Mish's Global Economic Trend Analysis

Money as Communication: A Purposely "Non-Educational" Fallacious Video by the Atlanta Fed
Deflationary Anecdotes From the Front Line; Simple Advice for Businesses
Monetary Tectonics: 50 Slides Illustrate Tug of War Between Inflation and Deflation
Immigration Debate in Perspective; Gumball Math

Money as Communication: A Purposely "Non-Educational" Fallacious Video by the Atlanta Fed

Posted: 09 Jan 2014 11:54 PM PST

The "macroblog" by the Atlanta Fed is promoting the concept of Money as Communication. Let's take a look.

A textbook description of money is usually just a recitation of its functions—it acts as a store of value, a medium of exchange, and a unit of account. This definition of money is a rather hollow one (as Minneapolis Fed President Narayana Kocherlakota noted back in his academic days) because it tells us only what money does but doesn't speak to the core issue—what is the problem that money solves?

The "unit of account" function, in particular, gets little development in the textbooks and has generally not carried much weight in the academic literature on the theory of money. (There are a few exceptions, like this NBER working paper by Matthias Doepke and Martin Schneider.) [Mish note: The paper costs $5]. But if people are going to communicate with one another about value, those communications are going to be most effective if done using some standardized metric—and that's where money comes in. As a "unit of account," our money is how we communicate about value. It can be a physical thing, like a particular commodity, or it can be an abstract concept, like the broad purchasing power of a medium of exchange.

...

In other words, it's essential that the unit of account conveys value so that the units expressed in trade, contracts, and financial accounts are both meaningful and durable. We recently produced a simple four-minute video on the subject. Give it a view and let us know what you think. We're big on getting our communications right.

By Mike Bryan, vice president and senior economist in the Atlanta Fed's research department.

4-Minute Video

link if video does not play: Fed Explains Good versus Bad Standards

Right at the one minute mark, the video proclaims "In the United States, the standard measurement for value is the dollar."

At that point I broke out laughing. But it gets even worse. The massive propaganda campaign begins at the 2:15 mark: "Was the gold standard a good way to measure value? As it turns out, not really".

At the 3:24 mark comes pure silliness regarding "price stability".

The video proclaims "The Fed is in charge of keeping the purchasing power of the dollar stable."

Fairness in Reporting

In the interest of fairness and accurate reporting, Mike Bryan ought to have shown theory vs. reality.

In particular, Bryan ought to have mentioned the housing bubble and collapse, bank bailouts, the dotcom bubble, and the current Fed-sponsored equity and bond market bubbles.

But if he did that, he would have been fired. So instead he writes a bunch of nonsense to make Bernanke and the Fed look good.

This is the way the system works, and it explains much of the self-congratulatory hype we see today from academia.

Want a job in the research department at the Fed? Well the first prerequisite is you have to be a monetarist fool who agrees with the Fed's inflationist stance.

Five Things Bryan Doesn't Understand

What money is
Price stability
Exponential math
Who benefits from inflation
That Fed policies are responsible for asset bubbles that grow increasingly larger over time

That's one hell of a lot of things to be wrong about, especially for someone "big on getting our communications right".

But "right" for whom?

There is one more possibility: Bryan does understand some of those things, but instead creates nonsensical videos to keep his job or get bonuses.

It's a tough call, but all in all, I strongly suspect he was hired for his role precisely because he is a brainwashed believer in academic nonsense.

Let's step back for a second and ask a very basic question.

What is Money?

Please consider a few re-ordered sentences starting at the bottom of page 15 of Murray Rothbard's classic text What Has Government Done to Our Money?

Money is a commodity used as a medium of exchange.

Like all commodities, it has an existing stock, it faces demands by people to buy and hold it. Like all commodities, its "price" in terms of other goods is determined by the interaction of its total supply, or stock, and the total demand by people to buy and hold it. People "buy" money by selling their goods and services for it, just as they "sell" money when they buy goods and services.

Money is not an abstract unit of account. It is not a useless token only good for exchanging. It is not a "claim on society". It is not a guarantee of a fixed price level. It is simply a commodity.

Money Does Not Measure Values

In a footnote at the bottom of page 17, Rothbard explains "Money does not measure prices or values; it is the common denominator for their expression. In short, prices are expressed in money; they are not measured by it."

Indeed! And that sentence alone says how ridiculous the video is.

What Is The Proper Supply Of Money?

Continuing from the book on page 25.

Now we may ask: what is the supply of money in society and how is that supply used? In particular, we may raise the perennial question, how much money "do we need"?

Must the money supply be regulated by some sort of "criterion," or can it be left alone to the free market?

All sorts of criteria have been put forward: that money should move in accordance with population, with the "volume of trade," with the "amounts of goods produced," so as to keep the "price level" constant, etc. Few indeed have suggested leaving the decision to the market.

But money differs from other commodities in one essential fact. And grasping this difference furnishes a key to understanding monetary matters.

When the supply of any other good increases, this increase confers a social benefit; it is a matter for general rejoicing. More consumer goods mean a higher standard of living for the public; more capital goods mean sustained and increased living standards in the future.

[Yet] an increase in money supply, unlike other goods, [does not] confer a social benefit. The public at large is not made richer. Whereas new consumer or capital goods add to standards of living, new money only raises prices—i.e., dilutes its own purchasing power. The reason for this puzzle is that money is only useful for its exchange value.

[Thus] we come to the startling truth that it doesn't matter what the supply of money is. Any supply will do as well as any other supply. The free market will simply adjust by changing the purchasing power, or effectiveness of the gold-unit [monetary-unit].

Bryan, as well as Paul Krugman and all Keynesian and Monetarist economists desperately need to read and understand the book.

Please read the eBook! It's a great read, only112 pages, explained well, and easy to follow even for a relative economic beginner.

Price Stability

Let's explore the concept of price stability in regards to housing.

About a year ago I tackled the subject in Dissecting the Fed-Sponsored Housing Bubble; HPI-CPI Revisited; Real Housing Prices; Price Inflation Higher than Fed Admits

The article starts with a look at the rate of increase in home prices as measured by HPI (Home Price Index) vs. the rate of increases in OER (Owner's Equivalent Rent).

Comparative Growth in HPI vs. OER

From 1994 until 1999 there was little difference in the rate of change of rent vs. housing prices. That changed in 2000 with the dot.com crash and accelerated when Greenspan started cutting rates.

The bubble is clearly visible but neither the Greenspan nor the Bernanke Fed spotted it. The Fed was more concerned with rents as a measure of inflation rather than speculative housing prices.

That look like stability to you?

It's pretty easy to ignore price instability, when your job depends on it!

How well did the Fed do at setting interest rates? Another chart from the same post explains nicely.

Variance Between the CPI and HPI-CPI

The above chart shows the difference between the CPI and HPI-CPI. Note that the largest negative discrepancy marked the exact top of the housing market in summer of 2005.

The Fed purposely held interest rates too low, too long, fostering an enormous housing bubble.

Did the Fed ever admit that? Of course not! And Bryan would be fired if he did.

In the video, Bryan complained about price stability under gold. Let's take a look at actual price stability with a chart from Monetary Tectonics.

Hmmm. It seems we have had price stability on a gold standard but have had anything but price stability since.

Well, when your job depends on it, you ignore such things.

For more Monetary Tectonics discussion, please see Monetary Tectonics: 50 Slides Illustrate Tug of War Between Inflation and Deflation

Exponential Math

Does Bryan understand exponential math? Does anyone at the Fed?

I rather doubt it. If they do, they certainly are light-years away in comprehension as to what it really means.

For example, Bernanke is a huge proponent of 2% inflation targeting. Know what that looks like? I do, because I have posted the chart before.

Inflation Targeting at 2% a Year

Some Keynesian and Monetarist nutcases propose 4% inflation targeting.

What if wages don't keep up?

Real Disposable Income Per Capita

As you can see, real disposable income per capita is not an exponential function, but rather a linear one. And even on linear basis, income did not keep up.

So, what happens when wages don't keep up? You have workers at McDonalds demanding $15 and hour (see Battle for $15 minimum Wage; Should Companies Pay Workers More? Wal-Mart a Savior or a Pariah?)

And how does the Fed respond?

By cutting interest rates.

The result is more asset bubbles that the Fed still cannot see. Interest rates are so suppressed that it is convenient for companies to buy hardware and software robots instead of hiring workers to do jobs.

Robots Don't Complain

Robots don't complain about working conditions or pay, but Fed consultants never noticed. Nor do Fed consultants investigate why the Fed's inflation policy is not working as expected.

Then again, their job depends on not noticing and not investigating.

Bryan says "Give it a view and let us know what you think. We're big on getting our communications right."

OK Let's rate the video.

Rating the Video

A+ for keeping Mike Bryan employed
A+ for getting Mike Bryan a raise or bonus
A+ for spreading Fed propaganda
A+ for a video that will brainwash kids and teachers - the apparent target audience
F- for factual content (but facts are the last thing his employer wanted)

In conclusion, Mike Bryan did his job to perfection. Congratulations!

Mike, please tell your boss you deserve a raise.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Deflationary Anecdotes From the Front Line; Simple Advice for Businesses

Posted: 09 Jan 2014 06:35 PM PST

In response to Monetary Tectonics: 50 Slides Illustrate Tug of War Between Inflation and Deflation I received an interesting email from reader "David" entitled "Deflationary Anecdotes From the Front Line"

Hello Mish

I have a small medical software development business in Ohio. We are tiny. With 25 employees we have no purchasing power.

Yet, in the past 6 months we have gotten huge discounts on our purchases, simply by asking.

1) Our garbage hauling contract came up. We shifted to a smaller container. Our existing supplier quoted us $120/month. A competitor came in at $50/month. Our existing hauler matched the price straight-away. We now pay $50/month. [That's a 58% reduction]

2) Postage: Our Pitney Bowes machine is at the end of the lease. We asked for a quote on a smaller machine. They quoted $125/month (plus consumable supplies and postage). Their competitor came in with a similar machine and quoted $42/month. Pitney Bowes lowered their price to $98/month. Strangely PB didn't even try to convince us why their machines were better to justify paying 100% more.

3) Answering Service: We pay $130/month. A competitor approached us for $59/month. Competitor offered us a free trial to test them to make sure they were good.

It is shocking at the oversupply and lack of pricing power from our suppliers. Keep in mind we are a teensy tiny account so I can only imagine the deals we could negotiate if we were bigger.

David

There are a couple morals to this story.

There is no pricing power in services
Ask for discounts and you will get them

Simple Advice for Businesses

Anecdotes do not constitute "data" but the above email is from a very reliable reader. Thus, I highly suspect many discounts are available for those who simply ask.

So ask!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Monetary Tectonics: 50 Slides Illustrate Tug of War Between Inflation and Deflation

Posted: 09 Jan 2014 11:36 AM PST

Mark J. Valek, CAIA, Partner & Fund Manager, at Incrementum AG sent a nice email earlier today regarding the inflation-deflation debate. Mark writes ....

Financial markets have become highly dependent on central bank policies. We sincerely believe that grasping the consequences of the interplay between monetary inflation and deflation is crucial for prudent investors these days. To express our views on this highly relevant topic, we have just finished our Incrementum Chartbook, explaining the dynamics of "monetary tectonics".

Attached please find our new Incrementum Chartbook: 50 Slides Illustrating the Tug of War Between Inflation and Deflation!

We wish you a happy, healthy and prosperous new year!

Kind regards,

Ronald Stoeferle & Mark Valek

Here is the introduction from the 50 page PDF Incrementum Chartbook # 2: Monetary Tectonics

Our Conviction

Due to structural over - indebtedness and the resulting addiction to low/negative real interest rates, we are certain that the traditional way of thinking about financial markets and asset management is no longer beneficial for investors. Therefore, at Incrementum we evaluate all our investments not only from the perspective of the global economy but also in the context of the current state of the global monetary regime. This analysis produces what we consider a truly holistic view of the state of financial markets.

Financial markets have become highly dependent on central bank policies. Grasping the consequences of the interplay between monetary inflation and deflation is crucial for prudent investors.

We sincerely believe that the Austrian School of Economics provides us with the appropriate intellectual foundation, especially in this demanding financial and economic environment.

Ronald-Peter Stoeferle, Mark J. Valek

Here is a generous sampling of charts from the PDF, interspersed with a few comments by me, in italics. Click on any chart for a sharper image.

History of QE

Light Years Away From Normal

Price Inflation Where?

Here!

Where Did the Money Go?

Price Deflation was Once Common

What Are Monetary Tectonics?

I added that box in red. It is very similar to my own stated thoughts, that the US would go in and out of deflation over a number of years. I view US hyperinflation calls as essentially nonsensical. Japan will be first.

Comprehending Currency

In a note related to the asterisk, the authors encourage the interested reader to look up what F.A.Hayek wrote about the concept of the inverted pyramid in Prices and Production.

Deflating Credit vs. Inflating Monetary Base

Tug of War

Once again I see eye to eye with the authors, adding that a busting of the equity and bond bubbles are going to be anything but inflationary!

This time the asterisk is accompanied with the footnote:
* Please also refer to another outstanding speech of James Rickards on the Future of Money

** Low velocity according to the Monetarist Paradigm

Total Credit Market Debt as Percent of GDP

US Bank Credit Growth

Money Supply Growth US and Eurozone

* According to the Austrian School the concept of quantifying an exact figure for velocity is questionable, due to several issues, partly regarding the accounting of the money supply and the calculation of GDP. However the demand to hold currency is currently extremely high i.e. velocity low

I concur with that comment, adding velocity is low because, not in spite of all the monetary printing.

Conclusion: Inflation Or Deflation?

Still Signaling Disinflation

Final Mish Thoughts

I appreciate Incrementum AG making these charts available. I especially appreciate the common-sense approach of including credit in their analysis.

In general, hyperinflationists (as well as many self-proclaimed Austrians) ignored and continue to ignore credit, even though credit dwarfs money supply. Those screaming hyperinflation or strong inflation is at hand, missed the boat and will continue to do so for the foreseeable future.

Another equity bubble bust is around the corner, and that bust will be anything but inflationary.

There is much more in the PDF to see, including an analysis of gold, silver, and other commodities. Inquiring minds should peruse the entire report.

Thanks again to Ronald Stoeferle & Mark Valek for their superb analysis and charts.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Immigration Debate in Perspective; Gumball Math

Posted: 08 Jan 2014 11:58 PM PST

Recently I received a link from a friend that puts the immigration debate into perspective. The video is from 2010 but seems timeless. I had not seen it before.

Link if video does not play: Immigration, World, Poverty, Gumballs

I like the "gumball" analogy. However, I have never heard anyone say "US immigration is the key to solving world poverty". So right off the bat I am wondering if Roy Beck is attacking a straw man that does not exist.

Then again, I have heard people say that we need immigration and a higher birthrate to grow the economy. We don't.

Beck helps put a bit of perspective on things. But he fails to discuss why we have masses of illegal immigrants.

The problem is not immigration, per se. The problem is the "free lunch society" of Medicaid, disability, schools, foods stamps, etc., etc., that makes it desirable for masses of people to want to come to the US for handouts.

Beck does point out that some of the best and brightest want to come here. OK. But, isn't that a good thing for us?

Yet, if it's good for us, then it must be bad for someone else (something that Beck clearly implies). Mathematically it is impossible for every country to have net "good" immigration.

And here we are, with no coherent immigration policy to protect US taxpayers from "gumball math". Every state seems to have its own policies, with California being particularly lax.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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