David R. Henderson  

Steve Chapman Publicizes My Bet

Rejoinder to Ridley on Innovat... Anna J. Schwartz, RIP...

In his column in the Chicago Tribune today, Steve Chapman publicizes my inflation bet with Bob Murphy:

Inflation hawks have been predicting a severe outbreak for years. But David Henderson, an economist at Stanford University's Hoover Institution and the Naval Postgraduate School, has been skeptical enough to put his money where his mouth is.

In December 2009, he publicly bet economist Robert Murphy of the Pacific Research Institute $500 that by January 2013, there would not be a single point at which the CPI would be up 10 percent or more from a year before. So far, it hasn't been, and it shows no sign it will.

There's a lot of other good content in the piece. He notes, for example, that MIT's Billion Prices Project finds inflation to be lower than the 1.7 percent that the government estimates. Steve also cites Scott Sumner.

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CATEGORIES: Monetary Policy

COMMENTS (8 to date)
BZ writes:

Dr. Murphy never should have made that bet -- four years must have seemed like a nice safe long time, but you just can't time these things. Still, I'm curious what Dr. Henderson's reasoning was on this question.

Several possibilities come to mind:
1. Monetary inflation never happened. The banks aren't sitting on all those excess reserves. The Sky is Not creaking above us.
2. Monetary inflation happened, but the Fed can Fix it! They will start selling bonds which will be bought up like Hot Cakes. The bonds will then never be cashed in. All is right with the world.
3. Dr. Henderson looked into his crystal ball and saw regime uncertainty everwhere. Monetary inflation happened, the Fed can't fix it, but the second shoe clearly does not begin to drop until FIVE years later, not the four that that silly Dr. Murphy is predicting.

Anyway, I'm betting either there's a fourth option, or better yet, someone can point me to an econlog post that will explain it all to me.

libfree writes:

I don't know about Dr. Henderson, but the bond markets were predicting the same thing. Always bet with the market rather than against it.

mick writes:

CPI is designed with the specific purpose of reporting as low a number as possible. If you look at the cost of goods households actually need, such as food, heating, education, health care, cars and movie tickets there has been substantial inflation. It is no coincidence this items are either ignored or carefully obfuscated in the CPI.

This is the final calamity of non falsifiable economics. When statistics are rigged to never give contrary answers, huge financial disasters appear without warning, nothing is falsified, and the disaster deepens. The only way out is to stop playing the silly narrative game and start acting like scientists.

Ken B writes:

David, are you endorsing Chapman's main argument, that the fed needs to ease?

David R. Henderson writes:

CPI is designed with the specific purpose of reporting as low a number as possible.
Actually, it’s not.
If you look at the cost of goods households actually need, such as food, heating, education, health care, cars and movie tickets there has been substantial inflation. It is no coincidence this items are either ignored or carefully obfuscated in the CPI.
You want us to be scientists, but we have no way of knowing, as scientists, what people need. I think most people would agree with me, though, that if we tried to measure “need,” we would not put movie tickets in the basket. What the Bureau of Labor Statistics actually does is take a representative basket of goods and services that people buy and price them month to month. That does include food, heating, and health care. I’m not sure about the others. For more on this, mick, see Michael Boskin, “Consumer Price Indexes,” in David R. Henderson, ed., The Concise Encyclopedia of Economics. The whole Encyclopedia is gratis on line.

David R. Henderson writes:

@Ken B,
Yes, I do endorse Chapman’s main argument. In fact, what I said in my interview with that didn’t make it through to the final cut is that inflation is temporary and government spending programs (the likely alternative people will advocate for “stimulus”) tend to be forever.

BZ writes:

Honest to goodness I tried to answer my own question : had already gone back and read all the old posts, the Tribune column in question, and Dr. Caplan's comments on it all.

I guess I'll just leave it with this:

If any of the good Drs are amenable, a fan of the blog would like to humbly request a Story about how the quantitative easing thus done amounts to Not Much. I would be willing to become a premium subscriber for some understanding of How Much quantitative easing would have been required for it to amount to Much in the price inflation world.

Sean1358 writes:

Professor Henderson:

I, along with many, search for an explanation of extensive QE that has created few jobs and minimal inflation. You argue this suggests that the QE has not been extensive enough. Clearly, a huge demand for US dollars and bonds currently exists, but a large percentage of it is coming from foreign investors and governments. I question how a dollar stored in a Japanese bank helps a small business in the US increase labor or capital.

I agree that the main benefit of the Fed’s QE program is low interest rates, which had some positive influence on our economy over the last couple of years. Investors are buying-up rental property, Wall Street traders are gambling in the Futures Market, consumers are spending money they don’t have, and the US government borrows trillions from foreign investors on the cheap. You don’t think this might be a sugar high? Doesn’t this just mask the real problems we are facing?

I’ve heard a lot of explanations for the Great Recession: credit default swaps, poor judgment by rating agencies, interest-only loans, non-existent credit standards, not enough Federal oversight, too much Federal intervention, etc. I would like to suggest that at the core of the problem was the prevailing view that real estate prices would never stop growing. The single largest consumer expenditure was growing much faster than their ability to pay and nobody thought that this was a problem? By the time Greenspan started taking questions about a bubble, which he initially denied on the grounds of a lack of speculative buying, it should have long burst already.

After the tech bubble burst in 2000, the economy recovered thanks in part to a credit cycle carried over from the 1990s that developed as interest rates were falling. Americans were paying off their credit cards by refinancing their houses, so they could max-out their credit cards again; and everyone got richer from all that free money. How do we recover that? Plus, productivity gains from technology and the shifting of jobs overseas continues, while we import millions of prospective employees each year. Do we believe that printing money will create a whole new industry to absorb the unemployed?

It appears that any of the QE benefiting the US ends up on Wall Street, which can’t figure out why Main Street won’t continue to ante up. Apparently, they aren’t familiar with the term “fool me once, shame on you, fool me twice, shame on me.” Many folks understand that if you buy a small business from your neighbor, you should expect to pay 1 or 2 times net income plus or minus a little more depending on growth expectations of the business. Wall Street wants to convince “retail investors” (what some of them refer to as the dumb money) that a small, relatively worthless chunk of a big company is worth 15, 30, or even 60 times earnings. Most of these companies have no chance of multiplying their incomes 15 times over (not 15%, 1500%) anytime in the near future.

Inflation is temporary? It may seem temporary for someone whose income is automatically adjusted for inflation, but Pay Scales at private companies rarely shift. Therefore, the real value of a job description decreases with inflation. This phenomenon over a few decades, along with a lack of savings, explains why most people can’t qualify for a loan. What will we do when the baby boomers realize that they can’t make their mortgage on Social Security?

While CPI may not reflect it, I argue that the areas of the economy that benefit most from QE are in fact overvalued: the stock market, bond prices, and housing in many markets. I believe we need to stop borrowing from our future in order to pay for the past. We need to unwind all this excess debt. We need to recognize that we are in a state of emergency, that our current path is completely unsustainable. It means tough policy decisions, not Quantitative Easing. Guess what America, you can’t have your cake and eat it too. No more Band-aids, its time to call a doctor.

Thank you for the opportunity to share my opinion,


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