[ Follow Ups ] [ Post Followup ] [ Mosler dot ORG BBS ]
Posted by warren mosler (72.161.109.198) on 11:20:19 11/17/07
On 11/17/07, wrote:
Inflation does not appear to be showing up in the government numbers yet. Maybe they are just political. I don't know if you have checked out a site shadowstats. Give me your thoughts.
http://www.shadowstats.com/cgi-bin/sgs/data
Particularly with non convertible currency and a floating fx policy, the word 'inflation' is more than problematic. I've written that it comes down to changes in prices paid by govt when it spends but of course this question here isn't about 'theory.'
Any measure of 'inflation' is necessarily for further purpose, so the question becomes what that further purpose is.
For example, if the further purpose is to index social security payments, Congress might want 'that cpi' to reflect the cost of living for that demographic group.
For the Fed, they are after a cpi which, if kept low, optimizes long term growth and employment. That could be a very different basket with very different methodology. So along those lines the Fed has it's own various 'core' type measures to try to determine if they have the right interest rate policy to keep 'inflation' at a level that optimizes long term growth and employment. So, for example, if they feel they have it 'right' at the moment, that means a 4.5% funds rate is correct for growth and employment given headline cpi at 3.5 year over year, core at 2.2, and the other measures where they are, and it's also right for the shadow number (looks like 11%?) as the FOMC knows all those numbers and then takes a vote.
Then there is the question of attempting to measure 'real growth' for a variety of different purposes. This brings in 'quality adjustments' with the usual example of getting more computer power for the same price tag showing up as a drop in the cost of living when the only purpose of the added computer power is for advertisers to get into your email. Or output in the service sector being measured by wages and salaries, so if the price of a haircut goes up the question of whether you are you getting a better haircut or not alters 'inflation.' And there are countless other examples, making the entire question of 'gdp growth' subjective. Even unemployment gets blurred, without going into further detail in this note.
The Fed seems to do a reasonably good job trying to pack all the further purposes into a single cpi, and when you directly discuss with them the details of what they do and why they do it their points have almost always been well taken. On thing they do that I don't agree with, however, is using futures prices for non perishable commodities such as oil as indicative of the most likely prices in the future in forecasting models. But that's another story. Also, owner equiv rent is questionable, but again, it all depends on what the further purpose of the index is, and that question is not getting any serious attention by the politicians who are responsible for that decision.
As for 'monetary aggregates' they are various measures of 'open interest' in the currency, as it's all 'loans create deposits' and different aggregates grow at different rates as the composition of liabilities shifts. For example, if I buy a corp bond it's not in M2. But if I invest in a money fund, and that fund buys a corp bond, my shares of the fund are in M2. Most analysts have downgraded the aggregates as they can't find them useful for forecasting.
- Hide quoted text -
[ Follow Ups ] [ Post Followup ] [ Mosler dot ORG BBS ]