<p>I have not talked with my dad about the current “credit crunch” on wall street. You are right about the law of big numbers. However, do you think we wouldn’t have been unable to attain the growth we have had over the last 94years if we were not on the federal reserve system?</p>
<p>And off we go, apparently.</p>
<p>I would argue very vehemently against someone who posited that a low inflation rate (~3%) is actually bad for an economy. Generally it is viewed as healthy in the economic community, for reasons that you are welcome to look up if you would like.</p>
<p>As for your little GDP chart, it’s nice, but it undermines your argument. Yes, 4% growth rate isn’t bad - but since the Fed took over growth rates have held steady or gone significantly upwards (depending on the time period), despite the difficulty in maintaining growth rates that dstark pointed out.</p>
<p>dstark: Consumers love it when prices go down. They hate it when their wages go down. Both happen in deflationary periods. ;)</p>
<p>jclay2: Yes. Absolutely yes. Without a doubt growth rates would have been lower over the last century without the Fed. Now, they would’ve been higher with a Fed that did its job better, but that doesn’t mean the current one is inherently a bad institution.</p>
<p>Remember, the opposite of inflation isn’t deflation; it’s recession. If you look at it graphically, it jumps right out.</p>
<p>I don’t feel like arguing over macro 101, but that’s something that always bothers me a little bit. </p>
<p>For the record, though, I agree that a low inflation rate, 2-3%, is generally healthy for the economy, especially when you consider that reported inflation rates from CPI are generally over-estimates.</p>
<p>1 of42, why do wages have to go down if productivity is up 3% a year? Why can’t prices drop 1% a year and wages go up 1% a year if productivity goes up 3% a year?</p>
<p>3% inflation is too high in my opinion. Supposedly in the Fed’s opinion too. Makes it very difficult for those on fixed incomes and the elderly. We are going to have a very old population soon (unless our immigration policies change).</p>
<p>I don’t have too much of a problem with the Fed shooting for 1-2% inflation. When you grow the money supply at 9% a year for 5 years it makes that target tough to reach. ;)</p>
<p>“especially when you consider that reported inflation rates from CPI are generally over-estimates.”</p>
<p>That is total bs. That’s what we are told. It’s false. Look at what makes up the CPI and look at what makes up a person’s budget.</p>
<p>“However, do you think we wouldn’t have been unable to attain the growth we have had over the last 94years if we were not on the federal reserve system?”</p>
<p>I honestly don’t know.</p>
<p>Ask your dad about the credit crunch. If the Fed did nothing, it would be very deflationary. Of course, the Fed isn’t going to do nothing.</p>
<p>Ok, just because the united states experienced growth after 1913, doesn’t mean it wouldn’t have under the gold standard. Also, I suggest you look at the history of fiat money vs. specie. To be nice, fiat money failed miserably every time it has been attempted.</p>
<p>
I have looked at what makes up the CPI. And I see typewriters disappearing and being replaced by computers, which are a superior technology. I see cellphones suddenly appearing and lowering communication costs while away from home. I also see that the CPI can’t account for substitutions of goods/services, such as a family buying more apple juice if the price of cranberry juice skyrockets. </p>
<p>Finally, I see the 1995 report by the Boskin Commission, appointed by the Senate, which says that the CPI overestimates inflation by 1.1% a year in 1996, and 1.3% a year before 1996. </p>
<p>So, you take the 2-3% reported inflation rate which I said I felt comfortable with in my last post, and you subtract a little over 1%, and you end up with the 1-2% figure that you brought up.</p>
<p>How much is health care as a percentage of the cpi? Education costs? How come home prices aren’t in the cpi? </p>
<p>“I also see that the CPI can’t account for substitutions of goods/services, such as a family buying more apple juice if the price of cranberry juice skyrockets.” </p>
<p>I don’t buy the substitution stuff. I prefer cranberry juice and it goes up in price so now I can go out and buy apple juice which is a product I don’t like. That’s supposed to be similar and now prices aren’t going up? Why don’t I just substitute cranberry juice with water. Now prices have really dropped. I can buy chicken instead of beef? I may not like to eat red meat.</p>
<p>jclay2, so how would the gold standard work?</p>
<p><a href=“http://finance.yahoo.com/focus-retirement/article/103929/Investing-to-Beat-Inflation?mod=retirement-IRA[/url]”>http://finance.yahoo.com/focus-retirement/article/103929/Investing-to-Beat-Inflation?mod=retirement-IRA</a></p>
<p>For the last 40 years the inflation rate is 4.7%. </p>
<p>Ugly.</p>
<p>How many people really are on a fixed income? SS is CPI adjusted and nearly everyone gets it. Higher inflation usually means higher income from interest.
If you take out the Carter years it’s not bad.</p>
<p>You don’t get to cherry pick. ;)</p>
<p><em>sigh</em></p>
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</p>
<p>First off, most of the data from the 1860s to 1914 were reconstructed by economists. Economists have used things such as manufacturing data to try and shape the economic data from that time period, but it’s inaccurate. </p>
<p>Second off, you have phenomena such as the Gilded Age (rise of industry and transportation through rail services – if you know your microeconomics…and macroeconomics, a change in technology can positively impact all growth models.)</p>
<p>If you read the CPI charts correctly (again, I’ve stated their flaws before), you see that inflation hits a spike during the First World War. On the other hand, wartime periods tend to be great for production, etc., as long as you can keep your inflation in check. As we know now, that didn’t happen.</p>
<p>Again, if you read the CPI data correctly, you see that lovely little dip in inflation (a period of deflation) in that period we like to call the “Great Depression.”</p>
<p>Does that explain part of where I’m trying to go with this? Inflation isn’t the tell-all indicator of how the economy is progressing. I’m not going to review the whole economic history of the United States… frankly, that’s outside of my capacity.</p>
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</p>
<p>Something doesn’t match out here. While MBA students certainly do take economics, I don’t think it’s a qualifier to teach economics at a university, even as an adjunct. Not to go after an ad hominem attack here, but something doesn’t match out.</p>
<p>By the way, I’m not going to shut you down, just correct you on a few points. You can think whatever you want of what I have to say. Just so I can get my credentials out of the way, I’m a third-year student with coursework in micro and macroeconomics, international trade and finance.</p>
<p>And to a certain extent, your father was right. Our economy suffered greatly as a result of failing to control inflationary trends prior to the Great Depression. The Federal Reserve was still taking its baby steps at the time. Does that make it responsible for the economic failures of the United States?</p>
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</p>
<p><em>sigh</em></p>
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</p>
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</p>
<p>Not necessarily. While deflation can be one component of recession, recession is a decline in a country’s GDP for two or more quarters (at least that’s how I learned it.) In some theoretical wonderland (aberrational as it might be), prices and wages might fall but the economy could grow. (Will never happen.)</p>
<p>
</p>
<p>Couple problems. </p>
<p>1) The gold standard is inflexible and may have money supply issues.
2) Gold is a finite resource.
3) Some economists will argue that the current fiat system follows the gold standard.</p>
<p>
</p>
<p>Medical care: 6.281% of the CPI (whereas for an individual, it would reflect about 25%). Education costs: 6.034%, whereas an individual would have about 3.0%, Housing: 42.691%, while hypothetically it would be closer to 25%.</p>
<p>Source: [Table</a> 1. Consumer Price Index for All Urban Consumers (CPI-U): U. S. City Average, by expenditure category and commodity and service group](<a href=“http://www.bls.gov/news.release/cpi.t01.htm]Table”>Table 1. Consumer Price Index for All Urban Consumers (CPI-U): U. S. city average, by expenditure category - 2023 M12 Results)</p>
<p>I was speaking along the lines of inflationary gap versus recessionary gap, which I believe are essentially opposites. I didn’t mean actual, technical “recession.” Definitely correct me if I’m wrong, though; my econ memory is a bit fuzzy.</p>
<p>So we see that health care costs, which have been rising at close to double digits for many years, have been undercounted by a factor of 4. (I thought it was a factor of two). </p>
<p>Hmmm. It’s going to make it hard for that 1 to 2% overcounting to look accurate.</p>
<p>As for housing, we use some kind of rent number and we don’t use housing prices. </p>
<p>If we used housing prices from 2000 to 2006, we would have had higher inflation numbers. We would have had to raise interest rates sooner than we did. This would have stopped housing prices from getting out of hand. We would not have had a housing bubble. We would less likely have had a credit crunch. All those phony finance instruments wouldn’t have worked for housing because people would have said rising housing prices were inflationary and this would not have been looked at favorably. </p>
<p>The housing bubble and following credit crunch were all preventable if housing prices were kept in the cpi, the Fed wasn’t so loosey goosey, and Wall Street didn’t come up with these new financial instruments where people worth two cents could buy a house.</p>
<p>Because housing prices were not in the cpi and medical costs were undercounted, the cpi numbers were tamer. We had lower interest rates than we should have had and for longer than we should have had. This led to money supply growth larger than it should have been, borrowing higher than it should have been, and consumption higher than it should have been. (The latter has led to problems with our dollar). Savings in this country are lower than they would have been otherwise.</p>
<p>So what do we have. A population that has too much debt, not enough savings, too much invested in housing, and financial institutions that have overstated their earnings.</p>
<p>The solution…</p>
<p>Lower interest rates.</p>
<p>Inflate out of our problems.</p>
<p>Sell our assets cheap to foreigners. Abu Dhabi just bought a small piece of Citicorp tonight.</p>
<p>Ruin the value of our dollar.</p>
<p>Bailout our financial institutions.</p>
<p>Reward those at the top of our financial institutions who screwed up with severance packages totalling over $100 million. </p>
<p>Lay off workers from those very same financial institutions.
Lay off workers from industries that are related to housing. </p>
<p>Set up golf outings with the new CEOs of the financial institutions to meet with the treasury secretary, members of the Fed and other high ranking officials.</p>
<p>jclay2, ask your father what I have left out? ;)</p>
<p>Mmhmm. The Fed has obviously not always done a great job; I don’t think anyone is trying to argue that it has always been perfect. I’m just saying that the gold standard would be far worse.</p>
<p>Yes but corranged, an inflationary gap is not the same thing as “inflation.” An inflationary gap simply refers to the short run equilibrium of aggregate supply and aggregate demand being beyond the long run aggregate supply (an economy producing at a rate that it cannot sustain for the long term). The opposite of inflation is deflation which is arguably worse for the economy.</p>