Inflation Is Here

In our last post we reviewed the price increases for several commodities, stocks and bonds, covering most of the global investable universe.  Let’s take a closer look at some of the implications touched on.

For convenience, here are the figures again:

Copper (CPER):  30.34%
Gold (IAU):  24.23%
Silver (SLV):  40.88%
Platinum (PPLT): 13.13%
Short Term UST (VGSH):  1.77%
Intermediate Term UST (VGIT):  5.32%
Long Term UST (VGLT):  12.87%
US Stocks (VTI):  19.72%
XUS Stocks (VXUS):  8.38%
Stocks (VT):  14.64%

Several possible takeaways here. One that struck me was the gains across such disparate assets as copper, gold, long term treasuries, and stocks around the world. This covering a period during which took place the worst economic collapse since the Great Depression.

What do these assets have in common that would make them all increase in value by double digits? Nothing intrinsic to the assets themselves presents itself. The one thing that they all unequivocally have in common isn’t in the assets themselves, but rather the fact I’ve quoted them in dollars. After all the price of something is just the value of that something divided by the value of the pricing unit.

Maybe they didn’t increase in value. Maybe the dollars deceased.

And by a heck of a lot more than 2%.

Had I quoted those prices in ounces of copper or ounces of gold, stocks and bonds would all be down. Pricing stocks in terms of gold instead of dollars, for example, we have:

US Stocks (VTI):  -3.71%
XUS Stocks (VXUS):  -12.83%
Stocks (VT):  -7.79%

A little more consistent with economic reality? A change in your choice of units can be so clarifying.

Consider that the value of an asset is ultimately in what you can buy with it. So for the actual value of this group of assets to have increased by double digit percentages would mean that there would have to have been a double digit increase in the amount of goods and services produced.

That’s just not happening.

We’re staring down the barrel of double digit inflation. Either asset prices must fall or consumer prices rise in kind. Or some messy combination of both.

20 thoughts on “Inflation Is Here

  1. Llanlad says:

    Thanks for the posts Finster. Interesting and informative as always.
    I find it incredible that financial types won’t believe inflation is there just because an acronym with initials (CPI) claims it isn’t there. Either these people don’t buy stuff or don’t pay attention.
    I have two quick growing children and have been selling bikes, scooters, balance boards that they’ve grown out of for the same prices I bought them 2-3 years ago. I ordered Mrs Llanlad’s Christmas pressies in September and I’m still waiting on some of them-a sure precursor to inflation. Houses around me are selling 20% higher than a year ago. The weekly shop is up 15-20%. Staples are all up noticeably.
    Finally it is often claimed we can’t make comparisons as we can’t compare like for like due to technological improvements . I can quibble with this argument too.
    Some examples I encountered this year-
    I had a leaking kitchen tap (faucet) and went to change the washer. I thought this was straightforward but now they are made with a ceramic cartridge- £8!!!
    Clutch went on car- but comes with a flywheel- £950 (£250 on the old type clutch)
    Replacement TV- Similar price but I have to login with personal details to get the same functionality.
    And don’t get me started on the idea that you must subscribe for Office online or the obsolescence of electronic goods due to “bricking” or no support.
    Finally every tradesmen is charging significantly more; this I don’t mind as at least it shows that workers are in a position to charge more even if they can’t buy more.
    Inflation is here alright. You just have to look at the price of things and not rely on government acronyms or deflation theories .

    1. Bill Terrell says:

      This also highlights a weakness in the tendency to use the forex markets as an indicator of changes in the value of a currency. If the dollar and the pound both lose 10% of their value, just looking at their value in terms of each other shows no loss.

      I couldn’t agree more with your point about comparing like for like over time. This is one reason the prices of elementary commodities like copper and gold can be so informative. They’re the same stuff they were last year, the year before, and a billion years before that. Ultimately though it’s the assumption that value resides in things that is at fault with conventional measures of inflation. My own index of inflation, explicit in the value of the dollar, is based on the axiom that human time is the fundamental unit of value.

      Financology Dollar Index

      Inflation is Not an Economic Condition

  2. Llanlad says:

    Thanks for the replies and the interesting links to the inflation posts. If things were somehow priced in hours that needed to be worked for that particular individual then I imagine people would behave quite differently. I know I value my free time highly!
    Anyway Merry Christmas to you and yours and keep up the good work on the blog. It’s both a valuable and entertaining resource.

  3. cb says:

    Jeff Snider, who we both respect, holds certain views opposite to mine and I believe opposite to yours. He maintains that the Federal Reserve (FED) has been powerless to create the inflation they would like see.

    Jeff holds that QE (Quantitative Easing) is not money printing. He holds that QE just places dollars as reserves within the FED accounts of primary dealers and that there is no effective mechanism to introduce those dollars into circulation.

    Jeff also holds that low interest rates are evidence that there is a dollar shortage. He even maintains that low yields on Junk Bonds are evidence of a dollar shortage.
    (My position is that low interest rates are due to interest rate suppression by the FED.)

    The below link is to Making Sense Eurodollar University – Episode 16. I think the entire 35 minute question and answer session is worth the time. I particularly invite you and your readers to view the 1 minute 20 seconds from minute 4 to 5:20.

    1. Bill Terrell says:

      Jeff Snider is a pretty smart guy, but it doesn’t sound like he understands inflation. The Fed has indeed created inflation … a lot of it. This and the previous post cite abundant evidence.

      Maybe he is confusing inflation with increases in the Consumer Price Index. It’s a common assumption, but until someone justifies it it’s still just an assumption. I know of no actual argument having been made that increases in the CPI are the same as inflation. If you can find one, please post it.

      Meanwhile even if you make that assumption, the CPI has been rising. Sounds to me like Snider is getting lost in a world of technical arcana trying to answer the monetary equivalent of “Why is the earth flat?”.

      I listened to the interview segment you cite. There’s a lot about financial system plumbing but no clear exposition of inflation. For a no-nonsense discussion of inflation, try the following link instead:

      Inflation is Not an Economic Condition

      1. KC says:

        I believe Jeff stated in a later interview within the last month or so at Eurodollar University podcast, that his view on inflation is the increase in cost of everything. Not just the cost of commodities or food in a few sectors of the economy. Emil Kalinowski and Jeff Snider cover the CPI in their later episodes. Big bets are made on both sides of the inflation question time will tell.

        1. Bill Terrell says:

          If he truly means everything, presumably he includes things like stocks, commodities, and home prices (not merely equivalent rents) along with wages and consumer goods. That would be my approach as well. Please see my latest post on the subject, today’s FDI update.

          But pretty much all prices are rising. Consumer prices are rising. Wages are rising. Asset prices are merely rising more. I sometimes focus on certain indicators like the asset prices cited above because these real time prices tend to be first responders … the canaries in the inflation mine.

          According to CB’s reply, Snider says the Fed is “has been powerless to create the inflation they would like see”. Taken literally, I suppose that just means the Fed doesn’t merely want inflation, but “core” PCE deflator growth above 2%. But if that’s what it boils down to, the Fed is just getting in its own way. If only it wanted to, it could surpass 2% just by selecting a different metric.

          This tells me there is something fishy about the Fed’s rhetoric. Look at its history. Whenever it seems to approach its goal post, whether employment, inflation or whatever, it just moves the goalpost further down the field. The Yellen Fed for instance long sought unemployment below 5%, then when that was reached, just found a new justification for continuing ultra-accommodative policy. When 2% “core” PCE inflation was at hand, the Powell Fed switched to averaging in prior inflation below 2%.

          Anyone else get the feeling the Fed’s real objective is something else?

          I don’t mean to pick on Snider. Despite my criticisms, I think he has a lot to offer. He’s someone I’d welcome the opportunity to sit down with and talk economics. If we did, I think I could get him to agree inflation is running rampant.

  4. CB says:

    Human time is not fungible. Your hour of time reading and comprehending an article yields a different result than the same endeavor by most other humans.

    1. Bill Terrell says:

      For the benefit of readers who may not have spotted the association, I believe CB is referring to my above reply to Llanlad in which I take human time as the fundamental unit of value.

      CB, your objection is noted but impotent. Nowhere have I assumed that human time is fungible. I haven’t even specified that it’s the time of any particular human. You can’t invalidate a statement by hanging extra baggage onto it and rebutting the baggage. That would be the rhetorical equivalent of throwing a stranger into bed with your wife and then accusing her of infidelity.

      Let’s make this a bit easier for you. I assert that human time is the best fundamental unit of value. You can disprove it merely by citing a better example.

      Of course if you can’t cite a better example, you will have helped reinforce it…

  5. cb says:

    Your axiom: “human time is the fundamental unit of value.”
    I would like to sort out how you assign and define human time as a fundamental unit of value.

    Please clarify what you mean by human time. And, how is a value attributed to that time.
    Are you talking about a unit of human time (ie an hour, day, lifetime)?

    I value an hour when I am rested differently than an hour when tired. Same for healthy vs sick, poor vs comfortable, young vs older, etc. I have friends who value their time differently than I do. An hour of light labor might be valued differently than an hour of exerted labor. An hour in a condition of plenty might be valued differently than in a condition of scarcity.

    I took your link above to your Financology Dollar Index. In your FDI you are relating the value of the US Dollar to the value of human time, but I see no explanation showing a measuring unit for the value of human time. Is it the the average value of an hours time for an average human? Is it the market value in dollars an average human will trade an average hour of time for? or, ……… What is it?

    1. Bill Terrell says:

      First we have a bit of unfinished business. You raised some arguments about fungibility, and I fully addressed them. Then I challenged you to cite a better standard of value, but you didn’t respond.

      By failing to cite a better alternative – when specifically challenged to do so – you’ve conceded by default that human time is the best fundamental standard of value. Please confirm just to ensure we don’t have to revisit the question repeatedly.

      In general continuing with any debate only after all previous points have been addressed avoids wasting time due to hashing, rehashing and talking past each other. But my challenge is more than a procedural technicality – human time’s superiority to every alternative is a key reason for my selection of this metric – so it’s not trivial.

      I’ll be glad to take up your new business in full once the old business is dispatched.

      For now, bear in mind that we’re not concerned with measuring the value of human time itself, but with measuring the value of other things. Particularly the value of the dollar, and not from one place to another, but from one time to another. Not in absolute terms, but relative ones, changes over time. If you think carefully about my question, about what possible ways one might do this, you’ll find some of your questions disappear on their own. What would you use to measure changes in the value of the dollar? By searching for some other fundamental unit of value, and not finding it, you’ll understand why human time is all there is better than I could ever explain it. Then let’s talk.

  6. cb says:

    You dismissed my statement that human time is not fungible by stating that you never claimed it is. If you wish to assign human time as the fundamental unit of value even though it is not fungible, have at it. It seems lacking to me me, so I posed a few questions to see if i could understand more about your position.

    If you don’t wish to discuss your position without imposing conditions, then I will let the discussion as documented speak for itself.

    1. Bill Terrell says:

      A response to a point can take the form of agreeing with it, disputing it, or showing why it’s not relevant. Just ignoring it doesn’t qualify.

      I didn’t just ignore your fungibility point, I dealt with it square on. I showed that it arose from extraneous assumptions, an effort to prompt you to clear the field of impediments to understanding. And weighing human time against the available alternatives is a key step.

      Your response to mine? Like it wasn’t there.

      Are you familiar with th the Socratic method? It’s an interactive process. It employs thought and reflection, not just spoon feeding answers. It’s a participation sport.

      Join me on the field, CB. Let’s at least make it a fair sport where both sides get to pitch and both sides have to swing at the ball.

  7. cb says:

    Your assertion: “I assert that human time is the best fundamental unit of value.”

    I neither accept nor reject your assertion. After all it is yours, and you are entitled to it. I will consider it, as time and interest allows.

    In the book “Zen and the Art of Motorcycle maintenance” the author was nearly driven mad in his quest to understand/define/find value.

    Some alternatives to consider, within the human realm:

    Human Effort
    Human Comfort
    Human Production
    Human Agreement

    1. Bill Terrell says:

      First thing is to avoid reading things into it that aren’t there. The very general term human time isn’t peculiar to any particular human or any particular condition. The essence of it is that it is the one thing we all have exactly the same allotment of every hour, young or old, male or female, rich or poor. If you have a background in math and science, you may be familiar with units like foot-pounds or newton-meters for energy. Or energy-time or momentum-length for action. It’s a little like that. Human-time.

      These are definitions or axioms, not reducible to simpler terms. Like the axioms of Euclidean geometry.

      If for instance the average population of the world is 7 billion in a given year, the total quantity of human time is 7 billion human-years. In the aggregate, this constitutes a market of human time.

      Sound like a venture into the abstract? Sure. This is just one reason that to get your arms around it, it’s really helpful to compare it to alternatives.

      You are already familiar with the problem of measuring how many dollars are in existence. I submit the amount of human time in existence is actually a much more definite quantity. Just look up the current world population. Multiply that times 24 and you have the number of human hours in existence in a day.

      On to the alternatives. What does the Federal Reserve use to measure inflation? A basket of consumer goods and services. You could apply your fungibility argument to that, right? You bet. And this time you’d be right on target. Not only is the mix of goods and services constantly evolving, but so is the quantity. Critically important is the fact that that they’re not comparable over time. A buggy whip does not have the same value in 2020 as in 1920. An iPhone wouldn’t have had the same value in 1920 as it does in 2020. It’s absurd to even contemplate. Mere things don’t even have a value in the absence of humans. Yet that doesn’t appear to bother government economists. They just apply their hedonic adjustments and go on their merry way.

      But humans are pretty much the same this year as last year, as a century ago. The material world may change, but human nature is the same today as in the age of Shakespeare. Each day each human has exactly 24 hours of time, no more no less. Technology cannot innovate more. Government cannot legislate more. The Fed cannot print more. We can neither demand more nor supply more. All we can really do with it is choose how to allocate it. In the process of doing so, how we spend this uniquely fixed resource, we express how we value the things we can consume and produce.

      It’s not about putting a value on human time, but how human time puts a value on other things.

      So we have one alternative on the record that’s actually in wide use. The Fed says a basket of domestic consumer goods and services is the best unit of value.

      Do you agree? Prefer one of your other options?

      Merry Christmas & Happy New Year!