Does Production DEFLATE Money Supply?

[Starving Steve]

A question for the monetarists and gold-bugs here: Does production deflate growth in fiat money supply?

Compare the world of the 1920s (with the gold standard) to the world of to-day: In the 1920s, what did Mexico produce? -- or India? -- or the Soviet Union? or Canada? -- or China? -- or Japan? -- or Africa? -- or the Middle East? --or SE Asia? -- or Eastern Europe? or Southern Europe? -- or Brazil? Think about what these parts of the world produce now and what they will soon produce.

The comparison is even striking if one considers the U.S: What could the consumer purchase in a general store in the 1920s and compare that to what the US consumer can purchase now at, for example, WalMart or Home Depot?

The reason why I present this question is that I recently bought a Japanese small car and noticed that the new car price had barely changed since the 1980s. I recently bought an oak roll-top desk and noticed that the price had fallen since the 1980s. I recently bought a conventional colour TV and noticed that the price was about one-quarter of what it was in the 1980s. My computer cost less than ever before, and it does much more than ever before.

I just bought a new washer and dryer set, and their price had fallen so much that they were sold for the same price that I used to buy re-conditioned washer and dryer sets at in the 1990s.

I just sold my gold at $907 per ounce even though it is likely to go over $1000. Yet, when I compare what an ounce of gold bought in the 1960s at $35 and compare that to what an ounce of gold can buy now at $907, I would much rather have what I can buy now at $907 per ounce.

And when I look out over the landscape in California and see all of the McMansions with Spanish tile roofs, I begin to wonder: Might I be able to buy one of these unsold McMansions with my Yanque dollars--- but buy it at a much reduced price in future?

So, back to the question: Do the valleys of unsold McMansions DE-flate the fiat money that Greenspan and Bernankee and all of the other central bankers have been printing? Thus, does production deflate fiat money growth?:confused:

[FRED]

A question for the monetarists and gold-bugs here: Does production deflate growth in fiat money supply?

Compare the world of the 1920s (with the gold standard) to the world of to-day: In the 1920s, what did Mexico produce? -- or India? -- or the Soviet Union? or Canada? -- or China? -- or Japan? -- or Africa? -- or the Middle East? --or SE Asia? -- or Eastern Europe? or Southern Europe? -- or Brazil? Think about what these parts of the world produce now and what they will soon produce.

The comparison is even striking if one considers the U.S: What could the consumer purchase in a general store in the 1920s and compare that to what the US consumer can purchase now at, for example, WalMart or Home Depot?

The reason why I present this question is that I recently bought a Japanese small car and noticed that the new car price had barely changed since the 1980s. I recently bought an oak roll-top desk and noticed that the price had fallen since the 1980s. I recently bought a conventional colour TV and noticed that the price was about one-quarter of what it was in the 1980s. My computer cost less than ever before, and it does much more than ever before.

I just bought a new washer and dryer set, and their price had fallen so much that they were sold for the same price that I used to buy re-conditioned washer and dryer sets at in the 1990s.

I just sold my gold at $907 per ounce even though it is likely to go over $1000. Yet, when I compare what an ounce of gold bought in the 1960s at $35 and compare that to what an ounce of gold can buy now at $907, I would much rather have what I can buy now at $907 per ounce.

And when I look out over the landscape in California and see all of the McMansions with Spanish tile roofs, I begin to wonder: Might I be able to buy one of these unsold McMansions with my Yanque dollars--- but buy it at a much reduced price in future?

So, back to the question: Do the valleys of unsold McMansions DE-flate the fiat money that Greenspan and Bernankee and all of the other central bankers have been printing? Thus, does production deflate fiat money growth?:confused:

Compare traded and non-traded goods and services and you'll see the differential impact of managed currencies and petrodollar recycling producing a global supply glut of traded goods while credit inflation at home inflates the prices of tuition, medical care, health care, insurance, and real estate.

http://www.itulip.com/images/cpi1978-2004.gif

[Jim Nickerson]

Starving Steve,

I think you made some good observations, and it has surprised me that no one has chosen to offer comments, FRED excepted. No offense to FRED, but I do not see where his post answered your question, but that may well be due to a lack of my own understanding.

Houses besides being places to live, certainly do comprise a "market." Markets are subjects to fluctuations in which extremes are reached. To my thinking the recent extreme in high prices in homes has been the end result of marketing by real estate agencies and loans (boosted by the low interest rates the Greasespam oversaw) and on-going, unending willingness of Americans to want to possess any and everything despite their abilities to do so.

One thing I have picked up here at iTulip is the relativity of values depending on how one prices various assets. If house prices go up, one could say the value of the bonar has gone down and blame some, most or all of house price increases on the devaluation of the dollar (inflation). Whereas some of the increased costs of homes I would blame on the insanity of people willing to pay so much. When houses or the stock markets go down, one way to look at that everyday it happens is to appreciate the dollars one has will then buy more, so bonars have gained in value.

I think some of the observations you posted with how prices have stayed the same or even decreased when one assesses what one is getting in the way of various products is right, but those apparent greater values for fewer dollars may be best explained on decreased costs of production by so much stuff, shit it seems almost all stuff, coming from China or other lost cost production centers for stuff. No doubt a lot of the stuff is better technically, but looking at a curved screen TV shows me the same essence of what's happening as does the biggest and flatest one made.

I've probably noted everything you've posted some of which was of no interest to me particularly, no offense intended. It struck me at some point you were a young fellow, and then it struck me later you were my age or older, and I think the latter impression is where I am now. Perhaps our attitudes about most things are different, but it seems to me at we get older we need less stuff, so regardless of how cheap or neat it may be, I believe somewhere we should begin to draw the line about buying new stuff just because it is new and neat and sleek, etc.

I think of all the "stuff" I have bought in the past 5 years the only thing has been a couple of Krugerrands that I can look at and think, at least at this moment, these things have actually gotten more valuable--and I don't own much gold at all. Everything else I have bought new is worth less. Thanks heavens I or wife haven't bought a lot of new stuff.

I don't think production deflates money growth. Excesses of items at some point exceeds demand and thus prices fall. I think that is why you will be able to buy all the house you need and much more at some point for fewer bonars, that is if you have the bonars.

[Andreuccio]

Starving Steve,

I think you made some good observations, and it has surprised me that no one has chosen to offer comments, FRED excepted. No offense to FRED, but I do not see where his post answered your question, but that may well be due to a lack of my own understanding.



I think Fred's point is that there has indeed been, if not deflation, very little inflation, in traded goods, like televisions. Countries like China can keep low wages and manage their currency relative to the dollar, which keeps the price of their exports low, well below CPI.

There has been quite a bit of inflation, on the other hand, with respect to non-traded goods, like college tuition and medical care. The prices of these items have inflated well beyond CPI, and even more so when compared to traded goods.

Housing, food, and transportation have apparently followed CPI fairly closely, and are thus somewhere in the middle.

[Jim Nickerson]

I think Fred's point is that there has indeed been, if not deflation, very little inflation, in traded goods, like televisions. Countries like China can keep low wages and manage their currency relative to the dollar, which keeps the price of their exports low, well below CPI.

There has been quite a bit of inflation, on the other hand, with respect to non-traded goods, like college tuition and medical care. The prices of these items have inflated well beyond CPI, and even more so when compared to traded goods.

Housing, food, and transportation have apparently followed CPI fairly closely, and are thus somewhere in the middle.


Since FRED put up that chart, the issue of inflation affecting college tuition and medical care has been bouncing around in my skull with regard to the question of what is different about those two specific items?

I am not sure I have arrived at any answer, but one consideration is that what one purchases with either of them is very difficult for whoever is paying the bill to know exactly what he/she is getting for their money. Were it possible to know exactly, or even closely, the value received for dollars put up, the prices might well, if not in all probability, be lower.

[sadsack]

I think Fred's point is that there has indeed been, if not deflation, very little inflation, in traded goods, like televisions. Countries like China can keep low wages and manage their currency relative to the dollar, which keeps the price of their exports low, well below CPI.

There has been quite a bit of inflation, on the other hand, with respect to non-traded goods, like college tuition and medical care. The prices of these items have inflated well beyond CPI, and even more so when compared to traded goods.

Housing, food, and transportation have apparently followed CPI fairly closely, and are thus somewhere in the middle.

In other words, Fred's chart is a devastating refutation of Bernanke's infamous comment about US consumers (paraphrase): "If they buy domestic products, they will not be adversely affected by the precipitous decline in the value of the US dollar."

In fact, those who consume only domestically produced resources (i.e., "non-traded goods and services") will be hurt the worst.

[Andreuccio]

In other words, Fred's chart is a devastating refutation of Bernanke's infamous comment about US consumers (paraphrase): "If they buy domestic products, they will not be adversely affected by the precipitous decline in the value of the US dollar."

In fact, those who consume only domestically produced resources (i.e., "non-traded goods and services") will be hurt the worst.

I'd put that in the past tense: those who consume only domestically produced resources (i.e., "non-traded goods and services") have been hurt the worst.

I wonder if in the near future we won't see a reversal of the chart, with prices for domestic goods going up moderately, while "traded" goods rise substantially.

[c1ue]

The key point to keep in mind regarding electronics and similar types of semiconductor toys is that the majority of cost lies in 2 areas:

1) Capital cost to build fabs
2) Assembly

Design is a high cost, but not if your volumes are in the millions.

The recent credit bubble - as well as significant national subsidies - has led to chronic overbuilding of fabs, thus compressing the capital cost portion of products.

In turn the low cost assembly labor in China, Indonesia, and other countries also has reduced the 2nd component.

However, all of these trends can be considered at their peak (near highest achievable efficiency).

Capital costs will remain low as it is unlikely the next generation semiconductor fab technology is even worthwhile pursuing for near-on a decade, and this means in turn the existing fabs will be largely depreciated by the time the actual US downturn fully hits.

This is important because one of the largest driving factor behind functionality was cost of said functionality in silicon. Up until recently, the extra cost to manufacture (i.e. capital and development cost) in a new process would be repaid both in absolute cost and in increased functionality benefits as a result of smaller, thus cheaper and faster transistors.

This trend has ended as power considerations have negated the smaller geometry speed advantages.

Labor will go up, but between general overcapacity and the aforementioned US downturn, it is also unlikely to increase much.

However, neither component is likely to decrease much so prices are pretty much as good as they're going to get in nominal purchasing power terms.

As an example, I track a number of electronics just for grins:

1) LCD monitors - have plateau'ed at roughly $230 for a 19" screen for the past 18 months.
2) CPU+motherboard+memory - a bare bones, 1/2 generation old system has plateau'ed at roughly $300 for a couple of years; I was able to get a $200 barebones once last year but it was a closeout e-Machine.
3) mouse, keyboard, CD-ROM - have been at $6, $6, and $10 for at least 5 years now.

As for increased functionality, this doesn't necessarily mean squat.

Having a faster computer may be forced upon you by Vista, but there are still plenty of ways to browse the Internet, read email, work on spreadsheets, and compose documents without a brand new machine and/or Vista.

[FRED]

Also it's useful to separate perishable goods that have to be purchased and/or consumer daily, such as food or gasoline from goods that are bought semi-annually because they go out of style, such clothes (except for Jim... just kidding!), from services like insurance and health care that are purchased in perpetuity, vs products that are purchased every few years because they become obsolete (try running Vista on a 5 year old PC) from a car or TV that you buy once every five years or so because the new TV has HDTV and the car has ABS.

[Starving Steve]

A few footnotes here to add to the discussion:

1.) My 32inch colour TV is a flat screen, but it is conventional, i.e, it has a picture tube. The colour TV is also heavy, and there is no way that it could be easily hung on a wall.

2.) These McMansions here in California are domestic products that were mass-produced, and they might now go DOWN in price for several reasons:

a.) Lenders might want realistic and up-to-date appraisals on properties before they lend in future;

b.) Lenders might want equity to lend on, not air;

c.) Property taxes might begin to bight homeowners in future, especially if properties can not easily be flipped for a profit;

d.) Water costs are already well into three digits on the average California home, and the same is true with gas and electric costs;

e.) Commute costs are outrageous, and no small number of McMansions have been built on speculation in the Central Valley, far from employment centres;

f.) Lenders may demand proof that borrowers have employment and the ability to make payments on a loan;

g.) Incomes in the Silicon Valley may now begin to fall because jobs can be out-sourced to India with a mouse-click;

h.) Local governments may be slow to reduce property taxes (even if home prices decline) because government is in need of revenue, especially in California;

i.) Price increases for materials and labour may have no bearing in future on real estate prices because of the number of homes for sale and unsold; however, price increases for materials and labour may add to the cost of maintaining a home and therefore further motivate home-owners to sell and sell in a bad market;

j.) Baby-boomers now facing retirement may opt to down-size their homes and therefore, further increase the supply of McMansions on the market;

k.) Immigrants to California will require affordable rental housing in future, not McMansions, so there will be no rental safety net under the McMansion market.


The bottom-line is that places like California might be in for a severe deflation despite the inflationary policies of central bankers like Bernankee. So in the end, it could be that the U.S. might have a re-play of the Japanese real estate led deflation experience--- and that could be the best case scenario of what is about to happen. ( The worst case scenario could be Latin American-style currency collapse in the U.S, and a consequent hyper-inflation. )

[BiscayneSunrise]

Jim,

Regarding people not knowing exactly what they are paying for regarding college and health care. I think when it comes to college, parents know exactly what it is they are paying a premium for and that is the staggering premium associated with brand name universities so the kids can have the very best pedigree on their resume . I'm not saying it is a good value but the pedigree is worth a lot in many peoples minds. Beyond that, you're right. people figure college is worth it but don't really have anywhere else to turn so colleges typically charge what the market will bear.

As for health care, you're right people have no idea what it is they are paying for since they don't have enough knowledge to comparison shop and by and large don't care to shop around since someone else typically picks up the tab.

Interesting anecdote: Our family dog just had hip surgery. Grand total: $2500 and in the doggie hospital for less than 48 hours. My guess is that similar surgery for a human would have been $20-40,000K. Why the difference? I'm open to input but my guess is the vets know full well that many owners would opt for euthanasia if the cost is too high so have an incentive to keep the cost reasonable. Probably too, not much in the way of liability insurance is included in the cost of animal health care.

If health care becomes a tradable good, i.e through medical tourism we would likely see prices plummet. Perhaps, too, we could find discounted college educations overseas. Much cheaper and it gives the kids the pedigree of an international education.

[sadsack]

Also it's useful to separate perishable goods that have to be purchased and/or consumer daily, such as food or gasoline from goods that are bought semi-annually because they go out of style, such clothes (except for Jim... just kidding!), from services like insurance and health care that are purchased in perpetuity, vs products that are purchased every few years because they become obsolete (try running Vista on a 5 year old PC) from a car or TV that you buy once every five years or so because the new TV has HDTV and the car has ABS.


This brings to mind another metric of demand inelasticity - how viable is the used market for a given commodity/consumable?

It is unlikely to impossible that most consumers can safely or economically find used food, used energy, used insurance, or used healthcare.

On the other hand, there's plenty of used cars, furniture, houses, electronics, etc.

In my own case, I only buy new when used options are unviable or unavailable. While discretionary purchases (durable goods, etc.) are becoming increasingly affordable, I'm really feeling the bite with respect to the cost of perishables and mandated services.

Don't get me wrong, though, I'm by no means starving; I'm just addicted to 90% off in the used market . . .

[Jim Nickerson]

Jim,

Regarding people not knowing exactly what they are paying for regarding college and health care. I think when it comes to college, parents know exactly what it is they are paying a premium for and that is the staggering premium associated with brand name universities so the kids can have the very best pedigree on their resume . I'm not saying it is a good value but the pedigree is worth a lot in many peoples minds. Beyond that, you're right. people figure college is worth it but don't really have anywhere else to turn so colleges typically charge what the market will bear.

As for health care, you're right people have no idea what it is they are paying for since they don't have enough knowledge to comparison shop and by and large don't care to shop around since someone else typically picks up the tab.

Interesting anecdote: Our family dog just had hip surgery. Grand total: $2500 and in the doggie hospital for less than 48 hours. My guess is that similar surgery for a human would have been $20-40,000K. Why the difference? I'm open to input but my guess is the vets know full well that many owners would opt for euthanasia if the cost is too high so have an incentive to keep the cost reasonable. Probably too, not much in the way of liability insurance is included in the cost of animal health care.

If health care becomes a tradable good, i.e through medical tourism we would likely see prices plummet. Perhaps, too, we could find discounted college educations overseas. Much cheaper and it gives the kids the pedigree of an international education.

I agree with your observation about big name U's and the pedigree factor, but still one does not know exactly the "education" one is purchasing usually for one's child. But to the largest degree the actual education depends on the student.

Are all surgeons who do hip replacements equally competent and their results equal? I figure, "NO." But odds are the fees are close from one to another. It is impossible to know what you are getting. Do operations cost any less when they don't succeed? Ultimately lawyers need to be removed from the equation of what healthcare costs. I could could go on with opinions, but it would not be worth anyone's time.