Monday, August 17, 2015

I'm going for simple here

My annotations


jim said...

I thought the discussion was about the Federal debt?

The way it works is: In 1992 the govt sells a security for something like $0.40 that has a face value of $1. This transaction increases the gross federal debt by $1. Then in 2012 the govt pays out $1 when the bond matures.

Today if you wanted to fund $1 of federal debt with a 20-year security the price of the security would be about $0.65. The difference in price mostly reflects what today's bond buyers expect in inflation compared to what was expected in 1992.

Greg said...

I think you are going down the same rabbit hole here that so many of the Zero Hedgers do when they talk about the Federal Reserve and its "trashing" of the dollar. They talk about how much something cost in 1914$ vs today and then do an inverse and say how much less the dollar is worth. Mostly I think that is a worthless exercise that adds nothing to anyones economic understanding. Value of a dollar is a pretty meaningless metric I think, especially in our modern era of fiat floating exchange rate currencies.

One problem with that line of thinking, to me, is it seems there is an unstated idea that the only way a money is "sound" is if it stays the same value or appreciates in value. So if I can buy a loaf of bread with 1$ today I should be able to save 1$ today and still be able to buy at least a loaf in 10 years for whatever that 1$ has compounded to or else someone has been screwing with my currency. This usually gets presented as punishing those poor little thrifty "savers" that our economy needs.

Now I have sympathy for people who have saved well their whole lives and want to stop working (I will be one soon!) and I certainly feel like our system can afford to NOT make people work 35 hours a week or more when they are 70 in order to "pay for" their health care or whatever but these discussions about the value of currency over time do not give us any insights. In fact I think they are a distraction from the real issues.

When I encounter a Zero Hedger who shows me that chart my respnse is usually "So?" "How much is a dollar supposed to be worth today and how do you know?" "What would be materially better if the dollar were worth what you think it should be?" "Is there any way to target and keep a dollars value consistent through time?" "All I know is its better to be alive in 2015 than in 1914."

The Arthurian said...

Despite all that, Greg, prices have gone up. And when you say

"Value of a dollar is a pretty meaningless metric"

you seem to forget that inflation is a change in the value of the dollar, and that the topic up for discussion here is "inflation erodes debt" and that you have been involved in that discussion. Do you mean to say now that it is not a worthwhile topic?

The Arthurian said...

Jim, what would have happened in your government borrowing scenario, if inflation turned out to be twice what was expected?

jim said...

As it happens in my govt borrowing scenario it turned out inflation was less than expected. The bondholders could buy more with what they got back than with what they put in. It is my understanding that most of the federal debt to the public is denominated in shorter term securities that can track inflation more closely.

The fact is that the belief that inflation erodes debt is one of the primary reasons people go out of their way to borrow. And in turn, the extra spending the borrowing driven by that belief produces is one of the primary drivers of inflation. But that dynamic feed back loop can break down. The current lower interest rate (higher bond price) reflects the lower inflation going forward.

As for Zerohedge, I'm convinced those people are just trying to jack up the price of gold. Everything they publish is is done solely because they believe it will help that cause.

Greg said...

Actually Art inflation is most commonly defined as a sustained rise in the general price level over time. There is nothing about a change in the value of a dollar.
That notion is simply a derivative of prices rising. Some like to say, usually those with a monetarist bent, that a rising price of goods is simply just a falling price of dollar. Its a mathematical relationship that sounds right but I think it is flawed because it treats money just like another commodity and it assumes that it is something totally under our control by controlling "supply" of money. In the world of modern money the idea that money is a commodity or that controlling our supply of money will keep our money value where we want it are flawed notions. All our prices of money are relative prices in this integrated world of competing currencies and things that Japan does affect our dollar value regardless of whether we have done anything at all.

Its not that its not a worthwhile topic to discuss the longterm affects of debt (private and public)and inflation on our economy I just think there are certain metrics that might lead us astray and not really give us any insights. Ive come to think that most discussions regarding "value" of a dollar end up in a place where only "savers" are virtuous, Central Banks are nefarious and if we just got the government out of the money business everything would be alright. So talking about inflation is fine but I dont think "value of the dollar" is a very good way to think about inflation.

One of the reasons Krugman even has to make a statement that "Inflation erodes debts" is that he is trying to get monetary authorities to target more inflation to help the economy (in his view). He is begging for something to help the consumer and Tankus points out that it (inflation) cannot reliably help out the consumer. But we know that inflation (at least as it is understood by TPTB) hurts the banks..... in two ways really.

It is said that inflation helps debtors and hurts creditors. In the private debt relationships we are debtors to banks in the public debt relationship we are creditors to the govt. But who else is creditors to the govt? Banks and other financial institutions! They hold alot of govt bonds as well, much more than households do. So the average guy might be able to be helped a little by some inflation with their debts to banks but they are hurt in their income from govt. They are also hurt by the price of everything else they need being higher. But banks are hurt in both relationships by inflation. Inflation is bad!

A steady and slow rise in all prices,including incomes, probably is good. In fact I believe there is no "economic growth" without inflation (rising prices of everything including wages) but if you watch what all the smart people managing our economy are scared of and try to fight, its the rising wages part. Almost any sign of wages rising is a harbinger of the bad inflation and must be struck down with a policy move to raise interest rates. In fact cutting wages seems to be the cure du jour.

I know you are not trying to make value judgements with your posts, your not saying whether inflation is bad or good, whether you are arguing for it or against it but I think when you do a post that uses an inflation metric citing "falling dollar" as a proxy for inflation you not only are using a possibly dubious metric but you are working against the consumer. A falling dollar can be associated with a rising standard of living but most people would vote against ANY policy that they thought would lessen the value of their dollar over time.

The Arthurian said...

"Actually Art inflation is most commonly defined as a sustained rise in the general price level over time. There is nothing about a change in the value of a dollar."

Oh my god, Greg. The one is the inverse of the other.

Greg said...

"Oh my god, Greg. The one is the inverse of the other."

Oh really? At all times? This relationship holds always? I think not.

You cant just say look at our price level in 1992 and our price level in 2012 note the change and just invert it and say that the value of the dollar has changed inverse to that, there are actual markets FOR the dollar and its price is changing all the time, sometimes in the exact opposite way of an inverse!

Just because you can look at a difference between price levels in two years and decide to express the change in price level as a price of dollars doesnt mean the actual price of dollars moved in that direction.

Actually its pretty lazy analysis I think for someone to look at 20 year price rises of x% and just say " Well that just the dollar falling x%".