Is the author debating a strawman or something? Actually, they just seem confused. At the start, they state asset price increase is not inflation, then, at the end, agree that there is some inflation going on in the real estate space.
So the author is agreeing with the people they're supposedly countering. I don't understand the point of this piece.
Yes, the author is debating a straw man. The argument that the government is understating inflation is a pretty simple one.
1) The government is heavily incentivized to understate inflation in order to limit its expenditures for social security and TIPS, both of which are indexed to inflation. Social security in particular would explode in costs if, say, the official rate had been 1% higher on average over the past 30 years since the inflation measure got significantly changed during the late 80s and early 90s. In fact, if you look back at the discussion surrounding those changes, bringing down the costs of social security was an explicit reason for the redesign.
2) Complexity and obscurity. None of the input data is released, and there's this thing called 'hedonic quality adjustments' which is the umbrella beneath which economists decide how much to lower inflation when the quality of goods gets a little bit better. The FED economists point out that a car from 2018 is better than a car from 2012 and they adjust inflation downwards in order to account for the increase in value that consumers are getting in their car. Consumers counter by pointing out that they still have to spend the actual money...
Analysis) With transparency and a lack of incentive to cheat (see 1) hedonic quality adjustments would be an allowable modification, but with opacity and a strong incentive to cheat, they pretty much guarantee that inflation is fudged downwards. The debates around changing the inflation measure have focused heavily on reducing social security payments. In short, any time you have excessive complexity, lack of transparency, and an incentive to cheat, you can expect cheating.
Why should we care? First and foremost, Anyone who has a relative collecting social security would probably be upset to hear that grandma is getting about 60% of what she should be getting, given the promises made and the value of the money she contributed.
Second, and the big point that the article missed entirely, is that real gdp per capita HAS been declining, reflecting that decrease in standard of living that one would expect to see if inflation were understated.
> Unfortunately, the pandemic has permanently broken every economic chart in existence.
> But if we take away the outlier 2020 data points, the average real annual GDP growth from 2010-2019 was 2.3%. The inflation rate in that time averaged roughly 1.8% per year.
> If you’re one of the conspiracy people who believe inflation has actually been running at 5-6% per year, that would assume the economy has been contracting by 1-3% per year over the past 10 years.
> And if you’re a full tinfoil hat person who assumes inflation is actually 10-12% per year[fn2], that’s like saying we’ve been in a full-blown depression and the economy has lost 80% of its value.
> This is absurd and patently false but that’s the claim you’re making if you really think inflation is this high.
If GDP was growth for the last decade was "only" ~2.5%, then how could have inflation been higher than that? It would have meant we were in a recession/depression.
Yeah, and the claim that inflation has been at 10-12% per year for the past 5 years is so ridiculous that it can be discarded without any analysis.
If they claimed that inflation is, say, 3.5% instead of ~2% then we could look at their arguments. But to claim that it's at ~10-12% is a little like claiming that all our thermometers are faulty and it's actually 40 degrees Celsius outside. Complete detachment from reality.
>Second, and the big point that the article missed entirely, is that real gdp per capita HAS been declining, reflecting that decrease in standard of living that one would expect to see if inflation were understated.
And why resort to conspiracy theories? Look at other data sources. They are consistent with the official inflation rate. E.g. https://fred.stlouisfed.org/series/T10YIE or MIT Billion Prices Project.
If that's your only explicit criticism, then that's not much of a criticism.
The author was clearly referring to stocks, bonds, and other financial instruments when discussing asset price inflation (he refers specifically to "risk assets"). And then, at the end, he didn't "agree" that there is some inflation in the real estate space:
> Of course, there are areas of the country where housing prices are out of control. But this is how averages work. Some data points are above average while others are below average.
In any case, I don't believe that he's arguing against a strawman. I've seen plenty of discussions on HN alone that the "true" inflation is much higher than the reported inflation, and that this can only be measured by looking at BitCoin prices, for instance.
I'm saddened to see that while this post isn't down-voted, it is not the most up-voted post that it deserves to be so. I expect this to be because most people don't know what the Cantillion Effect is, so this post will attempt to show it.
People think of inflation like they think of the oceans. If the ice caps melt and water melts in, the shore lines from New York to Tokyo rise slightly. If you track this rise, that's inflation. That's not how it works, and it's not what the CPI tracks. Inflation is much more analogous to inland water, you know, lakes and rivers.
If you give the bottom 80% of the income distribution more money, they will spend it right away like a river. If you give the 81-90%, portion of it will be saved in their lake(say, a 401k) and they will spend some of it. And if you give the top 10% more money, they save all of it in their reservoir.
The way that we have been introducing new money into the system is not by melting ice in the middle of the ocean. We also haven't been raining all over. The key way that new money has been introduced over the past 50 years is by lowering the interest rate. When you lower the interest rate, what happens is that people refinance, and suddenly they can pay less, but quickly realize, oh, I can also borrow more, so they do.
I'll show you a few numbers, which I got by going to the zillow housing affordability page with default settings. I only modified the interest rate, all other values stay the same.
Year | Average Interest Rate 30 Year Fixed | Home you can Afford
1981 | 18.39 | $124,797
1991 | 9.00 | $200,862
2010 | 6.26 | $244,531
2020 | 2.67 | $328,569
And so what we see people and REITs and companies doing is taking out larger and larger loans, and putting those dollars into assets. Companies take out a bond and buy back their own stock(which props up zombie companies). And why wouldn't they, it's profitable because the environment makes it so. And that money flows throughout the system. We can track the inflow of all of this money by looking at say.. the M3. This seems to be the crux of your point, if the amount of money in the M3 has gone up by 40x since 1971, why is inflation not out of control?
The CPI is a measure for inflation that does not track the oceans water level. The M3 tracks that, and as you can see the M3 is out of control. The CPI doesn't track stock purchases, even though if you ask any personal finance person, they recommend that the average person put 15% of the money into retirement stocks, why is that? If the CPI were to track stocks weighted at 1971 levels, inflation WOULD be out of control. The CPI tracks, specifically, an average of tangible items that the bottom 80% spends their money on. Therefore the inflation number is based on the height of certain rivers. Now that's an important figure to keep in mind, after all if you get inflation in that bracket and income isn't rising, you quickly run into a revolution. And so that's what the FED has found, if you track the CPI you get the perfect amount of heating to boil the frog without them noticing.
But when you introduce money into the system by lowering interest rates, you are in effect giving the money in proportion to the assets already owned. Someone bought that home in 1981, and someone with the same exact income would bid 328k for it today. You basically tripled that home owners asset, without any need to compare anything else, like actual income rises, or for instance SF has moved upmarket which would also effect prices. And so if you don't have much assets, it's a desert. If you do, it's a rain forest. And because the wealthy already have all that they want, demand for those items that the bottom 80% spend their money on doesn't change. So the supply and demand of those items don't change. So the CPI value stays the same. But money was introduced. If you take a look at the velocity of the M3, the M3V, you can see this take place. The wealthy get the gains of the new M3 dollars, and store it away. The more dollars created, the lower the velocity.
So the question we have to ask ourselves, now that interest rates are at 0%, is that the FED has two options, they can continue to do they have been doing this year and dump the money straight into the reservoir by buying bonds and we'll get the same results, but it doesn't look like that is going to have popular support much longer. You see lowering interest rates is an implicit way to give wealth to the wealthy, and much like how CO-VID is implicitly killing more people per day than 9/11 did explicitly, but now that the FED is forced to explicitly give money out. What happens if it starts raining in the desert by printing money and handing it out fairly, say through a UBI? Will the rivers rise? If the CPI inflation indicator shows that the rivers are rising, what are we set to do?
So the author is agreeing with the people they're supposedly countering. I don't understand the point of this piece.