Before we get into this morning’s Consumer Price Report from the Labor Department, a reality check is suggested because of what I’ve long-held is one of the Big Lies in economics.
I refer to what John Maynard Keynes talked about: He sold the marginally-sane idea that there is a prevailing level of prices. It is this, argued the Keynesians, that determine what goods and services cost. They’re wrong, of course, but we’ll get to that.
Sadly for the U.S. ever since, we have missed the whole source of booms and busts – because it’s a difficult thing to understand. Impossible in the thinking styles of the 1920’s but becoming rapidly intuitively apparent today. Recently, on the Peoplenomics side of the house, I explained how booms and busts are natural cycles that arise from company (and technology) growth and replacement.
What was going on in the 1920’s was one style of agriculture, for example – the draft animal type – was being replaced with the mechanized variety.
We can quickly see how farmers continued to produce crops (even though prices were falling) and it’s something that cursed Herbert Clark Hoover before he ascended to the presidency. Most people don’t appreciate that Hoover was deeply involved in trying to right the instability that resulted from the farm/mechanization overlap.
” Hoover was a leader in the Efficiency Movement, which held that every institution public and private was riddled with unsuspected inefficiencies. They all could be improved by experts who could identify the problems and solve them. He also believed in the importance of volunteerism and of the role of individuals in society and the economy.
The problem Hoover was trying to solve (inefficiency) was not the right problem. The REAL cause of first the Roaring Twenties and the ensuing Hard Times of the Great Depression were really generated by too much innovation, too quickly.
If there’s an itsy-bitsy splash of hope that our next Depression could be smaller, it’s because barriers to innovation and new enterprise as lower with computers and programming. It doesn’t take huge capital to form a company these days – a solid computer with a couple of code monkeys are do it all. And then there’s Go Fund Me…
Still, the Depression was overlap at the macro level. It’s easy enough to express in set theory. You have one circle (the farmers) and another – overlapping – circle which is the New Industry called farm automation.
At first, there was little overlap – no intersection of sets. But companies saw opportunity and so equipment makers (like Allis-Chalmers, for example) expanded like mad.
Allis-Chalmers was a U.S. manufacturer of machinery for various industries. Its business lines included agricultural equipment, construction equipment, power generation and power transmission equipment, and machinery for use in industrial settings such as factories, flour mills, sawmills, textile mills, steel mills, refineries, mines, and ore mills. The first Allis-Chalmers Company was formed in 1901 as an amalgamation of the Edward P. Allis Company (steam engines and mill equipment), Fraser & Chalmers (mining and ore milling equipment), the Gates Iron Works (rock and cement milling equipment), and the industrial business line of the Dickson Manufacturing Company (engines and compressors). It was reorganized in 1912 as the Allis-Chalmers Manufacturing Company. During the next 70 years its industrial machinery filled countless mills, mines, and factories around the world, and its brand gained fame among consumers mostly from its farm equipment business’s orange tractors and silver combine harvesters. In the 1980s and 1990s a series of divestitures transformed the firm and eventually dissolved it. Its successors today are Allis-Chalmers Energy and AGCO.
As Allis Chalmers, Ford, and the new internal combustion engine-driven industries grew, so did the overlap area (the intersection grew). Job shortages attracted rural people to the big cities.
Back to “set theory” – which was relatively unheard of in the 1930’s when John Maynard Keynes was spewing his notions on economics. Computers, databases, and advances in technology have significantly changed our ways of thinking at very fundamental levels.
Thank you databases like dBase III.
Today, it should be obvious to anyone with modest computer database skills, that the intersection (* again, what the overlap of sets is called, or vesica piscis if you’re a math-type) changed over time.
As set overlaps grow, you see a boom. Work for all farm hands and work for all the factory builders, and what about those distinct Allis Chalmers tractors? More manufacturing and sales than you can shake a stick at. You see, THE BUBBLE happens due to overlap.
The mistake that Keynes made was not thinking of the Depression as a SET THEORY problem. Instead, linear-thinking ruled the day, Keynes had held (wrongly I argue) to the idea that there’s a prevailing prices thingy.
What’s really going on is competing supplies and demands with gobs of moving parts that don’t simplify as easily as economists would like. Kind of like heat island – another ugly, complicated, problem best simplified and then marginalized, but I digress…
So convincing was Keynes argument that it took hold with the banker crowd – equally in-the-dark about how economic overlaps works.
So today, visiting the International Monetary Fund website here, you can read of the godlike status afforded Keynes for giving clueless bankers some fresh ideas:
“During the Great Depression of the 1930s, existing economic theory was unable either to explain the causes of the severe worldwide economic collapse or to provide an adequate public policy solution to jump-start production and employment.
British economist John Maynard Keynes spearheaded a revolution in economic thinking that overturned the then-prevailing idea that free markets would automatically provide full employment—that is, that everyone who wanted a job would have one as long as workers were flexible in their wage demands (see box). The main plank of Keynes’s theory, which has come to bear his name, is the assertion that aggregate demand—measured as the sum of spending by households, businesses, and the government—is the most important driving force in an economy. Keynes further asserted that free markets have no self-balancing mechanisms that lead to full employment. Keynesian economists justify government intervention through public policies that aim to achieve full employment and price stability.”
Of course, there was another, more simple explanation: and that’s where the monetarists come along.
They point out that the fundamental policy error made in the Great Depression was in trying to hold prices at their old (and no longer supportable) high levels.
This caused all sorts of economic displacements, job sharing, and job cuts. Arguably, had prices been allowed to go where they would in a bust (down) the Depression could have been shorter (still painful, though) and we’d have come through faster.
It’s an article of faith among monetarists (which I confess to being) that intervention makes things worse.
This may seem like a YUGE yawner to you, but I’m warming up to the point.
As you read today’s data on PRICE INFLATION, try to remember the monetarist’s view:
Prices don’t go UP. The purchasing power of “money” goes DOWN.
Oh, and how far is down?
Looking at the Federal Reserve’s most recent H.6 Money Stocks report, M2 (not seasonally adjusted because “seasonal adjustments” are nonsensical in year-on-year comparisons since the “seasons” are identical, but that’s a statistics discussion for another morning) is up 4.2% and if you follow the fine work of John Williams over at ShadowStats.com, you’ll see that implied M3 – a revealing statistic that wrong-way Greenspan buried to keep knowledge of bankster schemes hidden from the public – is presently running about 5%.
So keep those numbers in mind: M2 says your money has been watered down 4.2% and Williams’ M3 reconstruction says try 5%.
Detailed foreplay, but THAT is what you really need to know in order to understand the Consumer Price report which was just released:
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in February on a seasonally adjusted basis after rising 0.5 percent in January, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index rose 2.2 percent before seasonal adjustment.
The indexes for shelter, apparel, and motor vehicle insurance all rose and contributed to the 1-month seasonally adjusted increase in the all items index. The food index was unchanged in February, as a decline in the index for food at home offset an increase in the food away from home index. The energy index increased slightly, with its component indexes mixed.
The index for all items less food and energy increased 0.2 percent in February following a 0.3-percent increase in January. Along with shelter, apparel, and motor vehicle insurance, the indexes for household furnishings and operations, education, personal care, and airline fares also increased in February. In contrast, the indexes for communication, new vehicles, medical care, and used cars and trucks declined over the month.
The all items index rose 2.2 percent for the 12 months ending February, a slightly larger increase than the 2.1-percent rise for the 12 months ending January. The index for all items less food and energy rose 1.8 percent over the past year, while the energy index increased 7.7 percent and the food index advanced 1.4 percent.”
It’s a sad joke that government policy wonks believe in so-called core inflation. That’s inflation with food and energy backed out. Try living life without either and you’ll see what I mean.
Markets were about flat after the announcement. With quadruple options this week, the next few days ought to be interesting.
The Crooked Media
But what’s terrible instructive is how the networks are burying the story like it didn’t happen.
And those that mention it seem more obsessed with TRUMP USING ALL CAPS IN HIS TWEET.
Meantime, Mueller’s gone fishing again.
The PC media ain’t saying it yet, but all the victims in Austin area bombings have been minorities. See All 3 Austin Package Bombs That Killed 2, Injured 3 Are Connected, Police Say for details.
US Dept.. of Useful
Now, for Useless
French government announces security plan for Mayotte island. (Damn, there goes my plan for revolution there!)
OK, tomorrow we look at health numbers and life span projections on the Peoplenomics side. And more fun and excitement here Thursday.