Posted on 12/02/2007 4:53:00 AM PST by Zakeet
The problem is that drops in price level of one good in an economy, with the same quantity of goods available and the same money and velocity merely increases the price level of other goods. It does not cause inflation or deflation per say.
Only an increase in the total quantity of all goods with the same money x velocity will result in "deflation."
Dropping the price of an Intel processor merely increases the amount of dollars available to bid for an ancient bottle of Chateau Lafite.
Export of manufactured goods is 2.8% of our GDP. Period.
With housing prices dropping, without M3 growing by a large amount, the risk of deflation is very high. If energy wasn't up so much in the last 4-5 years I believe we would have very strong deflationary pressures.
In fact, export of manufactured goods is 2.8% of GDP, and increasing the relative wealth (call on goods and services produced in the US economy) does not make the rest of us wealthier, but rather poorer.
The falling dollar is merely the first step in settling long outstanding accounts.
Net savings rate excludes capital gains though. Of course, all government stats are skeptical.
That's why I'm sticking with Lenovo. /sarc
Let's, if we can, zero in on a few points that we can agree on, shall we?
First, can we acknowledge that the way GDP is calculated leaves room for much uncertainty? The Fed is forever revising figures from years back in order to smooth out their year-to-year curves. Plus we all know there's a huge (as in hugh) underground economy whose share of the total can only be estimated but is likely a tad greater than that of the accounted-for economy in annual growth rate.
So does the Fed print off more money to keep that underground economy from siphoning all those greenbacks into filthy dirty hands of Colombian dope peddlers and taking them out of domestic circulation? That's possibly one reason, but if it is it's far down the list.
We are in the midst of a credit expansion, not just a runaway printing press. The Fed's intentional lowering of the overnight rate has put new money into circulation, through the magic of loans against homes and cars and boats and other tangible property used as collateral.
One could argue whether or not these loans ought to be counted in the GDP numbers, as they are technically consumption, not production. But some of the production would not have occurred (e.g., overbuilding of new homes, overproducing SUVs) had fewer buyers been eligible for loans -- which would have been the case had interest rates not fallen as they did.
Now, AndyJackson offers a good example of the way in which lower production costs can produce, locally usually, what some people would call "inflation," or higher prices. It may be more money to bid on a fine bottle of wine, or it may simply be more money invested if the people receiving the extra money are so inclined. As I recall from Econ 101, there's basically only two things you can do with money, save it or spend it. Once you have the necessities taken care of, many of us would rather invest the excess and see it grow. (I suppose that bottle of Chateau Lafitte might be considered an investment if it remained corked. The temptation would be great, however.)
A more mundane example, which affects more people, is real estate. If more money flows into Silicon Valley because of increased productivity -- which is precisely what happened in the '80s with Apple, Cisco, Atari, Sun and others leading the way -- and with it an increased demand for engineers and technicians and managers to pump out more computers and video games, what happens to real estate prices? You got it: they go through the roof, and they did. Even though computers continually dropped in price as the industry found cheaper manufacturing facilities in the Orient, the price of new and existing homes in Palo Alto, Sunnyvale and Santa Clara continued upward unabated. Lotsa money, not lotsa places to live.
What happens when the real-estate bubble bursts? Do the investors lose their money? Not if the loans were made under a federal mortgage guarantee. The lenders will be made whole, we can count on it. WaMu is too big to fail, so says the Fed.
Home prices may fall, some people will have to move in with their parents, and a number of mortgage lenders will close their doors. But one thing we can count on is continued inflation, in the original sense of the word.
As the dollar loses value to buy "things," what do you think foreign investors are going to do? Are they going to put more or less money into American stocks and bonds? (I think I know how you will answer.)
Hollyweird is one of our biggest exports other than McDonald’s and Starbucks.
Well, then. We're all gonna die I guess.
I believe it, but I have tried to stick to government furnished numbers for the simple reason that it is bad enough and there are those such as Toddsterpatriot who will jump on you if you question the rosy picture that gets painted. So, while I don't agree that those are the facts, I will stick to them.
We are in the midst of a credit expansion, not just a runaway printing press. The Fed's intentional lowering of the overnight rate has put new money into circulation, through the magic of loans against homes and cars and boats and other tangible property used as collateral.
What is a credit expansion besides a "runaway" printing press. When MZM or M3, which is so bad that the Fed stopped publishing the numbers 2 years ago, expands much more rapidly than GDP then we have runaway printing presses. Using real estate as collateral in a credit-expansion bubbles is a self-referential sort of think. Southern California average real estate prices are 10 x average per family earnings. That is 2.5 to 4 x any sort of equilibrium price. Therefore, once the credit bubble bursts, the price at which the collateral can be liquidated is a small fraction of the outstaninding loans against it.
whether or not these loans ought to be counted in the GDP numbers, as they are technically consumption, not production
GDP (total goods and services produced) = consumption + government + investment + exports. To the extent it is not imported it is part of GDP.
If more money flows into Silicon Valley because of increased productivity
The money flowed into Silicon Valley because the resulting investment in capital equipment in the rest of the economy improved productivity in the remainder of the economy. A lot of the increase in real estate was the result of an investment bubble (paper shares selling at a multiple of their "value" based approximately at productive value less depreciation divided by market ROI). This went not into productive activities but a lot of expensive cars, real estate, wine and cocaine in the Valley.
What happens when the real-estate bubble bursts? Do the investors lose their money? Not if the loans were made under a federal mortgage guarantee. The lenders will be made whole, we can count on it.
Even the Federal Reserve cannot print money that fast. Furthermore, the beauty of SIV's is that they are held by investment funds and pools that are not subject to FDIC insurance or oversight.
AndyJackson offers a good example of the way in which lower production costs can produce, locally usually, what some people would call "inflation," or higher prices.
Not quite. The illustration was to bolster the argument that with a constant money supply,improved productivity that results in decreased costs results not in deflation of the overall price level, but merely the increase in costs elsewhere in the economy. Prices could only decrease if the same money were chasing, not the same number of goods, but more goods. More goods means that (deflated) GDP grows (with a negative deflator if the quantity of money remains unchanged).
No one said that. It is simply that exports of manufactured goods, while important to many individuals in the economy, are not the savior of the US economy.
I thought you were going to stick to the facts? Any more Greenspan speeches you can misinterpret or misquote today?
The market only knows that I have a ton of apples to offer and cares not whether I produced with a weeks worth of labor or a years worth.
My hoped for selling price will be affected. But if because of decreased laziness, I produced the apples with 10% less labor and drop the price 10% the only effect will be that everyone at the market will have the savings to spend on other goods. In the bargaining for those other goods their prices will be set by the amount of money remaining.
If I plant 10 more trees and bring 1.1Tons of apples to market then the market will care. First I have increased GDP by my 10%. But the effect on my price will depend. Either I will get the same price, if demand is there, so I make an addition 10% and someone else in the market loses or I might get the same total compensation meaning 10% less per apple, or I might find myself selling my apples at half price because they are a glut on the market (because a competitor also produced an extra 10%). But total value of all goods sold in the market that day, assuming everyone spends all of his money, and everyone sells all of his goods will remain unaffected. In this case my extra 10% is slightly deflationary, and the only question is how the deflation is apportioned.
When did the Fed stop publishing M3?
BTW, I knew that comment would flush you out. It is an irrelevant distraction having nothing to do with the discussion here about affect of increased productivity on price levels.
this is much too rational for many on this forum.
And BTW do you really think that MZM (post 98) is actually under control in any normal sense of the word?
March 2006.
When did Alan Greenspan say people should take 1.75% ARMS or that they were stupid if they didn't?
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.