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Lighthouse Investment On The 'N'-Word In Monetary Policy

Tyler Durden's picture





 

N as in "Nominal". Nominal GDP targeting, the latest burlesque of monetary fiction. But first things first. There is a land, where people calculate a "potential GDP". How do they do that? By simply extrapolating trends. Potential GDP is "the level of economic activity achievable with a high rate of use of its capital and labor resources". In the past, the differences from observed GDP were not very large, though now we are growing "below trend". But what if that trend has changed? With a flawed measurement of economic activity, leading to an imaginary output gap, what else might our economic elite come up with? Stagnating real GDP and high unemployment are no fun. After exhausting every traditional and non-traditional tool of monetary and fiscal policy, what else could be done to make that GDP grow? Nominal GDP equals real GDP plus inflation. So if real GDP doesn't want to grow... Eureka! you just have to cause more inflation, and nominal GDP will obediently join its potential GDP. Except for one little error of judgment: if elevated inflation led to wealth creation and jobs, Zimbabwe would be the richest country on earth. As real incomes of US employees have stagnated for more than a decade, rising prices would either lead to falling volumes, or force households further into debt. Also, how would this be different from a communist command-style economy?

 

Lighthouse - Letter to Investors - 2012-12 - Excerpt - Monetary Policy - The N-Word

 


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Mon, 12/03/2012 - 19:19 | Link to Comment kliguy38
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So what you're saying is that we're being lied to??? NOOoooo!!!! Say it aint so.

Mon, 12/03/2012 - 19:22 | Link to Comment The Alarmist
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But with it's cultural diversity and its fine tradition of the rule of law, Zimbabwe is the richest country on Earth.

Mon, 12/03/2012 - 19:42 | Link to Comment knukles
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This is all so depressing, I think I'll go just imagine Benji, Timmah and the lot committing suicide.

Mon, 12/03/2012 - 19:49 | Link to Comment smlbizman
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and billy joe is betting on a big come back.....i love that guy

Mon, 12/03/2012 - 23:01 | Link to Comment ACP
ACP's picture

It's not offensive if you say nomina.

"Nah man, it's just nomina GDP target, you know what I'm sayin'?"

Tue, 12/04/2012 - 14:28 | Link to Comment cranky-old-geezer
cranky-old-geezer's picture

 

 

Let's see now, we have 1% GDP growth and 15% inflation.

I guess that means real GDP is -14%, which sounds about right, economy shrinking 14% / yr.

Mon, 12/03/2012 - 19:21 | Link to Comment AccreditedEYE
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Fantastic work. Illustrates that the Ivory Tower has been fully unleashed.... and while they may enjoy absolute power here at their zenith, their fall will be epic and last decades.

Mon, 12/03/2012 - 19:20 | Link to Comment q99x2
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Kill game. You ain't gotta lie to kick it. They're lying to us about GDP

Mon, 12/03/2012 - 19:30 | Link to Comment Insideher Trading
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And who is getting hurt the most by the policies of profligate federal spending by Obama and enabled by the Fed?

The poor.

Inflation doesn't have the same consequences on the rich, as the rich are in most cases smart enough to protect against inflation by buying things like gold, real-estate, or art, which they can trade amongst themselves.

It's all those red diaper doper babies demanding more free shit that ironically are thrust into ever lower standards of living as inflation begins to take hold caused by the printing of money to fund the borrowing we can't afford.

The inflation in the US may take a bit longer than usual due to monetary gimmickry such as 'steralized' money printing, but none the less, it will take hold. Even more ironically the African American demographic (where Obama enjoys a 98% approval rating) will be economically punished the worst as that demographic has the largest percentage of the population in poverty and most vulnerable to inflation.

So while this whole vilify the rich and punish the rich thing continues, the rich will do what the rich have always done...move their money into ambiguous Caribbean banking centers, outsource their employees to lower cost, or raise the price of the products they produce. Obama will make sure the poor will pay through inflation all while reducing federal revenues as the rich pull out of the system that attempts to confiscate what they've earned.

 

Mon, 12/03/2012 - 19:41 | Link to Comment LawsofPhysics
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Yes, inflation is the real evil here, but it would be much easier to believe that "they earned" their wealth if they weren't so fucking busy stealing mine in order to keep their subsidies and bailouts.  There havn't been any real consesuences for bad behavior since Nixon closed the PM exchange window.  Fine, kill the fucking dollar, kill all fiat it's time to find out exactly what everybody's labor is really worth.  I can tell you one thing, earned income will finally be earned again.  fucking bring it!!!

Mon, 12/03/2012 - 19:46 | Link to Comment Insideher Trading
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...they are.

I feel for the poor, who are about to become poorer-er.

Mon, 12/03/2012 - 19:49 | Link to Comment LawsofPhysics
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Everyone not in the 1 % is about to become poor, yet some may be "millionaires" at the same time.  Oh well, the laws of Nature and physics make no promises regarding anyone's survival.  That people think otherwise (especially since fraud is the status quo) is beyond stupid.  Interesting times.

Mon, 12/03/2012 - 23:50 | Link to Comment Chuck Walla
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And who is getting hurt the most by the policies of profligate federal spending by Obama and enabled by the Fed?

The poor.

Yes, but then the "poor and destitute" will cry out for a savior. And one will be on hand for "man does not recognize a problem before he has the solution in hand"(K Marx).  And they will accept anyone, anything to keep the flow of sustenance coming. Such is their degradation and corruption. They think they are so smart getting it for free, but when the snare closes, they are fully had.

 

FORWARD SOVIET!

Tue, 12/04/2012 - 14:32 | Link to Comment cranky-old-geezer
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The poor.

Actually the middle gets hurt most. 

Mon, 12/03/2012 - 19:36 | Link to Comment LawsofPhysics
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I predict that we will be "beating expectations" all the way down.

Mon, 12/03/2012 - 20:12 | Link to Comment The Gooch
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and... "BLEATING EXPECTATIONS".


Mon, 12/03/2012 - 20:14 | Link to Comment knukles
knukles's picture

Ya know, there's bad taste and there's bad taste.
I mean, Brad Pitt and Jennifer Aniston was bad taste.
But the recent stories about Brad and Mike Tyson?

That's just wrong.

 

Now, many of you may be wonder, WTF is wrong with this guy Knuks?
What's he going on about with Mike Tyson and Brad Pitt in a love triangle menage a trios between the two of thm.
I mean Mike counts a two of the 3 people.
BTW ever heard his squeakie voice?
Bizarre.
Well, kind readers, it has everything to do with how bloody messed up the whole world is, because what with our illustrious leaders, luminaries, geniuses and brain surgeons we got in charge, I'm really beginning to wonder if thinking about Brad and Mike in a hot tub of KY Jam isn't the sane thing to be doing?

Mon, 12/03/2012 - 20:15 | Link to Comment Uncle Remus
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Who bites who and where...

Mon, 12/03/2012 - 20:18 | Link to Comment knukles
knukles's picture

Whoa!
Now that's a truly profound question.
Like considering if Benji and Timmah get married on the Love Boat...

So many heavy thoughts, so little time before mom throws me off the computer....

Mon, 12/03/2012 - 20:15 | Link to Comment NoDebt
NoDebt's picture

The ultimate reversion to the mean.  Like most of the world has worked for most of human history.  A small number of rich, a large number of poor and just enough middle class to service the rich. 

Coming soon to a country near you.

Mon, 12/03/2012 - 20:18 | Link to Comment Piranhanoia
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"If you ignore the huns, persians, turks, egyptians, galls, britons and the rest,  Rome is looking good".

Julius Whatever IV.

Mon, 12/03/2012 - 20:28 | Link to Comment knukles
knukles's picture

Most excellent!

 

If God hadn't meant man to have Diabetes, he wouldn't have made sugar, fat, porn, sofas, and remotes.

(all that laughing hurts my chest)

Mon, 12/03/2012 - 20:33 | Link to Comment Acet
Acet's picture

No, no, no. The real trick is much more interesting.

You see, the figure published in the press for GDP growth is Real GDP, so the GDP figure obtained by discounting inflation from the measured GDP, which is nominal. The way real GDP is calculated from nominal GDP is by using the GDP deflator which is calculated from the publish inflation figures - the larger the inflation figures the larger the GDP deflator and the smaller the real GDP figure is vs the nominal once.

So here's the trickery: alter the way inflation is calculated so published inflation is actually lower that reality, maybe even pump up real inflation (say, by printing tons of FRNs).

End results is this:

  1. Higher inflation means higher nominal GDP (wealth production is no higher, it just gets counted in more monetary units)
  2. The lower inflation numbers are then used to calculate the GDP deflator, which means a lower GDP deflator.
  3. The lower GDP deflator means that nominal GPD is reduced by less when calculating real GDP which means better GDP figures are published

This is almost certainly what has been going on in the US for a couple of years now (if you believe US GDP is really growing, then I have this sweet price I can offer you on a famous bridge in NY) and probably in a couple of other countries. Notice how so many countries have changed the way they calculate inflation in the last decade or two and how, amazingly, the new way consistently gives lower values than the older way.

 

 

Mon, 12/03/2012 - 20:35 | Link to Comment Bwahaha WAGFDSMB
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It ain't about creating wealth, or raising living standards.  It's about keeping the fractional reserve banking ponzi going.  Nominal growth is all that is required.

It's worth noting that the propaganda line is shifting from "there is no inflation" to "inflation is good". 

Mon, 12/03/2012 - 21:13 | Link to Comment GreatUncle
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GDP is just a metric created to be able to say "hey we are good to borrow this amount just look at all the GDP we have".

From my perspective anybody quoting GDP has not got a clue what part of the GDP is real growth where somebody has bust a gut to try and do something of worth.

The major part of all GDP is just a financial speculation detatched from the real part such that it can be considered illusionary just like the value of Apple solely keeping the US economy afloat on the number of ipads it sells.

Mon, 12/03/2012 - 21:52 | Link to Comment robertocarlos
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Nas - "Shorties on their knees for niggers with big cheese".

Mon, 12/03/2012 - 21:38 | Link to Comment dark pools of soros
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if enough people starve and die then per capita income should rise

 

Mon, 12/03/2012 - 21:49 | Link to Comment robertocarlos
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There is an economic paper out now in Canada that explains that salaries are increasing because after X years 85% of people in the lowest income group have moved up to one of the four higher income groups. Many,10%?, of the lowest income earners move straight to the highest income group. This paper was published by 2 right wing economists. You can use numbers to twist the truth. Canadians need assurances they are getting richer in order to increase spending.

Mon, 12/03/2012 - 22:21 | Link to Comment Stuck on Zero
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My analysis says that if two banks grab ownership of everything and swap CDSs at the rate of $30 trillion each year while the rest of us starve to death on nothing, the GDP will be much higher that it is today.  According to the Fed that's a good thing.

 

Tue, 12/04/2012 - 02:27 | Link to Comment merizobeach
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Tyler, what's the situation between you and Jim Rickards?  He has been discussing NGDP targeting (and his opposition to it) for nearly two years.  Then, recently, he called you out for allegedly blocking him from your twitter feed--what's up?  Is it that he's too noisy on twitter or that he taunts you for the Euro not having fallen apart yet?  I guess he can't be right about everything (certainly not his catholicism), but he seems to have enough inside connections to give real insight to many of his observations.

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