The information is based on April data and is therefore consistent with
the CS report. Both New York and Florida are at the top of the list of
states with the longest period between initial default and final
foreclosure. For the nation as a whole the number of days has nearly
doubled over the past few years. NY and Florida are 31% and 21% higher
than the national average.
This is not a coincidence. This is cause and affect in action. I live in
metro NYC and own property in S.Fl. I see what is going on. There are
many middle to upper price homes on the market that have not seen an
offer for more than a year. A good number of these are already in
default. The borrowers are underwater and there is nothing they can do. A
HAMP style ReFi accomplishes nothing. I know people in both areas who
have contacted their lender and have been told to come up with an
acceptable short sale or deed in lieu transaction. The borrowers have
been told by the bank(s) that if they do not cooperate they will have
their credit wrecked and be subject to default judgments. So the
borrower puts the house on the market and hopes for an offer that is
acceptable to the lender. In the mean time they stay in the home for up
to two years and pay very little (if anything) on the old mortgage.
There is substantial evidence that these people are buying IPhones and
going on vacation with the money they are saving by not paying the debt.
Some thoughts:
-This “extend and pretend” at its worst.
-The lenders will not let this continue forever. The day of reckoning is
coming. It well be felt in all of the states. It will be felt hardest
in the states that have the highest days to foreclosure numbers.
-As a former owner is foreclosed they will be forced to rent. Given that
few in this category are paying any meaningful amount of their current
monthly mortgage it is likely that they will have less disposable income
post foreclosure.
-My conclusions:
(A) RE in Fl and NY is going to tank this fall.
(B) Consumer demand for things from clothes, gadgets and leisure is
going to suffer an out sized decline.
(C) The extend and pretend policy is catching up with us. This approach
was a “buy some time” idea in the hope that things would work out. They
have not worked out. We are about to pay the price for that failure.
If we revert to more traditional levels in the ratio of initial default
and foreclosure we are going to hit an economic wall. This is just one
more thing stacking up against us.
41 Comments:
At 7/18/2010 10:51 AM,
VangelV said...
Let me remind you that pending sales are at an eleven year low and that you are still looking at a third of all sales coming from foreclosed properties. It is hard to spin that as optimistic news until we get most of the foreclosures behind us and prices have bottomed in real terms.
At 7/18/2010 5:09 PM,
Benjamin said...
CA house prices have pretty much bottomed, and are slowing rising in middle-class or better areas. The Inland Empire got tanked, and other less-wealthy areas.
Still, the Fed needs to do a lot more, a lot lot more.
We need reflation in property values to get the economy going again. The Fed needs to move aggressively to quantitative easing.
The Fed, like liberals moaning about injustice, or conservatives hysterically overfunding military boondoggles, is fighting a war long over.
Inflation is dead, deader than Jimmy Hoffa.
The Fed's mission now to get the economy going, by any means necessary.
Funny, it seems all of leaders are trapped in the 1960s--forever fighting 1960s battles against racists, commies or other "threats," and inflation.
Time to move on, dudes.
Even should the Fed err and stimulate too much, I would rather live through a long inflationary boom than a long deflationary recession.
Right now, the Fed has us targeting the latter.
At 7/18/2010 7:37 PM,
VangelV said...
We need reflation in property values to get the economy going again. The Fed needs to move aggressively to quantitative easing.
Why should the Fed punish savers because idiots in California, Arizona, and Florida bid up the price of housing to ridiculous levels? Housing is mostly owned by older people who have benefited from the cheap credit policies of the Fed for decades. It seems to me that if house prices reflected reality it would be great for the younger people who are currently priced out of the market and are unlikely to be able to afford homes if the Fed continues to take the country down the same inflationary path.
And I would not say that inflation is dead. If we read the latest Shadowstats report we find out that, “Adjusted to pre-Clinton (1990) methodology, annual CPI inflation was roughly 4.3% in June 2010, versus 5.4% in May, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, was about 8.4% (8.37% for those using the extra digit) in June, versus 9.2% in May.
The bottom line is that the government reporting does not seem to reflect the feelings of average individuals because the reports manipulate the data to minimize CPI and unemployment, while they overstate GDP growth. If we stuck to the reporting methods used in the early 1980s we would find that inflation and unemployment are significantly higher that what the government is reporting. If we want things to improve we need to let the economy flush out the bad investments and the reckless risk takers get wiped out as prudent savers and investors are rewarded for doing the right things.
At 7/18/2010 8:45 PM,
PeakTrader said...
VangelV, your belief inflation is understated doesn't add up. It's obvious, U.S. living standards improved substantially over time. Inflation likely remains grossly overstated.
Here's what the founder and CEO of Seeking Alpha stated:
Bill Gross Claims the CPI is Understated, But Is He Right?
"Your standard of living is your income divided by the cost of goods and services you purchase. If the cost of goods and services falls and your income holds steady, your standard of living rises. Don't tell me that the radical improvement to the standard of living for almost the entire US population due to the invention and mass production of the washing machine is captured purely by the price decline of advertised products. People used to spend a day a week washing clothes by hand! The substitution effect due to innovation and product improvement has to be captured somewhere, and the CPI is the right place to do it."
At 7/18/2010 9:23 PM,
VangelV said...
VangelV, your belief inflation is understated doesn't add up. It's obvious, U.S. living standards improved substantially over time. Inflation likely remains grossly overstated.
I cited John Williams at Shadowstats. He compares the reported CPI with a CPI that is calculated by using the same methods used in the 1980s before the changes made to the method during the Reagan Administration and the pre-Boskin method change, which was implemented by the Clinton administration. Using those methods we see a massive amount of inflation in consumer prices. Most goods and services are priced higher and taxes, fees, and service charges are higher.
This is felt by voters who have rejected the spin being told by the mainstream press and the analysts, abandoned the Republican and Democratic parties in droves and are now targeting specific candidates to support.
The bottom line is that the true money supply is increasing sharply and foreign lenders are having second thoughts about the wisdom of holding USTs as reserves at a time when Obama promises to run massive deficits as far as the eye can see and states are facing bankruptcies. If you look around you see the smart money has stopped attacking gold and have been quietly moving towards precious metals in the expectation of a major crisis that cannot be solved by injections of liquidity. Most fiat currencies are close to collapse and there isn't a viable solution that would get us out of the mess that the central banks created.
Sometime within the next decade you will see a major restructuring that will do away with the Welfare/Warfare state because there will be no real money to pay the bills with. Most people will see the folly of holding an 'asset' that is the liability of a counter-party and can be created out of thin air by an institution that has been granted a legal monopoly to counterfeit.
At 7/18/2010 9:32 PM,
VangelV said...
Bill Gross Claims the CPI is Understated, But Is He Right?
"Your standard of living is your income divided by the cost of goods and services you purchase. If the cost of goods and services falls and your income holds steady, your standard of living rises. Don't tell me that the radical improvement to the standard of living for almost the entire US population due to the invention and mass production of the washing machine is captured purely by the price decline of advertised products. People used to spend a day a week washing clothes by hand! The substitution effect due to innovation and product improvement has to be captured somewhere, and the CPI is the right place to do it."
We expect that the improvement of technology will lead to a much higher standard of living. But that does not negate the fact that most of the essentials that we use in our daily lives have gone up in price substantially. When was the last time you saw the price of health care, insurance, tuition, license fees, property taxes, rents, bread, eggs, milk, etc., go down in price? Is the average car cheaper now than it was ten years ago? Or house? Concert ticket? Basketball or football ticket?
I have seen these arguments before by people excusing changes that would hide price increases. We were told that real GDP was much higher because faster CPU speeds meant wealth that was not captured in the data. We were told not to worry about the price increases of beef because people would substitute factory farmed chicken, which was cheaper. So prices did not really go up; they went down.
What surprises me is the so-called bond geniuses not pointing out the obvious and demanding higher rates to compensate them for owning depreciating government paper. Perhaps I should not be surprised. Many of these idiots have been making their money by trading bonds and playing arb games across the yield curve. It seems that they too have been bitten by the bug and turned from being investors to being degenerate gamblers with other people's money.
At 7/18/2010 10:25 PM,
Benjamin said...
VangeIV-
Actually, I am more worried about commercial real estate--office, industrial retail all selling for half off.
If we get sustained deflation in property markets, our banking system collapses. Borrowers walk away from their non-recourse loans. Banks without money means a sustained deflationary recession, That may strike you as a fair result that teaches people a lesson, but really I would rather live through an inflationary boom.
The "bond geniuses" see what everyone sees: We are facing deflation. You will be lucky to earn small negative rates on your savings soon.
In inflation: The way to measure inflation has to be updated from time to time, and there is no "right" way. We all know about switching from beef to chicken when beef gets expensive. Or the incredible increases in computing power, much higher mpg cars etc. Healthcare care is more expensive and also better--how you measure inflation?
Here is a key point: If you had stuffed money in a mattress three years ago, you would be richer today than then. You could buy twice as many houses, retail centers etc. Almost any type of property, coast to coast.
In fact, you could buy more equity (stock) than 10 years ago.
We have had serious deflation in all investment asset categories--almost no DJ company is worth more than 10 years ago.
Deflation will lead to a long sustained recession. Think Japan, but without Japan's culture and civilization.
Even the gold lulu's are dumping gold, as they do not know what will happen to gold in a deflation.
At 7/19/2010 1:59 AM,
PeakTrader said...
VangelV, inflation is the general price level. It's inappropriate to pick and choose to create your own price level and claim that's really the general price level.
Like I said, your belief doesn't add up. If inflation was 8%, why was the bond market demanding less than 4%? Was the "Goldilocks" economy of 3 1/2% real growth and 2 1/2% inflation (or 6% nominal growth) an illusion, and it was really negative 2% real growth and 8% inflation?
Hedonic adjustments in the CPI were likely conservative, which would continue to overstate inflation, particularly since the Information Revolution began around 1982, which brought new products and faster quality improvements.
Using Hedonic Methods for Quality Adjustment in the CPI
There has been strong recommendation that the BLS explore the use of hedonic methods for quality adjustment in the Consumer Price Index (CPI) for decades. The Price Statistics Review Committee in 1961 expressed the view that hedonic analysis would provide a "more objective" approach to addressing quality change than the BLS standard methods of dealing with this issue. More recently, the Advisory Commission to Study the Consumer Price Index (the Boskin Commission Report, 1996) reiterated this recommendation, recognizing that accurate measures of quality change will enable a more accurate measure of pure price, or "cost-of-living" change.
A price index, such as the CPI, intends to measure the effects of price changes while holding other economic factors, such as the physical attributes of the goods available, constant. In the real world, however, goods and services are always changing in their physical characteristics. This makes it necessary to find some method of subtracting out the value of quality change when the market basket and prices change.
At 7/19/2010 7:16 AM,
VangelV said...
VangelV, inflation is the general price level. It's inappropriate to pick and choose to create your own price level and claim that's really the general price level.
You are confusing cause and effect. Inflation is the increase in the money supply. It is that increase that leads to a change in price levels. Inflation causes the real value of the monetary unit to erode and we see a loss of purchasing power. But that does not mean that the loss of purchasing power is uniform. Changes in technology and improvements in manufacturing techniques can make prices go down even during a period of relatively high inflation. (The 1920s are a good example of this.)
Like I said, your belief doesn't add up. If inflation was 8%, why was the bond market demanding less than 4%? Was the "Goldilocks" economy of 3 1/2% real growth and 2 1/2% inflation (or 6% nominal growth) an illusion, and it was really negative 2% real growth and 8% inflation?
We have no free market. When the Fed adds liquidity and gives the banks money at close to zero interest the banks in turn buy USTs and the bond yields fall. That will persist as long as the Fed is prepared to keep lending at close to zero percent and there is an arbitrage opportunity.
Of course, it helps to have other countries with massive debt problems that are as bad or worse and foreign banks looking for 'safety.' But that game has not worked out very well because the purchasing power of all fiat currencies has been falling. That is the reason why gold has risen to a record high in all currencies even as central banks have done all they can to suppress the price by leasing their gold reserves to bullion banks, which have sold it in the open market. Even with the usual sharp corrections triggered by massive shorts in the futures market the price of gold has been going up since the period of disinflation ended a decade ago.
At 7/19/2010 7:53 AM,
VangelV said...
Hedonic adjustments in the CPI were likely conservative, which would continue to overstate inflation, particularly since the Information Revolution began around 1982, which brought new products and faster quality improvements.
No. The changes are not conservative because their purpose has nothing to do with measuring the change in price levels experienced by the average family, which is what CPI was supposedly designed to reflect. It was an indicator that measured the change in the cost of a FIXED basket of products and services that included housing, energy, health care, food, and transportation. When those price increases could not be hidden the government chose to 'adjust' the methodology used to calculate the index. The sleight of hand developed by Boskin and others before him is a simple fraud designed to play games of make pretend and to avoid a system meltdown. But that is not working very well because the public has become aware that what is being reported has not exactly been the common experience of most people.
I would be taking advantage of the periodic sharp gold price contractions to accumulate some cheap insurance against the fraud. If you do not you will have nobody to blame for the effects of teh crisis but yourself.
At 7/19/2010 9:58 AM,
morganovich said...
vangel-
i think you are correct about the hedonic adjustments, but i also think that their significance to CPI has been less important than the shift from using an arithmetic mean to a geometric one.
the shift to geometric calculation emphasizes whatever products in the consumption basket drop in price and reduces the weighting of whatever rises. clearly, such a change can only have the effect of reducing reported CPI. however, all the elasticities etc that are assumed under such a methodology are purely hypothetical and no actual data is used to arrive at them, so gasoline is presumed to have the same elasticity as movie tickets, a ludicrous assumption.
the further we move from just measuring price changes into an adjusted hypothetical world statistical manipulation, the greater the danger that we have obscured what is actually going on.
At 7/19/2010 11:18 AM,
Bill said...
Vangel: So are you saying that housing is overpriced and gold is underpriced? If so, that is frankly laughable.
Also, what role does inflation play in housing prices in your view?
At 7/19/2010 12:17 PM,
morganovich said...
bill-
just a sidenote, but you comment seems to have some backwards causality in it.
increases in housing prices causes inflation, not the other way around. absent wage increases, inflation in some commodities consumed (like gasoline, food, whatever) cause disinflation in other commodities as less money is left to buy them.
it's not as though there is one even inflation rate that filters into goods. it is their price changes that cause inflation, not inflation that causes their price changes.
At 7/19/2010 1:05 PM,
VangelV said...
the further we move from just measuring price changes into an adjusted hypothetical world statistical manipulation, the greater the danger that we have obscured what is actually going on....
I agree. So do many voters who no longer trust the government reports because they do not reflect their personal experiences.
For the record, I think that the CPI is a flawed measure because it does not reflect the actual experiences of individuals across class and age distributions. For someone like me the experience over the past decade has been one of deflation because I spend a great deal of money on items like books, software, technology and other items that have gone way down in price. By moving my kids from a decent private school to excellent public schools that were free my biggest cost item went to zero. And by retiring I reduced the impact of some cost items that were heavily influenced by inflation. But my experience is not common and for many people, particularly the poor, the last decade has been one of a large loss of purchasing power.
At 7/19/2010 1:12 PM,
VangelV said...
Vangel: So are you saying that housing is overpriced and gold is underpriced? If so, that is frankly laughable.
I was told that when I began to purchase gold in 2000. It is now selling for about four times what I purchased it for. The house I own has only doubled in price. While we have not seen the carnage in real estate that the US saw it is clear that housing prices are way too high in Canada and likely on the way down.
That said, local house prices in the area in which I live are moderately overpriced when compared to those in California where easy credit and fraud allowed people to buy prices that were well above their true free market values with money that they could not afford to pay back. We now see a mountain of inventory ready to add supply to the market any time prices seem to firm up. While I do not discount a nominal price increase the real price of housing will go down and you will be able to buy a typical house with fewer ounces of gold in three or four years than you what it goes for today.
Also, what role does inflation play in housing prices in your view?
The increase of money and credit allowed more people to bid up the price of housing to unsustainable levels. In a free market system a house would sell for about 100 times its monthly rent. During the peak we were seeing prices three or four times that level.
At 7/19/2010 1:22 PM,
VangelV said...
increases in housing prices causes inflation, not the other way around. absent wage increases, inflation in some commodities consumed (like gasoline, food, whatever) cause disinflation in other commodities as less money is left to buy them.
You are confusing cause and effect. Not too long ago inflation and deflation had simple definitions that were tied in to the supply of money and credit. The statists did not like that and, as they usually do, twisted the language to add confusion. Now price increases, the effect, are confused with inflation, the increase in the supply of money and credit.
Your ignorance of the problem is easily explainable if you are young and not well read in economics. See the links below for some clarification.
http://www.dailypaul.com/node/137327
http://www.inflationdata.com/Inflation/Inflation_Articles/Inflation_Definition.asp
At 7/19/2010 4:29 PM,
PeakTrader said...
Without responding to false assumptions, anyone who believes inflation (reflected in the general price level) has been understated needs to look at the real economy. Real wages have been flat since the mid-'60s. Yet, a typical individual can purchase much more with one months income today than in the mid-'60s. Real wages have been flat, because inflation has been overstated.
At 7/19/2010 4:40 PM,
morganovich said...
vangel-
i think it is you who have this a bit backwards or at least are just splitting semantic hairs. (and FWIW, i have 16 years of experience in financial markets and am an avid student of both economics and economic history with multiple degrees in the fields. this does not make me right, but it does mean i have a highly informed opinion on the topic, so why don't we focus on the substance of the issue rather than making claims about youth and being uninformed.)
inflation is change in price. this has been the common usage for decades and centuries. the inflationary definition to which you refer is monetary inflation (as opposed to price inflation which is now commonly called "inflation") the 2 used to be more clearly delineated in their usage.
many things can cause price inflation, including (but certainly not limited to) money supply. anything that limits the aggregate supply of goods also causes inflation.
imagine a policy that no new homes could be built in the US. population would continue to grow, and even with a steady monetary base that would cause price inflation in housing as demand increased and supply could not adjust.
bingo. price inflation without monetary expansion.
you are using an uncommon and quite dated secondary usage of "inflation" to supplant the usage of the primary definition. it's essentially semantic hair splitting.
as a % inflation has long been defined as:
(price in year x+1 - price in year x)/ price in year x.
using an old dictionary usage to contradict literally centuries of economics texts is really little more than a parlor game.
you are just trying to redefine a term the meaning of which the rest of the discussion has a clear view. let us stick to economics rather than rhetoric.
even the purely monetarist view of M * V = P * Q allows for inflation without monetary expansion through either hikes in V (velocity of money) or a decline in Q (quantity of goods)
the definition you posit refers to monetary inflation, not price inflation which is what is commonly meant when the word inflation is used.
monetary inflation can cause price inflation, but it is not in and of itself price inflation.
if money supply expands but less rapidly than supply of goods or less rapidly than velocity of money declines, you can have price deflation at the same time as monetary inflation.
At 7/19/2010 5:22 PM,
misterjosh said...
The median price was $8000 lower. Isn't that the amount of the house buying stimulus? Was that effective in May?
At 7/19/2010 6:16 PM,
VangelV said...
...inflation is change in price. this has been the common usage for decades and centuries. the inflationary definition to which you refer is monetary inflation (as opposed to price inflation which is now commonly called "inflation") the 2 used to be more clearly delineated in their usage.
You just proved my point that your knowledge of economics is very limited. The definition of inflation and deflation have been changed quite recently because of the desire by staists to confuse voters so that they stay ignorant--as you seem to be--of the difference between cause and effect.
As late as 1983 Webster's New Universal Unabridged Dictionary defined inflation as, "An increase in the amount of currency in circulation, resulting in a relatively sharp and sudden fall in its value and rise in prices: it may be caused by an increase in the volume of paper money issued or of gold mined, or a relative increase in expenditures as when the supply of goods fails to meet the demand."
The evidence is quite clear. Inflation used to mean an increase in the supply of money and credit, not a change in price levels. That changed recently when Keynesian professors who dominate the economics field began to talk of inflation as a persistent increase in the level of consumer prices without saying much about the cause--the increase in available currency and credit beyond the proportion of readily available goods or services.
many things can cause price inflation, including (but certainly not limited to) money supply. anything that limits the aggregate supply of goods also causes inflation.
I agree that other factors can effect the price of some goods and services. We have seen that in computers and electronics where prices kept going down even during periods of rapid monetary growth.
imagine a policy that no new homes could be built in the US. population would continue to grow, and even with a steady monetary base that would cause price inflation in housing as demand increased and supply could not adjust.
How quaint. Let us imagine a policy that changes supply. That does not show anything because I have never claimed that a change in supply could not have effects that would not be predicted by looking at the supply of money and credit. My argument is about what happens to general prices as the supply of credit and money grows faster than the supply of goods and services.
Have to go now and pick up the kids from basketball. If there is anything that I have not addressed will get back to the argument when I get the time.
At 7/19/2010 7:52 PM,
morganovich said...
no vangel, they have not.
what has changed is that what was called price inflation is now simply called inflation and that the sort of inflation you refer to is called monetary inflation.
it's like arguing that "dude" used to be an insult. so what? word usage changes. in the case of inflation it did so to bring common usage (webster) into line with the academic usage of economists).
your argument about money supply outstripping an increase in output (assuming constant velocity) is both obvious and valid. of course that is so. M * V = P * Q tells us so.
but your argument about the webster's definition of inflation is just semantic hair splitting. you knew full well we were discussing changes in price level and are just being contrary to no apparent purpose apart from showing that words change. irrespective of what webster says "inflation" has been in common usage by economists to mean change in price level for nearly 100 years. go read fisher on the topic. that was written in the early 1900's. you will find his usage to be that of the current webster definition.
many words are used differently in academic and scientific forums than their public usage. what you have proved is not that i lack a historical basis in economics, but that you have not, in fact, read any old economists and are thus susceptible to notions like the statists changing the definition of a word.
the fact that public use of the word has come into line with academic usage is a sign of nothing other than the increased precision of english.
if you want to argue that inflation measures such as CPI have been horribly adulterated since the 80's and no longer mean what they used to, there i am in complete agreement, but using questionable semantics in an attempt to demonstrate a statist plot simply stretches credulity too far. you are well into tinfoil hat territory there and your notions that "inflation" entered the economic lexicon as meaning price level change as a result of the keynsians is provably false. it was so used before the(again, read your fisher)
i realize that both usages used to be common, but that has not been so for a very long time, so i don't see what the point of your hair splitting is. if you want to make a point about monetary policy (and it seems awfully loose to me as well), make it, but enough with the definitional squabbles. you know full well what the common usage of the word is and just seem to want to be difficult.
At 7/19/2010 9:33 PM,
VangelV said...
it's like arguing that "dude" used to be an insult. so what? word usage changes. in the case of inflation it did so to bring common usage (webster) into line with the academic usage of economists)....
No, it isn't. By confusing the effect with the cause the government makes it easier to limit economic liberty and to ruin savers. And as I said, the new use was not common. It was understood that price inflation was caused by monetary inflation, which is what economists found more interesting and meaningful to think, write, and talk about. The change was pushed by the progressives who needed cover for what they were doing to ruin the economy with their false and dangerous ideology.
As I said, you Keynesians do not understand economics because if you did you would reject your views. I found it amusing that Ron Paul and Peter Schiff were being ridiculed for pointing out the obvious. While they (and the Austrians) pointed out that housing was in a massive bubble the Keynesians who dominate the profession and have most of the positions at the Fed were talking up the bubble and saying that everything was fine. What I find interesting is that the same thing is being repeated once again as the spin about the false recovery is taking hold in the media even as the average person is finally paying attention and seeing that things are not what the false prophets at the Fed and the government are suggesting.
At 7/19/2010 9:33 PM,
VangelV said...
your argument about money supply outstripping an increase in output (assuming constant velocity) is both obvious and valid. of course that is so. M * V = P * Q tells us so.
Fisher's nonsense? That is what you are relying on for support of your silly ideas?
For the record, I agree with Rothbard on this. He pointed out that the equation is a meaningless triviality that tells us that money spent equals money spent, or that it is simply wrong. You can look at his Man Economy & State, Mises' Human Action, Anderson, or a number of other economists who expose the Fisher fallacy for the empty and meaningless drivel that it is.
Before I go over the equation and point out the obvious problems with it let me state that the people who take the equation seriously seem to be unaware of the fact that money is not the means of payment but the means of exchange. When I buy a $200 pair of shoes I pay for those shoes with the production of goods and services that I exchanged for the $200. It does not matter how many times that $200 exchanged hands; what bought those shoes was my production. (The real pool of funding comes out of real production, not the speed at which money is exchanged.)
Because I do not want to divert from the equation I will end the argument in the paragraph above in the hope that you understand what I am trying to say. But even if you do not it does not matter because you seem to be unaware of the problems with your equation.
What are those problems? Well, let us begin by pointing out that Fisher's 'Q' cannot be determined in reality and without it the equation is meaningless drivel. (For those unfamiliar with Fisher, Q stands for the total physical quantity of goods exchanged but that is a meaningless concept because one cannot add the sale of a potato to a Porsche and get a number that means anything in the real world.)
Fisher's P, 'the average price level,' suffers from the same problem; it can't be measured or calculated. Please tell us how one can average the sale prices of Porsches, porches, potatoes, popcorn and all other goods and services in the economy to get a number that means something? I suspect that even an ideologue would have to admit that without meaning all you are doing is stating a few general trivialities that have no application in the real world.
That brings us back to V, a dependent variable that is calculated by multiplying two meaningless numbers and dividing them by a number that we cannot measure very well because we can't agree on a proper definition. How exactly can you take a concept like velocity seriously when you can't measure it and have to calculate it by multiplying numbers that cannot be measured (and have no real meaning) and divide them by a number that you can't really agree on?
No wonder you are so confused. You take a trivial equation that has no real meaning and use it as a foundation for your political ideology as you pretend that it is self evident truth. Sorry but that does not work well with rational thinkers.
At 7/20/2010 8:50 AM,
morganovich said...
vangel-
rothbard? anarcho-capitalism? really? to spout that doctrine and while accusing others of not living in the real world is ridiculous. he's the one they trot out when trying to make the austrian school look ridiculous and ungrounded in reality. stick to hayek and von mises.
i didn't say i was a monetarist. i actually lean more towards the austrians. (but not rothbard who simply does not live in the real world) i just tossed out that equation to make a point - money supply is only a part of price inflation.
as an equation, it holds fine. as you say, it just means money spent = money spent, virtually a tautology. to avoid this obvious fact, you attempt to shift the problem to one of data collection as a rhetorical dodge.
of course data collection is hard. no one can ever know the price of every good and service that changes hands nor are goods and services consistent over time. it's a VERY difficult task. we may argue about the best methodology, but you certainly cannot substitute money supply for price level and expect to know what's going on, so you have to try something, no? GDP is an estimate too, real GDP doubly so as it needs a CPI calculation first. so is unemployment, and pretty much every other economic variable. that's living in the real world. you use the best data you have. shall we just fly blind? i grant you, i liked the CPI much better in 1980 than once grrenspan was done with it and i prefer to use a privately calculated figure using the old methodology, but that's still an estimate too, just one i like better. you seem to be saying we should say "data gathering is hard. let's not measure the economy". congratulations, you have discovered margin of error in data collection. so, enough with your attempt to change the argument, back to the substance:
claiming that the data cannot be easily measured does not mean the equation is untrue, only difficult to apply. your semantic wriggles seem endless. do you ever actually get to the facts? price inflation and monetary inflation are different. ceteris paribus, the latter causes the former, but it need not do so if other variables change nor must money supply increase to cause price inflation.
your shoes example is flawed in an important way: velocity does matter. sure, the real value is the real value, but the amount of money needed to support all the transactions in a society depends on how rapidly it moves. as soon as we add money, the figures become nominal. you are confusing your terms. think of velocity of money as like friction. if low, you need a lot of money to cover the same transactions else it's scarcity will begin to drive either Q down or M up as credit is extended.
your argument that a variable is not important because it needs to be calculated is ridiculous. study some physics. are you saying that drag coefficients are not real? coefficients of friction? you can only measure these through inference from other variables. you have read a bunch of kooks and are substituting that for rigorous understanding of the math and theory.
to quote your own words "no wonder you are so confused".
At 7/20/2010 12:10 PM,
VangelV said...
rothbard? anarcho-capitalism? really? to spout that doctrine and while accusing others of not living in the real world is ridiculous. he's the one they trot out when trying to make the austrian school look ridiculous and ungrounded in reality. stick to hayek and von mises.
Why not stick to the economic argument instead attacking the political views? As I said, Rothbard, Mises and many other Austrian economists have taken apart most of the foundations that Keynesians use to support their unworkable, illogical, and muddled economic theories. Until you can point out where the Austrians went wrong you have no valid counterargument.
i didn't say i was a monetarist. i actually lean more towards the austrians. (but not rothbard who simply does not live in the real world) i just tossed out that equation to make a point - money supply is only a part of price inflation.
You did make a point. You believe economics theories that are based on unsupportable foundations like the quantity theory of money. You may not agree with Rothbard's political views or his defense of individual liberty but I never brought those issues up and stuck to the economics.
as an equation, it holds fine. as you say, it just means money spent = money spent, virtually a tautology. to avoid this obvious fact, you attempt to shift the problem to one of data collection as a rhetorical dodge.
As I said, the equation has no meaning and you can't talk about velocity if you can't measure it and have to come up with it by doing arithmetic operations on other variables that can't be measured or calculated. The use of that equation is theology, not science.
You also missed the other point that I was making. Printing money does not create wealth or help individuals because their purchasing power is based on the value of their own production with respect to the production of others, not how fast money is circulated in the economy.
At 7/20/2010 12:22 PM,
VangelV said...
of course data collection is hard. no one can ever know the price of every good and service that changes hands nor are goods and services consistent over time. it's a VERY difficult task. we may argue about the best methodology, but you certainly cannot substitute money supply for price level and expect to know what's going on, so you have to try something, no? GDP is an estimate too, real GDP doubly so as it needs a CPI calculation first. so is unemployment, and pretty much every other economic variable. that's living in the real world. you use the best data you have. shall we just fly blind? i grant you, i liked the CPI much better in 1980 than once grrenspan was done with it and i prefer to use a privately calculated figure using the old methodology, but that's still an estimate too, just one i like better. you seem to be saying we should say "data gathering is hard. let's not measure the economy". congratulations, you have discovered margin of error in data collection. so, enough with your attempt to change the argument, back to the substance:...
Let me stop your argument there. What you are saying is that you admit that you have no idea how to measure or calculate the value of the variables in the equation but that having government workers making wild assed guesses is better than doing nothing.
Now if you could point to the data gatherers and anlaysts being able to use the made up data to come up with accurate predictions I might cut you some slack but you can't. It was not the Keynesian users of that equation or the bureaucrats who were pointing out the dangers in the early 2000s but the Austrian economists, who stuck to the actual unimpeachable fundamentals. While the Keynesians were taking up their use of models and methods that never seemed to be able to predict anything the Austrians pointed out that using linear equations to predict outcomes in a non-linear dynamic system was worse than stupid.
That is why most of the people on your side of the argument failed to see the crisis coming while the Austrians nailed it. You will never understand economics until you get rid of the false foundation that you learned in school and embrace reality.
claiming that the data cannot be easily measured does not mean the equation is untrue, only difficult to apply. your semantic wriggles seem endless. do you ever actually get to the facts? price inflation and monetary inflation are different. ceteris paribus, the latter causes the former, but it need not do so if other variables change nor must money supply increase to cause price inflation.
As I said, the equation is a true triviality. Saying that white is white does not give us free license to pretend that we can draw valid conclusions by using mathematical equations that are not suitable for non-linear systems. The modern economic profession is a fraud that make astrologers and Marxist media critics look good in comparison. The fraud continues because economists provide cover for governments looking to destroy the productive classed by using redistribution schemes that keep them in power and to transfer wealth from workers, savers, and investors to the ruling politically dependent class.
As I wrote (and you agreed), the equation is a meaningless triviality. As such it is unsuitable to support the arguments that you are trying to make.
At 7/20/2010 12:33 PM,
VangelV said...
your shoes example is flawed in an important way: velocity does matter. sure, the real value is the real value, but the amount of money needed to support all the transactions in a society depends on how rapidly it moves. as soon as we add money, the figures become nominal. you are confusing your terms. think of velocity of money as like friction. if low, you need a lot of money to cover the same transactions else it's scarcity will begin to drive either Q down or M up as credit is extended.
It is amazing how you fail to see that the money is a medium of exchange. If farmer Joe buys a salmon from Frank the fishmonger for $10 the funding comes from the bushel of wheat that farmer Joe produced. The amount of money does not matter because the relative exchange will be the same. What is really exchanged is the wheat for the salmon with money playing the role of medium of exchange, not the means of payment.
It is because you understand so little about the nature of money and monetary theory that you make errors in logic that would not be made by those that are more knowledgeable in the subject. Of course, you are not alone in this. The financial media keeps trotting out the same group of idiot 'experts' who are even more clueless than you are and who keep making predictions that would make us very wealthy if we bet on the opposite coming true. They too suffer from a poor education in which political ideology was being passed off as science.
In an era of free and accurate information that is readily accessible we have no excuse for turning a blind eye to reality or the truth. While I came from a similar position as you did I had the courage to abandon it when new information that destroyed the positions that I believed in became available. I think that you may wish to reexamine what you believe in and take the same route.
At 7/20/2010 1:19 PM,
VangelV said...
your argument that a variable is not important because it needs to be calculated is ridiculous. study some physics. are you saying that drag coefficients are not real? coefficients of friction? you can only measure these through inference from other variables. you have read a bunch of kooks and are substituting that for rigorous understanding of the math and theory.
My argument is that you can't use a trivial equation that says money paid equals money received to mean more than it does. As I said, funding from purchases comes out of actual production, not the quantity of money because goods and services are valued relatively to each other. If a bushel of whet will get me a salmon it does not matter whether the medium of exchange says that both are worth $1 or $100. If the increased quantity of money were the path to wealth than Wiemar Germany, post-Tito Yugoslavia or Mugabe's Zimbabwe would have been a paradise for workers and savers.
to quote your own words "no wonder you are so confused".
As I said, you try to use an equation that says money spent equals money received to mean something that it does not by trying to isolate variables that you cannot measure or calculate EVEN IN THEORY. As I asked, how do you add the production of potatoes to the production of Porsches to get anything meaningful? Or how do you average the price paid for a pound of potatoes, a gallon of milk, a Porsche, a house in Maine, a chicken in Alabama, and an alligator burger in Florida to get an average price per unit of production? You can't. So you pretend that guessing is enough because you have an equation that tells us A is A and that is a tautology that is not disputed. The fact that you can't start with A is A and get to your politically based economic beliefs never seems to bother you.
Well, it would bother a rational individual who values truth over politics or ideology.
At 7/20/2010 1:40 PM,
morganovich said...
vangel-
no. that is absolutely wrong. money exists for reasons other than eliminating the coincidence of wants problem.
you keep saying $10 worth of wheat like that is a real exchange rate. it's not. you are confusing your terms. the real exchange rate might be a half pound of salmon for a bushel of wheat. once you inject the notion of $10 worth, it's a monetary issue. the example you lay out is meaningless.
the wheat to salmon exchange rate can and will change. thus, the amount of salmon that = $10 might differ as might the amount of wheat. the fact that the price of salmon can rise relative to wheat in physical terms demonstrates that not all inflation is monetary. whereas a 1/2 pound of salmon might buy a bushel today, it might take 3/4 pound next week if the salmon are running. that's non monetary wheat inflation. how is it that you cannot see this?
notions that it doesn't matter if you call it $10 or $100 dollars are very limited in their scope. it sure matters if you have savings in dollars. that inflation would sentence you to penury if you were on a fixed income or make you joyous if you had loans outstanding.
you keep making all these unsupported claims about your monetary knowlwdge, but pepper them with such rudimentary errors that i'm not really sure how to speak to you. you are looking at once piece of a system (and a piece you do not seem to understand) and mistaking it for the whole.
worse, you seem to feel that because dta collection is difficult that it is meaningless. that's a cute armchair position to take, but in the real world people like me need to make predictions about what is going to happen. to do that, we need data. one must be aware of its limits, but to abandon it altogether or to pretend that friction doesn't exist because you must calculate its coefficient from other variables is just stupid. it's a parlor game played by people who don't have to make decisions.
your reading comprehension is also pitiful, as, if you go back, you will see that i did in fact say that i do support the austrian school. i have little respect for the keynsian straw man you keep trying to pin on me. the difference between you and i is that twofold:
unlike you, i actually understand the austrian school as you clearly do not.
also unlike you, i am living in a real world where models need to be made and judgments rendered about the future. i do this to guide economic decisions. the government does a lousy job of a great deal of this which is why many of us use other data series, but we do need data. (i know john williams well and use his datasets for certain applications) we manage to extract some very useful predictive value from it.
that's science, not theology. science has error bars. all measurement has error. it doesn't stop us from building airplanes and nuclear reactors. your platonic notions of perfect data are just quackery. even numbers like money supply are estimates. you do the best you can with what you have and keep the limits in mind when drawing conclusions. that is how science works. you have obviously never performed any and are just regurgitating quackery masquerading as intellectualism and erecting a straw man argument that if data isn't perfect, it isn't useful. knowing you are going 70 MPH +/- 10 MPH might not be perfect, but it's a helluva lot more useful than just saying "fast".
At 7/20/2010 2:15 PM,
VangelV said...
no. that is absolutely wrong. money exists for reasons other than eliminating the coincidence of wants problem.
How can I be wrong when I never said it? I claim that money is a medium of exchange. You agree.
you keep saying $10 worth of wheat like that is a real exchange rate. it's not. you are confusing your terms. the real exchange rate might be a half pound of salmon for a bushel of wheat. once you inject the notion of $10 worth, it's a monetary issue. the example you lay out is meaningless.
No it isn't. I am merely pointing out that the funding for the purchase comes out of production. If the money supply was doubled or cut in half a bushel of wheat would still be exchanged for a salmon.
the wheat to salmon exchange rate can and will change. thus, the amount of salmon that = $10 might differ as might the amount of wheat. the fact that the price of salmon can rise relative to wheat in physical terms demonstrates that not all inflation is monetary. whereas a 1/2 pound of salmon might buy a bushel today, it might take 3/4 pound next week if the salmon are running. that's non monetary wheat inflation. how is it that you cannot see this?
I think that you have no idea about what you are reading. I have never claimed that the value of some goods cannot increase relative to others. In fact, I have been clear that we have seen major price declines in new technology items even during periods of high inflation. All I have argued is that the exchange is between the goods in question and that the currency is just the media of exchange. A change in the amount of currency in circulation will not change the relative valuation between the goods that are being exchanged. (I am ignoring the timing differences. Obviously there is time dependency when the supply of money and credit are in great flux and even if the relative valuation between two goods stays the same the price can be different due to the time dependence.)
notions that it doesn't matter if you call it $10 or $100 dollars are very limited in their scope. it sure matters if you have savings in dollars. that inflation would sentence you to penury if you were on a fixed income or make you joyous if you had loans outstanding.
Again you miss the obvious. It makes no difference if a loaf of bread costs $0.15 or $1.50 if it is exchangeable for ten eggs in both cases. The trouble is not the amount of money but the CHANGE in the quantity of money. That is why I oppose the inflation that you are calling for. By increasing the money supply you are calling for an attack on savers so that you can help borrowers. I see no moral justification to use the power of government to hurt one class so that you can help another.
At 7/20/2010 3:08 PM,
VangelV said...
you keep making all these unsupported claims about your monetary knowlwdge, but pepper them with such rudimentary errors that i'm not really sure how to speak to you. you are looking at once piece of a system (and a piece you do not seem to understand) and mistaking it for the whole.
The fact that you read into something that I write that isn't there is your problem, not mine. As I said, I have never said that money is not a medium of exchange that helps to facilitate transactions. I have never claimed that some goods cannot change in price relative to other goods regardless of the monetary conditions. Your misrepresentations of my position does not support the positions that you cannot support.
worse, you seem to feel that because dta collection is difficult that it is meaningless.
No. I am saying that unless you have a unit of measure and a robust method talking about some value that you cannot define clearly is meaningless.
The question I asked is simple yet you fail to answer it. How do you add the production of potatoes to the production of Porsches to get a meaningful value? Or how do you average the price paid for a pound of potatoes, a gallon of milk, a Porsche, a house in Maine, a chicken in Alabama, and an alligator burger in Florida to get an average price per unit of production? The bottom line is that the indexes that Fisher was talking about constructing have no basis in reality or a theoretical method that would create them. Yet, you want to pretend that there is some scientific basis for them because you do not wish to reveal that your beliefs are based on political or theological beliefs.
but in the real world people like me need to make predictions about what is going to happen.
Like you? We all make predictions all the time and need to rely on our ability to understand what is going on to make the choices that we have to in life.
to do that, we need data. one must be aware of its limits, but to abandon it altogether or to pretend that friction doesn't exist because you must calculate its coefficient from other variables is just stupid.
I have nothing against data. My problem is with using it to create artificial constructs that have no basis in either reality or valid theory. Whether you like it or not, we cannot average the production of spring wheat with the production of family sedans or with the number of services that call girls provide to their clients. Yet, that is what is required to provide meaning to the equation that you cited. Without having a way to do what is required the equation reverts back to that trivial tautology, money spent equals money received, which is useless for prediction purposes.
your reading comprehension is also pitiful, as, if you go back, you will see that i did in fact say that i do support the austrian school.
My comprehension is fine. I merely note that your claim of support for the Austrian School is inconsistent with the fact that Austrians have destroyed the equation that you cited as being important and meaningful and have made clear that using linear equations and assumptions of equilibrium in a complex world that is dynamic and non-linear is wrong.
At 7/20/2010 4:20 PM,
morganovich said...
no. it's not a bushel of wheat exchanged for a salmon. that is much too hard to do, which is why you need money to solve coincidence of wants. it's goods for money, money for goods.
"It makes no difference if a loaf of bread costs $0.15 or $1.50 if it is exchangeable for ten eggs in both cases. The trouble is not the amount of money but the CHANGE in the quantity of money. That is why I oppose the inflation that you are calling for. By increasing the money supply you are calling for an attack on savers so that you can help borrowers. I see no moral justification to use the power of government to hurt one class so that you can help another."
all you are arguing is that nominal price level doesn't matter, but rather change in price level. duh. in this i agree, and have been agreeing, despite your inability to see it. you are making the same argument i did. punishing savers to bail out irresponsible borrowers is indeed bad policy. i have never said otherwise. i make that argument all the time.
you are trying once more to shift the debate into policy. i agree completely that driving monetary expansion for the purpose of causing inflation to mitigate government and consumer debt is ethically wrong and creates horrible moral hazard.
but that's not what we were discussing.
money supply must rise as an economy grows else trigger deflation. you get better growth in output under mild inflation than under deflation. the key here is the word "mild" which can obviously be argued about and attempts to build laffer type curves for inflation and growth are tricky, but i presume you are not advocating fixed money supply? (and the deflation and attendant drops in investment it causes) presuming not, money supply needs to move up with output. the proper level will always involve some guesswork and estimation.
if your argument is that we have had more money supply growth than is good for us in the last decade, there too i agree, but believing that does not change the fact that not all inflation is monetary which has been my point all along.
At 7/20/2010 5:18 PM,
VangelV said...
no. it's not a bushel of wheat exchanged for a salmon. that is much too hard to do, which is why you need money to solve coincidence of wants. it's goods for money, money for goods.
How strange; while you claim to be a follower of Austrian economics you seem to be a supporter of the economic ideas of Mugabe and Chavez instead.
Let me make this clear. Money is the medium of exchange. Period. End of story. Consumption is financed by production. Farmers can buy shoes or fish only because they produce grains, meat, or other agricultural products. Similarly the people who catch fish can only buy bread because they catch fish. Money makes the transactions easier but it does not fund the transactions.
Let me try something different. There are thousands of books, articles, or papers that have been written by Austrians that make this point. I will cite a few bits of literature below to help you out.
You could go to the standard and read The Theory of Money and Credit.
http://mises.org/resources/194
You could look at one of my favourite economic books, Human Action.
http://tinyurl.com/37jzryh
You could look at Man, Economy & State, cited above. (I believe that the information is in Chapter 11.)
I just used Google to do a search on the velocity of money and found the same argument that I provided above made by Frank Shostak. In the commentary we read the following:
From the equation of exchange, it seems that money together with velocity is the source of funding for economic activities. Furthermore, from the equation of exchange, it would appear that for a given stock of money, an increase in velocity helps finance a greater value of transactions than money could have done by itself.
As logical as it sounds, neither money nor velocity has anything to do with financing transactions. Here is why.
Consider the following: baker John sold ten loaves of bread to tomato farmer George for $10. Now, John exchanges the $10 to buy 5kg of potatoes from Bob the potato farmer. How did John pay for potatoes? He paid with the bread he produced.
Observe that John the baker had financed the purchase of potatoes, not with money, but with bread. He paid for potatoes with his bread, using money to facilitate the exchange. In other words, money fulfills here the role of the medium of exchange and not the means of payment.
The number of times money changed hands has no relevance whatsoever on the baker's capability to fund the purchase of potatoes. What matters here is that he possesses bread that can be exchanged by means of money for potatoes.
The argument is simple and should be familiar to anyone who has actually read the Austrians. Obviously you fall short on that front.
At 7/21/2010 9:20 AM,
juandos said...
Well today the WSJ folks aren't so optimistic about the housing situation: Housing Market Stumbles
In major markets across the country, home sales are deteriorating, inventories of unsold homes are piling up and builders are scaling back construction plans. The expiration of a federal home-buyers tax credit at the end of April is weighing on the market...
At 7/21/2010 9:34 AM,
morganovich said...
v-
chavez? really? that's quite a jump to make (and utterly wrong)
you are heading in about a zillion different directions at this point, all to mask one simple fact: that you made an unsupportable claim about inflation early on. now you seek to spiral in a million other directions rather than admit you were wrong. i'm not going to chase you down every ridiculous half informed rabbit hole.
unlike you, i've read most of these original texts and unlike you, i am not so dogmatic that i don't see value in multiple schools.
you make wildly inconsistent arguments about the same equation that is a tautology also being demolished. it's one or the other. it cannot be both.
it's such a simple equation that it's literally definitional. you can argue that velocity is a fudge factor, but it does seem to show consistent values in given economies in adjacent periods. sure, it can change over time, but something has to measure lending conditions.
consumption in a given economy does not have to equal production. what do you think a trade gap is? how about debt accumulation? a farmer need not grow wheat to buy salmon if he can borrow money.
economies behave differently in response to changes in money supply if they have an active banking sector that takes deposits and extends loans as opposed to having citizens hoard cash under the mattress or hold value in sterile instruments like gold.
so where, in your world, is that accounted for?
velocity of money is a defined term. arguing that it doesn't exist is like arguing that there is no such thing as the circumference of the earth because it's never been measured with a tape measure.
you are just passing on half digested websites that you don't understand and making arguments so oversimplified that they miss the meat of the issue.
it's not enough to send weblinks. you have to read them and understand them.
it is the keynsians who attacked M * V = P *Q. it's the monetarists who supported it, including freidman who restated it as P * Q = f(M) with f being a function to stand for velocity (and other variables). your views about who said what are so backwards it's pretty astounding.
hayek, von mises etc make many excellent points about economic organization and attempting the business cycle, but they have some pretty shaky ground as well. if you take then too far (as you are) it becomes a useless set of dogma akin to solipsism in philosophy. arguing that you cannot prove that anything outside the self is real is a parlor game. it's not useful for living your life.
i believe in the notion that people and economies are self organizing and need much less guidance and interference than they currently receive, but the sort of statistical nihilism you seem enamored of (hell, you cite rothbard) is just a silly game for academics.
saying that there are limits to predictive value in economics and error in data collection just means it's like any other science. you account for it, and make predictions tempered by your uncertainty. predicting weather is very uncertain too, but i'll bet you look at weather reports...
At 7/21/2010 12:55 PM,
VangelV said...
you are heading in about a zillion different directions at this point, all to mask one simple fact: that you made an unsupportable claim about inflation early on. now you seek to spiral in a million other directions rather than admit you were wrong. i'm not going to chase you down every ridiculous half informed rabbit hole.
I supported my claim that when economists used to talk about inflation their primary concern was the increase in the supply of money and credit, not the effects, which we know to be price inflation.
For a person who claims to support the Austrian position you seem not to know it very well because no self respecting follower of the Austrian School confuses the effect with the cause.
The diversions are yours. I asked simple questions about the variables that make up the trivial tautology that you cited but have yet to see you answer them. That is because you know that my argument, which is that of the Austrian School, is valid. There is no way to construct any of Fisher's needed indexes in theory even if the data were readily available and there was the assumed equilibrium that never seems to exist in the real world.
unlike you, i've read most of these original texts and unlike you, i am not so dogmatic that i don't see value in multiple schools.
Your own postings show that you do not understand the books that you claim to have read. And there is no value in two contradictory claims. One is true and valuable while the other is false. I suggest that in your eagerness to find value in beliefs that were not true you have become so confused that your position is one that is worse than that of an ignorant individual. Knowing that you don't know is fine. But not knowing that you are ignorant of the truth is dangerous.
you make wildly inconsistent arguments about the same equation that is a tautology also being demolished. it's one or the other. it cannot be both.
I claim that the best you can say is that it is a trivial tautology. But as soon as you talk about V, P or Q there is no substance to any of your claim of validity because none of those variables can be measured or constructed accurately. That is a very simple statement understood by anyone who is familiar with the Austrian School. Because you are not familiar with the Austrians you make arguments that they demolished years ago.
At 7/21/2010 12:57 PM,
VangelV said...
it's such a simple equation that it's literally definitional. you can argue that velocity is a fudge factor, but it does seem to show consistent values in given economies in adjacent periods. sure, it can change over time, but something has to measure lending conditions.
As I said the equation is a trivial tautology that cannot be used in the way that you want to use it because you can't determine any of the variables that were used to create it. It is one thing to say that the money paid out is equal to the money that is received but another to talk about a concept that you cannot measure of define with any precision or accuracy. And you can't assume a linear world in equilibrium if you want to be able to predict anything accurately because the economy is dynamic and non-linear.
a farmer need not grow wheat to buy salmon if he can borrow money.
That is true. But credit and money printing do not create wealth; production of goods and services does. As I wrote above, if printing money were the key to wealth and a healthy economy Venezuela and Zimbabwe would be booming.
My argument still holds. Funding does not come out of the particular medium of exchange or its circulating volume. It comes from the value of the production of the consumer. If farmer Bob is good at what he does he will have more purchasing power than farmer Bill, who is not as good at producing as much out of the same amount of inputs. Of course their purchasing power will also depend on the relative valuation between what they produce and what they want to consume. The argument is simple for anyone who understands classical economics. Sadly, most of you Keynesians do not seem to be familiar with the basics.
economies behave differently in response to changes in money supply if they have an active banking sector that takes deposits and extends loans as opposed to having citizens hoard cash under the mattress or hold value in sterile instruments like gold.
There is nothing sterile about gold. Bankers don't like it because it limits their ability to rob savers by inflating the supply of money and credit as you can in a fiat based system. Governments hate it because it does not allow them to fund useless projects designed to buy votes.
And I have never claimed that economies do not respond to changes in the supply of money and credit. If you have read the postings or understood the Austrian economists you would find that we argue that it is the increase in the supply of money and credit that was responsible for the crisis that we find ourselves in. While the Keynesians were cheering the IT and housing bubbles it was the Austrians that pointed out why the liquidity injections would end very badly. You guys were wrong. The Austrians were right.
Going back to gold, the Austrians predict that its price will continue to rise against fiat currencies because all fiat currencies will wind up at their intrinsic value, which is their use as paper. They do not claim that the rise will not be interrupted by counter-trend moves that are driven by dumping of gold on the market by hedge funds or central banks, or by temporary changes in sentiment. They are simple making the argument that the market's choice as money will continue to gain as it has been since Nixon closed the gold window at the NY Fed.
At 7/21/2010 1:48 PM,
VangelV said...
velocity of money is a defined term. arguing that it doesn't exist is like arguing that there is no such thing as the circumference of the earth because it's never been measured with a tape measure.
Is it defined? You get V by doing arithmetic operations using variables that can't be constructed even in theory. How exactly do you have a production index that adds the production of potatoes, cloth, paper, back rubs, movies, and aeroplanes, nuclear weapons, hydroelectric dams, wind turbines, iron ore, etc., etc., etc., and get something that is meaningful? Or average the prices and get something meaningful? As you have pointed out, supply and demand are always in flux. That means that what may be true when I began to type this sentence will no longer be true by the time I finish. No matter how we spin it, that means that the aggregate based approach taken by Fisher and Keynesians simply does not work.
you are just passing on half digested websites that you don't understand and making arguments so oversimplified that they miss the meat of the issue.
As I said, I understand the position very well. That is why I gave you several books to read on the subject. The fact that you confuse cause and effect and wealth with the means of exchange is a problem that you have to correct.
it is the keynsians who attacked M * V = P *Q. it's the monetarists who supported it, including freidman who restated it as P * Q = f(M) with f being a function to stand for velocity (and other variables). your views about who said what are so backwards it's pretty astounding.
You are clearly right about this point. Keynes was pushing I + C = Y instead. But I agree with Hazlitt and the Austrians that it is the same triviality that basically tells us that the money spent is the money that is received with the old equation still being seen underneath. (Y is P*Q)
The argument is still the same. In one case there is a call for the government to meddle by printing more money and increase the velocity of circulation. In the other there is a call for the government to increase spending to offset private consumption and/or investment. Same thing. Both want meddling.
As I said, I prefer for the government to step aside and let the markets to liquidate bad investments so that the economy can begin to recover.
Have to go and pick up the kids. I will finish this off later.
At 7/21/2010 2:30 PM,
morganovich said...
v-
you continue to branch out into dozens of new topics to occlude the fact that price inflation is distinct from monetary inflation and to move away from your pedantic semantics which are just a word game and into a newly framed debate. if we do that, this is going to go on forever.
returning to the issue:
price inflation is caused by the prices of goods moving. period. that is utterly non debatable as price inflation is defined as the change in the price level. hence, price inflation is caused by changing prices of goods. this is literally such a basic definition that you are making an argument that a circle is not a circle. you can try to talk past this all you want, but facts are facts. this is a straightforward definitional issue. there is no room for argument.
many things (including change in money supply) can cause a change in the price of goods. however, monetary expansion does not always cause such an increase. it needs to be considered in comparison to the number of goods in an economy (Q or whatever) and other factors (either velocity of money or freidman's f(M)).
again, this is such basic first principles stuff. it's astounding that you continue to argue with it.
monetary expansion is not price inflation. it encourages price inflation, but it's not the same thing. this is all i have been trying to get through to you. i'm literally gobsmacked that you could disagree.
if the amount of goods goes up more than the supply of money does, then you can still get price deflation during monetary inflation. you can pump all the money you want into and economy and not trigger price inflation if people hoard the money (drop in velocity or reduction in f).
price inflation can occur with flat or even declining money supply.
you are mistaking "promotes" price inflation with "is" price inflation.
can you really argue that any of the above is not true?
At 7/21/2010 4:10 PM,
VangelV said...
you continue to branch out into dozens of new topics to occlude the fact that price inflation is distinct from monetary inflation and to move away from your pedantic semantics which are just a word game and into a newly framed debate....
I am saying that monetary inflation is the cause of price inflation. It is as simple as that.
As long as governments continue to rob savers and investors by using the printing presses they will continue to lower the purchasing power of the fiat currencies, which will inevitably fail.
We have now seen the PIIGs take a hit because they have been abusing their financial systems and are now seeing the bigger players like Japan, UK, France, and the US also beginning to tip over. The fiat currencies have been abused for about forty years now and are now seeing them at the end of their cycle.
As we see a collapse in credit we should see another contraction that takes down the price of stocks, housing, etc. But that action is facing the headwinds of the death of fiat money. Eventually we will see gold take out $1,500 and silver go over $25. When they do the price will begin to take off and fear will grip investors who are looking for a way to salvage their retirement plans. I suspect that there will be a default on the futures market and that we will see a massive jump in agricultural commodities and energy. Eventually as the money dies things usually bought on credit will also explode and those poor fools who purchased homes that they could not afford will finally be able to jump out of the frying pan only to be wiped out by the fire.
At 7/21/2010 4:12 PM,
VangelV said...
price inflation is caused by the prices of goods moving. period.
No. It is usually caused by an expansion of money and credit. While technological advancement and improvement in production techniques can cause some prices to collapse (see electronics for a great example) in general an expansion of money and credit causes prices to go up.
My twelve year old has a perfect example of the effect of money printing on prices. He points to the Johnny Cash song, The Night Hank Williams Came to Town. In case you don't know the lyrics they are as follows:
Harry Truman was our president
A coke an burger cost you thirty cents
I was still in love with Mavis Brown
On the night Hank Williams came to town.
"I Love Lucy" debuted on TV
That was one big event we didn't see
'Cause no one stayed at home for miles around
It was the night Hank Williams came to town.
As my son pointed out in one of his projects, Johnny Cash provides us with a lot of information about inflation. On that night, Monday October 15, 1951, the price of a Coke and a burger was .2 g of gold, about the same as it is today. (In 1951 the gold price was fixed at $34.72 per ounce versus the current spot price of $1,185 as I type this.) While the gold price of a meal stayed about the same (I could argue that it fell because we get a lot more and higher quality today than we did then) the nominal price of that same meal increased by 3,200%. No wonder banks and governments love money printing and the resulting price inflation. By having first use of the new money that is printed they rob savers, workers, and the poor who are at the back end of the new money receiving line.
The fact that you have no clue about the insidious effect of inflation speaks volumes about how little you know about the Austrian School that you claim to support and understand. You remind me of Krugman, who keep writing about Hayek without being familiar with what Hayek actually wrote.
The simple fact is that the meddling that you seem to be in favour of does not work. Markets work best when they are left alone so that consumers can pick the winners and losers, not when governments use their power to prop up bad investments for political reasons or when the Fed tries to bail out the economy by harming savers.
Have to take the kids to their English class. We can take up this later.
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