Maker Prices Up Sharply Even Using The Government's Own Statistics

Indeed the administration's own particular preposterously skewed facts are starting to reflect expansion. Maker costs (actually barring nourishment and vitality) were up .4% in the not so distant future. That interprets into a 5% rate of expansion.

Higher oil costs at last drive up the expense of a wide mixture of products and administrations. Add to this the way that cash supply development recently has been hearty and you have the elements for higher expansion.

In the event that reported expansion is at 5% you can make certain that genuine swelling is over 8%. How does the legislature bend the expansion figures? The two most critical ways are geometric weighting and "hedonic changes" (sounds like something you would get at the chiropractor!)

Geometric weighting changes the crate of merchandise to reflect value changes. On the off chance that meat costs go up, individuals will (it is expected) purchase more chicken and less meat. So the legislature lessens the weight of meat costs (and whatever else goes up more than the normal) in the wicker container of merchandise. The issue is that while individuals might really purchase more chicken if meat costs climb, the way that they do so does nothing to change the way that costs have climbed by a certain sum.

It is profoundly beguiling to report expansion in this way. Simply ponder it. Consider a crate of two merchandise that are halfway substitutes for each other. Each one expenses $1 for every unit. Sally Consumer buys these products in equivalent amounts at current costs. Expect the cost of Good A goes up 10% to $1.10 and the cost of Good B goes down 10% to 90 pennies. Sally is similarly situated that she was before in that the aggregate expense of what she buys has not changed. Expansion in this situation is zero. Supreme value levels have not transformed; it is simply that An expenses somewhat more while B costs a bit less.

Government statisticians, nonetheless, take a gander at this situation and declare that now Sally will purchase a greater amount of B and to a lesser degree a (this could possibly be genuine). The aggregate value that Sally needs to pay is currently lower. Subsequently, costs are dropping: flattening.

Yet this is preposterous. Costs are not dropping, they're simply moving around like they generally do. A few things are going up in value while others are going down.

Much consideration has been given to the part of "hedonic" alterations in the administration's expansion information. In my perspective, insufficient consideration has been dedicated to the issue of geometric weighting.

The truth of the matter is that expansion is altogether higher than the legislature declares, and as the cost of oil keeps on riing the rate of swelling will just increment.

Cassandra

In Greek mythology, Cassandra was the daughter of King Priam and Queen Hecuba of Troy. Her beauty caused Apollo to grant her the gift of prophecy. In an alternative version, she spent a night at Apollo's temple, at which time the temple snakes licked her ears clean so that she was able to hear the future (this is a recurring theme in Greek mythology, though sometimes it brings an ability to understand the language of animals rather than an ability to know the future). When Cassandra of Troy refused Apollo, he placed a curse on her so that she and all her descendants' predictions would not be believed. She is a figure both of the epic tradition and of tragedy.

Anacardiaceae

Anacardiaceae (the cashew or sumac family) are a family of flowering plants bearing fruits that are drupes and in some cases producing urushiol, an irritant. Anacardiaceae include numerous genera with several of economic importance. Notable plants in this family include cashew (in the type genus Anacardium), mango, poison ivy, sumac, smoke tree, and marula. The genus Pistacia (which includes the pistachio and mastic tree) usually is now included, but has sometimes been placed in its own family, Pistaciaceae.

Cassandra (metaphor)

The Cassandra metaphor (variously labelled the Cassandra 'syndrome', 'complex', 'phenomenon', 'predicament', 'dilemma', or 'curse'), is a term applied in situations in which valid warnings or concerns are dismissed or disbelieved.

The term originates in Greek mythology. Cassandra was a daughter of Priam, the King of Troy. Struck by her beauty, Apollo provided her with the gift of prophecy, but when Cassandra refused Apollo's romantic advances, he placed a curse ensuring that nobody would believe her warnings. Cassandra was left with the knowledge of future events, but could neither alter these events nor convince others of the validity of her predictions.

The metaphor has been applied in a variety of contexts such as psychology, environmentalism, politics, science, cinema, the corporate world, and in philosophy, and has been in circulation since at least 1949 when French philosopher Gaston Bachelard coined the term 'Cassandra Complex' to refer to a belief that things could be known in advance.

The China Factor

The China Factor
I found the following comment to a post on Brad Setser's Blog tremendously perceptive and reprint it here in its entirety. The comment was in response to a post in which a Chinese official acknowledges that ultimately the value of all the dollars Asian central banks have accumulated (as part of their currency manipulation to boost exports) will lose much of their value.

"... all east Asian countries have tremendous foreign exchange reserves and they all want to get rid of them, but if you do this then you cause competitive devaluation, not of their own currencies, but of the US dollar. So we should do this in an orderly fashion. If Asian countries moved too fast, everyone would lose..."

To this, JM commented:

The passage from which the above was extracted keeps using the word "if", but there is no "if". When you lend things of value to someone who has no way to repay you, and never will, then your loss dates from the instant that you lend, not from whatever future time at which you finally admit to yourself (or the true owner of what you lent) that you'll never be repaid.

We must all keep in mind that money is a medium of exchange, and has value only to the extent that you can exchange it for something of value.

For what things of value can the Asians exchange their dollars? And what value have those things compared to the value of the things they sent us to get those dollars?

To avoid loss, the Asians would have had to have consistently demanded that if we wanted them to send us things of value we must promptly send them something of equal value in return.

But they didn't, because for that to happen with money as the medium of exchange, they would have had to ensure that exchange rates were always such as to make it worthwhile for Americans to make and send such things (and would also have had to dismantle their myriad non-tariff trade barriers). But that would have led to various privileged elements within their societies losing their positions of privilege. So they didn't.

What is going on here can be properly understood only by viewing it as a variant of the vendor-financing frauds of the telecom bubble years.

By lending their customers the money to buy their products, Nortel, Lucent and others made it appear that they were making lots of money. But they weren't, because there was no way that their customers could ever get the revenues to repay the loans, and indeed the very making of those loans acted to ensure that, by creating telecom capacity far in excess of demand.

Similarly, by lending us the money to buy their products, Asian governments (esp. Japan and China) keep their citizens busy and believing that all is going splendidly. But the very making of those loans ensures America will never be able to repay them, by destroying the only American industries that could create the things we might repay them with.

If this were only a result of true "comparative advantage", there would be no serious problem, as it would just ensure a more optimal allocation of American resources. But prices are the fundamental signalling mechanism through which resource allocations are to be optimized, and exchange rate manipulation systematically falsifies prices.

The trillions in reserves now piled up in Asia represent a massive accounting fraud inflicted on the the people of Asia by their governments, analogous to the frauds inflicted on the shareholders and workers of Nortel and Lucent by their managers. In the case of Nortel and Lucent, there were regulators that could call them to account, and force the losses to be recognized. But in the case of the Asian governments who or what could do that? Can this fraud in fact be sustained forever?

Has the scale of the fraud not already grown so great that none of the Asians can face up to it? Is that not implied between the lines of ...'s remarks? He says, "If Asian countries moved too fast, everyone would lose..." But they've already lost. They have exactly the same problem Enron had with the assets it shoveled out into its "special-purpose entities" -- it wasn't that the assets were such that selling them would drive down prices down below their true value, it was that it would reveal their true value. Any pace the Asian countries may move at, if fast enough to reduce their reserves, will send the dollar down to its true value.

Why are Chinese workers and business owners willing to do 8200 yuan worth of production to get $1000? Because the can exchange that $1000 for more American goods and services than they can get for 8200 yuan? Hell no, 8200 yuan in China buys as much as $5000 in America. At the very instant that they accept payment they have lost $4000.

The only reason Americans can buy 8200 yuan worth of stuff for $1000 is that the Chinese government guarantees its people that it will give them 8200 yuan in exchange for the dollars. Where does the government get the yuan? It prints them. Where does the $4000 dollar loss go? It is spread across the entire economy, so that in effect everyone in China has that much less deferred buying power than they think. But it's not a deferred loss, and it's not a loss they can somehow avoid by selling off the dollars at some measured pace. All that's deferred is the recognition of the loss.

Perhaps there's no real loss anyway. Perhaps had the workers and businessmen been told Americans would pay them only 1640 yuan for the goods, they'd have made them for that anyway. But I think not.

PS: Because a large fraction of the Chinese trade surplus with the US is actually an indirect Japanese trade surplus, you could substitute the Japan for China anywhere above with equal validity (except that the Japanese will only send us about $1500 of stuff for a $1000 dollars).

Written by jm on 2005-12-17 13:37:43