Chances of losing (and winning!) are close to zero.

[Marc De Mesel]

Would you feel cash in a checking account is a good way to overcome inflation?  Yet if you look at the return on 3 mo tbills you have:

5.35% since 1972 (vs. 4.35% BLS CPI-U)
2.28% since 2012 (vs. 2.47% BLS CPI-U)

So someone who has had 100% cash in a checking account since 1972 or even 2000 hasn't lost anything to inflation?  Doesn't seem very believable to me.

Good point systemsceptic.

Thinking out loud here, lending money has always been a tricky business, only profitable for the wise man. In the free banking era banks went broke regularly.

Then came 'safe' banks backed by 'lender printer of last resort'. Fiat starts to lose value and people are forced to put it in the bank to keep up with inflation.

In such scenario, do depositors make profit after inflation? Very likely not. Because money now loses value everybody wants to lend out their money to the bank lowering profit margins. And banks compete less and less due to less and less competition (only big banks get the bailout). (We can see that clearly the past years where banks give now only 1% but still lend out at 4%-7%. Their margins are increasing thanks to government policies but at the expense of the depositor.)

So historical bank interest rates / short term bond interest rates are likely below true inflation, and thus true inflation since 1972 is likely higher than this 5.35%, and since 2002 likely higher than this 2.28%.  The safety these instruments have thanks to the printing press/bailout, come at a price of slowly losing instead of suddenly.

[systemskeptic]

Marc,

Agree with the above point.  Trying to prove inflation with a basket of goods is likely impossible because there will always be people who argue that they have a different basket of goods. 

The absolute worst rate you can possible get on an investment is in short duration bonds / CDs.  If those pay a real return than almost everything does, if everything paid a real return why would there be any talk of inflation?

Right now I have a checking account paying 3% interest, current CPI is 2%.  Am I really getting a 1% real return with money rotting in a checking account? Doubtful.

Here is a data-point to add to the pile.  Five years ago I bought a heated motorcycle jacket liner for winter riding.  Cost: $179.99 direct from the manufacturer.  Today the exact same jacket is $234.99.  That is 30% more or ~5.5% increase per year.  Is that item in the billion prices project?  How can I go view it's price in the pile to see if it matches my personal experience?  Who is monitoring to verify that data is even valid?  If that item is not included, why not?

[systemskeptic]

From Billion prices project: "PriceStats runs a set of automatic procedures to ensure that the data can be used for inflation measurement."

Here is a funny procedure: If (measured inflation > official CPI) {next;}

[Kshartle]

Marc,

Agree with the above point.  Trying to prove inflation with a basket of goods is likely impossible because there will always be people who argue that they have a different basket of goods. 

The absolute worst rate you can possible get on an investment is in short duration bonds / CDs.  If those pay a real return than almost everything does, if everything paid a real return why would there be any talk of inflation?

Right now I have a checking account paying 3% interest, current CPI is 2%.  Am I really getting a 1% real return with money rotting in a checking account? Doubtful.

Here is a data-point to add to the pile.  Five years ago I bought a heated motorcycle jacket liner for winter riding.  Cost: $179.99 direct from the manufacturer.  Today the exact same jacket is $234.99.  That is 30% more or ~5.5% increase per year.  Is that item in the billion prices project?  How can I go view it's price in the pile to see if it matches my personal experience?  Who is monitoring to verify that data is even valid?  If that item is not included, why not?

Ak pattern rifles and ammo are double the price they were when the prez was elected in 2008. I guess there's been 100% inflation in Ak pattern guns since then. The price of my cell phone from 2008 is now free (with a contract). I guess there's been 100% deflation in my old cell phone.

Inflation is not the movement of prices. That's an effect of inflation. Picking a basket of goods, even if it's perfect doesn't tell you how much inflation there is because it doesn't take into account that prices naturally fall as technology and business makes production less costly.

That's why I stick with the size of the money supply. According to the St Louis FED M1 is up 20.1% in the last 2 years. M2 is up 13.2%. Does anyone have the numbers from much farther back on these?

Those imply annual inflation at 9.6% or 6.5% respectively. M2 is a better reflection of the effect, they've stopped publishing M3.

We must keep in mind the major US export is dollars. The holders of those dollars feel the effects of the inflation since their governments are printing to maintain exchange rates. We are temporarily shielded from the effects. Does anyone believe this will continue forever?

Interestingly two years ago M1 was 22.4% of M2. Now it's 23.7%

I'm sure it's been growing for quite a while. As it grows the FED will need to print more and more to keep the inflation economy going.

Anyone have the actual FED numbers on M1 or M2 going way back?

[Gumby]

Inflation is not the movement of prices. That's an effect of inflation.

Most of us are too tired debating the definition of "inflation," but you should really say, "I believe that inflation is not the movement of prices," because your definition of inflation is not how most economists define inflation.

See: http://en.wikipedia.org/wiki/Inflation

In economics, inflation is a persistent increase in the general price level of goods and services in an economy over a period of time.

Source: http://en.wikipedia.org/wiki/Inflation

M2 is a better reflection of the effect, they've stopped publishing M3.

The Fed replaced M3 with MZM ("Money Zero Maturity"). If you really believe in the Quantity Theory of Money (I don't) then you need to use MZM, and its velocity (MZMV), if you are going to attempt to discern inflation from the money supply — otherwise you are just looking at a tiny fraction of the money supply.

http://research.stlouisfed.org/fred2/series/MZM

http://research.stlouisfed.org/fred2/series/MZMV

See also: http://en.wikipedia.org/wiki/Money_with_zero_maturity

MZM has become one of the preferred measures of money supply because it better represents money readily available within the economy for spending and consumption

Source: http://www.investopedia.com/terms/m/mon ... turity.asp

Some economists maintain that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply, while others take the view that under the conditions of a liquidity trap, large injections are "pushing on a string" and cannot cause significantly higher inflation. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to changes in the velocity of money supply measures; in particular the MZM ("Money Zero Maturity") supply velocity. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.

Source: http://en.wikipedia.org/wiki/Inflation

Of course, if you wanted to get an even broader measure of the money supply, you could track M4.

M4 = M3 + Commercial Paper + T-Bills

But, of course, once you understand what M4 is, you have to admit that T-Bills are a form of money, and we don't want to have that conversation again.

[Kshartle]

Do you have inflation in some goods and deflation in others at all times??

[systemskeptic]

Do you have inflation in some goods and deflation in others at all times??

No...inflation or deflation occurs in a currency zone not in individual items.  Individual items can go up or down for a host of reasons, that is price action not inflation.  This is why you arguing guns (affected by politics) vs. MT arguing about housing (affected by credit bubbles) is not very productive.

At any rate, I would be interested to see MT or others who agree with CPI to answer:

1.  Why it is likely that cash in a checking account or 3-6 month CD could earn a real return
2.  What external validation has been performed on the MIT billion prices project.  Is it possible to spot check individual items?  Is there any access to their data?  Why should we trust that data anymore than CPI?

[Kshartle]

Do you have inflation in some goods and deflation in others at all times??

No...inflation or deflation occurs in a currency zone not in individual items.  Individual items can go up or down for a host of reasons, that is price action not inflation.  This is why you arguing guns (affected by politics) vs. MT arguing about housing (affected by credit bubbles) is not very productive.

At any rate, I would be interested to see MT or others who agree with CPI to answer:

1.  Why it is likely that cash in a checking account or 3-6 month CD could earn a real return
2.  What external validation has been performed on the MIT billion prices project.  Is it possible to spot check individual items?  Is there any access to their data?  Why should we trust that data anymore than CPI?

Additionaly, the fact is that the CPI is calculated differently than it used to be. Does anyone think the government calculates it differently in order to make it more accurate, or to allow it to infl er...expand the money supply, devalue it's debts....permit it to spend more than it takes in or can afford to borrow with interest, all the while not adjusting social security and other CPI indexed payments?

This is like giving the government the ability to grade it's own tests. Any wonder it gives itself an A?

[Kshartle]

One of the more ironic benefits of inflation though, and one of the ways it positively impacts the economy is to effectively lower the minimum wage. If the dollar were suddendly printed in such large quantites that it lost half it's value in a short time it would have the effect of cutting min wage to less than $4.

Even people with zero skills would be hireable in some jobs (many not seen since before min wage) because the employer could afford to train them. This by itself would be a huge benefit.

Of course we could have that all on it's own without all the inflation negatives by just doing away with the min wage, socialist, violent, disgusting, permanent poverty nonsense. 

[moda0306]

Do you have inflation in some goods and deflation in others at all times??

No...inflation or deflation occurs in a currency zone not in individual items.  Individual items can go up or down for a host of reasons, that is price action not inflation.  This is why you arguing guns (affected by politics) vs. MT arguing about housing (affected by credit bubbles) is not very productive.

At any rate, I would be interested to see MT or others who agree with CPI to answer:

1.  Why it is likely that cash in a checking account or 3-6 month CD could earn a real return
2.  What external validation has been performed on the MIT billion prices project.  Is it possible to spot check individual items?  Is there any access to their data?  Why should we trust that data anymore than CPI?

Additionaly, the fact is that the CPI is calculated differently than it used to be. Does anyone think the government calculates it differently in order to make it more accurate, or to allow it to infl er...expand the money supply, devalue it's debts....permit it to spend more than it takes in or can afford to borrow with interest, all the while not adjusting social security and other CPI indexed payments?

This is like giving the government the ability to grade it's own tests. Any wonder it gives itself an A?

Speaking of "Arguments from Ignorance"  .

Just because it might seem like the government is up to something doesn't mean turning off our brains and accusing them of something is the next logical step.  Hedonic adjustments are perfectly reasonable.  MIT seems to align very well with CPI.

If we're going to use gas, gold, guns, and grain to measure inflation, then the next time you see those all DROP in price, let's all scream "DEFLATION," shall we?  You can't just take them on the upside and ignore when they go down (or get better).

Oh, and does this mean debt/GDP ratio is more like 90%?  70%?  50%?  If inflation is so much higher than we've been projecting, that means the debt/GDP ratio is far lower than we currently estimate.

Further, this means the welfare state and government-spending has grown on much slower a scale than the very inflationistas that hate it have claimed.

Are you sure you want to go down this inflationist conspiracy rabbit hole?  Pretty soon we might have to expand the welfare state just to catch it back up to where it was in the 1990's!!

[Gumby]

MIT seems to align very well with CPI.

That's the problem with the CPI conspiracy theories. The independent third-party data matches up quite well with the official numbers. If the CPI is some kind conspiracy, then you would see some evidence in the independent third-party data. But, you don't.

Both ECRI (Economic Cycle Research Institute) and MIT continue to confirm that the government's data is relatively accurate. You see similar results from other third-party indicators, such as the ISM Manufacturing Survey and GAO food prices, etc.

[Lowe]

@ Kshartle

Can a national gov't devalue its debts?

In trying to devalue its debt through price inflation, it only has two tools.  It can decrease taxes or increase outlays.  Either way the debt gets larger in units currency, possibly offsetting any reductions in debt value caused by reduced currency value.

[Kshartle]

No...inflation or deflation occurs in a currency zone not in individual items.  Individual items can go up or down for a host of reasons, that is price action not inflation.  This is why you arguing guns (affected by politics) vs. MT arguing about housing (affected by credit bubbles) is not very productive.

At any rate, I would be interested to see MT or others who agree with CPI to answer:

1.  Why it is likely that cash in a checking account or 3-6 month CD could earn a real return
2.  What external validation has been performed on the MIT billion prices project.  Is it possible to spot check individual items?  Is there any access to their data?  Why should we trust that data anymore than CPI?

Additionaly, the fact is that the CPI is calculated differently than it used to be. Does anyone think the government calculates it differently in order to make it more accurate, or to allow it to infl er...expand the money supply, devalue it's debts....permit it to spend more than it takes in or can afford to borrow with interest, all the while not adjusting social security and other CPI indexed payments?

This is like giving the government the ability to grade it's own tests. Any wonder it gives itself an A?

Speaking of "Arguments from Ignorance"  .

Just because it might seem like the government is up to something doesn't mean turning off our brains and accusing them of something is the next logical step.  Hedonic adjustments are perfectly reasonable.  MIT seems to align very well with CPI.

If we're going to use gas, gold, guns, and grain to measure inflation, then the next time you see those all DROP in price, let's all scream "DEFLATION," shall we?  You can't just take them on the upside and ignore when they go down (or get better).

Oh, and does this mean debt/GDP ratio is more like 90%?  70%?  50%?  If inflation is so much higher than we've been projecting, that means the debt/GDP ratio is far lower than we currently estimate.

Further, this means the welfare state and government-spending has grown on much slower a scale than the very inflationistas that hate it have claimed.

Are you sure you want to go down this inflationist conspiracy rabbit hole?  Pretty soon we might have to expand the welfare state just to catch it back up to where it was in the 1990's!!

Well it does take some logical thinking here to figure out that an entity with the ability to devalue currency but must by law increase it's outgoing payments based on the devaluation might possibly have an incentive to understate the devaluation (since it controls that also).

Ahhh but logic does not always appear on a chart so it is persona non grata here.

You realize the government states what the CPI is right? You realize that they have welfare payments indexed to the CPI right? Is it a "conspiracy theory to point out they might have an incentive to tilt the inflation numbers in their favor?

Why do you think they have revised the way the CPI is calculated multiple times? Do you think it's to be more accurate? Why would they do that? What incentive do they have to do that?

Humans respond to incentives. Even government angels who spray countries with depleted uranium weapons and slaughter civillians.

[moda0306]

MIT seems to align very well with CPI.

That's the problem with the CPI conspiracy theories. The independent third-party data matches up quite well with the official numbers. If the CPI is some kind conspiracy, then you would see some evidence in the independent third-party data. But, you don't.

Both ECRI (Economic Cycle Research Institute) and MIT continue to confirm that the government's data is relatively accurate. You see similar results from other third-party indicators, such as the ISM Manufacturing Survey and GAO food prices, etc.

Those commies at MIT don't care about reality.  Hopefully they won't be allowed on Galt Mountain when the revolution comes.

Wait... check that... it's not a mountain... it's a town in rural Mississippi with the GDP of some geek's basement in Silicon Valley.

[Kshartle]

@ Kshartle

Can a national gov't devalue its debts?

In trying to devalue its debt through price inflation, it only has two tools.  It can decrease taxes or increase outlays.  Either way the debt gets larger in units currency, possibly offsetting any reductions in debt value caused by reduced currency value.

Or it can print money to pay the debts. Of course it can devalue it's debts. It is doing this non-stop.

I don't understand how either of the roads you mention devalue the debt.

[Lowe]

@ moda

Are you sure that inaccurate inflation figures would affect the Debt/GDP ratio?  I don't understand this.  If value per dollar figure is lower than realized, that means both debt value and GDP value are lower than realized, but lower by the same proportion.  Making debt/GDP the same.

[Gumby]

@ Kshartle

Can a national gov't devalue its debts?

In trying to devalue its debt through price inflation, it only has two tools.  It can decrease taxes or increase outlays.  Either way the debt gets larger in units currency, possibly offsetting any reductions in debt value caused by reduced currency value.

Or it can print money to pay the debts. Of course it can devalue it's debts. It is doing this non-stop.

I don't understand how either of the roads you mention devalue the debt.

Lowe is correct. The Fed can't legally print to pay down Treasury debt — the Fed can only buy (i.e. monetize) debt, via swaps with banks. The Treasury can only issue more debt-based currency when it "prints". When Harry Browne and others say that a fiat government can always "print" they are referring to printing debt-based money (which causes more debt to be created).

In other words, Congress (via the Treasury) "prints" debt and the Fed monetizes that debt.

[moda0306]

Additionaly, the fact is that the CPI is calculated differently than it used to be. Does anyone think the government calculates it differently in order to make it more accurate, or to allow it to infl er...expand the money supply, devalue it's debts....permit it to spend more than it takes in or can afford to borrow with interest, all the while not adjusting social security and other CPI indexed payments?

This is like giving the government the ability to grade it's own tests. Any wonder it gives itself an A?

Speaking of "Arguments from Ignorance"  .

Just because it might seem like the government is up to something doesn't mean turning off our brains and accusing them of something is the next logical step.  Hedonic adjustments are perfectly reasonable.  MIT seems to align very well with CPI.

If we're going to use gas, gold, guns, and grain to measure inflation, then the next time you see those all DROP in price, let's all scream "DEFLATION," shall we?  You can't just take them on the upside and ignore when they go down (or get better).

Oh, and does this mean debt/GDP ratio is more like 90%?  70%?  50%?  If inflation is so much higher than we've been projecting, that means the debt/GDP ratio is far lower than we currently estimate.

Further, this means the welfare state and government-spending has grown on much slower a scale than the very inflationistas that hate it have claimed.

Are you sure you want to go down this inflationist conspiracy rabbit hole?  Pretty soon we might have to expand the welfare state just to catch it back up to where it was in the 1990's!!

Well it does take some logical thinking here to figure out that an entity with the ability to devalue currency but must by law increase it's outgoing payments based on the devaluation might possibly have an incentive to understate the devaluation (since it controls that also).

Ahhh but logic does not always appear on a chart so it is persona non grata here.

You realize the government states what the CPI is right? You realize that they have welfare payments indexed to the CPI right? Is it a "conspiracy theory to point out they might have an incentive to tilt the inflation numbers in their favor?

Why do you think they have revised the way the CPI is calculated multiple times? Do you think it's to be more accurate? Why would they do that? What incentive do they have to do that?

Humans respond to incentives. Even government angels who spray countries with depleted uranium weapons and slaughter civillians.

Logic is a valid addition to the discussion, chart or no chart .

I realize the government states what CPI is.

I realize LOTS of payments are indexed to it.

It's not a conspiracy theory to point out that they might have an incentive to tilt inflation numbers... this is NOT what inflationistas are saying.  They're saying they ARE  tilting inflation numbers to a huge degree.

They've revised the CPI calculation because it was previously flawed, with too-simple statuses within the "basket" of goods we consume. 

They did that because the government isn't ALWAYS trying to f*ck us over.  Sometimes, due to some unknown force, they actually stick to their public duty and try to build nice parks, safe bridges, and a stable monetary system.

Find me the dork at the BLS who does overtime by blasting the middle east with radioactive material.  Your anger over that type of behavior is understood.  But the nature of bureaucracy is that it's pretty often far less evil than we think it is... just clumbsy.

[Lowe]

@ Kshartle

Can a national gov't devalue its debts?

In trying to devalue its debt through price inflation, it only has two tools.  It can decrease taxes or increase outlays.  Either way the debt gets larger in units currency, possibly offsetting any reductions in debt value caused by reduced currency value.

Or it can print money to pay the debts. Of course it can devalue it's debts. It is doing this non-stop.

I don't understand how either of the roads you mention devalue the debt.

Theoretically they could do that, because they write the laws.  However in developed countries I don't think they do that.

Only the national banks print money, but they only use it to buy bonds.  So it ends up in the accounts of large banks, who don't care whether it's there or not, and aren't going to change their business based on it.  So it won't cause inflation.

So we're back to the two fiscal tools I mentioned, and the same conundrum.

[Kshartle]

@ Kshartle

Can a national gov't devalue its debts?

In trying to devalue its debt through price inflation, it only has two tools.  It can decrease taxes or increase outlays.  Either way the debt gets larger in units currency, possibly offsetting any reductions in debt value caused by reduced currency value.

Or it can print money to pay the debts. Of course it can devalue it's debts. It is doing this non-stop.

I don't understand how either of the roads you mention devalue the debt.

Lowe is correct. The Fed can't legally print to pay down Treasury debt — the Fed can only buy (i.e. monetize) debt, via swaps with banks. The Treasury can only issue more debt-based currency when it "prints". When Harry Browne and others say that a fiat government can always "print" they are referring to printing debt-based money (which causes more debt to be created).

This is a dead-end discussion for us. The conclusion will be the disagreement over whether or not when the FED creates new dollars and buys bonds it is devaluing the dollar. We've reached this so many times I'd rather just skip to it and call it done.

How about the trillion dollar coin? Can the gubmit mint 18 trillion dollar coins and devalue/pay off it's direct debt?

[Kshartle]

@ Kshartle

Can a national gov't devalue its debts?

In trying to devalue its debt through price inflation, it only has two tools.  It can decrease taxes or increase outlays.  Either way the debt gets larger in units currency, possibly offsetting any reductions in debt value caused by reduced currency value.

Or it can print money to pay the debts. Of course it can devalue it's debts. It is doing this non-stop.

I don't understand how either of the roads you mention devalue the debt.

Theoretically they could do that, because they write the laws.  However in developed countries I don't think they do that.

Only the national banks print money, but they only use it to buy bonds.  So it ends up in the accounts of large banks, who don't care whether it's there or not, and aren't going to change their business based on it.  So it won't cause inflation.

So we're back to the two fiscal tools I mentioned, and the same conundrum.

What about that trillion dollar coin?

Laws aren't a big problem for the gumbit since it writes, passes, and enforces them. Rules are for the ruled not the rulers.

[moda0306]

@ moda

Are you sure that inaccurate inflation figures would affect the Debt/GDP ratio?  I don't understand this.  If value per dollar figure is lower than realized, that means both debt value and GDP value are lower than realized, but lower by the same proportion.  Making debt/GDP the same.

Lowe,

We KNOW what the debt is in nominal terms today.  What is tougher to measure is GDP in nominal terms (you have to measure the quantity/nature of transactions).

If inflation has been far higher than reported, then nominal GDP, compared to 10 years ago (or 15, or 20... whatever) is also far higher.

This means, also, that the welfare state (and government spending) is a much smaller portion of GDP than currently assumed.

You can't have your cake and eat it too (not you, Lowe.. just inflationists in general).  You can't claim that inflation is far higher than reported for the last decade, and then forget to adjust all the other things you hate for the higher rate of inflation you propose is reality.  You can't say "everything is irrelevant until you adjust it for inflation" and then forget that welfare, deficits, spending, Medicare, National Debt, etc falls under "everything," not just the value of your "savings" or investments.

[Gumby]

What about that trillion dollar coin?

The trillion dollar coin is legal, but it is technically a loophole because the law was accidentally worded in a way that allows for a trillion dollar coin to be created, when that wasn't what it was intended for. The law was intended for issuing commemorative platinum coins for purchase by private citizens.

Also, the Platinum coin law is very new. It was written during the Bush administration. It wasn't even an option until recently.

[moda0306]

Or it can print money to pay the debts. Of course it can devalue it's debts. It is doing this non-stop.

I don't understand how either of the roads you mention devalue the debt.

Lowe is correct. The Fed can't legally print to pay down Treasury debt — the Fed can only buy (i.e. monetize) debt, via swaps with banks. The Treasury can only issue more debt-based currency when it "prints". When Harry Browne and others say that a fiat government can always "print" they are referring to printing debt-based money (which causes more debt to be created).

This is a dead-end discussion for us. The conclusion will be the disagreement over whether or not when the FED creates new dollars and buys bonds it is devaluing the dollar. We've reached this so many times I'd rather just skip to it and call it done.

How about the trillion dollar coin? Can the gubmit mint 18 trillion dollar coins and devalue/pay off it's direct debt?

The government can't really "print away its debt," because its money is debt (assuming you deem the Fed to be a public entity).  It's literally trading one government liability for another.  Just different "agencies" if you will.

[Gumby]

KShartle, there wouldn't be any point to trading the national debt for a few shiny coins (other than to skirt around the debt ceiling). Treasuries are savings assets for the private sector. Banks and citizens prefer Treasury bonds to cash when they are trying to save. That's why grandmas buy Savings Bonds.

Anyway, Lowe's assertion still stands. You're just avoiding the question.