patrick.net

"Jamie, you can stay, but only if you dont behave."

Must ... not ... comment.

Whew. Progress.

Of course I could just check the weather forecast! But that would be cheating.

I predict a scattered flurry of posts, with mostly gloomy economic skies, punctuated briefly by sunny bullish optimism...

In my opinion, the reason that attempting to use gold, or any other precious metal or commodity to hedge against either inflation or the USD, is because of the Dornbusch model. http://tinyurl.com/9vcdx There are just way too many variables at play, including micro currency supply-demand factors relating to reserve currency status, to accurately hedge such things except with other currencies directly (I'm excluding operational hedging which multinational companies can certainly do).

There is no distinction, in theory, between nominal interest rates (which are strongly correlated with inflation) and currency exchange rates because of covered-interest-rate-parity. This is pretty accurate for convertible, open market currencies which include the USD, EUR, JPY, GBP and many others. It doesn't include the RMB or any other fixed/pegged/banded or non-convertible currencies.

But I think a lot of inflation is MUCH scarier than a little deflation

I disagree with this.

Contentions that deflation is good (I'll use stabilizing) are based on the Pigou effect, which is a theory from the 1930s. It assumes that (1) falling prices lead to higher real-money balances, which while true in theory-land is not observed in the real economy. (2) When the real-money balances rise for households, people "feel" wealthier, and will thus spend more (this is the Pigou prediction).

This reasoning caused many economists in the 30s to believe that the early deflation preceding the depression was good, and would stabilize the economy. We know how that turned out.

In contrast, defaltion--even modest deflation-- is *known* to cause problems because of (1) debt-deflation theory. This is the thing where people with long, fixed rate loans "make" money because they're paying back in stronger dollars than the bank loaned the money out at. But debtors have a higher propensity to spend than creditors, so this cycle leads to self-reinforcing contraction (a credit crunch), which is hard to break once started without huge, costly government intervention. We broke it with New Deal spending and capital controls. The Japanese have nearly broken it with over 100% of GDP debt burden.

(2) Expected future inflation becomes negative. When consumers observe this they put off consumption decisions. When companies see this they put off investment decisions. This is also a vicious circle which is hard to break when started. A lot of this goes to Peter P's market psychology arguments.

Simply, for a *little* deflation to have any effect, it has to be *enough* deflation to cause real problems. It's not linear by any measure; there is a critical threshold which, once crossed, bury the money and start growing your own food in the back yard.

Besides, moving is a pain!

Don't I know it.

Don't worry Jack, I'll always talk to you. In fact, all this behaving just isn't as much fun as the misbehavin'.

I really know very little about gold as a hedge against the dollar. I have heard amongst the chatter that there were predictions in the 70's (I think) that gold was going to skyrocket, and it did the opposite and in fact never hit the levels that were sometimes predicted.

Is that relevant now? I don't know. But it seems interesting to me that the reactions of one bubble are often a path to another one. I'm hearing talk that suggests once people pull their money out of housing the stock market is going to have a bull run again because people will need a place for their "wad." (couldn't resist) And gold is getting a lot of talk these days, so perhaps there is another bubble in the making. More finacially educated folks than I can make better predictions, but from a view from the sidelines it's interesting to watch.

Gold is going to skyrocket! Why? The streets of the BA are paved with it.

I agree that hyperinflation is terrible; nearly as terrible as deflation. But hyperinflation is relatively easy to halt, even in the Weimar it was halted in a mere few months once there was directed fiscal & monetary intervention. (In the summer of '23 the rate was over 10,000%, by Jan. '24 it was between 0-3%, a result of the Rentenbank reforms. I studied the Weltwirtschaftliches Archiv in school.) Deflation is hard to stop, on the other hand.

I also agree that pre-modern capital markets, deflation was a natural, useful cycle, and was generally quite modest and self correcting. This is no longer true in an environment of much more perfect, less sticky capital markets. The folks who allowed the Great Depression to occur weren't just stupid, they were handed a set of events which, in their minds, should have self corrected based on historical data. But they failed to consider the massive changes that the capital markets had gone through between the 1890s and the 1930s.

There have been no examples of modest, secular deflationary cycles in the US post 1800s.

"people will need a place for their “wad.” "

(...lead me not into temptation, but deliver me from evil...)

You're right Sacto, behaving is no fun at all.

I have a question regarding "core inflation" what is in the "consumer basket"?

what is in the “consumer basket”?

Easter eggs.

"I have a question regarding “core inflation” what is in the “consumer basket”?"

I am forbidden to answer this question, for fear of wrath from, uh, Jack.

Maybe Peter P is actually the Easter Bunny.

Jamie, just throw a bag of doritos at him as he's likely just put the bond down and will need them.

dang, not "bond", BONG!

Maybe Peter P is actually the Easter Bunny.

No, I am the were-rabbit.

"Jamie, just throw a bag of doritos at him"

I believe in Marin County, when they get the post-bong munchies, they eat all-natural gourmet baked garlic and parmesan soy chips.

American homeowners are going to be slapped with bigger monthly payments just when they’re already drowning in debt and lining up at the bankruptcy courts by the thousands.

Fuck em.

I have a question regarding “core inflation” what is in the “consumer basket”?

You can use FRED, at the St. Louis Fed Reserve to research this. It is complex, and the basket is huge.

http://research.stlouisfed.org/fred2/categories/9

Something to remember about CPI, it is a fixed basket of goods, those only bought by consumers. It tends to overstate inflation, currently by about 1%. The GDP deflator is a variable index, which covers all goods purchased, and it tends to understate inflation. CPI and GDP deflator have been within 2% of one another except during the late 70s, when CPI was probably overstating inflation quite a bit. Fixed baskets overstate because (1) they don't account for consumer substitution, (2) they don't account for new goods introduced--like iPods, (3) they don't measure changes in quality--like price increases due to product upgrades such as in cars.

The Tax Panel is goint to make some recommendations...

http://tinyurl.com/9wlnc

I have a feeling that it may go through this time because many US voters can benefit from the changes.

For those who are considering a home purchase, please assume that no deduction is possible in your calculations.

The mere talk of these changes may cool/crash the California market, unless Bush shoots it down quick enough.

Indicators of market distress are still largely absent. Foreclosure rates are low, down payment sizes are stable and there have been no significant shifts in market mix, DataQuick reported.

DQ likes to copy and paste this.

And I like to copy and paste this,

Newly Abundant liquidity can readily disappear - Alan Greenspan

Soon enough...

Newly abundant liquity is largely absent. Buying interest is low, prices are unstable and there have been huge shifts in market psychology.

Newly abundant liquity is largely absent. Buying interest is low, prices are unstable and there have been huge shifts in market psychology.

Well that should be fine, everyone in the BA has a secure job at a start-up software company and earns 150K +, and the peons that lick their toliets have secure manufacturing day jobs, plus the robust economy will weather the storm.

ahahahahhahahahahahahhahahahahaha oh my god thats funny ahahahahahhaahahahahahahahhah

"and the peons that lick their toliets have secure manufacturing day jobs"

And all the crappy low-paying, no-benefits service sector jobs are actually filled by GRUD's (Google Robotic Underling Drones). They look remarkably like people, but they're not. This is Google's latest venture -- creating robots to replace humans in all the jobs that Bay Area residents are too educated to do.

Just checked Uhauls site,

4-5 bedroom truck from SF to Phoenix $2170

4-5 bedroom truck from Phoenix to SF $199

Now that's really really odd, especially given the high salaries and positive intangibles of the BA. Oh, now I get it, the BA companies are subsidizing the moves, and Phoenix isn't. That must be it.

"4-5 bedroom truck from SF to Phoenix $2170"

Uhaul knows that Bay Area residents will settle for nothing but the best (except in the case of housing, and choice of cities to flee to when they can no longer afford to live in the Golden Land), so these trucks departing SF are actually upscale luxury Uhauls with Mercedes engines, deluxe leather air-cooled seats (so the Arizona sun won't burn their precious asses), and built-in espresso machines.

Just checked Uhauls site,

Now that’s really really odd, especially given the high salaries and positive intangibles of the BA. Oh, now I get it, the BA companies are subsidizing the moves, and Phoenix isn’t. That must be it

The price difference is big, and probably reflects some of the net outflow of people from the BA. However, very different prices like this are common in logistical network optimization pricing functions. The fact that the BA is so much bigger, and has more absolute demand, would account for a need to discount trucks inbound into the BA. The same thing is true in rental cars, airline pricing and schedules, or any other system that needs to move around assets.

Uhaul knows that Bay Area residents will settle for nothing but the best (except in the case of housing, and choice of cities to flee to when they can no longer afford to live in the Golden Land), so these trucks departing SF are actually upscale luxury Uhauls with Mercedes engines, deluxe leather air-cooled seats (so the Arizona sun won’t burn their precious asses), and built-in espresso machines.

And gold-threaded tires for Bay Area's gold-paved roads.

H.Z.

I agree with your read on GDP deflator data. The problem with CPI is the inverse, however, vis-a-vis substitution effects. CPI tends to (sometimes dramatically) overstate inflation during certain supply shocks. This is some of the reasoning behind removing food and energy. Although energy demand is inelastic, a lot of substitution between energy types occurs fairly quickly in response to price changes. These numbers force up CPI but have less of a real impact on the aggregate national income.

Whether we like CPI or not (and I don't) is a bit moot because so many contracts and entitlements are tied to CPI; so it affects us nonetheless.

The fact that the BA is so much bigger, and has more absolute demand, would account for a need to discount trucks inbound into the BA.

Or--I bet there's so many trucks heading out of CA they need to pay overhead for shipping available ones in? Still, that price difference is outrageous!

hmmmmmmmmmmmmm, now why would that be?

Not to be devil's advocate, but even if the emmigration rates were exactly identical, there would be more accumulation of trucks in smaller cities than larger ones, simply because of the math.

and has more absolute demand, would account for a need to discount trucks inbound into the BA

Huh? Kind of an inverse supply/demand theory?

Huh? Kind of an inverse supply/demand theory?

Logistical optimization of asset placement trumps supply-demand. You can't supply-the-demand if you don't have a truck there. So long as the revenue less cost of the discount is above marginal costs, you can discount to try to get something (0 is better then

Logistical optimization of asset placement

I wouldn't want to say that five times fast ;)

(0 is better than

[one more time] (0 is better than

{time to work anyway}

To be fair, Phoenix also gets a lot of immigration from other places. It would be more telling if we get the same data from other city-pairs like NY/SF and LA/SF.

Bay Area residents will settle for nothing but the best (except in the case of housing, and choice of cities to flee to when they can no longer afford to live in the Golden Land), so these trucks departing SF are actually upscale luxury Uhauls with Mercedes engines, deluxe leather air-cooled seats

There's a new business model realtors can move into...showrooms of moving vans, "staged" to suit individual tastes...modern, tradtional, or sporty--there's a van for every lifestyle. Rates begin at $5/mile, financing available.
"Flee the Bay Area in style: you're moving up--not moving out!â„¢"

NYC - BA, BA - NYC roughly the same cost

BA - DALLAS $3699
Dallas - BA $860