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Guest Post: On Commodity Inflation And Long Term Underemployment

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Sat, 10/03/2009 - 16:37 | 87780 Anonymous
Anonymous's picture

What is the logic that says government intervention will "assure a more painful destination in the process"?

Market force is just that, and disregards all attempts to artificially control it. Mass mind, which is the market, shouldn't be all that duly influenced by meager government attempts to oppose it.

Sun, 10/04/2009 - 05:05 | 88104 Anonymous
Anonymous's picture

The answer is in the article.. if you still don't understand, I suggest reading up on some introductory managerial accounting..

Sun, 10/04/2009 - 21:00 | 88472 Anonymous
Anonymous's picture

I would like to suggest a review of Adam Smith's "Wealth of Nations". Adam does consider it a zero sum game where, on a macro level, the taking of one deprives another.

To Adam, all economic cycles revolve around nothing more than the speed of money -the time it takes for a capital investment to be repaid. The longer it takes, the less employment can be supported and all the rest that flows from that.

In his time the focus was on America and the effect on trade it had on the UK and Europe. We can compare that in some sense now to the US and China. So undeveloped and so thriving, the capital thrown at it is lost in ever expanding development.

As Adam points out, capital, returned in whole in a year , employs 4 times more than it could if 4 years were required but only 1/4 of that returned "in whole" in just 3 months.

Capital, it should be noted, consists of far more than just pecuniary rewards and "in whole" means just that, it cannot be supplemented from an external source which then acts as a the whole.

Britain benefited from America & the West Indies but not nearly as much as it could have, and most of that benefit , or what was perceived as a benefit, was derived from the negative effects Britain's handling of trade with America had on Europe.

If you read "Wealth of Nations" and replace England with America and China with America, do you not see history repeating itself?

Sun, 10/04/2009 - 23:35 | 88549 Anonymous
Anonymous's picture

The creation of asset bubbles causes misallocation of resources (think housing for most of this decade). The Fed turned on the spigot of easy money to avoid falling prices. We got falling prices, five years later after many new houses were built. This increased supply, caused only by distorted economic incentives related to the housing bubble, caused the price of homes to fall by a greater value than would have happened if the Fed did not use such accommodative monetary policy. Therefore, the final destination for the housing market will end up more painful than what we would have originally had.

Sat, 10/03/2009 - 16:53 | 87794 mikeyv1970
mikeyv1970's picture

Excellent analysis.  Especially the historical comparisons as ole Ben Bernanke seems to have forgotten some of the larger historical lessons to have been learned!


Sat, 10/03/2009 - 17:16 | 87806 Lionhead
Lionhead's picture

Bravo; you sir have summed up the problems in a nutshell. There is nothing new under the sun in our age vs the Great Depression. When will "leaders" finally come to their senses?

Sun, 10/04/2009 - 09:46 | 88142 mikeyv1970
mikeyv1970's picture

Lionhead, I was referring to larger lessons such as throwing money at a problem may not be the best thing to do. Or the idea of artificially maintaining wages (ALA Unions or legislatively)...etc.  This crisis is new in so far we have a massive credit contraction, production surplus, and massive unemployment that is growing due to the death spiral of no money to buy, means less stuff can be bought, which means companies have to lay off to meet "expectations"...which fuels more of the same.  My view being expressed is somewhat simplistic of the massive problems...especially the ones concerning real estate, banks...etc.  However, that is the point I was making about historical lessons.  Many of the larger issues are very similar BUT this one is different as the populace can communicate nearly instantaneously via twitter, and other social mechanisms.  When the populace decides it has had enough...it will be very fast and violent...


Sat, 10/03/2009 - 17:51 | 87824 ZerOhead
ZerOhead's picture

Pretty much dead on.

However the shocker this time around could be 'stubbornly' high global oil prices. That will in effect put a floor under many commodity prices from falling... especially argicultural products. And the precarious way farm credit is structured... big price swings are possible. Just can't imagine the dollar strengthening to a point (with a known QEer at the helm) that people will get more for less post-crash.

Course I've been wrong before...

Sat, 10/03/2009 - 18:35 | 87851 Anonymous
Anonymous's picture

'2012' movie has it wrong. The looming disaster will be a financial collapse. This post makes a good case for S&P <666.

Sat, 10/03/2009 - 19:12 | 87855 Miles Kendig
Miles Kendig's picture

It remains suspect that poor economic decision making could last for over a decade.

LTCM, its aftermath and the fed put have been around for longer than one decade.  Does Grant Dossetto support the idea that the economic decisions of this past decade are a case study in sound economic decision making?  His article would argue otherwise.

Sat, 10/03/2009 - 19:38 | 87880 Michael
Michael's picture

Hopefully, long term unemployment will cause a 75% off sale in the price of health care. We already know what the unemployment rate is doing for the real estate market.

Sun, 10/04/2009 - 00:21 | 88022 Hephasteus
Hephasteus's picture

The health industry has been swimming in deep pocket tax cash for so long they don't even know how to face limitations of growth and wealth any more.

Sat, 10/03/2009 - 20:22 | 87898 Great Depressio...
Great Depression Trader's picture

Great analysis. He is calling for stagflation with rising prices but falling output. Its the middle ground between pure deflation and 80's style inflation.

Sat, 10/03/2009 - 21:24 | 87939 glenlloyd
glenlloyd's picture

Now that's what I call honest straightforward writing!

And he's right too, in the depression there was a policy initiative to keep wages high and to raise wages as well. Super bad idea, this contributed to unemployment. I've always found it very difficult to get people to understand this fact. When I explain that if someone receives a higher wage because of union mandate, someone somewhere else must receive a lower wage and they just don't seem to get it.

Lots of bad policies in the Depression (first one), lets see what kind of bad policies they come up with for this time around...we have some showing up already!

The Great Depression was the point at which interventionism really got rolling, before that time we hear about recessions but no one really remembers them much because they were short lived. The Great Depression was the first time Govt. took an interventionist roll and look at how badly it went. When Bernanke says the Fed didn't do enough he's lying.

Rothbard's "Americas Great Depression" is a good read on this.

Sun, 10/04/2009 - 10:50 | 88165 torabora
torabora's picture


"someone somewhere else must get a lower one (wage)?

An economy is NOT a zero-sum gain. Each participant adds value in excess of what they take out because of the multiplier effects. The game gets bad when debt fails to be paid...rich people failing have a multiplier far exceeding the average working man and scams like Madoff are more than a ripple in the economic fabric.

If this was true then a CEO who receives 400X the average floor workers wage means 399 people didn't get a job.

The level of nonsense...especially union bashing, gets worse with every passing day. Yet the corporate execs are scurrying off with mega-million$$$$ in options cash outs. Besides, union memberships have been running at all time lows for decades. Also, Minimum wages have NEVER even caught up with inflation.


It isn't hourly wage folks that are responsible for ANY of this. This is caused by the top raking off all the cream leaving the no-fat milk behind that has no protein in it either.


Sun, 10/04/2009 - 11:28 | 88187 Anonymous
Anonymous's picture

There is little doubt that government and its bedmates propping up the system so that taxpayers and the ignorant investors are left with the bag. The problem with artificial union and CEO pay is the same. It seems awfully difficult to reign in CEO pay as a shareholder. Although much of the problem is that each shareholder is hurt too little to make it worth his while to fight, I bet if you go digging through the legal jungle there is regulation that encourages this entrenching. Inflated CEO and Union pay are both taken from the shareholder. Bring back the corporate raiders!

Mon, 10/05/2009 - 02:42 | 88616 Anonymous
Anonymous's picture

I've seen the argument being made here before, and found it somewhat wanting then. I believe your counterpoint is and should be well taken.

Most unionism in the 1930s did not start out giving moderate waged people high wage jobs. It basically made it possible for people who, in almost every case, were making below living wages to make wages that were sufficient for them to get a basic foothold again. This in turn made it possible for them to save (which was only heightened with the deferred pay to soldiers during World War II), and most of the businesses that were started during the 1950s could be traced to this savings pool, not to the investments by the ultra-wealthy.

I'd contend that one of the bigger factors during the Depression was the continued payment of dividends by companies, which sucked out a significant amount of potential working capital that could have been used to hire more employees (or could have been used to pay them more, this increasing the potential market). The wealthy then (just as the wealthy now), tend to keep the wealth in a very limited community - trickle down economics did not work then any more than it does now.

There has been two forms of stimulus proposed in the last year. The first has been an attempt to make the banks "whole" and for the most part has been wasted by the banks themselves as high bonuses, excessive speculation and money used for hostile M&As. The second has been spent on infrastructure investment, is just now moving into the economy, and is slowly beginning to manifest itself in at least an overall decrease in the second derivate of unemployment loss, if not yet the first.

One other point to consider - unlike with the New Deal, most of the jobs being promoted are not, in general bureaucratic ones - instead, they are jobs that are being put out on bid contracts to private companies, in order to spur growth in the private sector.

Sat, 10/03/2009 - 23:03 | 87991 OrganicGeorge
OrganicGeorge's picture

I've had the honor to know some men who worked in the WPA.  These make work jobs you write about were a lifeline to these, out of work homeless people or US citizens depending on your point of view when doing a cost benefit analysis.  If you dial back the "wealth effect" of your CBA you will discover that giving a citizen a job, when there are no jobs to be had, is not make work, but life affirming.

Maybe I'm the only gray beard here but I read this kinda of stuff back in the 60's how everything from the New Deal was really a raw deal for the country.

Sun, 10/04/2009 - 03:33 | 88084 MsCreant
MsCreant's picture

Greybeards are cool. I kinda doubt you are the only one.

If they did high speed rail, or hell, even improved the current rail we have now, that would be a new deal project that would get us something that was not simply make work, and something life affirming.

I have been to national parks made possible by WPA funds. The facilities were built to last forever. I fear the work they will come up with will be shoddy crap made with, oh I don't know, Chinese steel. I feel very conflicted about it.

Sun, 10/04/2009 - 10:12 | 88151 Anonymous
Anonymous's picture

OrganicGeorge, I think you are right on target. What many fail to realize is that in an economy with massive unemployment, we are essentially squandering lost opportunity. The people that worked for the WPA would like have not worked at all. The value of the product they created was tremendous and long lasting (university buildings, roads, bridges, dams, etc). I think the key to the success of the WPA was putting people to work building valuable product.

The problem I see with our stimulus of today is that we are focused on building projects that were valuable yesterday and will not create the kind value that benefit society in future years. Instead of building roads and bridges where we already have them, we should be building the roads and bridges of the future: extremely efficient electric grids and public very high speed internet to every home and business in the country. These two could put a lot of people to work and result in a long term reduction in cost across a multitude of industries.

Sun, 10/04/2009 - 00:56 | 88039 Anonymous
Anonymous's picture

There are still many WPA bridges and buildings in use where I live. All much prettier and much more practical than the cr*p we built in the last 20 go-go years. Take the money back from the banksters and put it into a new WPA.

Sun, 10/04/2009 - 05:02 | 88103 chindit13
chindit13's picture

Quite the battle of the academics. Almost eighty years after the fact we still argue about both the cause and the solutions implemented at the time.

The problem is that only one of the academics has control today over the monetary policy, and he has decided that since he spent his early career studying Great Depression I, he is certain he has the answer for Great Depression II. His ego is so large, or so fragile, that he cannot see that maybe he got it wrong and maybe he didn't really earn his PhD. Now he is playing it with the same style as a Nick Leeson or the guy at Amarinth...doubling down and tripling down on what may well turn out to be a losing position.

Sun, 10/04/2009 - 08:33 | 88125 perpetual-runner-up
perpetual-runner-up's picture

I mentioned this a few weeks ago on the boards...since no two crisis are the same...what I am seeing shape up is a collapse in asset prices as we have to much stuff and no one is buying crap they dont need anymore (less the darwins who should go away anyway) but at the same time, we are on the verge of a currency collapse which should manifest next year when tax recipts come in at a horrible level and debt maintanence req are much larger than anyone pictured....

simultaneous global deflation with a localized currencey collapse simultaneously...gold and silver to the moon (beyond all expectations)




Sun, 10/04/2009 - 08:40 | 88126 DrPsycho
DrPsycho's picture

thanks for this great post, I'll send it to friends as must read for its clarity and knowledge.

Sun, 10/04/2009 - 12:41 | 88228 perfectlyGoodWh...
perfectlyGoodWhiteBoy's picture

I just want to make sure that you used console prices to prove deflation without a single mention of Moore's law and no one has yet to point this out. How is everyone enjoying their confirmation bias this weekend?

Sun, 10/04/2009 - 18:24 | 88408 Anonymous
Anonymous's picture

Moore's Law would explain why the IPhone is dropping in price during sales growth. Cutting prices when sales are dropping is an indication of lack of pricing power, hence final goods market deflation.

Sun, 10/04/2009 - 18:15 | 88405 Anonymous
Anonymous's picture

About your unprecedented steps; they did everything NOT to do ANYthing. Plus; not every asset is/was pumped up by goberment. Now,

go try & make your homework. Again.

Sun, 10/04/2009 - 20:11 | 88441 Anonymous
Anonymous's picture

We Can Handle inflation by inceasing wages
Salaries & (union) wages go up
Some get more than others

So why can't we learn how to handle deflation
by decreasing wages -- Some more than others

Sun, 10/04/2009 - 20:20 | 88451 boooyaaaah
boooyaaaah's picture

We handle price inflation by increasing salaries and (union) wages -- strikes, career moves -- some get more others less

When will we learn to handle deflation by salary & wage decreases -- some get more others less

The devaluation of the dollar through money inflation doesn't seem to do the trick

Even when the Fed gets serious about reigning in money inflation by raising interest rates, al la Volcker, the wages never go down --- only the number of employees

Unfortunately the safest employer to protect against both job loss and wage loss is the Government -- which is the prime culprit at the begining of the cycle

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