Missing Inflation.

[matmat]

I actually would like to organize a group that buys cars in the US, and resells them in europe. Prices on autos currently are about 1-1, and the euro is worth $1.50US. So after shipping costs and import taxes I figure we can make a 15-20% profit. (Does anyone know the Tarriffs?)

I am speaking out of my @$$ here, but i think that american cars need to be modified to be fully legal and compliant in europe.

[Gerben42]

Yes, the engine must be taken out. No one would want to drive a car that uses so much petrol anyway.

 

I recently bought a car (my first one :rolleyes:) and it drives 80 km on one gallon of petrol. This would be very unusual in the US I guess...

 

<edit: got wrong how much a gallon is, apparently 3.8 liters...>

[matmat]

Yes, the engine must be taken out. No one would want to drive a car that uses so much petrol anyway.

hehe

yeah

more seriously, though -- i think some stuff has to be done to the headlights etc.

[mike777]

I actually would like to organize a group that buys cars in the US, and resells them in europe. Prices on autos currently are about 1-1, and the euro is worth $1.50US. So after shipping costs and import taxes I figure we can make a 15-20% profit. (Does anyone know the Tarriffs?)

 

Possiblly, there are other items out there with this kind of arbtrage opportunity which we can sell which are cheaper to ship...

 

 

As to inflation and exchange rates, here is my over simplification....

 

The process has been:

a. the fed sees inflationary pressure

b. the fed increases their target rates. (decreases the money supply)

c. this decreases inflationary pressure

e. with higher rates than the euro (pick your favorite currency), the value of the currency is decreasing faster with time than the euro, so I would rather have a euro in my pocket than a dollar. Consequently, the relative values of currency changes until there is an equilibrium.

 

Note:

1. The way the fed effects the interest rates  is by buying treasury bills (increasing the money supply since they are paying with cash) which lowers rates or selling treasury bills (decreasing the money supply) which raises rates

2. rasing rates, makes it harder to borrow money which slows the grouth of the economy

3. this is done because when an economy is growing too quickly, pricing ineffeciences occur which causes price inflation (I respond to your price change then you respond to my price change and so on)

 

 

Important Note:

There are other factors that influence exchange rates than just the relative interest rates. In general, if you want to buy goods from a country, you need the correct currency. If there is extra demand for products (at the current price) from a country, this raises the value of the currency, until price and demand are in equilibrium.

 

As to why european prioducts are cheaper in the US than in europe its either:

a. they are cheaper to make here (less taxes, lower salaries)

b. they are making so much money in europe, that even if they cut there profit margin in order to sell things at US competative prices, they still make money...

Yes but the fed is doing just the opposite...increasing the money supply. :)

 

btw I did the opposite in the 80's shipping from Germany to the USA....it is quite the hassle...

[Al_U_Card]

You guys are missing the point. They are not trying to correct the situation, they are guiding it. They want it to go down in value so they do certain things, if it works, fine, if not, then they try the opposite (or other things too) to get it to go where they want it.

 

You need to look to their motivation and goals, not their stated policies. That will explain what they are up to and what you can expect and who their real masters are. :)

[mike777]

You guys are missing the point. They are not trying to correct the situation, they are guiding it. They want it to go down in value so the do certain things, if it works, fine, if not, then they try the opposite (or other things too) to get it to go where they want it.

 

You need to look to their motivation and goals, not their stated policies.

Who....is there some tiny group conspiracy out there run by Bush. I thought you said he was not that smart? Where is Congress or are they on vacation or part of the conspiracy?

[Al_U_Card]

Guess it depends on your definition of tiny. Big pharma, big oil, big industry, and the military.....oh and btw, your congress is the biggest bunch of teat suckers (You do know what a PAC is?) this side of....just look at who benefits over the bloodletting of your youth. You really sure that you need to destroy Islam to defeat terrorism? Compare the deaths by terror attack to that from pharmaceutical "complications" or auto accidents etc. Gotta get that coffee and the old schnozz working there, my friend.

[mike777]

Guess it depends on your definition of tiny. Big pharma, big oil, big industry, and the military.....oh and btw, your congress is the biggest bunch of teat suckers (You do know what a PAC is?) this side of....just look at who benefits over the bloodletting of your youth. You really sure that you need to destroy Islam to defeat terrorism? Compare the deaths by terror attack to that from pharmaceutical "complications" or auto accidents etc. Gotta get that coffee and the old schnozz working there, my friend.

Fair enough....your list includes just about all of American families....so fair enough.

So now we can blame the american family...:)

[joshs]

I actually would like to organize a group that buys cars in the US, and resells them in europe. Prices on autos currently are about 1-1, and the euro is worth $1.50US. So after shipping costs and import taxes I figure we can make a 15-20% profit. (Does anyone know the Tarriffs?)

 

Possiblly, there are other items out there with this kind of arbtrage opportunity which we can sell which are cheaper to ship...

 

 

As to inflation and exchange rates, here is my over simplification....

 

The process has been:

a. the fed sees inflationary pressure

b. the fed increases their target rates. (decreases the money supply)

c. this decreases inflationary pressure

e. with higher rates than the euro (pick your favorite currency), the value of the currency is decreasing faster with time than the euro, so I would rather have a euro in my pocket than a dollar. Consequently, the relative values of currency changes until there is an equilibrium.

 

Note:

1. The way the fed effects the interest rates  is by buying treasury bills (increasing the money supply since they are paying with cash) which lowers rates or selling treasury bills (decreasing the money supply) which raises rates

2. rasing rates, makes it harder to borrow money which slows the grouth of the economy

3. this is done because when an economy is growing too quickly, pricing ineffeciences occur which causes price inflation (I respond to your price change then you respond to my price change and so on)

 

 

Important Note:

There are other factors that influence exchange rates than just the relative interest rates. In general, if you want to buy goods from a country, you need the correct currency. If there is extra demand for products (at the current price) from a country, this raises the value of the currency, until price and demand are in equilibrium.

 

As to why european prioducts are cheaper in the US than in europe its either:

a. they are cheaper to make here (less taxes, lower salaries)

b. they are making so much money in europe, that even if they cut there profit margin in order to sell things at US competative prices, they still make money...

Yes but the fed is doing just the opposite...increasing the money supply. :)

 

btw I did the opposite in the 80's shipping from Germany to the USA....it is quite the hassle...

Yeah but the Fed just started increasing the money supply 6 weeks ago after years of decreasing it. So far the european banks have not followed suit. I have not looked at the market implied forward rates on the LIBOR recently, but perhaps there is an expectation that the european central bank is going to follow suit (which would cause the relative long term rates to not change much since the fed started lowering rates).

 

Anyway, there is a complex topic since there is an equilibrium between:

a. prices of goods

b. demand for goods (now and later)

c. costs of labor

d. costs of capital

e. exchange rates

and other economic factors

 

with some large inefficiencies built in in the form of the cost to tranport an item from one location to another...

 

Furthermore, I definitely over simplified before since while lowering the rates correlates with a slower time discounting of money (the money in my pocket loses value at a slower rate) the real interest rate (interest rate-inflation rate) that I can receive can go up or down, and it makes sense to convert your (unused) money to whatever currancy gives you the highest real rate of return, so if no one was trying to keep money in the pocket and spend it near term, the real rate of return should reach equilibrium between countries unless there is an expectation for increased demand of one currancy over another in the future.

 

 

The day I ever understand this topic fully, I will be a happy man...

[Winstonm]

To answer any question about inflation, it is necessary to define what is meant by inflation - and there are many definitions. The Federal Reserve of Cleveland defines inflation as a rise in general prices caused by an increase in the money supply.

 

Under this definition, the reason U.S. inflation has not skyrocketed to match the deficit is that our inflation is exported. In the last 6 years, the Federal deficit has climbed from roughly $5 trillion to $9 trillion. If the Federal Reserve had been required to monetize that debt with U.S. currency, we would be looking at Weimer-like hyperinflation. Fortunately, we have been able to export most of that debt to China, Japan, and the OPEC nations via the trade deficit, and those countries then recycle those dollars into U.S. treasuries, thus putting a cap on interest rates via this somewhat artificially created demand.

 

Another reason imports are not rising outrageously is the U.S. dollar peg that many countries use for their currency - as the dollar devalues, so, too, do these currencies.

 

The big disaster that could cause havoc is for the dollar to be tossed aside as the world's reserve currency, thus making the holding of the dollar a liability rather than a necessity. That could cause a collapse of the value of the dollar, and a massive inflation in the U.S.

[Winstonm]

Yeah but the Fed just started increasing the money supply 6 weeks ago after years of decreasing it.

 

Not quite accurate. The last permanent System Open Market Opereration was in May. What has been occuring over the past 2 months is in Temporary Open Market Operations - called repurchase agreements - and it does not expand the money stock. It is the technique the Fed uses to infuse extremely short term liquidity into the banking system in order to preserve the targeted Federal Funds Rate - which is simply the rate that banks lend overnight to each other. The great infusions being reported are not money stock increases, but show the difficulty and reluctance of banks to lend to each other at the target rate of 4.75%.

[Al_U_Card]

Guess it depends on your definition of tiny.  Big pharma, big oil, big industry, and the military.....oh and btw, your congress is the biggest bunch of teat suckers (You do know what a PAC is?)  this side of....just look at who benefits over the bloodletting of your youth.  You really sure that you need to destroy Islam to defeat terrorism?  Compare the deaths by terror attack to that from pharmaceutical "complications" or auto accidents etc.  Gotta get that coffee and the old schnozz working there, my friend.

Fair enough....your list includes just about all of American families....so fair enough.

So now we can blame the american family...:)

Geez Louise, Mike. If and when you vote, do you just ask who the Republican candidate is? You should take a better look at your system and lifestyle while they still exist.

[Al_U_Card]

it does not expand the money stock. It is the technique the Fed uses to infuse extremely short term liquidity into the banking system in order to preserve the targeted Federal Funds Rate - which is simply the rate that banks lend overnight to each other.

Now why does that sound like money handlers manipulating the "free" market so that their plans and goals will be realized?

 

ps sorry for the quote chop.

[Winstonm]

it does not expand the money stock.  It is the technique the Fed uses to infuse extremely short term liquidity into the banking system in order to preserve the targeted Federal Funds Rate - which is simply the rate that banks lend overnight to each other.

Now why does that sound like money handlers manipulating the "free" market so that their plans and goals will be realized?

 

ps sorry for the quote chop.

It absolutely is, but not from the "headline" repo infusions - repurchase agreements and reverse repurchase agreements are techniques the federal reserve uses to add or subtract liquidity into the banking system in order to protect their federal funds target rate.

 

Another thing is the "headline" is usually way, way wrong. Take today, for example. The Fed added $47.25 billion in repurchase agreements, and this was ballihooed in the headlines - what was not said was that this "infusion" was against expirations of existing repurchase agreements that drained $40.5 billion, and the treasury sold another $6.5 billion in notes to make the total liquidity infusion for the day $0.25 billion - quite a ways from the screaming headline of "Fed Pumps in $47.5 Billion!" (It's true, but only $0.25 billion of that was real.)

 

It is the change in the federal funds target rate that is the crux of the manipulation, not the day-to-day operations to implement that rate.

 

The entire point of lowering the federal funds target rate is to make it cheaper for banks to borrow money, so they may then lend it out cheaper, and thus encourage even more borrowing to a nation $9 trillion dollars in debt - but hey, what's another trillion here or there among friends, as long as the stock market is up and the investement banks are making money, all is well with the world.

 

Isn't it?

[mike777]

I actually would like to organize a group that buys cars in the US, and resells them in europe. Prices on autos currently are about 1-1, and the euro is worth $1.50US. So after shipping costs and import taxes I figure we can make a 15-20% profit. (Does anyone know the Tarriffs?)

 

Possiblly, there are other items out there with this kind of arbtrage opportunity which we can sell which are cheaper to ship...

 

 

As to inflation and exchange rates, here is my over simplification....

 

The process has been:

a. the fed sees inflationary pressure

b. the fed increases their target rates. (decreases the money supply)

c. this decreases inflationary pressure

e. with higher rates than the euro (pick your favorite currency), the value of the currency is decreasing faster with time than the euro, so I would rather have a euro in my pocket than a dollar. Consequently, the relative values of currency changes until there is an equilibrium.

 

Note:

1. The way the fed effects the interest rates  is by buying treasury bills (increasing the money supply since they are paying with cash) which lowers rates or selling treasury bills (decreasing the money supply) which raises rates

2. rasing rates, makes it harder to borrow money which slows the grouth of the economy

3. this is done because when an economy is growing too quickly, pricing ineffeciences occur which causes price inflation (I respond to your price change then you respond to my price change and so on)

 

 

Important Note:

There are other factors that influence exchange rates than just the relative interest rates. In general, if you want to buy goods from a country, you need the correct currency. If there is extra demand for products (at the current price) from a country, this raises the value of the currency, until price and demand are in equilibrium.

 

As to why european prioducts are cheaper in the US than in europe its either:

a. they are cheaper to make here (less taxes, lower salaries)

b. they are making so much money in europe, that even if they cut there profit margin in order to sell things at US competative prices, they still make money...

Yes but the fed is doing just the opposite...increasing the money supply. :)

 

btw I did the opposite in the 80's shipping from Germany to the USA....it is quite the hassle...

Yeah but the Fed just started increasing the money supply 6 weeks ago after years of decreasing it. So far the european banks have not followed suit. I have not looked at the market implied forward rates on the LIBOR recently, but perhaps there is an expectation that the european central bank is going to follow suit (which would cause the relative long term rates to not change much since the fed started lowering rates).

 

Anyway, there is a complex topic since there is an equilibrium between:

a. prices of goods

b. demand for goods (now and later)

c. costs of labor

d. costs of capital

e. exchange rates

and other economic factors

 

with some large inefficiencies built in in the form of the cost to tranport an item from one location to another...

 

Furthermore, I definitely over simplified before since while lowering the rates correlates with a slower time discounting of money (the money in my pocket loses value at a slower rate) the real interest rate (interest rate-inflation rate) that I can receive can go up or down, and it makes sense to convert your (unused) money to whatever currancy gives you the highest real rate of return, so if no one was trying to keep money in the pocket and spend it near term, the real rate of return should reach equilibrium between countries unless there is an expectation for increased demand of one currancy over another in the future.

 

 

The day I ever understand this topic fully, I will be a happy man...

I do not have a quote for proof...but trust me I doubt the fed has for more than one or two days decreased the money supply the last 5 years....

 

In no way has the fed decreased the money supply for all or even a tiny fraction the last 5 years....

 

to put it another way the money supply increases every single day...99.99% of the time.

 

you can talk about implied forward rates or bootstrapping and any other theory you wish but studies show momentum is the best guess..a poor one but still the best guess...for forward rates...

 

anyway back to my main question which is the boiling pot of inflation......

[joshs]

To answer any question about inflation, it is necessary to define what is meant by inflation - and there are many definitions.  The Federal Reserve of Cleveland defines inflation as a rise in general prices caused by an increase in the money supply.

 

Under this definition, the reason U.S. inflation has not skyrocketed to match the deficit is that our inflation is exported.  In the last 6 years, the Federal deficit has climbed from roughly $5 trillion to $9 trillion.  If the Federal Reserve had been required to monetize that debt with U.S. currency, we would be looking at Weimer-like hyperinflation.  Fortunately, we have been able to export most of that debt to China, Japan, and the OPEC nations via the trade deficit, and those countries then recycle those dollars into U.S. treasuries, thus putting a cap on interest rates via this somewhat artificially created demand.

 

Another reason imports are not rising outrageously is the U.S. dollar peg that many countries use for their currency - as the dollar devalues, so, too, do these currencies.

 

The big disaster that could cause havoc is for the dollar to be tossed aside as the world's reserve currency, thus making the holding of the dollar a liability rather than a necessity.  That could cause a collapse of the value of the dollar, and a massive inflation in the U.S.

While I certainly beleive that the cleveland fed governors know more about economics than I do, they obviously know less about what is a definition.

 

In physics, we know that Force=Mass* Acceleration

in Chemistry we know that PV=nRT (for an ideal gas)

 

There are seperate definitions for each term here. The relationship between the abstract quantities constitutes a theory.

 

There is a general definition of inflation. And there is a theory about the cause. Even if everyone completely agrees with the theory, that does not mean that the theory is part of the defintion. Thats like saying that "the orbits of the planets is a motion, around the earth, caused by superimposing circular paths." -E.G The Ptolomaic model of Orbits. the defintion of orbits is destinct from the explanation. the phrase "caused by" really should never be part of a definition.

 

Here there really are some substantive differences between the monitarists, which obviously is the school of thought subscribed to by the Cleveland Fed, and the Kensyians, into the causes and nature of inflation, especially over the short term.

 

Anyway, Inflation is a notoriously difficult thing to measure, since

a. prices of different goods change at different rates

b. the mix of goods people buy change

c. the quality of the goods change over time

 

Anyway, as you point out in a different post, and I think Mike misunderstood, there is a big difference between a perminant change in the money supply, and a short term change.

 

To make a perminant change, one could

a. print more money

b. burn or distroy existing money

c. create a new currancy with is exchanged for the old currancy at a fixed convernsion rate

 

All of these have the effect of merely "changing the units" of money. This results in a uniform effect on all prices. (with a few technical exceptions that have to do with the fact that money is not infititely divisable, so if you say, get rid of the penny, it does effect prices, but not uniformly. 2 cent gumballs will probably cost 5 cents after the change which is a 150% increase).

 

the other way of changing the money supply is short term. this is the amount of money that is currently in circulation.

 

Imagine the following, 10Billion dollars gets put in a vault that can't be opened for 20 years, at which time someone gets it (or we all share it). the 10 Billion dollars has disappeared from the economy temporaily so no one can spend it, or lend it to someone else to spend or do anything with it for now. On the other hand, the money will be available in 20 years. As there is less money available now to purchase products, there are 2 effects here:

 

a. since the money available to spend has decreased, prices have to drop, since someone with $5 available will be more likely to spend $3 on a beer than someone who has $4 , assuming both of them have other things that they want or need to buy. Effectively, decreased money available results in decreased demand for goods at any given price level, and prices have to fall to reach a new equilibrium since demand has fallen. The exact effect is complicated here and may not be completely uniform across all products in the short term

 

b. Imagine two situations. Situation 1 is that this 10 Billion was all taken from one person and situation 2 is that it was taken uniformly from everyone.

b1. This person, who will get 10Bil in 20 years, wants to spend money now. Thus he agrees to gives someone part (or all) of the 10Bil in 20 years in exchange for some amount of money now. the conversion between these two is the effective interest rate (I will call this the discount rate). As there is now increased demand for money now then there was without this person's request, the "cost" of getting money now (the discount rate) has to increase. Thus interest rates goes up and everyone borrows less and spends less.

b2. The effect is the same if the money was taken from everyone, and is returned to everyone in 20 years. there is an increased demand for money now, and thus an increase in interest rates and a decrease in spending.

 

Note the 2 different effects here are linked:

prices falling (or rising slower) do to a short term decrease in the money supply, and interest rates going up.

 

The main way the fed controls the money supply, is by buying or selling securities. When they buy securities the money goes into the economy (and leaves "the vault") thus increasing the money supply. When they sell securities the money leaves the economy and goes into the vault. When the money goes into the vault, in general, there is less money available to spend, so inflation slows and demand for money increases causing rising interest rates.

 

Hopefully I have this straight now...

[mike777]

The news just said Thanksgiving dinner will cost 11% more this year.

They did not suggest we could all eat 11% less so I guess that is not an option.

[helene_t]

lol, Mike ;)

[Winstonm]

Josh, it is even worse than that - there are many different defintions of what constitutes inflation. Some say it is strictly increase in money stosck, thus debasing the value of each bill. Others say it is money supply + debt increases.

Still others look at price measurements.

 

I think the best definition is simply a debasement of money, whatever the cause; price increases are not inflation but the response to inflation. You can have price increases and decreases occuring at the same time in different values, i.e., corn higher, computers lower. However, you cannot have inflation and deflation occuring at the same time - that is why, IMO, it is senseless to look at any "basket of goods" to measure inflation - all you are seeing is price movements, and that may or may not be inflation.

 

I think the money stock + debt is the correct definition, because debt is required to establish money.

[Al_U_Card]

We can relate all aspects of the economical impact of currency into value for money in terms of how much work you have to do to purchase goods or services.

 

I mail a letter (yes people still do that) and it costs me $1. That cost me 5 min of my workday to send it. When it cost $0.05 (yes I am that old) and I was earning $2 per hour, effectively, the 5 cent letter was half as expensive as the dollar one. The value of the stamp has been reduced by half. Inflation has eroded its value by 50%. So over the intervening years, did the speed of delivery increase by twice? (Or some other tangible benefit that accrues to the intrinsic value of the good or service.)

 

Look to the things you buy with the money you earn. That is its only real value. THis is why, as lower paying, service type jobs become the norm, the economy lags. More work hours to buy the same things. In economies where the pay rates are increasing, value for money is assured.

[glen]

Relating to this thread and the more recent "A Discussion of Modern Inflation Causes" thread, the latest issue of Fortune has this article:

 

The great inflation cover-up