Gyroscopic Investing

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Clive wrote:
What if I told you that government inflation rates have been seriously understated over the years and instead of the 3% annualised average against published inflation figures since 1926 the real actual rate was 8% !!!

I would say I believe you.  

Clive,

I think the inflation story deserves more attention.

To me, it seems like the inflation story has two distinct components.  First, there is the reduced purchasing power from central banks' steady erosion of the value of money.  This part of the story is well known.  Second, however, is the reduction in prices that comes from increasing efficiency, globalization, etc.  It's hard not to notice that we all pay far less for many items than we used to, among them non-designer clothing, electronics, and all manner of plastic junk.  There are also items that have not increased in price that much for reasons I don't fully understand.  A hamburger, fries and drink costs only a little more than it did 25 years ago. 

When I thought about this matter a while back, it seemed to me that an entry level automobile was a good proxy for inflation because an entry level automobile captures both of the factors above (i.e., the blended effects of devaluation and falling costs associated with efficiency and improved technology).  What I found was that the price of an entry level automobile since 1972 had increased at approximately 4% per year, which is what the typical CPI-based figure looks like for this period.

What's important to remember, however, is that the entry level car of today is a far more sophisticated piece of technology than it was 40 years ago.  For that 4% increase in price annually you are getting a more efficient, safe and comfortable vehicle than you could have purchased 40 years ago.

I definitely see dramatic inflation in many areas of the economy that has been going on for a long time.  Higher education, health care, and concert tickets are the three that always amaze me. 

I think that for a person in the U.S. the real inflation story likely differs dramatically from household to household.  Households with young healthy people with no kids may feel very little inflation, while a family that utilizes the health care system regularly, has kids in college and likes to watch live music may feel the effects of inflation heavily.

For people who live away from the big cities, I think there is often much less inflation than in urban areas (although wages are lower in rural areas as well).  I think it's a good trick to live and work in an urban area and save your money and then retire to a rural area and enjoy a much higher standard of living.

MT you bring up some good conceptual points.  Inflation is not a rise in relative prices, but rather a continual change in the price level itself. 

The difference is that while clothes and computers may be falling in price, this is in relation to other goods and does not mean that inflation may not still be present.  In other words, if inflation were zero instead of some positive amount, the price of clothes and computers would have fallen even more.

The case of concert tickets is an interesting one and has occurred over the last 20 years.  It used to be that you could buy a concert ticket for about 2-3 times what you could buy an album or CD for.  When I was in graduate school and taking a price theory course a question we looked at was why ticket prices were so low, as evidenced by long lines and a second-hand market for tickets (scalpers).  The answer was that performers wanted to attract more than just the devoted fans to their shows in order to entice them to purchase their music. Given the digitization of music, and the relative ease with which theft can occur, sales of music have suffered.  I believe that performers increased the price of tickets in order to compensate for slower sales of their music.  So now you might pay 10-20 times more for a ticket than a CD or iTunes download.  This example is not one of inflation, but rather a change in relative prices that is independent of whatever underlying inflation exists.

One point I'd like to make is that food inflation isn't typically measured properly.  I used to run a health food company and we favored organic produce, grass-fed/free range meats & wild seafood.  150 years ago, this was the norm.  With advancements in food technology, it's possible to do a variety of things to food to maximize yield per unit relative to input costs.  I won't get into some of the health issues we are accepting for the lower cost of food, but it's there.

Not long ago the food inflation issue was brought up by Mish.  He made the case that he can buy meat for the same price--ON SALE--as what was sold 40 years ago.  So, he says no inflation.  Sorry, very weak argument.  The meat itself is not the same and there's a big difference buying meat about 2 days from becoming rancid from buying freshly butchered meat.

The point of all this is that when we look at official inflation figures, they are guesstimates.  Often changed and manipulated for political purposes (by both parties), they are always suspect.  No doubt inflation has been understated for some time, it's just difficult to say exactly what comparable prices are.  For instance, it used to be 1 oz of gold used to buy a fine man's suit.  Well, what's fine?  Is a $200 suit in Men's Wearhouse fine?  Not really.  100 years ago, a fine man's suit was personally tailored by a man with years of experience.  It was made of exceptional material and then hand cut and sewn according to exact measurements to fit the body it was measured for.  A suit like that today would be $5000 in my area.  Technology has made cheap suits more appealing, but a cheap suit is still a cheap suit.

Clive, you might be right on your figures, I can't really say.  I would imagine, though, that increases in productivity have been captured in the PP somewhere along the line.

MediumTex wrote:
...while a family that utilizes the health care system regularly, has kids in college and likes to watch live music may feel the effects of inflation heavily.

I don't think the increase in the cost of health care is so much inflation related as it is efficiency related.  There are huge differences between what health care actually costs and what a patient is actually charged.  The latter tends to be much higher.

I think the cost of education has gone up b/c of how easy it is to get a student loan (backed by the government).  It makes absolutely no sense to me that an 18 year old kid can borrow $50K + a year to get a degree that may or may not ever make money.

Adam

Adam1226 wrote:

MediumTex wrote:
...while a family that utilizes the health care system regularly, has kids in college and likes to watch live music may feel the effects of inflation heavily.

I don't think the increase in the cost of health care is so much inflation related as it is efficiency related.  There are huge differences between what health care actually costs and what a patient is actually charged.  The latter tends to be much higher.

I think the cost of education has gone up b/c of how easy it is to get a student loan (backed by the government).   It makes absolutely no sense to me that an 18 year old kid can borrow $50K + a year to get a degree that may or may not ever make money.

Adam

I would apply the same logic of government involvement in education to health care as well.  But I also think that the quality of health care has improved due to technology and medical advances, making it more expensive for pure cost reasons.

Health care is a really interesting example.

One factor that has increased the cost has been the enormous amount of public money that has gone into the system since Medicare was started in the 1960s.  If you look back to when costs started rising, that's when it really started.

We have also built a culture that is basically toxic to mental health, so the cost of preserving sanity has also gone up exponentially in recent years.

Another thing I have noticed is that a significant percentage of the entire amount that a person spends on health care throughout his or her life is often spent in the last few weeks or months of life.  I'm not in favor of death panels or anything, but this seems like a big problem, and by "problem" I mean it just seems terribly inefficient.  I don't know what the answer is, though.  

EDIT: I think PkgMan makes the same point in fewer words--government involvement has driven up cost, but also probably funded some breakthroughs that do actually lead to better health in some cases.

Pkg Man wrote: MT you bring up some good conceptual points.  Inflation is not a rise in relative prices, but rather a continual change in the price level itself. 

The case of concert tickets is an interesting one and has occurred over the last 20 years.  It used to be that you could buy a concert ticket for about 2-3 times what you could buy an album or CD for.  When I was in graduate school and taking a price theory course a question we looked at was why ticket prices were so low, as evidenced by long lines and a second-hand market for tickets (scalpers).  The answer was that performers wanted to attract more than just the devoted fans to their shows in order to entice them to purchase their music. Given the digitization of music, and the relative ease with which theft can occur, sales of music have suffered.  I believe that performers increased the price of tickets in order to compensate for slower sales of their music.  So now you might pay 10-20 times more for a ticket than a CD or iTunes download.  This example is not one of inflation, but rather a change in relative prices that is independent of whatever underlying inflation exists.

Thanks for that excellent concert ticket analysis.  That makes a lot of sense.

When looking at a music fan's total spend on musical entertainment, perhaps prices haven't risen that much after all.  He buys recorded music cheaper, but pays more to see it live.

I never used to think of concerts as a musical form of a "loss leader", but maybe that's what it really was.  The first concert I saw was AC/DC in 1983, and I believe that ticket was $12.75.  If I had come out of the concert wanting to buy an album of the music I had heard, it would have cost me $7.99 or so.

Today, I will spend around $80.00 for a concert ticket, and I can come out of the show and buy the music I heard for $7.99 or so.

MediumTex wrote: The first concert I saw was AC/DC in 1983, and I believe that ticket was $12.75. 

Nice.  I didn't get around to seeing them until the Razor's Edge tour, which I think was in '92 or '93.

Pkg Man wrote:

MediumTex wrote: The first concert I saw was AC/DC in 1983, and I believe that ticket was $12.75. 

Nice.  I didn't get around to seeing them until the Razor's Edge tour, which I think was in '92 or '93.

You guys are showing your age.  I just got back from the Justin Beiber concert and it was amazing!    Apparently he even has a biography about all 16 of his years....should be an inspiration to us all.

Wonk wrote:

Pkg Man wrote:

MediumTex wrote: The first concert I saw was AC/DC in 1983, and I believe that ticket was $12.75. 

Nice.  I didn't get around to seeing them until the Razor's Edge tour, which I think was in '92 or '93.

You guys are showing your age.  I just got back from the Justin Beiber concert and it was amazing!   ;D  Apparently he even has a biography about all 16 of his years....should be an inspiration to us all.

I saw Hannah Montana in 2007 and the Jonas Brothers opened.  It was a great show (seriously--the kids liked it too ).  The screaming reminded me of one of those old Beatles shows.

It was also easily the most I ever paid for concert tickets.

Probably the coolest show I like to tell people about seeing was Metallica in 1985 off the Ride the Lightning tour.  It was a few months before they started to really break out and there were perhaps 1,200 people at the show.  I saw them about two years later on the Master of Puppets tour and that was really an amazing show.  I was the right age and they were at the right stage of their musical career.  It was perfect.  I don't remember what I paid for that ticket.  I saw them a few times after that but it was never anything like that Master of Puppets show.

MT,

I was completely unfamiliar with Metallica's 80's music and someone gave me Lightning, Puppets, and Justice on 3 burned CD's.  I played guitar at that time.  While it took some time for me to jive with some of their thrashier songs (I now love them all), their slower ones were amazing, and Master of Puppets, the song itself, absolutely floored me.  I thought it was metal perfected.

Still to this day I get chills listening to that song.  Along with Die Hard and Ronald Reagan, they make up the Trifecta of "things not to be embarassed about when looking back on the 80's."

I'm jealous you got to experience their career in person.  I was 2 when MoP came out.

I will share one more experience on this topic.

Other than the Metallica experiences, I also had the good fortune to sit front row center (the only time I've ever done that) for a U2 concert in 1987.  This tour would later be the basis for the "Rattle and Hum" album, and B.B. King was with them for a portion of the tour.  I was playing in a band at the time and my friend and guitar player was with me at the show.  After B.B. King opened up the show and U2 played their set, B.B. King came back out to play a few encores with them.  Before one of the songs, Bono asked the crowd if "anyone would like to play his guitar."  Of course, the whole arena raised their hands, but my guitar player friend happened to be the one closest to the stage and Bono pulled him up on stage, showed him the chords for "People Get Ready" and my friend proceeded to play this song with U2 and B.B. King in front of 15,000 or so people.  Afterwards, my friend climbed back down from the stage and they finished the show.  It was the most amazing thing--really one of those once in a lifetime experiences (more for him than me, but it was really a great experience).

That sort of thing doesn't happen very often, but it's pretty neat when it does.

Sorry to get so far off topic, but that's a story I love to share.

Pkg Man wrote: But I also think that the quality of health care has improved due to technology and medical advances, making it more expensive for pure cost reasons.

There is certainly more technology, and more diagnosis right along with it.  Whether this is truly improving care and quality of life can be debated.  

The medical industry is second only to the financial industry in terms misinformation.


This book is pretty good, but really just scratches the tip of the iceberg.

http://www.amazon.com/Worried-Sick-Pres ... 0807831875

This one's about the mental health issue MT keeps mentioning.  

http://www.amazon.com/s/ref=nb_sb_ss_i_ ... n+epidemic

MediumTex wrote: I'm not in favor of death panels or anything, but...

I'm sure I'm not telling you anything you don't already know, but the fact that making ethical end-of-life medical decisions was compared to a "death panel," is a shame.  

Most of these desisions would require a simple conversation with a patient and his/her family the end result of which would be a peaceful and comfortable dying experience for the patient.  No one was talking about euthanizing anyone.  Drives me nuts!!!

Adam

Adam1226 wrote:
Most of these desisions would require a simple conversation with a patient and his/her family the end result of which would be a peaceful and comfortable dying experience for the patient.

Adam

Adam, in my experience, these conversations are already occurring. People still often want everything done for there loved one. It is a difficult problem that a broke country has to face.

And as a rock and roll aside, I would like to give a shout out to REO.

The death panel narrative is unfortunate.

My Dad passed away in 2005 and there came a point where it was clear that it was not productive to try to do anything else.  He died peacefully at home.  I would have done anything I could for him, but at some point it became clear that the disease had won. 

When you look at the fact that so much of our federal budget (SS, Medicare, 70% of medicaid) is diverted to sustaining the elderly, and another huge chunk (interest) basically the current "cost" of past society for the now elderly, one begins to get a little bit curious, insensitive, and sometimes even angry about the choices of why we transfer wealth in this country.

I would find it much more morally righteous if the federal government had enacted broad based educational/residential and health insurance programs for children in the 1930's and 1960's, respectively, rather than 2 programs basically taking from the young to keep the old alive and comfortable.

I am not one to quickly jump on the "eliminate SS & medicare" bandwagon, but it seems to me our society's values are a bit screwy when we've made people who've had their whole lives to save and are in their last years of their lives our financial priority at the expense of our future productive citizens and the children of this country today.  One wonders if their was that much liberal economic/political/moral theory behind these broad social insurance programs as much as the following three words having their usual affect:

"Old People Vote"

The unfunded liabilities problem is just one facet of the much larger problem of the whole society simply having far more debt than could ever be paid off (or even serviced) under almost any set of assumptions.

I think Japan will hit the wall before the U.S. will and it will be interesting to see how it unfolds when the ability to pile up more debt is finally exhausted.

In the U.S. it's like the whole country went on a debt binge starting in about 1983 and the future that no one thought about then is starting to turn into the present.

Keynes' quip about in the long run we are all dead is not exactly right.  In the long run the people who run up the debt ARE all dead, but that doesn't mean there aren't OTHER people around when the bills come due.

6 Iron wrote:
Adam, in my experience, these conversations are already occurring. People still often want everything done for there loved one. It is a difficult problem that a broke country has to face.

I agree that it is happening more, but I think it still often occurs in such a way as to make family members feel as though they are basically pulling the plug on grandma.  

Still, you're right.  I think there is some increased awareness recently.  

I think it's kinda one example (of many that are possible) of how the medical system has advertised itself in such a way as to foster false expectations from the public.

It reminds me a little bit of the financial world b/c I think people willingly buy into a lot of the dogma dispensed by both fields without much due dilligence of their own.  It's no surprise that both systems have become a bit troubled recently.

 

MediumTex wrote: The unfunded liabilities problem is just one facet of the much larger problem of the whole society simply having far more debt than could ever be paid off (or even serviced) under almost any set of assumptions.

I think Japan will hit the wall before the U.S. will and it will be interesting to see how it unfolds when the ability to pile up more debt is finally exhausted.

In the U.S. it's like the whole country went on a debt binge starting in about 1983 and the future that no one thought about then is starting to turn into the present.

Keynes' quip about in the long run we are all dead is not exactly right.  In the long run the people who run up the debt ARE all dead, but that doesn't mean there aren't OTHER people around when the bills come due.

I'm also watching Japan's situation.  I'm curious when mathematics meets reality.  300%?  500%?  10000% Debt/GDP?  If it never does, I say we should give up our jobs and just let Benny and the Inkjets take over.  What's the point in working if debt doesn't matter?

Wonk wrote: What's the point in working if debt doesn't matter?

Worked in Zimbabwe. 

Adam1226 wrote:

Wonk wrote: What's the point in working if debt doesn't matter?

Worked in Zimbabwe.  

Note that Zimbabwe does not have a credit based monetary system.  They are literally printing money in larger and larger denominations.  They aren't necessarily running up debt (though I am sure they have repeatedly defaulted on whatever money the international community was foolish enough to loan to them).  

Mugabe's picture should be in the dictionary next to the word "thug".

EDIT: it looks like Zimbabwe put in some sort of short term stabilization plan in 2009 that has stopped the runaway inflation (probably temporarily) by some kind of hybrid currency peg that is set to expire next year.

MediumTex wrote:
Note that Zimbabwe does not have a credit based monetary system.  They are literally printing money in larger and larger denominations. 

I've heard this argument before, but never fully understood.

Basically, in Zimbabwe, the government literally prints money and gives it directly to the people who then go out and spend it, which bids up the price of most everything.

In the US, the Fed buys debt from banks who can then loan the money out (or not), depending on how credit-worthy they think an indiviudal or business is, so the money can potentially sit in the bank. 

The problem is that this is not profitable for banks, as it looks bad to have billions of dollars in earning no interest sitting in their books, so they end up making bad loans.   

This is why, in the US, we have things like housing bubbles, or stock market bubbles instead  of hyperinflation when we create money.  It's it's the bursting of these bubbles that prevents us from literally printing money, such as is done in Zimbabwe.

Am I close?

I think there were some extreme economic mismanagement factors that had a lot to do with the hyperinflation.  Not monetarily related.