noreply@blogger.comtag:blogger.com,1999:blog-11719208.post-68650588570314920542009-09-10T08:08:23.931-07:002009-09-10T08:08:23.931-07:00"Had this been understood and had interest ra..."Had this been understood and had interest rates been kept higher over the last ten years, we probably wouldn't have near the number of problems that we've seen in the last year or two."<br /><br />damn!<br /><br />i've been saying for years that the whole "plan china" is just a way of hiding inflation on the backs and in the lungs of brown people.<br /><br />it hasn't been higher wages and stricter environmental controls that have spawned offshore cheapocity -- i mean who really lives better now than in 1971ish? .00001%?<br /><br />but the quest for tupperware must continue!<br /><br />pump, benny pump!¡™£¢∞§noreply@blogger.comtag:blogger.com,1999:blog-11719208.post-31864605496730529652009-09-10T07:24:18.479-07:002009-09-10T07:24:18.479-07:00We too had noticed this effect several years ago, ...We too had noticed this effect several years ago, because everything that required the labor of Americans (heathcare, education, plumbing services, etc.) kept going up in cost, while everything on the shelves at Walmart kept going down. I love the way you've partitioned and graphed it out so meticulously, logically linking all the pieces together to confirm our suspicions. <br /><br />Thinking forward, here's a puzzle for you: If the Fed couldn't tell the difference between domestic and import inflation, and kept rates too low until 2008, as you say--what happens if the domestic economy is still slumping over the next few quarters and there's rampant domestic deflation, but it gets cancelled out in the CPI by import inflation caused from the weakening US dollar? Does the Fed end up tightening too soon and killing any chance of recovery? Would you predict that's a likely scenario given what you've shown here?Clarissa Alversonhttps://www.blogger.com/profile/08598281831881042169noreply@blogger.comtag:blogger.com,1999:blog-11719208.post-82041868121410925682009-09-10T06:52:46.888-07:002009-09-10T06:52:46.888-07:00"Yes, pegged currencies in Asia play a role h..."Yes, pegged currencies in Asia play a role here"...<br /><br />Most of the theories I've read suggest that pegged currencies are the primary reason that imported goods have had such low price inflation...<br /><br />Basically China has been manipulating their currency to keep their products below market costs here.<br /><br />In a nutshell that's the whole "savings glut" argument isn't it?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-11719208.post-37990211741540168402009-09-10T05:55:08.576-07:002009-09-10T05:55:08.576-07:00I suspected as much for a long time though the &qu...I suspected as much for a long time though the "quality adjustments" also play a major part.Ted S.noreply@blogger.comtag:blogger.com,1999:blog-11719208.post-11303689296572364092009-09-10T04:23:10.409-07:002009-09-10T04:23:10.409-07:00wow! Great post! I guess "the art of wisdom i...wow! Great post! I guess "the art of wisdom is the art of knowing what to overlook"!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-11719208.post-16412128885609667322009-09-09T20:37:01.043-07:002009-09-09T20:37:01.043-07:00That owners equivalent rent has always perplexed m...That owners equivalent rent has always perplexed me. Its good to see what the inflation data looks like with this removed. Nicely done!Anonymousnoreply@blogger.com