Economics

First Decline in Core Inflation Since 1982

|

With smart, targeted soap invesmtents, we can keep this system from collapsing.

Friday's Consumer Price Index Summary from the Bureau of Labor Statistics contained some news so arcanely bleak it drove even Paul Krugman, the doctor, to say two true things. The "core" CPI, which includes consumer prices except food and energy, has declined for the first time since 1982.

In a post quoted by Calculated Risk, Krugman sees facts not fitting his theories and suggests we change our way of measuring inflation. He also hits Federal Reserve Bank chairman Ben Bernanke with Japan's lost decade:

[C]ore CPI has been behaving erratically lately, making me doubt whether it's still a good guide to underlying inflation (by which I mean the trend in prices that, unlike commodity prices, have a lot of inertia).

What I find myself looking at these days are the Cleveland Fed "trimmed" inflation measures, which exclude outlying large price movements; the ultimate trim is the median, the rise in the price of the median category. And these indicators tell a story of dramatic disinflation in the face of a weak economy … We may have to start calling the Fed chairman Bernanke-san, after all.

Both of Krugman's points make sense. A year ago he cited a scenario in which the zombie banks would do nothing but consume government cash following the Japanese pattern, which is precisely what has happened. (For more on America's appropriation of the lost decade, check out Reason's July 2009 cover story.) Like all the core beliefs of the economic elite, of course, this one is worth a whore's wedding vow: When the TARP was still being debated, Krugman supported it, with rueful handwringing, in the belief that allowing rich pigs to suffer the consequences of their actions would have caused an apocalypse of a meltdown of an armageddon.

But the case against core CPI is more interesting. I have never understood what leaving out food and energy costs does to make core CPI a relevant representation of the economic well-being of Americans, and my recent experience at Safeway and the gas station indicates prices for both are flat anyway (though gas prices are said to be rising again).

The recovery getting underway.

The saddest thing about the economic hyperpocalypse is how little use anybody has made of it to throw out vast chunks of macroeconomic pettifoggery and monetarist voodoo. The contents of the consumer price index could probably use a more vigorous reshuffling if you want to get accurate numbers on what Mr. and Ms. Average are paying for stuff. Misleading concoctions like Owner's Equivalent Rent are still in use. Even GDP, that too-big-to-follow whale—and the only evidence, really, with which you can claim the recession is over—is as easily gamed as the tables at Rick's American Cafe. They can create more than a trillion additional dollars in the course of one year, and not cause the price of anything to go up. That's a pretty good reason not to believe anybody who claims to have things figured out.

The political way through the cognitive dissonance is to say, "The recovery is underway but people are still hurting." How about this instead: People are hurting because the recovery isn't underway. To recognize that we have to move the conversation beyond people like the Obama economic team, who say we need to keep pushing on a string; people like Krugman, who say we need to push harder; and people like Ben Bernanke, who say we need cheaper string. If you never travel outside the circle jerk of mutual congratulations, you might think all three of those claims are true.

As the masters of the economy wait for the little blue pill of inflation to kick in, kick back with Reason's coverage of what happened the last time it was 1982 and the era of runaway inflation was brought to a very painful end. Or see how inflation can give Old Kid Depression a sock on the button with this vintage propaganda from MGM:

And for more mind-boggling photos of soap bubbles being popped, check out Clementine's Posterous page.

NEXT: Under Obama's Watch, Lobbyists Keep On Keepin' On

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. “whore’s wedding vow” You mean the groom,right?

  2. That’s “Corps inflation” Tim. Axe Obama.

    1. Saying “Axe Obama” is pretty tone-deaf.

        1. He’s saying you’re a racist for making fun of Ebonics. I will now wag my finger at you digitally.

          1. Oh, I get it now. Can’t repeat the same pronunciation Obama uses on occasion when he invokes his Negro dialect.

            Is Nuklr still okay because White presidents said it that way?

  3. Like all the core beliefs of the economic elite, of course, this one is worth a whore’s wedding vow

    Stop comparing free-market, hard-working whores with politicians or Paul Krugman.

    And some whores wind up marrying men who are unaware of their past, and stick to their vows, trading in quantity for a steady income and light working conditions.

    1. Is that from the book of Mormon too?

  4. people like the Obama economic team, who say we need to keep pushing on a string; people like Krugman, who say we need to push harder; and people like Ben Bernanke, who say we need cheaper string.

    Very nice, Tim. The Olympic judges give you a 4.87 out of 5 for that one. It’s win all the way.

    And you didn’t even have to dress up in sequins and stand in the ‘Kiss and Cry’ area.

    1. Oh, I’m dressed in sequins. Nothing but sequins.

      1. Because of Reason’s impending network television revival of the 70s variety show? Oh, let it be true.

        1. Battle of the Bloggingheads’ Stars

          Welch is going to lion-tame. Gillespie is going to jump a shark on water skis. Weigel and Suderman vs. Moynihan and Mangu-Ward tug of war.

          1. Yeah, that would be okay, but I was thinking more Sonny & Cher or maybe Donnie & Marie. Songs, skits, the Ayn Rand Dancers.

            1. the Ayn Rand Dancers

              Thanks. Now all I can imagine is a sextet of dumpy Russian women in spandex writhing and chain smoking their way through Suderman croaking out “Gypsys, Tramps & Thieves.”

              1. Dumpy Russian women were a CIA plot.

                1. Apparently the skinny, coked idled ones are too.

                  The last time I was at a strip joint up in DC, a stripper told me,

                  ‘If you want a peak, you will have to tell me what you know about America’s security infrastructure.’

                  ‘Not a damn thing.’

                  ‘Too bad.’

                  1. Oh, misread you. She was obviously on the right wrong side.

          2. Welch is going to lion-tametoe.

        2. As long as The Jacket stays sequinless it’s all good.

          1. But rhinestones are okay, right?

            1. The Jacket will not be defiled with rhinestones. Maybe Nick can wear some on his choker but no rhinestones on the leather.

              It is somewhere in the amended version of Reason’s founding documents.

      2. Sequins don’t make the man, glitter does.

  5. So, even after all the borrowing and spending, we’re still going to have a deflationary spiral?

    1. exasperated hair pulling

      YES!!!! That’s the point guys like Robert Prechter and Mike Shedlock have been making for years now! The banks and government finally pushed SO MUCH credit and bad debt into the monetary system that they are now effectively impotent muppets and totally powerless against the deflationary forces it has created, despite their vaunted ability to print money.

      Deflation will be the ULTIMATE government sponsored catastrophe and the neo-Austrians are too busy checking the gold price on kitco and Reason is too busy hauling out old pictures of Gerald Ford wearing a W.I.N. button to write the story on it.

      1. You need to check the Hayek vs. Keyenes rap again. The point he makes at around 5.17., if memory serves addresses this.

      2. impotent muppets

        I thought that was impotent puppets at first glance. Correction canceled.

  6. Even GDP, that too-big-to-follow whale — and the only evidence, really, with which you can claim the recession is over — is as easily gamed as the tables at Rick’s American Cafe. They can create more than a trillion additional dollars in the course of one year, and not cause the price of anything to go up.

    GDP is a crappy measure of actual economic activity. If I do housework and yardwork on my own — zero addition to GDP. If I hire someone to do the same thing, higher GDP, even though the exact same things are being performed.

    If I drink beer, this is reflected in GDP. If I were to use 420, not. One type of buzz gets counted, the other doesn’t.

    And so on.

    1. You could drink Sweetwater 420 Pale Ale. It doesn’t contain any, uh, non-alcoholic intoxicants, though. But it would boost the Atlanta economy, at least a little.

    2. Yes, if you pay to have your chores done, then the money gets added to GDP. But doesn’t the money you paid for the chores then get subtracted from whatever you did with the same money when you were doing chores for yourself?

    3. I like Rothbards idea on this: the “G” (government spending) in GDP actually has the wrong sign. Because “G” is the sum total of transactions that were involuntary … that needed a gun pointed at somebody or they wouldn’t have taken place. So even if you are a minarchist and not an anarchist a better figure of merit for “how is the economy doing” would be GDP-2*G.

  7. That’s not a nun’s laugh; it’s a whore’s laugh.

    1. Here, child, finish your nothing.

      1. Geena, your presence intimidates me to the point of humiliation. Would you care to strike me?

        1. When did this become an erotica site?

  8. Point of clarification:
    a relevant representation of the economic well-being of Americans
    It’s not; the CPI is a measure of the amount of money in the system as compared to the inventories of goods. Food and energy are taken out of the core measure because they have wilder swings that can depend on outside influence, e.g. weather affecting crop yields. Inflation is caused by, as Freidman said, too many dollars chasing too few goods.

    They can create more than a trillion additional dollars in the course of one year, and not cause the price of anything to go up.
    That’s because they’re putting more goods out and supply and demdand are staying even.

    GDP, that too-big-to-follow whale — and the only evidence, really, with which you can claim the recession is over
    That’s news to the National Burea of Economic Research, you know, the people who assign dates to the beginning and end of a recession. They assign a monthly date and GDP is reported quarterly, which is why they use the Index of Coincident Economic Indicators: non-agricultural payrolls, personal income less transfer payments, industrial production and manufacturing and trade sales.

    That being said arguments can be made against the veracity of CPI and GDP measurements and the basket of goods used in the CPI.

    1. the CPI is a measure of the amount of money in the system as compared to the inventories of goods.

      Which is a perfectly reasonable thing to measure. The problem is that such a measure is not useful for determining inflation, nor for making cost-of-living adjustments; and yet it is used for precisely those things.

    2. That’s news to the National Burea of Economic Research, you know, the people who assign dates to the beginning and end of a recession.

      Going back to an old argument I had with joe….And they were granted that power by Who exactly?

      Yeah, fuck them, a recession is two consecutive quarters of declining GDP (as worthless a measure as that is).

      1. And they were granted that power by Who exactly?

        The government and everyone else who contracted with them to produce such numbers. When people contract with you for that job, I’m sure they will care about your personal style of business cycle measurement. Though I’m curious as to why you think GDP is a better measuring stick than coincident indicators.

        1. The government

          I must have missed that section of the constitution. Can you point it out to me?

  9. I have never understood what leaving out food and energy costs does to make core CPI a relevant representation of the economic well-being of Americans

    You think government-jiggered statistics are supposed to give an honest representation of Americans’ well-being? No, they simply provide charts that bureaucrats can point to if they want to brag about how well we’re doing under their aegis.

    Here’s how inflation statistics work: you complain because the cost of food and housing and energy and education and medical care is rising higher than your income, which makes you think “Damn! This sucks!” Then the government points to the items whose costs are actually counted in inflation statistics — namely, last season’s obsolete iToy, and the Dora the Explorer temporary tattoos so beloved by girls younger than five — and the prices for both have gone down, which means Americans’ standard of living is going up, which means anyone who says otherwise is just some whiny libertarian asshole who doesn’t sufficiently appreciate what our bureaucratic masters have done for us.

    1. So poeple can’t buy things they don’t need because the cost of things we do need has risen.

      I know lets only look at things we don’t need to measure inflation…Brilliant!!

      Good post Jeniffer. +2

  10. Dora the Explorer temporary tattoos?

  11. “But the case against core CPI is more interesting. I have never understood what leaving out food and energy costs does to make core CPI a relevant representation of the economic well-being of Americans, and my recent experience at Safeway and the gas station indicates prices for both are flat anyway (though gas prices are said to be rising again).”

    There is logic behind it. Those two areas are very volitile and dependent on areas that have nothing to do with monetary policy. If Iran goes nuts and nukes Israel, the price of oil (and thus US inflation) will skyrocket. If we have a terrible crop year the price of food will go up. Those things absolutely affect consumer well being and are relevant. But they don’t tell us anything about how our monetary policy is working and if we are getting inflation as a monetary phenomenon rather than a legitimate market price adjustment.

    1. Re: John,

      Those things absolutely affect consumer well being and are relevant. But they don’t tell us anything about how our monetary policy is working[…]

      Neither does the CPI. The basket of goods it is based on is more arbitrary and even less relevant to the point than an Easter giftbasket given on St. Valentine’s.

      I told that joke to my Economics teacher back when I was taking my MBA – he didn’t find it funny . . . NO pro-Fed Keynesian does, for some reason . . .

  12. In a post quoted by Calculated Risk, Krugman sees facts not fitting his theories and suggests we change our way of measuring infation.

    I think that last word is a typo. Did you mean “inflation” or “infatuation”?

    1. It’s not cool to make fun of Krugman’s weight.

  13. They can create more than a trillion additional dollars in the course of one year, and not cause the price of anything to go up.
    That’s because they’re putting more goods out and supply and demdand are staying even.
    In what country were you living for the year in question?

  14. I said before TARP and etc passed that we had the choice of 2 years of suck of at least a decade before we recovered.

    1. We should have taken the big suck and gotten it over with. Now we have 10 years of slightly less suck followed by crushing debt and maybe even worse suck.

      1. Yep. It would have been bad, but we would have already bottomed out and probably be on the upswing now.

        The banking industry would be in shambles and Michigan’s unemployment rate would have hit about 105%, but they would be correcting.

        1. Yes, and it would more likely be a sustainable recovery with people more aware of risk than the bubble we’re inflating now where people know they’ll get bailed out if they get in over their heads again.

        2. But if we had done that, the states would have defaulted on their pension obligations and everyone, including the unions, would have had to take pay cuts to get by. And we couldn’t have that. The whole thing was just a payoff to Democratic interests.

  15. To economists like Krugman and Bernanke, deflation is black death and inflation is a cure all. Just push the inflation button and all problems are instantly solved. Or if not, then you didn’t push the button hard enough.

    It’s not a sound theory, but it would be nice if it were true, wouldn’t it?

    1. Just push the inflation button and all problems are instantly solved.

      Deflation is black death to their ideology. Without inflation wreakless government spending will not be covered up by inflation and with deflation problems will mount the larger your government is.

      1. “wreakless” — I like it. Government spending that doesn’t smell bad. Very rare indeed.

  16. No inflation? How is gold doing? How is the US currency doing on foreign exchanges?

    1. There is a real market for gold. People use it for useful things. It is just sitting in bank vaults and in the mattresses of goldbugs. And the fact is that gold production has taken a nosedive in the last ten years. And demand, because it is a very useful metal, has continued to rise. Some of the rise in the price of gold is due to no shit market forces rather than the apocalyptic end of the dollar.

      1. I assume you are being sarcastic. I agree gold is weird and has nearly no utility. But it has had no utility for 10,000 years…yet for some fucked up reason humanity has put a premium on it.

        All markets are ultimately about perception. To assume gold does not act as hedge against inflation when it has acted that way since forever would be to ignore history.

        I don’t like it either but there it is.

        1. I agree gold is weird and has nearly no utility.

          Gold has many industrial uses.

          1. If you think Gold is priced from the demand generated from industry then I would like to show you a bridge i want to sell you.

            1. It is at least partially priced that way. Is it your contention that the metal is somehow immune from the laws of supply and demand? And I would bet that the number of industrial users of gold greatly outnumbers the number of gold bugs buying it for investment purposes.

            2. That’s not what I was responding too. I was responding to your claim that it has “nearly no utility.” That’s clearly false.

        2. Re: Joshua corning,

          yet for some fucked up reason humanity has put a premium on it.

          The reason is because gold is easily divided, recognizable, pretty to the eye, easy to coin, and slightly closer to indestructibility than Aunt Etna’s fruitcakes.

          1. Typical Gold Bug. Ascribing all kinds of magic and mystical properties to a shiny yellow metal.

        3. I am not being sarcastic. Gold is a very useful industrial material and the stuff is almost un-minable these days. We really may have hit peak gold. That is one of the reasons the price is going up, not the loss in the value of the dollar.

          1. There’s gold in space.

              1. But it’s lonely out in space.

                1. That’s only for Mars, which isn’t conducive to child-rearing, either.

                  Mining an asteroid? Sheer fun!

                  1. Yes, Mars ain’t the kind of place to raise your kids
                    In fact it’s cold as hell
                    And there’s no one there to raise them if you did.

                    But most of us are dealing with all this science [we] don’t understand.

                2. But it’s lonely out in space.

                  Another reason why they can’t hear you scream.

          2. I don’t have a dog in this fight, but gold is used in automotive air bag switches and in the contacts of computer RAM sticks.

            Angel or Devil, it is what you make it.

            1. and my teeth be made of gold. Arrrghhh.

          3. I can make things gold by touching them.

        4. Fabian Heretic!!!1

    2. It’s basically trading in a 1:1 relationship with the stock market. Owning gold and owning the S&P are almost the same thing at this point.

  17. peak gold

    As I said to the peak oilests who said oil would never drop below $150 again: bah.

    Gold is where it is because of the economy. The Gold:Oil ratio is just about right, unlike a few years ago, where the long gold, short oil strategy was a guaranteed moneymaker.

    1. We keep discovering more oil reserves. There hasn’t been a major gold strike in like 50 years.

      1. We don’t have auric-geology departments at universities either.

      2. But unlike oil, almost all the gold that has ever been mined is still in existence today.

        There hasn’t been a major gold strike in like 50 years.

        Define “major.”

        1. World Gold production peaked in 2005 at 2518 metric tons. In 2008, it was at 2356. It seems to have peaked. Note that the South African mines have dropped off dramatically. They are just mined out.

          http://www.goldsheetlinks.com/production.htm

  18. Shadowstats still runs the numbers using the old methods, and they show a pretty stout rate of inflation. Can’t get to it from here, but as I recall the method actually used back in 1982 would show inflation in the high single digits.

    Just sayin’ (the inflation numbers are cooked), is all

    1. That’s been so obvious that I wonder why NO ONE in the major media calls out the government on that point. I mean, I don’t really wonder, but it’s pretty pathetic.

  19. Another reason people like to store their wealth as gold: it’s heavy and dense. Try putting $50,000.00 worth of gold in your pocket and sneaking out the door — it’s not easy and people will notice you’re walking funny. Driving off in a $50,000.00 car, on the other hand, is easy and looks natural. Gold also looks good. I still remember what my wife said when she saw her first gold coin “How beautiful!”

  20. It says in the news today that after having been slowly creeping up for a while now, consumer confidence has suddenly nosedived back down to where it was about ten months ago.

    If things are looking up, the plebes are definitely not be getting the message.

  21. My current take on gold:

    Its price doesn’t reflect its value as ubermoney these days. It is traded like any other “risk asset”, which is why it tracks the other risk assets (other commodities, equities, etc.). For this reason, my gold portfolio has been much reduced recently (at a modest profit, thanks for asking).

    I’m currently of the opinion that gold should be held physically and used for savings. Gold miners should be treated like any other resource extraction investment.

    I am profoundly conflicted on where we are on an inflation/deflation cycle. Trillions of new cash has been created in the last year or so, but trillions in nominal assets were also destroyed. I think inflation, even hyper-inflation (reflecting a collapse in confidence in paper currencies) is coming, but I haven’t a clue when. Next year? Ten years?

    When it hits, you’ll be glad you’ve got some of your savings in gold. Until then, gold will be one hell of a tough investment to show a profit on.

    1. I think inflation, even hyper-inflation (reflecting a collapse in confidence in paper currencies) is coming, but I haven’t a clue when. Next year? Ten years?

      The inflation will hit the second after Banks start making loans again.

      1. A proxy i am using is comparing home prices of regions where smart growth constrains the supply of homes vs regions where there is no smart growth. When those two price averages start to parallel one another, i predict is when inflation will start to hit.

      2. The inflation will hit the second after Banks start making loans again.

        In other words, sometime probably later than a month or two from now, and earlier than the heat death of the universe.

        As long as the banks are preserved in insolvency and have toxic HELOC, second lien, option ARM crap sitting on their books and backing their depositors’ checking accounts, they’re not going to be making any loans to anybody.

        All the Austrian theory and Peter Schiff podcasts in the world won’t do investors a bit of good if they are stuck in gold and lose their jobs in a deflationary panic. Deflation is the (potential) midwife of hyperinflation. Hold cash so you can afford as much inflation insurance as possible when liquidation runs its course and gold bottoms.

    2. I think the inflation will come but not in hyperinflation form. Which is why we will have a dodecadip recession until about 2020 or so.

  22. Isn’t Krugman’s complaint the reason they keep monkeying with the inflation stats in the first place? He disagrees with the meaning attached to the delta in his variable, so the method of calculating the variable must be wrong. He’s forgotten the statistics are supposed to tell us something useful about the world, not be a club to whack your ideological opponents with.

  23. So do you guys honestly think the Fed should be tightening right now?

    Seems monetary policy is a blind spot for libertarians. Because inflation is a government created evil, it must be around the corner every second! Looking at the short term nominal rate as an indication of the easiness/tightness of policy is silly, as Scott Sumner has frequently pointed out. The policy instituted in late 2008 of paying interest on excess reserves has prevented any real growth in the money supply (not the monetary base.)

    1. No, we think the Fed should be not existing right now.

  24. Excellent article by David Stockman today:

    In your face, hippie moneterist


    Peering through a different frame, however, the Austrian notes that US money GDP was about $10.0 trillion at the time the Maestro let his exuberant cat out of the bag. Under an honest monetary regime this nicely rounded number might have stalled-out indefinitely — owing to the Great East Asian Deflation just then gathering a head of steam.

    The truth is, the extraordinary force of economic nature represented by the mercantilist export machine that sprung up in East Asia in the late 20th century was profoundly deflationary. Absent puffed-up domestic credit, the in-coming Asian trade would have flattened American employment, wages, incomes and prices. In so doing, it would have kept money GDP bottled-up at around $10 trillion, thereby denying the next decade’s debt-fueled rise in both output and prices which took money GDP to $14 trillion.

    By Austrian lights, then, this $4 trillion difference represents counterfeit GDP, owing to the false conversion of unsupportable borrowings into current income — debt which is now being forcibly liquidated. This bubble-driven inflation of money GDP also caused government revenues to swell unsustainably, thereby camouflaging for more than a decade the fiscal deficit’s actual, far more frightful, aspect.

    There’s no mystery in this contra-factual history. With money anchored to a standard, say gold, the armada of containerships steaming from the Pacific Rim into Long Beach would have brought massive trade deficits, but also would have set in motion their own correction. Taking flight in the opposite direction, gold bullion, not paper dollars, would have been on the backhaul to East Asia.

    In turn, an old-fashioned drain on America’s gold would have obviated a lot of fatuous jawing about the Chinese being seven-feet-tall economically or excessively addicted to an alleged financial opium called “over-saving.” Instead, without need for a single meeting of the open market committee, the loss of gold would have presently caused a sharp contraction of domestic bank reserves, a shrinkage of loans by an approximate 10 times multiple thereof and a sharp rise in the rate of interest on the dollar markets.

    Admittedly, consumption, imports, money wages, jobs and cost-bloated domestic enterprises would have all been laid low by such hard money discipline. But having thus been put to the mat, a nation of aging and now over-priced workers — and bankers, too — wouldn’t have found it expedient to live high on the hog. Instead, they would have discovered the “new normal” of higher savings, fewer credit cards, lower consumption, and slimmer paychecks — all on their own and about a decade sooner.It goes without saying that believers in the elixir of counterfeit money and credit, which is to say Keynesians, monetarists, and Goldman Sachs (GS) partners, will dismiss all this as flat-earth doctrine — fossilized ideas pre-dating the discovery of government’s wondrous power to manage the macro-economy.

    Still, a doctrine that holds out the state as an agent of economic betterment suffers from some deep flaws of its own. Decades of experience show, for example, that fiscal stimulus is an exercise by which one class and region steals from another. But the worse flaw is the hallowed central bank doctrine that deflation is always bad. In fact, wrong-headed deflation fighting is what generated the boom of the 1920s and the subsequent bust — a scenario repeated almost exactly during the last decade.

  25. I have never understood what leaving out food and energy costs does to make core CPI a relevant representation of the economic well-being of Americans,

    That’s probably because core inflation isn’t designed to tell you anything about the current economic well-being of Americans. That’s what you use the standard CPI for.

    Core CPI is used to estimate long-term inflation, because it correlates to long-term CPI trends more strongly than the unadjusted CPI numbers. Empirical tests show that if you want to predict what prices will be like eighteen months from now, using core CPI is more accurate than standard CPI. If you’re a business trying to make a budget for next year (or a central bank manipulating the money supply over the long term), core CPI is more useful for your planning than standard CPI.

    Krugman suggests that further-trimmed inflation, maybe even down to median CPI, fills the role of core CPI even better. That might be true. But even as those give you more accurate data on what prices will be like in a year or two, they would be even worse at telling you anything about the current economic well-being of Americans.

  26. “Recession” means that the real volume of goods and services being produced is dropping.

    “Expansion” means the production of goods and services is rising.

    The first part of the expansion, before the real volume of production has reached the level of its previous peak, is called “Recovery.”

    By its very nature, recovery is a situation where output is “too low,” relative to recent standards of what is the appropriate level of production.

    Even after output has “recovered” and reached its previous peak, it should have been rising all along. It will remain well below its long term growth path. Until that happens, production is “too low” relative to its past trajectory.

    Now, there are plenty of complications about the productive capacity of the economy and the possibility that production was “too high” before the recession started. All notions about what output “should be” are a bit precarious.

    But the notion that “recovery” means that the economy is supposedly “OK” is pretty ignorant. It just means it is no longer going in the wrong direction (down) and going in the right direction again, but may have a lot of catching up to do.

  27. “They can create more than a trillion additional dollars in the course of one year, and not cause the price of anything to go up. That’s a pretty good reason not to believe anybody who claims to have things figured out.”

    Supply and demand are basic principles of economics. Supply and _demand._ If the demand to hold money rises, and the quantity of money rises the same amount, then the purchasing power of money (the reciprocal of the price level) will be unchanged.

    The notion that changes in the quantity of money always has a proportional effect on prices is true, if one compares prices to what they would have been. If the demand for money rises, and the quantity of money is unchanged, the equilibrium price level falls. If the quantity of money rises to match the increase in money demand, then the price level is proportionately higher than it would have been if the quantity of money remained unchanged. But that isn’t higher than it was before the increase in the demand for money.

    Simple macroeconomics

    1. right-o. the only problem is determining what the “demand for money” is at a given point, and more to the point, ensuring that the supply is reduced once the demand for it wanes. the bursting of the credit bubble destroyed trillions of dollars of this countries aggregate balance sheet – the Fed’s expansion has merely corrected for that. The fact that core CPI is falling suggests that the Fed is actually still too tight. quantitative easing is here to stay. look for purchases of long dated assets, and increased TIPS issuance.

  28. Holy cow Bill, I am sure you are right but if It was too expliqu? dans le style des manuels scolaires.

  29. Thank you for the great web site – a true resource, and one many people clearly enjoy thanks for sharing the info, keep up the good work going….

Please to post comments

Comments are closed.