The Inflation Predictions Were Just Wrong, And Now They're Hurting People

TBI - Pragmatic Capitalism ^ | 6-22-2013 | Cullen Roche, Pragmatic Capitalism

[blam]

The Inflation Predictions Were Just Wrong, And Now They're Hurting People

Cullen Roche, Pragmatic Capitalism
June 21, 2013, 4:21 AM

Remember back when QE started and we saw charts of high powered money going vertical all over the place and everyone who didn’t understand modern banking said that the reserves would flood out into the economy causing high inflation or even hyperinflation? And do you also remember how most of those same people also said that the only way you’d be able to protect yourself from this hyperinflation was by owning hard assets like gold or silver? Well, the inflation never came. The most recent reading of 1.7% pretty much proves that we’re much more Japan than we are Weimar (and yes, even independent gauges confirm the low inflation story). And now the portfolio recommendations are falling apart as well….

It’s one thing to be wrong about the way banking works and the way inflation might spread. But most of these people were explicitly recommending a substantial overweight in gold and silver as well. And they’ve been annihilated in recent years. Gold is down 33% from its 2011 highs. And silver is down a staggering 60% since the time I started referring to it as a bubble. These are massive moves and if you’ve been substantially overweight these metals in your portfolio then you’ve experienced substantial pain based on sheer misunderstandings by people who are posing as experts.

The thing that really drives me crazy about this is that so much of this has come from the ideologically driven groups who were really selling nothing more than fear and hatred of the Fed and the government. Look, I know the government hasn’t done everything right and I am certainly no Federal Reserve apologist, but that doesn’t ever justify bad analysis and specific portfolio recommendations that are simply irresponsible. And that’s all we’ve seen here. People selling an ideology based more on politics than knowledge….

[expat_panama]

...some other way to combat deflation that doesn't involve giving an elite group the power to create infinite sums of money?

Hey, it works!   Though, I usually prefer to think of those guys as the 'hired help'.

[Toddsterpatriot]

There must be some way to decentralize this power.

You ever take out a mortgage or auto loan? You created money. When I did that, the Federal Reserve wasn't involved.

[DannyTN]

"-shows a strong correlation between lowering tariffs and improving economic conditions. "

Correlation is not causation. There were at least three things that occurred around 1950. Changes in monetary policy, lowering of tariffs, and implementation of safety nets.

Your graph in 103 showed that changes in monetary policy are correlated with improving economic conditions. That makes sense and fits with economic theory.

Tariffs are correlated as well but in my opinion only because they were implemented at the same time as the change in monetary policy. Again, the logical conclusion of your previous assertion that trade deficits are correlated with low unemployment is that we should eliminate exports let the trade deficit soar, unemployment should shrink dramatically. But it's illogical that trade deficits should cause low unemployment especially when we can quantify the unemployment caused by imports.

For that matter safety nets went in about the same time. But I don't see you arguing for more safety nets. Yet you argue for lower tariffs. Why? I can at least argue that safety nets allow people some time to find a match for their skills and therefore benefit the economy. But I wouldn't argue for more safety nets at this time. I do see a scenario where mass production of general purpose robotics could create huge labor dislocations and necessitate an increase in safety nets.

There could certainly be some amount of moral hazard effect from the implementation of safety nets that accounts for some of the unemployment increase, but I don't for a second believe 23% of Americans have succumbed to moral hazard. I believe the off-shoring has reduced the available jobs and left millions unwillingly unemployed.

What is undeniable is that we have a huge trade deficit with china. A huge trade deficit overall. We know that we have lost industries to off-shoring. And we have a large number of Americans sitting unemployed.

Raising imports tariffs would initially help pay for the unemployment costs reducing our gov't debt, and long term it would reduce the trade deficit, bring industries back to America and put Americans back to work. That would be good for individual Americans, good for the American economy and go a long way to fixing the budget deficit through increased Gov't revenues and lower safety net payments.

[expat_panama]

...GDP improvements have been sloping down and Unemployment has been sloping up since about 1950.  I think that has more to do with trade policy...

...Here's a closer look... ...a strong correlation between lowering tariffs and improving economic conditions. "

Correlation is not causation.

LOL!!!  Back when you thought the trade policy correlation was lower tariffs + worsening economy you said I think that has more to do with trade policy.  Now that we're seeing how higher tariffs came with a miserable economy the old "has-more-to-do-with" goes right out the window!  Seriously, while a lot of smart folks say tariffs had a negative impact in the '30's, it's an argument that's not settled easily.  All we really got is a complete lack of any correlation that tariff protection helps employment, and I'll settle for that.  Tariffs are obviously taxes with no proven benifit.

moral hazard effect from the implementation of safety nets that accounts for some of the unemployment increase,

I personally like that one though it's super hard to prove.  It's a lot clearer that there's no coincidence the big dips in unemployment happened during WWII, the Korean Conflict, and the Vietnam War --massive mobilization of war production along with a forced youth labor shortage.

[DannyTN]

"All we really got is a complete lack of any correlation that tariff protection helps employment,"

Your charts don't really show that. They are both highly correlated with the economic output. But you can't tell from the chart that one is impacting the other.

But what we can show is that countries that have been running trade deficits have on average higher unemployment than those that haven't. I've posted that chart.

And we can also analyze industry by industry and show the impact that imports have had on jobs.

That makes more than enough information to show that trade deficits can lead to unemployment.

Trade makes sense when you are at full employment. It doesn't make sense when you have a lot of excess labor sitting around doing nothing.

"Tariffs are obviously taxes with no proven benifit."

Ha! Our founding fathers didn't think so. They viewed tariffs as taxes on foreigners wishing to do business in the U.S.. They viewed tariffs as maximizing liberty because it reduced the need for direct taxes on the American Citizenry.

Even Adam Smith thought tariffs should at least offset the taxes on Domestic producers. Our tariffs are at 1%. Do you think our taxes on Domestic producers are 1%?!!!! No, they are more like 10%.

[expat_panama]

"All we really got is a complete lack of any correlation that tariff protection helps employment,"

Your charts don't really show that.

If you want we can crank out a quantified strength of correlation with an online regression analysis (applet here), but we'd first have to agree which data represent tariff protection and which equal employment.  Not a problem; you said-- "...GDP improvements have been sloping down and Unemployment has been sloping up since about 1950. I think that has more to do with trade policy..." --so either you've got supporting numbers we can both accept or you've just got an unproven 'feeling'.

"Tariffs are obviously taxes with no proven benefit."  

Ha! Our founding fathers didn't think so

Sure they did.  Check out the total repudiation of protectionism in all forms with this link to Tariff Policy published in 1779 by America's Founding Fathers Publishing Trust.  OK, I lied.  Seriously, we both know there were many founding fathers, some liked things like slavery and protectionism and others preferred freedom.  The bottom line is when they all sat down to vote, they agreed to send John Adams to Holland to set up America's first embassy to borrow money and work out an international trade agreement.

[DannyTN]

I wouldn't say you could prove it by that one graph. But neither would I call it an unproven feeling. That's feeling is backed up everytime I walk through Walmart and realize how much we are paying Chinese to do stuff that unemployed Americans could be doing.

Suppose you have 4 sons and three of them pay their own way, but one just got downsized and doesn’t have a job. You hire your lawn mowed at $30 a week. Your son needs $40 in gas money a week to go to school. You’re committed to providing him gas money if he can’t earn it himself.

Do you hire your son to mow the lawn for $40 a week? Or do you continue to hire it out at $30?

Most would say make him mow the lawn. You’d save the $30. And would only be out $10 a week when you would have been out a full $40.

Buying imports during periods of unemployment are just like that. We’re paying $40/week to unemployed Americans so that we can continue to buy the cheaper goods from China for just $30/week. It doesn’t’ make good sense. (numbers are for illustrative purposes only and not real world.)

[expat_panama]

fwiw (re founding fathers and trade):

US opens bilateral trade with China 1784

Dutch free trade agreement October 8, 1782

Swedish free trade agreement April, 1783

Caribbean free trade agreement 1784

Prussia free trade agreement 1785-1786

--it goes on and on...

[expat_panama]

neither would I call it an unproven feeling. That's feeling is backed up everytime I walk through Walmart

There's where our reality systems diverge. 

In my way of coping with life my theories are what's proven or disproven with reasoning and observation.  My feelings are my feelings; I can choose to have them and there's no way to ever disprove the fact that I've had the feeling.  However I work to avoid feelings that can lead me to believe things that are wrong, that aren't useful, or that make me suffer loses without any redeeming benefit.  I work to shuck those feelings no matter how many emotions or vivid experiences seem to reinforce those dysfunctional feelings.

Though, I understand that not everyone sees it that way.

[DannyTN]

Trade Ageements but not "Free Trade" agreements. I looked up the Dutch one and it's title is "Treaty of Amity and Commerce".

And while it's a trade agreement, it does not qualify as a free trade agreement. The U.S. and Netherlands agreed not to charge each other more duties than the most favored nations. (Still charging duties)

There was an exception made for export duties on Molasses from American Islands controlled by the Dutch and any merchandise from the colonies for use in those Islands was likewise to be export duty free. Says nothing about import duties.

So neither trade with the Dutch nor most of the lands controlled by the Dutch were to be duty free. Only trade with the American Islands controlled by the Dutch. And if I read that right, we gave up export duties on all our goods, in exchange for them giving up export duties on Molasses. (we must have really liked their molasses or maybe we didn't plan to charge export duties in the first place)

ART. 11. (1) It is agreed and concluded that there shall never be any Duty imposed on the Exportation of the Mellasses that may be taken by the Subjects of any of the United States from the Islands of America which belong or may hereafter appertain to his most Christian Majesty. ART. 12. (2)

In compensation of the Exemption stipulated by the preceeding Article, it is agreed and concluded that there shall never be any Duties imposed on the Exportation of any kind of Merchandize which the Subjects of his most Christian Majesty may take from the Countries and Possessions present or future of any of the thirteen United States, for the Use of the Islands which shall furnish Mellasses.

I'm assuming your other agreements are no more Free Trade agreements than this one.

Besides I"m not against free trade agreements with friendly countries that have similar wage structures. But free trade with communist china that keeps wages artificially low when we have high unemployment is economic suicide.

Founding Father's Original Tax Plan

[DannyTN]

I've given you plenty of economic reasoning with regard to tariffs.

• I've shown you a study that shows countries that run high trade deficits have higher unemployment.
• I've shown you a detailed analysis that goes industry by industry and calculates the number of jobs loss due to off-shoring.
• I've shown you the logical conclusion of your claim that trade deficits cause low unemployment is that we should quit exporting and let the trade deficit soar. (but no reasonable person really believes that or would be willing to do that)
• I've demonstrated with simplistic examples how it's better to employee Americans that always taking the lowest price, because when we pay for the unemployed Americans through taxes that's a hidden cost of the cheap imports.
• I've given you reasons other than unemployment, including the avoidance of foreign entanglements, the dependence on an enemy for military parts, the eventual erosion of ownership of our own industries.
• I've appealed numerous times to the base logic that if we are paying Chinese to do something, we could be paying Americans to do the same thing and it would put them back to work.
• I've shown you that import tariffs are not guilty by association simply because Unions advociated them. The logical end of that argument is to offshore all American industries and really teach those unions.
• I've shown you that there is no need to fear giving government additional revenues from imports, because we could cut income taxes by an equal amount making it tax neutral. And since we already have low tariffs, there is no additional government bureaucracy needed to raise rates.
• I've even shown you the history of trade favors some protectionism, a fact CATO tries hard to erase from history. Free Trade Doesn't Work Excerpt Chapter 6 - The deliberately forgotten history of trade.

  For the life of me, I don't understand your embracement of low tariffs in this economy. It seems to be based on some loyalty to misguided policies of the past that were labeled conservative or libertarian.

[RegulatorCountry]

Maybe he has a manufacturing operation in Central America expressly set up to import into the United States. Speaking to self-interest, in other words, while purporting to speak to the benefit of the nation as a whole. One in such a position would be fairly resistant to your logic.

[DannyTN]

A couple of the most anti-tariffs freepers have admitted as much. One has has a manufacturing consulting practice and one has investments in China. But I lose track of which ones have vested interests.

But you know I talked to a guy the other day who imports saddles for horses. And he was fine with import tariffs. He knew it would hurt his business in particular but overall would be good for America.

[ichabod1]

Econimics most certainly IS a science, the problem is people thinking that science has all the answers and is always right. It’s not. Far from it. Far FAR from it.

[expat_panama]

I've given you plenty of economic reasoning with regard to tariffs...   ...For the life of me, I don't understand your embracement of low tariffs...

Correct, and the vast majority of American voters are like me it that your arguments have failed to convince us to give you our money to support your needs.  Just the same, I do thank you for all the time and effort expended in sharing your feelings and I'd be grateful if you'd continue to let me know what else you come across in the future --I know I've gained a lot through our chat. 

In particular, please let me know of new free sources of transparent historic economic data you consider useful.  Correct me if I err but I understand that you accept shadowstats for unemployment, the BEA numbers for international payments and domestic production, the Fed's numbers for money/liabilities/asset values, and the BLS price indexes.  You know that I'm not willing to pay for shadowstats' secret proprietary adjustments to BLS' open numbers.  So far, all we've got for tariffs are these from the U.S. International Trade Commission and the Census Br, but let's keep in touch if either of us finds other primary sources.

When things around me change I change what I do, so my view on tariffs will change as conditions merit.  I understand that your decision on tariffs is absolute.

[catfish1957]

I actually think the FED has done a great job given what they have to work with.

If you call running up a $2T a year QE induced blank check a good job, then well.......

[DannyTN]

The government ran up $8 trillion in debt prior to 2008 with no help from the FED. If irresponsible congressmen want to spend, they’re going to spend FED or no FED.

The FED only got involved because unemployment soared, which is what they are supposed to do. That’s their legal mandate.

[DannyTN]

The government ran up $8 trillion in debt prior to 2008 with no help from the FED. If irresponsible congressmen want to spend, they’re going to spend FED or no FED.

The FED only got involved because unemployment soared, which is what they are supposed to do. That’s their legal mandate.

[DannyTN]

I was reading the excerpt from chapter 12 of that “Free Trade doesn’t work” book last night. He makes an interesting case that growth doesn’t come from specialization to take advantage of comparative advantage. Growth comes from having a diversified economy where advances in one industry tend to cause changes in other industries.

[DannyTN]

I was reading the excerpt from chapter 12 of that “Free Trade doesn’t work” book last night. He makes an interesting case that growth doesn’t come from specialization to take advantage of comparative advantage. Growth comes from having a diversified economy where advances in one industry tend to cause changes in other industries.