No.

Fudgeh Wudgeh?

So... exactly where does "Imperial Conflict" get involved?

Fudgeh?

No...

Bet he is now!

> xeno syndicated wrote:

> First of all, inflation rate is a meaningless stat.

Actual inflation is the key indicator.

Here:  http://www.westegg.com/inflation/infl.cgi

Before you call inflation rates "meaningless," perhaps you would care to explain the difference between my inflation statistic and your inflation statistics?  Interestingly enough, yours states that it's based on the CPI, which... is the exact same as mine... do they use different math, then?  Or is the only difference in question the fact that your data adds up my data for a group of years?

> What cost $100 in 2000 would cost $125.33 in 2010.

Think about this.  In the last 10 years, total inflation has been more than 25%

That is, in order to simply break even on your investments over the last 10 years, you would have had to make total gains of 25%.

That would be an annual return of 2.5%, merely to cover inflation.

And yet the rate of inflation is still speeding up, and very soon bonds will no longer offer returns high enough to cover inflation.

What will happen then, you think Zarf?

The problem with that argument is that it assumes inflation is something brand new.

In practice, business contracts account for inflation in their investments.  For example, banks will set their interest rates for loans at the inflation rate+whatever rate they want to charge to pay for business operations and produce a profit.  In the same way, when bonds are sold with an expectation that inflation will be an average of 2.5% per year, the interest rate on those bonds is likewise set at inflation rate+interest rate, not just an interest rate ignoring inflation.  Remember, adding that extra 2% to an interest rate doesn't add to the real cost of a loan, so it doesn't actually change the transaction itself whether we're talking about a 4% loan in a no-inflation society or a 6% loan in a 2% inflation society.

The thing about the past 10 year's inflation rate is that it's exactly what you want to see in the rate.  There's inflation, yes.  However, since it's at a stable percentage within a relatively small margin, businesses can generally cancel out the impact of inflation, both on the supply side by factoring inflation into expenses, and on the demand side by giving in to inevitable worker requests for additional money (let me put a golden star next to this part for later).

Plus, I just want to make one other note: If you're in a mutual fund that can't even regularly outperform inflation, it's not a problem with inflation.  Your mutual fund sucks at its job. 

Oh, one other note:
This "crisis" you describe is empirically disproven by just about every point in US history.  I took the liberty of testing inflation rates in various other points for comparison.  I just went through years divisible by 5 (to get a relatively unbiased sampling) until I could find some period where we see lower inflation rates.

What cost $100 in 1995 would cost $127.98 in 2005.
What cost $100 in 1990 would cost $131.39 in 2000.
What cost $100 in 1985 would cost $141.12 in 1995.
What cost $100 in 1980 would cost $158.57 in 1990.
What cost $100 in 1975 would cost $200.42 in 1985.
What cost $100 in 1970 would cost $212.61 in 1980.
What cost $100 in 1965 would cost $170.64 in 1975.
What cost $100 in 1960 would cost $131.10 in 1970.
What cost $100 in 1955 would cost $117.74 in 1965.
What cost $100 in 1950 would cost $123.06 in 1960. 

Take a moment and think about that.  You're trying to frame this as some sort of crisis.  However, it took me 55 years of running these numbers to find a scenario with lower 10-year inflation rates than we've had now.  If this was a legitimate crisis inflation situation, the US economy should have collapsed in 1970, 1975, 1980, 1985, 1990, 1995, 2000, and 2005... not including 10-year windows in periods that aren't divisible by 5!

Your own website's statistics disprove the uniqueness of our current inflation situation, and thus of your crisis story.  Are you ready to concede this one yet?

EDIT: Actually, one other note.  In finance, investors actually generally use bond holdings largely as a hedge against bad economic times.  They understand that bonds, especially Treasury bonds, aren't going to produce much growth.  However, they trade growth for the fact that it's probably more stable to buy a US treasury bond than, for example, stock in a US company (because if the US treasury bond suddenly became worthless, the company with stock wouldn't be too far behind).

> Before I respond to your other points, will you concede that if the inflation rate doesn't turn negative for at least a decade, there is serious danger of the global economy collapsing entirely?

Not a chance in hell. 

I've had this debate at home a few times.  There's two extremely important problems which people miss when suggesting a deflationary pattern:

1: Let's play a little roleplaying here.

Scenario 1: You get your paycheck.  You're thinking of buying, let's say a book.  The book is $5.00.  You could buy the book now.  Or you could wait a year and keep your money, at which point inflation would make your money on hand 2% less valuable, and the book would probably be marked up.  Do you buy the book now?  Probably, but it really won't make much difference.

Scenario 2: Now let's ratchet up the stakes.  Pretend you live in Weimar Germany at the time.  Inflation was at a rate where the value of money would drop in half every 3 days.  Insane, right?  But exactly what happened.  Anyway... now what do you do?  There's no question.  You get your paycheck and immediately run to the bookstore to buy that book before the value of your money diminishes (this is actually exactly what happened in the post-WW1 German economy... workers would immediately spend every last time they earned every day in order to outpace inflation).

Scenario 3: Okay, now let's go with your theoretical ideal world.  I'm thinking of buying a book.  I could buy it for $5.00 now.  Alternatively, I could sit my money under my mattress.  In a year, the money's going to be worth 2% more.  Now, I might be willing to buy the book.  However, if I'm absolutely sure I'll see a continuing pattern of deflation, it's going to be more and more difficult for me to actually go buy the book, and it instead becomes more likely I'll put the money under my mattress.

Okay... so what happened in each of these scenarios?  Let's go through them.

Scenario 1: At this point, inflation may be a factor in my decision.  It may not.  However, it's generally a good assumption that if my money sits under a mattress for 10 years, I'll be a net loser of money.  If I want to save money, I still can, but I need to find investments that can outpace inflation.  Either way, though, considering inflation, it becomes a better idea for me to either spend my money or save it in some sort of investment.  Both of these actions help stimulate the economy by injecting capital into other projects.  The result?  The inflation creates an incentive to use money in some way, stimulating growth.  However, it doesn't encourage a particular use of that money.

Scenario 2: So what happened in Weimar Germany?  How did the people react to hyperinflation?  The case studies here are really interesting.  The few banks that did exist ran their interest rates in the thousands of percents, to try making a profit over top of the inflation rate (note: another piece of evidence to prove my statement at the top of the post, stating that business contracts account for inflation).  The consumers would, en masse, spend their money as soon as humanly possible in order to ensure they get the most out of their money.

Okay, so why do I bring up Weimar Germany?  No, it's not just because I like typing.  There's a couple behaviors I wanted to note:
1: Individuals can make assumptions about inflation rates.  In Weimar Germany, the average people were experiencing a period of rapid inflation, and were able to identify both the existence of inflation and the rate of inflation.  Remember, we're not talking about economists here.  We're talking about average people with no economics background.  As a result, exchanges based on future money would be able to take this into account with banks huge interest rates meant solely to account for the huge inflation rates.
This doesn't assume these individuals are constructing economic models of inflation.  Rather, they simply follow patterns from the previous year.  So if inflation was 2% last year, businesses will assume inflation will stay around 2% for the next year, just like how, in this scenario, individuals assumed inflation would remain a constant.
2: Individual spending habits are influenced by inflation.  Simply put, it demonstrates that when inflation does change, people will change the rate at which they purchase.
3: Individual spending habits have aggregate effects.  Remember, every individual is going through these calculations.  Some individuals, such as bankers or anyone working in a mutual fund, may consider inflation to a stronger degree than average individuals.  The result, though, is that the people who do make decisions represent a larger percentage of people making that same decision, having a larger aggregate effect on buying habits.

Now that I've gone into that, what does the deflation scenario mean, then?  If an individual in a deflationary world expects 2% deflation for a year, it's in their interest to hold their money for a year, and gain a 2% return due to the increasing value of their dollar over the course of the year.  So they either put it in a bank account or just hold the money under their mattress.  This means the currency creates an incentive for people as a whole to stop spending money outside basic necessities.

What does that mean for the economy as a whole?  If people are discouraged from actually spending, it first means GDP's going to see an overall drop due to lack of sales.  That's bad thing #1.  Second, the lack of use of money would decrease what we call the velocity of money (the rate at which money is used in transactions).  Money velocity is actually an inflationary trend, multiplying the effectiveness a single dollar has in acting as a medium of exchange.  Anyway, this means the loss of money velocity will accelerate the deflationary trend, which itself further entrenches the incentive to save, creating a cycle of depreciation.

Meanwhile, this actually creates a completely different debt problem for the United States.  While future bond contracts can be adjusted to account for inflation, existing loan contracts can't.  This means it's generally nice to be a debtor when inflation rises (if your loan was written with an understanding that inflation would be 2% per year and it suddenly jumps to 3% per year, your loan effectively became 1% cheaper).  But what about during a deflationary period?  In the same way, if the US offers a 2% return on a Treasury bill and there's a deflation rate of 2%, it means the US is, in effect, paying 4% interest on that bill.  That just effectively doubled the rate of interest paid on that loan.

There's another problem.  How do you actually decrease inflation to a deflationary level?  Depending on the economic perspective to which you prescribe, there's different methods.  However, each method has different problems.

For example, one model of inflation, the Phillips Curve, suggests that short-term inflation is a function of 3 variables: The difference between the natural unemployment rate (the stable unemployment rate for a particular economy, generally 5-6%) and the current unemployment rate, the expected inflation rate (the rate people as a whole consider in price/wage determination... in normal economies, the expected inflation rate is generally the same as last year's inflation rate), and a separate variable for each nation, meant largely to determine the strength of the unemployment variable in influencing inflation rates.  I'm not exactly sure, but I believe in the US, this third factor didn't matter much (the variable for the US economy was close to 1, so if we rounded it, a 1% increase in unemployment would reduce inflation for that year 1%).  This model has actually shown to be correct for short-term inflation, indicating that inflation has a directly inverse relationship to unemployment (meaning to trigger deflation, you have to trigger unemployment).  The implication of this, then, is that if a nation wants to decrease inflation, to do so they need to increase unemployment (or, in the case of the current economy, keep unemployment near current levels).  Long story short, though, to get a deflationary economy actually requires that you force higher than normal unemployment rates, perpetuating economic problems even before the actual deflation occurs (To be fair, according to the Phillips Curve model, it would only require one year of higher unemployment.  After the one year, the public perception of future unemployment would adjust to assume prices would deflate, so the goal could be reset to normal unemployment).  But the Phillips Curve is only one portion of the puzzle.

A monetarist model, in contrast, argues that inflation is largely a result of money supply changes, determined both by the amount of currency and the velocity of money.  This one creates its own problems for a deflationary scenario in that deflation suddenly becomes hard to stop.  Let me use an equation here:

C*V=M
M=Money supply, C=Currency, V=Velocity of money.

This is the actual monetarist equation used to determine total money supply, barring the fact that I changed the symbols.  But they mean the exact same thing.

Let's assume that, before a deflationary trend, M=1,000, C=100, V=10

Deflationary trend begins.  Some money was pulled out of the market.
999*10=9990

Now, as per my description above, in a deflationary trend, people will be encouraged to not spend as much, reducing the velocity of money.  Let's assume, for the purpose of simplicity, over 10 years, the currency amount drops 10%, and the velocity of money drops 10% total.

900*9=8100

Let's also say this is the change from last year's money supply rate in a 10-year trend, described as:
905*9.1=8235.5

Now what happens when the government wants to reverse this trend?  Remember, the economy hasn't necessarily been healthy during this period.  In addition, the government will want to retain overall control over the money supply to ensure it can still be manipulated.  Now, the velocity of money half of the equation is largely a result of expectations of inflation.  Thus, in order to stop that velocity drop, the government needs to actually create an inflationary trend.  Otherwise, it will be useless.  So 8235.6 has to be the minimum result to restart inflation and end the future expectation of deflation.

915.07*9.0=8235.6

Remember, the money velocity was being held back largely because of the expectation of inflation.  So what happen the next year?

915.07*10=9150.7

Boom!  The velocity of money jumpstarts... 10% inflation!  Now we have two problems.  On the government side, the government needs to retract its move and buy back more currency to stabilize the supply.  On the consumer side, we just had a deflationary trend, followed by inflationary overcompensation.  If there's any scenario at which people can't create bonds and loans that account for inflation, it's when inflation is moving in an unstable direction between multiple distant points.  THIS is where you would see the bond collapse you described, if anywhere.

The problem is that the only way to overcome the loss in money velocity is to print too much currency in order to make the people expect inflation to start.  However, once you restart the economy, the result is a rebounding inflationary period, which must then be controlled.

> xeno syndicated wrote:

> I mean, Zarf, if we can't agree on the obvious, how can we have any constructive dialogue?

When yields on t-bills no longer cover inflation, interest rates will have to rise, and then the housing market will collapse, but this time finally.

And then what?

The question of what is "obvious" is often up for debate.  For example, as a student who actually studies economics and reads the works of economists who studied and created economic models that can accurately predict inflation, I think my side of this debate is extremely obvious.  That being said, if two people recognize that what they think may be "obvious" actually has ground for where an educated argument would still see disagreement, there's just as much ground for people to understand one another as there is with an issue that isn't "obvious."

noooooooooooooooooooooooooooooooooooooooooooo!

C

> xeno syndicated wrote:

> "Long story short, we don't need the war to explain the collapse in the market.  The market itself provides a much clearer story than the abstract war link."

Believing something doesn't exist doesn't negate its existence. 

You don't seem to want to analyze the effects the war has had on the economy.  I think, however, we have to consider the effects to determine whether or not we are winning or losing and whether or not we should keep fighting it, no?

I could say the same thing, arguing you are simply using the recession as justification to oppose the war.  The only difference between your personal attack and my personal attack would be that, between the two of us, I have a much better justification for my argument, actually analyzing the domestic economic markets involved in the crisis, whereas your argument is little more than blip talking points.  In fact, the very act of accusing me of doing something (not engaging an argument) when you blatantly sidestep an entire post with a 3-sentence reply that has absolutely no economic analysis is a pretty strong indictment of a claim that you simply don't want to analyze the real causes of economic crisis, only using it as a justification for an anti-war stance.

But what the hell, let's analyze your argument.

1: Inflation?  Okay, let's look at that!

http://www.miseryindex.us/irbyyear.asp

The statistics cover inflation rates for the past 60 years... and if you notice, the US inflation rate during the Bush years is actually quite consistent with historical inflation rates.  On average, the post-9/11 inflation rate (up to 2008) was 3.04%, compared with the Clinton-era 2.6% inflation rate (remember, this was a uniquely favorable economic period, driven largely by combined forces of trade liberalization and the .com boom... which would bust just shortly before Bush Jr. came to office).  Even if you remove the 2002 number (since that stagflation period was started by the 9/11 attacks, not the US response), the average is still a relatively healthy 3.3% (Compare this to Bush Sr. years or the giant Nixon-Ford-Carter-Reagan period).  Cause for some concern?  Yeah, probably, but it's still within the average inflation range for stable economies.

2: Okay, what about the oil price increase?

My argument is that oil prices are largely driven by demand increases from developing nations, specifically China and India.  The War on Terror will have some influence on the oil market, but it's limited to short term supply shocks.

First, let's get the statistics up.

http://inflationdata.com/inflation/inflation_rate/historical_oil_prices_table.asp

Pay attention to the inflation-adjusted oil prices.  Also, I want to throw this one out here:

http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_kd_zg&idim=country:USA&dl=en&hl=en&q=real+gdp+growth#ctype=l&strail=false&nselm=h&met_y=ny_gdp_mktp_kd_zg&scale_y=lin&ind_y=false&rdim=country&idim=country:USA&ifdim=country&hl=en&dl=en

Annual US GDP growth rates.

Anyway, what do we see here?

First of all, looking at the average oil prices, the 2000 average price (running in the $30's) was met with 3 years of dropped prices, not recovering the 2000 price again until 2003.  Now, the 2000-2002 period had an economic slowdown triggered by the .com bubble, followed by the 9/11/Enron slowdown.  The US economy starts to get out of the slowdown in 2003, just as oil prices rebound.

Here's another link, a graph of oil prices which better models short-term price changes:

http://www.worldculturepictorial.com/images/content/oil_chart_1996-2008.jpg

What do you notice about 2003?  There's a large oil shock in April 2003 (Iraq war buildup).  However, the oil pipelines would be secured in time (there was a short period after the invasion when the US didn't secure the oil pipelines in Iraq, creating obvious supply disruptions).  Once the Iraq war transforms into a general guerrilla war against towns, rather than a war against the Iraqi oil infrastructure, the price stabilizes... for the most part (there's still, on average, a slight increase from average post-"Mission Accomplished" prices to 2002 prices).

What happens from there?  We see a steady price increase, with large irregularities.  The question I would ask at this point?  What events actually brought on these specific increases?

http://www.google.com/imgres?q=world+oil+production+graph&num=10&um=1&hl=en&biw=1366&bih=608&tbm=isch&tbnid=fSey-qLCOIxUkM:&imgrefurl=http://dlb8685.wordpress.com/2010/06/02/kill-the-gulf-oil-drilling-moratorium/&docid=F6rJb06pJpe3-M&w=908&h=621&ei=e5tnTtKtNJOhsQKcqKymDg&zoom=1&iact=hc&vpx=1053&vpy=101&dur=867&hovh=186&hovw=272&tx=152&ty=121&sqi=2&page=1&tbnh=145&tbnw=210&start=0&ndsp=15&ved=1t:429,r:4,s:0

Another graph: World oil production.  Compare this to the oil price graph.  Oil production reaches its peak at the same time that prices start to skyrocket.  Meanwhile, China and India have expanding economies, demanding more oil.  This is an economics 101 scenario: As oil reaches its peak and demand increases, the supply can't meet demand, so the price will increase to balance the increased demand until a new equilibrium is established.

Note, in addition to this trend, that the 2008 recession debunks a good portion of this war theory.  If the growing oil prices were a War on Terror premium, the recession wouldn't have seen oil prices drop because the US was continuing the War on Terror.  However, we saw a drop.  The explanation?  US, European, and even Asian markets were using less oil during the recession, reducing the demand for oil... the result being a drop.

Actually, one note regarding Iraq.  Yes, I'm going to open up a giant hornet's nest with this argument.

http://www.fysast.uu.se/ges/files/images/Future%20Oil%20Production%20in%20Iraq.preview.jpg

Iraqi production.  Note that it hasn't met pre-war levels.  Okay, so there's some supply shock.
But wait... why the projected increase?

http://www.breitbart.com/article.php?id=080622113024.5rfe5v9s&show_article

In 2008, Iraq began awarding contracts to oil companies to increase oil production.  Iraq has largely untapped oil reserves, most likely a result of combined oil nationalization by the former Iraqi government and, more importantly, oil embargoes in existence until the 2000's (definitely another factor triggering the early 2000 price decrease).  With the successful occupation of Iraq, oil contracts have been awarded, meaning another 2-4 million barrels of oil per day to enter the market over the next few years.  With new oil contracts being entered, oil production in Iraq will increase, helping to reduce world oil prices.  In addition, Iraq's new resurgence in oil production and closer ties to the West than other OPEC nations will destabilize that cartel, undermining efforts at controlling oil supplies.  So if there's a war premium, it also means the pro-war crowd gets to write the new Iraqi production as an economic benefit of the war to counterbalance a war premium.  The result?  Future oil prices will be lower than they otherwise would be as a result of demand increases.  The increased supply of oil means increased spending on consumer goods throughout the purchaser economies (airline travel, plastics, reduced cost of shipping encouraging greater international trade, etc).  That's long term growth in the world economy... something very different from the supply shocks you're talking about.

3: Now that this is out of the way, what about the debt?  Okay, I'll concede this is a cost to the economy.  However, debt in itself has never been a justification to say no to a war.  The US became a huge debtor following WW2 and the Great Depression.  Was it worth it?  In that case, definitely so (I'd be willing to argue about whether the New Deal spending was effective, but that's a different story).  Why?  Because we compare the threat of Germany vs. the threat of debt.  In this case, it was really easy to say that Germany's a bigger threat, because the alternative to US intervention was allowing Germany to retain control of France, probably take down England (by Churchill's own admission, Britain was nearly bankrupt during the Battle of Britain, necessitating the Lend-Lease program).  I can't speculate far enough to determine how this would have influenced the USSR war (I'd actually guess Hitler would still make the critical screw-ups in the USSR, but the US couldn't possibly have known that at the time).

But what about today?  Well, the short answer is to ask what would have happened if the US hadn't engaged in the War on Terror?  A single terrorist attack involving 19 guys with box cutters was able to derail a US economic recovery coming out of 2000.  Nineteen... college... students... with... box cutters!

Remember, economic decline is just as bad as increased debt because government spending levels run opposite of economic growth: During a recession, the government doesn't generally cut spending, and actually increases spending to stimulate short-term growth.  So not only does debt increase, the debt/GDP ratio increases, which increases the cost of actually paying off the debt.

The question, then... is "how likely would the US have been to see a second terrorist attack on its economic infrastructure if it weren't for US intervention?"

This is something that makes Iraq particularly important.  From 2003-2006, Iraq was part of a veritable civil war with foreign fighters from all over the Middle East coming to the country to target US soldiers.

In the words of Admiral Akbar, IT'S A TRAP!  Military forces are much better equipped to deal with guerrilla wars than civilians in the US.  In addition, the market assumes that US forces in Iraq will be facing guerrilla warfare, minimizing market impact of each attack (the one exception is attacks upon oil supply, but the US did a better job of securing Iraqi pipelines later into the war).

In addition, this may have created a financing trap for Al Qaeda.  Look at it this way:
During the Iraq War period (not as a result of it, but around the same time period), Western banks froze over $140 million in Al Qaeda assets.  As given by the 9/11 Commission report, the 9/11 attacks cost Al Qaeda around $100,000 to conduct.  So if we assume 9/11 provides the baseline cost of a successful 9/11-scale terrorist attack, it means Al Qaeda could afford 1,400 9/11-style attacks (requiring about 280,000 martyrs).

Anyway, for the purpose of this model, let's assume there were 30,000 members of Al Qaeda, and total assets of $300 million before the Iraq war (the numbers chosen are arbitrary... not important for my overall model).  Anyway, post-Iraq, let's assume Al Qaeda doubles total recruitment to 56,000 members.  Sounds bad, right?  It would, except that with the loss of revenue for Al Qaeda as a result of US asset freezes and added recruitment means the per-terrorist assets are decreased... meaning Al Qaeda either has to make lots of terrorists idle (sleeper cells cost funding as well, albeit not nearly as much), or it has to focus on cheaper military operations (such as random IEDs placed in Iraq).

C-c-c-combo breaker!

But... both of those are just definitions of a war ending, not necessarily victory or defeat.  So again, what's the definition of winning?