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Hidden Inflation

The Industrial Revolution brought with it a huge growth in productivity. So much so that while in the 1700s some 90% of the population had to work in agriculture-food growing; today less than 2% of the population is occupied with this task. In an ecosystem with a limited amount of money, as it was throughout the 18th and 19th centuries, such a growth in productivity would cause prices to drop and living standards to rise. Such was the case during most of the 1800s, excluding the Civil War years. On average, between 1815 and 1895, prices went down 4% annually. 85 Meanwhile, annual per capita GDP went up around 1.5% a year, spelling a threefold increase in per capita GDP between 1820 and 1900.86 So while prices were dropping sharply, output was skyrocketing, a combination that yielded an important improvement in most Americans’ standard of living.

This kind of amelioration is, after all, the ultimate goal of human economic activity. After all, people do not eat gold, they eat products, hence what they need to improve their livelihood are more products not more coins. In the last thirty years of the 20th century, the world experienced a similar important shift: the Digital Revolution. This extraordinary technological milestone also brought huge improvements in productivity, so much so that we cannot even imagine running the world today without computers and the Internet. Yet prices for the most part did not go down. To the contrary, prices kept climbing. How can this be? Where did all this productivity growth go?

The simple answer is that money creation consumed this price reduction. All the productivity gains, which should have translated into society-wide improvements in living standards were instead eaten up by the flood of newly created money. Money creation produced inflationary pressure that pushed prices back up. Instead of lower prices and a higher standard of living for all people, the government got away with printing more money and the financial sector with taking on more leverage. In essence, the engines propelling the money creation— the oppressive costs of an increasingly complex society and government, the financial demands of a massive military-industrial complex, and the endless malinvestment bubbles— consumed the price reduction that would have otherwise been enjoyed by all the public. Hence, for all intents and purposes, our vast productivity gains were struck by a mammoth hidden tax, similar to inflation, yet even more subtle.

The fact that CPI increased by “only” an official average of 2.5% a year is not a result of some sort of miraculous new reality where unlimited money creation has no inflationary consequences. The reality is much bleaker than this fantasy. It was due to the Digital Revolution that such a super stealthy tax— an unthinkably huge seizure of resources and a transfer of purchasing power from the masses to the few— could have occurred while producing a “reasonable” official rate of inflation.

Steinhart, Chanan (2015-04-11). A Brief History of Money: How We Got Here and What’s Next ? (Kindle Locations 3773-3785).  . Kindle Edition.

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Capitalism Requires Optimism – Thoughts 2016 04 26


The call for a higher minimum wage is an admission that policies are stifling economic growth. The best way to increase worker pay is to create a demand for their labor.  This means stimulating investment and encouraging risk taking.  Capitalism requires optimism.

Yet the question remains how much of our stagnation is due to poor policy and how much is due to a social and economic shift. Such shifts usually signal the need to drastically reallocate resources. The political challenge is to aid those who are on the painful end of the change without slowing down the needed transition.

Part of the solution to such changes in the past was the mobility of the people to move to where the opportunities were.  Strong safety nets may prolong such needed adjustment by discouraging mobility. Perhaps there should be incentives to relocate when needed.  Instead the programs seem to encourage people to stay in dying towns and industries.

The thought process that criticizes the wealthy and the 1% is the same as ethnic or racial bigotry.  The wealthy are faceless and stereotyped and treated as a monolithic bloc. They are not considered as individuals. If they were they would be seen as the diverse souls that they are. Warren Buffet, Steve Jobs, Elon Musk, and Mark Zuckerberg do not fit the same wealthy stereotype as Donald Trump.

The attraction that so many of the middle and working class have for Donald Trump raises the question of how much inequality is a problem in the eyes of the voters. They rally in record numbers to a candidate who brags how rich he is and engages in gaudy conspicuous consumption.  This stands in stark contrast to Warren Buffet who could buy and sell Trump several times over.

The measurements of inequality are distorted and exaggerated and I contend that it is a much greater problem in the minds of the academics and politicians than it is in the minds of the voters.   The absolute level of poverty and the stagnation of middle class income is a far greater problem.  The middle class does not care how rich Donald Trump or Warren Buffett is: they care that their own prosperity has flat lined or declined.

I just read the Annual Report of Berkshire and will be attending the annual meeting. In reading Warren’s report (very simple report- no glossy covers and no pictures) he remains optimistic and runs his business as of the government is irrelevant.  They should be.

That does not mean we should ignore them, but perhaps we give them too much consideration when we plan our lives.

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Wage Price Fixing

from Carpe Diem and Mark Perry, a simple and effective analogy on the minimum wage, What economic lessons can we learn about the $15 minimum wage law from an ‘$8 per pound minimum beef price law’?

Economist Walter E. Williams has used the following example to illustrate the competition described above between unskilled and skilled workers by looking at the market for different qualities of beef (see examples herehere, and here). Suppose that hamburger sells for $4 per pound and sirloin steak sells for $8 per pound. Hamburger is a much lower quality variety of beef compared to sirloin steak, but can attract a significant number of buyers who choose hamburger over the higher quality option for the 50% savings in price. Likewise, many employers may choose lower quality, unskilled workers over higher skilled employees for the significant savings in labor costs.

But now suppose the government imposes a “$8 per pound minimum beef price law.” In that case, most shoppers who buy beef will then purchase more sirloin steak and less hamburger because the lower quality meat has lost it main weapon to successfully compete against higher quality sirloin steak – a significantly lower price that compensates for the lower quality. Result? Hamburger sales will suffer due to the “minimum beef price law” and sirloin steak sales will increase. Just like in the labor market, a $15 an hour minimum wage will remove the most effective weapon that unskilled workers currently have to compete against skilled workers – the ability to work for a lower wage. Result? Employment opportunities for unskilled and limited-experience workers will contract, while employment opportunities for skilled workers will increase.


A few economists content that some studies show no relationship between a higher minimum wage and unemployment, but the majority of studies (and common sense) show otherwise. There are conditions where the cost is muted such as where the market wage is already higher than the statutory minimum wage.

If market forces do not apply then why not raise the minimum wage to $25 an hour and why should we wait to phase it in over five years?  And who decides what the minimum wage should be  and where it should apply? What genius possesses the insight to know the correct wage for ALL workers in ALL states in ALL industries?

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The Wall of Worry

an excellent post from Scott Grannis at Calafia Beach Pundit, The Bad news is why I am optimistic

Grannis is one of my favorite economics bloggers- and one of the few that seems to combine a sense of harsh reality with a sense of optimism. He is strongly data driven yet retains a human element in his analysis.


As I noted some years ago, all the spending and borrowing that was supposed to “stimulate” the economy was essentially flushed down the toilet. Since 2009 we’ve conducted a laboratory experiment in the power of government spending to grow the economy by stimulating demand, and the result is proof that Keynesian theories are destructive, not stimulative. Neither government spending nor easy money has the power to create growth out of thin air, but politicians want to convince you that they do. The economy is weak today because we have wasted many trillions of dollars on transfer payments that only create perverse incentives to work less.

The biggest negative of them all is that the US economy is not nearly as large and as healthy as it could or should have been, had policies been better designed. This has been the weakest recovery in post-war history, and by a lot. If the economy had rebounded from the Great Recession with the same vigor it displayed in every post-war recovery, national income would be almost $3 trillion higher than it is today, as the chart above illustrates. Per capita income would be almost $9000 higher, and a family of four would be making $35K more every year. That’s real money, and it explains why the electorate is so upset these days with the establishment.


I guess his reasoning is that it is more likely to get better than to get worse.  One can err from excessive pessimism as much as excessive  optimism and the effect on your investments would be worse.

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Political Thoughts 2016 04 06


Russel Jacoby wrote a thought provoking book titled Bloodlust tracing the biblical roots of our personal violence towards one another. He used the phrase, “narcissism of minor differences”, to describe the violence not between groups that are the most different, but between groups that display relatively minor differences.  We can view the conflicts between the Catholics and the Protestants, and the Sunnis and the Shiites and see stunning violence between groups with very similar core religious beliefs and cultural heritage.

I wonder if this is what we are seeing now in the conflicts within both parties.

It seems not to be a conflict of ideologies but conflicts hinging on the absence of ideologies allowing voters to focus more on mere emotional triggers. The willingness of intra party factions to bolt even if it means the opposition party wins displays a greater hostility to fellow allies with similar but different ideas than to the other party with fundamentally different ideas.  They seem more inclined to lose than to compromise.

Retired Mercer University President Kirby Godsey once spoke of leaders who allow themselves to be “crucified on a six inch cross”.  Sometimes an ineffective leader suffers from too many principles and expends far too much political capital fighting for an issue that should have been compromised. This powerful metaphor also seems at play.


In customer service, Dean Young , the sales manager at General Steel, astutely observed that a customer would forgive a single error if it was fixed quickly and cheerfully, but that after a couple of errors they would be looking for short comings  and respond to transgressions that may have been previously too minor to notice.

I see this in the GOP circular firing squad posing as a primary. Many soft Republicans tolerated religious fundamentalists and other elements because we still thought the dominant ideologies were capitalism and constitutional conservatism.  Trump has proposed policies that seem antithetical to both ideologies and gets substantial traction from his stance. The objectionable elements have retained or strengthened their hold and the positive elements seem to have greatly retreated.  Republicans have never been as loyal to their party as the Democrats, and this current conflict makes it easier for conservative voters to reject the republicans as any coherent political philosophy.  Even if Trump is not the nominee the damage to what weak sense of party loyalty the Republicans ever had will be severe.

This leaves a lot of very unenthusiastic voters. The Democrats offer no home. They remain addicted to the growth in government from a century of Progressive policies that have evolved to a point where their leaders and voters are unable to articulate any difference between the modern Democrat and a socialist.  It is as stunning that an avowed socialist can do as well as Bernie Sanders as it is that a candidate as ethically flawed as Hillary can be the front runner.

The politically correct lunacy on the left has abandoned some of our most sacred intellectual principles  and is at least as  anti-intellectual as those that cling to their bibles and guns, and noticeably less tolerant.


Normally I fear that blind optimism obscures threats that seem obvious in hindsight. In  this campaign it is hard to see any road that leads to an acceptable leader.  The only surprise would be that everythings turns out reasonably well.


By far my favorite shareholder annual report I read is the Berkshire report written by Warren Buffet.  It strikes me this year, considering the political background, that Buffet remains quite optimistic and focuses on the bright prospects of his many successful companies.  Buffet’s attitude is not just to be above the fray, but to render it irrelevant.

That is not to suggest that we should drop out politically and not vote, but it does recommend that we spend more of our time focusing on the areas that we can influence and improve.