<![CDATA[Hedgehogs.net: '' related content]]> http://www.hedgehogs.net/tag/economic+theories?view=rss http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11402291/challenge-to-keynesians-prove-rising-prices-provide-an-overall-economic-benefit Thu, 23 Oct 2014 03:39:57 +0100 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11402291/challenge-to-keynesians-prove-rising-prices-provide-an-overall-economic-benefit <![CDATA[Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit"]]>
When the euro declined vs. the US dollar, the ECB was happy that inflation would inch back up. The fear now is that falling oil prices will take away the alleged gain of a falling euro.

With that backdrop, credit the Financial Times for the absurd headline of the week: Eurozone Fails to Benefit from Weak Currency as Oil Price Slides.
Pity the policy makers given the job of rescuing the eurozone from deflation.

The unorthodox steps the European Central Bank has taken since June – including a programme of private-sector asset purchases – have caused a steep fall in the euro. The single currency is down 8.4 per cent against the dollar and 4.75 per cent on a trade-weighted basis from its peaks this year.

The weaker exchange rate will ease pressure on the ECB in its fight to raise inflation back to its target of just below 2 per cent. Mario Draghi, the central bank’s president, has said the currency’s earlier strength explains 0.4 percentage points of the fall in inflation since 2012. In that year, prices were growing 2.7 per cent a year.

But just as this depreciation is starting to fuel inflation, the ECB must contend with a fall in oil prices that all but wipes out the effect of a sliding currency. A weaker euro should swiftly raise the cost of imported energy. Instead, Brent crude has fallen 9 per cent in euro terms this month alone. This is the main reason why eurozone inflation fell again in September to 0.3 per cent, a five-year low – a figure confirmed by data on Thursday.

“The drop in oil prices is a problem for the ECB,” says Marco Valli, an economist at UniCredit, adding, however, that the situation would have been far worse without the single currency’s fall.

“The impact on inflation is already visible and significant – if you still had the euro at 1.40 to the dollar, eurozone inflation would probably be zero.”
Pity the Keynesian Fools

Financial Times writers Delphine Strauss and Claire Jones say "pity the policy makers." I say pity the fools who believe the thesis of their article.

There is absolutely no benefit to rising consumer prices. Things are even worse if prices rise but wages don't.

The very essence of rising standard of living is more goods at lower prices thanks to innovation and rising productivity. And there is no reason to believe wages will rise (or keep up with prices) if prices do rise.

Challenge to Keynesians
 
I challenge Strauss and Jones (or anyone else but especially Keynesians and Monetarists) to prove rising prices provide an overall economic benefit.

Sure, those with first access to money benefit (the banks, the already wealthy, and government bodies via taxation). But that is at the expense of everyone else.

The absurd underlying notion behind the battle cry for inflation is that if prices fall people will stop buying things and the economy will collapse.

Reality Check Questions

  1. If price of food drops will people stop eating?
  2. If the price of gasoline drops will people stop driving?
  3. If price of airline tickets drop will people stop flying?
  4. If the handle on your frying pan falls off or your blow-dryer breaks, will you delay making another purchase because you can get it cheaper next month?
  5. If computers, printers, TVs, and other electronic devices will be cheaper next year, then cheaper again the following year, will people delay purchasing electronic devices as long as prices decline?
  6. If your coat is worn out, are you inclined to wait another year if there are discounts now, but you expect even bigger discounts a year from now?
  7. Will people delay medical procedures in expectation of falling prices?
  8. If deflation theory is accurate, why are there huge lines at stores when prices drop the most?

Bonus Question

If falling prices stop people from buying things, how are any computers, flat screen TVs, monitors, etc., ever sold, in light of the fact that quality improves and prices decline every year?

Deflationary Spiral Nonsense

I have discussed this many times before, most recently in Deflationary Spiral Nonsense; Keynesian Theory vs. Practice; Eurozone Policymakers Concerned About Falling Prices
The idea that falling prices are bad for the economy is ridiculous. Taking out insurance against falling prices is even more absurd.

Ask any consumer if he wants lower gas prices, lower food prices, lower hotel prices, lower computer prices, or lower prices on any consumer items and the answer will be yes.

Keynesian Theory vs. Practice

Keynesian theory says consumers will delay purchases if prices are falling. In practice, all things being equal, it's precisely the opposite.

If consumers think prices are too high, they will wait for bargains. It happens every year at Christmas and all year long on discretionary items not in immediate need.
Asset Deflation vs. Consumer Price Deflation

What central bankers should fear is falling asset prices, more specifically, loans made on assets in an asset bubble.

The irony is central banks create asset inflation by fighting something everyone on the planet should welcome.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com ]]>
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http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11401098/gold-and-real-interest-rate Wed, 22 Oct 2014 13:59:42 +0100 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11401098/gold-and-real-interest-rate <![CDATA[Gold and Real Interest Rate]]> Does gold respond to the inflation or rather to the real interest rate? Paul Krugman said once that the reason behind the high real price of gold between 2001 and 2011 was low real interest rates, not the expected inflation. Read More...

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http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11401080/challenge-to-keynesians-prove-rising-prices-provide-an-overall-economic-benefit Wed, 22 Oct 2014 13:59:22 +0100 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11401080/challenge-to-keynesians-prove-rising-prices-provide-an-overall-economic-benefit <![CDATA[Challenge to Keynesians 'Prove Rising Prices Provide an Overall Economic Benefit']]> The ECB has been concerned about falling consumer prices. I propose that's 100% stupid, yet that's the concern. Read More...

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http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11401071/phase-shift Wed, 22 Oct 2014 13:59:14 +0100 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11401071/phase-shift <![CDATA[Phase Shift?]]> Gordon T Long poses three questions for debate with John Rubino regarding the current Geo-Political Event Risks and Macro Economics developments ... Read More...

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http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11401055/why-the-business-cycle-is-failing Wed, 22 Oct 2014 13:59:00 +0100 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11401055/why-the-business-cycle-is-failing <![CDATA[Why The Business Cycle is Failing]]> Since WW2 economic theorists have posited that demand in the economy could be stimulated by a combination of deficit spending by the government and by suppressing interest rates. The separation of demand from production was promoted by ... Read More...

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http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11397093/roger-farmers-economic-window-thought-for-the-day Wed, 15 Oct 2014 06:58:24 +0100 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11397093/roger-farmers-economic-window-thought-for-the-day <![CDATA[Roger Farmer's Economic Window: Thought for the Day]]> ]]> 11397093 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11395271/microdocumentary-the-truth-about-boom-and-bust-cycles Sun, 12 Oct 2014 03:15:39 +0100 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11395271/microdocumentary-the-truth-about-boom-and-bust-cycles <![CDATA[Microdocumentary: The Truth About Boom And Bust Cycles]]> Most believe that expansionary monetary policy helps ease crises. Austrian School economists argue that central banks don't help in smoothing the amplitude of the cycles, but rather are the cause of cycles. Read More...

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http://www.hedgehogs.net/pg/blog/CentralBankNews/read/11393680/peru-maintains-rate-but-will-ease-if-necessary Fri, 10 Oct 2014 02:23:16 +0100 http://www.hedgehogs.net/pg/blog/CentralBankNews/read/11393680/peru-maintains-rate-but-will-ease-if-necessary <![CDATA[Peru maintains rate, but will ease if necessary]]>     Peru's central bank maintained its monetary policy reference rate at 3.50 percent, as expected, but maintained an easing bias by saying it "will implement additional monetary easing measures if it is necessary. "
    The Central Reserve Bank of Peru, which has cut its rate by 50 basis points this year, most recently in September, also said current and leading indicators "continue to show a weak economic cycle, with lower GDP growth rates than the potential output, although some signals of recovery have been observed in September."
    Peru's inflation rate rose to 2.74 percent in September from 2.69 percent in August, within the central bank's target range of 2.0 percent, plus/minus one percentage point, and expectations remain anchored to the range.
    Last month the central bank's president, Julio Velarde, forecast Peru's economy would likely expand between 3.5 and 4 percent this year, below the bank's August estimate of around 4 percent. The central bank has trimmed its growth forecast several times this year from an initial estimate of 6 percent as exports have declined.
    In the second quarter, Peru's Gross Domestic Product expanded by an annual 1.7 percent, down from 4.8 percent in the first quarter.
    The central bank issued the following statement:


"The Board of the Central Reserve Bank of Peru approved to maintain the monetary policy
reference rate at 3.50 percent.
This level of the reference rate is compatible with a projected rate of inflation within the target
range in 2014 and with inflation converging to 2.0 percent in 2015. This forecast takes into
account that: i) current and advanced indicators of economic activity continue to show a pace
of growth below their potential; ii) inflation expectations remain anchored within the inflation
target range; iii) recent international indicators show mixed signals of recovery in the world
economy, as well as higher volatility in financial and exchange markets, and iv) the supply
factors that led inflation to increase are moderating.
2. Inflation in September showed a rate of 0.16 percent, as a result of which inflation in the last
12 months rose from 2.69 percent in August to 2.74 percent in September, within the target
range. Inflation without food and energy recorded a rate of 0.09 percent, as a result of which
the interannual rate of inflation rose from 2.56 percent in August to 2.57 percent in
September.
3. Current and advanced indicators of activity continue to show a weak economic cycle, with
lower GDP growth rates than the potential output, although some signals of recovery have
been observed in September.
4. In October, the BCRP has continued lowering the rate of reserve requirements in domestic
currency –from 11.0 to 10.5 percent– with the aim of supporting the growth of credit in soles.
5. The Board oversees the inflation forecasts and inflation determinants, and will implement
additional monetary easing measures if it is necessary.
6. The Board of the Central Bank also approved to maintain the annual interest rates on lending
and deposit operations in domestic currency (not included in auctions) between the BCRP
and the financial system, as described below:
a. Overnight deposits: 2.30 percent.
b. Direct repos and rediscount operations: 4.30 percent.
c. Swaps: a commission equivalent to a minimum annual effective cost of 4.30 percent.
7. The Board will approve the Monetary Program for November on its meeting of November 13,
2014"

    www.CentralBankNews.info



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http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11390628/house-prices-real-prices-and-pricetorent-ratio-decline-in-july Thu, 02 Oct 2014 21:18:56 +0100 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11390628/house-prices-real-prices-and-pricetorent-ratio-decline-in-july <![CDATA[House Prices: Real Prices and Price-to-Rent Ratio decline in July]]> I started 2014 expecting a slowdown in year-over-year (YoY) prices as "For Sale" inventory increases, and the price slowdown is very obvious! The Case-Shiller Composite 20 index was up 6.7% YoY in July; the smallest YoY increase since November 2012 (the National index was up 5.6%, also the slowest YoY increase since November 2012.

I expect YoY prices to slow further over the next several months.

It is also important to look at prices in real terms (inflation adjusted).  Case-Shiller, CoreLogic and others report nominal house prices.  As an example, if a house price was $200,000 in January 2000, the price would be close to $280,000 today adjusted for inflation (40%).  That is why the second graph below is important - this shows "real" prices (adjusted for inflation).

Nominal House Prices

Nominal House PricesThe first graph shows the monthly Case-Shiller National Index SA, the monthly Case-Shiller Composite 20 SA, and the CoreLogic House Price Indexes (through July) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to February 2005 levels, and the Case-Shiller Composite 20 Index (SA) is back to September 2004 levels, and the CoreLogic index (NSA) is back to February 2005.

Real House Prices

Real House PricesThe second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to July 2002 levels, the Composite 20 index is back to June 2002, and the CoreLogic index back to March 2003.

In real terms, house prices are back to early '00s levels.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Price-to-Rent RatioHere is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to December 2002 levels, the Composite 20 index is back to September 2002 levels, and the CoreLogic index is back to July 2003.

In real terms, and as a price-to-rent ratio, prices are mostly back to early 2000 levels.

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http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11390593/house-prices-real-prices-and-pricetorent-ratio-decline-in-july Thu, 02 Oct 2014 21:00:23 +0100 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11390593/house-prices-real-prices-and-pricetorent-ratio-decline-in-july <![CDATA[House Prices: Real Prices and Price-to-Rent Ratio decline in July]]> I started 2014 expecting a slowdown in year-over-year (YoY) prices as "For Sale" inventory increases, and the price slowdown is very obvious! The Case-Shiller Composite 20 index was up 6.7% YoY in July; the smallest YoY increase since November 2012 (the National index was up 5.6%, also the slowest YoY increase since November 2012.

I expect YoY prices to slow further over the next several months.

It is also important to look at prices in real terms (inflation adjusted).  Case-Shiller, CoreLogic and others report nominal house prices.  As an example, if a house price was $200,000 in January 2000, the price would be close to $280,000 today adjusted for inflation (40%).  That is why the second graph below is important - this shows "real" prices (adjusted for inflation).

Nominal House Prices

Nominal House PricesThe first graph shows the monthly Case-Shiller National Index SA, the monthly Case-Shiller Composite 20 SA, and the CoreLogic House Price Indexes (through July) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to February 2005 levels, and the Case-Shiller Composite 20 Index (SA) is back to September 2004 levels, and the CoreLogic index (NSA) is back to February 2005.

Real House Prices

Real House PricesThe second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to July 2002 levels, the Composite 20 index is back to June 2002, and the CoreLogic index back to March 2003.

In real terms, house prices are back to early '00s levels.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Price-to-Rent RatioHere is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to December 2002 levels, the Composite 20 index is back to September 2002 levels, and the CoreLogic index is back to July 2003.

In real terms, and as a price-to-rent ratio, prices are mostly back to early 2000 levels.

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