Quote from citizennobody:
OK chihuahua boy (an annoying dog that wont stop barking or learn). You are wrong on so many points in this reply that it would take me all night to rebutt your point, but I will be brief. I can understand your dismay with the chain weighted deflator index used to count the CPI because mathmatically it distorts fluctations intertemporally back into time, but where is the inflation? The housing bubble? If it was essentially a bubble then by definition it is not inflation. Are housing prices rising? Yes, of course they are but that again is demand related.
When are you going to get a clue and understand the inflation is created through increases in the Msupply and is reflected in ALL goods throughout the economy. Relative increases/decreases between sectors is price behavior defined by supply/demand. INFLATION AND PRICE BEHAVIOR ARE 2 DIFFERENT THINGS. Of course, there will be hot spots within the economy that have irrational buildups. But that is a self correcting situation. A housing bubble, PLEEEEEEASSSSSSE, we haven't even begun to see any evidence of that. And spare me any anecdotal evidence using housing prices as a proxy for a bubble.
The hedonic adjustments provide further cover for the shell game of "hide the inflation" currently played. You are correct that, in a 'guns and butter' economy that relative supply/demand differences control pricing behavior. But financial policy can engender distortions in this behavior. The gorilla in the room is an overt federal policy of encouraging home ownership, and the risk premia charged to non-FNMA/GNMA/FDMC lenders for securitizing their mortgage portfolios (because said lending agencies have the implicit backing of the federal government). These, and other policy changes, mean that
ceterus is no longer
paribus over timeframes longer than 5 years (at the longest-- I'd argue for 2 years).
The proof of the pudding is, as they say, in the tasting. The
ex post facto proof of the housing bubble is that the bubble is now bursting. As with all RE declines, the $1M-and-over market is the first to go, followed by the other tiers. If you're waiting for a federal agency to declare 'the bubble' is bursting, you'll miss it.
The point being that if it weren't for federal policy changes, the moneys directed into the housing bubble would have been spread out over the economy as a whole, and then you'd see the "non-existant" inflation reflected in the hedonicised and otherwise-mangled cpi numbers.
As for the government cheating on the CPI. WOW what a freaking conspiracy theory. I guess the thousands of economists working in the US were asleep at the wheel when that happened. I guess that all the major brokerage houses and traders just ignore that statistic. I guess all the major brokerage houses that have their own economists pay big bucks for nothing.....
No, they pay their big-bucks economists to understand the mangled CPI numbers (among other things). If I remember correctly, there was a bunch of debate about those changes. Now that its been years, everyone has incorporated into their models and life goes on.
As far as outright cheating, there's a lot of contrary opinion out there. Federally-funded economics departments are not going to be the first ones to question the numbers (it might affect the individual demand curves for their research). But read some stuff in the world of
practicum, like Morgan Stanley's Stephen Roach or Pimco's Bill Gross, and you'll find the scepticism you say doesn't exist in the economics community.
{edit} Run the numbers on COLA adjustments to social security payments, adding 1% to the cpi. you'll see that the difference is enough to induce cheating among all but the most fearless governments.
And for crying out loud. The discount rate that fed produces really has no direct effect on the market it is just an announcement statistic that gives the market a clue as to the sentiment of the Fed. AND ANYONE THAT HAS EVER TAKEN A MACROECONOMICS CLASS WOULD KNOW FOR A FACT THAT USING FISCAL POLICY IS THE OPTIMAL STRATEGY TO CLOSE INFLATIONARY GAPS NOT THE FED (monetary policy) AND THAT THE FED (monetary policy) IS OPTIMAL STRATEGY TO SPUR ECONOMIC GROWTH OR CLOSE A RECESSIONARY GAP. WE TEND TO DO THE OPPOSITE IN THIS COUNTRY.
And anyone who's taken anything beyond Macro101 knows that economic truths cannot be reduced to simple all-caps pronouncements.
The discount rate itself may be a mere sentiment indicator, but what it indicates is the stance of the fed's open-market operations. Those have real impact.
WHY? Because we have found that some controlled sustainable (LOW) inflation is vital to the growth of economy. <snip>.
Exactly. So the inflation sceptics think that it's impossible to maintain present monetary aggregate growth without triggering damaging levels of inflation, currency effects, etc. And they (rightly) wonder how the govt is pulling it off. One of the clues about how they're doing it is in a paper by former SECTREAS Rubin about Gibson's paradox.
Regards,
Laziz
