Tag: Wild Ass Guess

The cause of inflation down to the last decimal point WAG.

Years ago, I  took over a commodity brokerage with an employee who recently had won a chartist competition. A chartist is a securities researcher or trader who analyzes investments based on past market prices and technical indicators.

He had endless historical data and formulas for that data, and based on all that, he predicted the markets.

Despite winning a national competition, his trading proved to be a spectacular failure. While past data told him what had happened, He had no idea why it happened, so his predictions were worthless.

He didn’t understand cause and effect.

In this vein, an article claims to explain the cause of inflation to the last decimal point. Do you believe it?

Federal spending was responsible for the 2022 spike in inflation, research

Increased federal spending helped the economy bounce back during the pandemic, but it also caused a surge in inflation, research reveals. Inflation is difficult to control. Its cause is often even harder to pinpoint.  

Yes, if all you have is formulas and you don’t understand how an economy works, the cause is hard to pinpoint. But that doesn’t stop technicians from trying to identify it.

In attempting to understand the 2022 spike in inflation that followed the pandemic, some policymakers — up to and including President Joe Biden — blamed shortages in the supply chain. But a new study shows that federal spending was the cause — significantly so. 

“Our research shows mathematically that the overwhelming driver of that burst of inflation in 2022 was federal spending, not the supply chain,” said Mark Kritzman, a senior lecturer at MIT Sloan. 

Fascinating that Mr. Kritzman should conclude inflation was caused by spending.

If he were correct, net spending, i.e., the difference between taxes and gross spending, would cause inflation. That is what puts spending dollars into consumers’ pockets.

Net spending, or deficit spending, tells us how much money the federal government adds to the economy after taxes are subtracted.

Here is some data Mr. Kritzman may have overlooked:

No relationship exists between increases and decreases in federal net spending (red) vs. inflation (blue).

Not only does Mr. Kritzman overlook the data showing no correlation between net government spending and inflation, he tries to put mathematical measures on how much total federal spending (ignoring taxes) affects inflation.

In writing “The Determinants of Inflation,” Kritzman and colleagues from State Street developed a new methodology that revealed how certain drivers of inflation changed in importance over time from 1960 to 2022. 

In doing so, they found that federal spending was two to three times more important than any other factor causing inflation during 2022. 

Specifically, their results showed that:

  • 42% of inflation could be attributed to government spending.
  • 17% could be attributed to inflation expectations — that is, the rate at which consumers expect prices to continue to increase.
  • 14% could be blamed on high interest rates.

When you see those kinds of specific percentages, you should be doubtful, and when you see them attributed to something like “inflation expectations,” you should be incredulous. Does Mr. Kritzman believe he can measure consumer expectations and include that in an equation? Really?

You might have noticed that his results totaled 73%, leaving only 27% for oil shortages—the real cause of inflation.

Oil price changes (green) are closely related to inflation (blue).

The graph shows the essentially parallel tracks of oil prices and inflation. This is no coincidence; oil costs are part of virtually every product and service. In April 2020, OPEC agreed to a historic cut in oil production by 9.7 million barrels per day starting in May 2020. 

Despite massive federal net spending after 2015, inflation (blue) remained relatively low until COVID hit in 2020. Then, we had a recession (vertical gray bar), cured by increased federal net spending.

Inflation didn’t begin until April 2020, when OPEC cut oil supplies to raise prices. This reduction in supply led to inflation (green) that is only now being cured as oil prices drop.

Here is a closer look at inflation and oil during COVID:

Crude oil prices rose due to OPEC price control. This caused inflation to increase. Then OPEC lowered prices and inflation followed down.

Kritzman said that using government stimulus money to help the economy rebound during the pandemic made sense, given the unprecedented circumstances. “People really didn’t know if we were going to have a 1930s-type depression, so the government erred on the side of more stimulus than less stimulus,” he said. 

“I don’t judge that to be a bad thing to have done, but it did cause this big spike in inflation,” Kritzman said. “What was surprising is not just that [the driver] was federal spending but that it was so overwhelmingly federal spending.”

Wrong. It was overwhelmingly OPEC oil shortages, along with other COVID-related scarcities of food, shipping, metals, lumber, computer chips, labor, and other scarcities, that caused inflation.

Here is how they came to their conclusion: 

The authors arrived at their conclusion by using the Mahalanobis distance statistic, which has been used in a range of projects, from measuring turbulence in the financial markets to detecting anomalies in self-driving vehicles. 

In their paper, researchers first used a hidden Markov model to identify four regimes of shifting inflation: stable, rising steady, rising volatile, and disinflation.

Then they used the Mahalanobis distance to figure out how eight different economic variables caused the economy to shift between those regimes. The economic variables the authors looked at were producer prices, wages/salaries, personal consumption, inflation expectations, interest rates, the yield curve, the money supply, and federal spending. 

Finally, by applying an algorithm to the data from 1960 to 2022, they were able to see how inflation drivers had changed in importance over time. This enabled them to predict the likely path of future inflation — a capability that could potentially be of  help to policymakers and investors alike.

The results dispel the notion that the supply chain could be blamed for the 2022 spike in inflation, Kritzman said. 

The results may or may not dispel that notion, but they don’t deal with the fact that inflation is caused by shortages of critical goods and services, usually oil and/or food, not federal spending.

Here is their explanatory graph. As you will see, federal deficit spending is not even shown on their graph. Could it be because even they don’t believe it’s a relevant factor?

Examine their graph, and you’ll see a few peculiarities. 

  1. The first is that they mix cause and effect: Causes would be Personal Consumption, Interest Rates, Yield Curve, Money Supply, and Federal Spending. 

The effects would be Producer Prices, Wages, and Salaries. It’s not clear how one can claim that producer prices cause inflation when they are caused by inflation.

2. If Personal Consumption is only 6.2% at fault, how is Federal Spending given 41% blame for inflation? Was all that inflation caused strictly by the government’s purchases, not by consumer purchases? Unlikely.

3. And if federal deficit spending flooded the economy with money, how did the money supply only increase by 2.9%? 

4. Finally, there’s that amorphous “expectations” thing. How was that translated into dollars to reach the precise number 16.9%?  If you had inflation expectations, how would you put a number on that?

How would you determine it was 13.9% responsible for changing your consumer buying or business selling prices? 

The numbers in the above graph are what I like to call WAGs (Wild Ass Guesses), made to look scientific by applying fake mathematics.

“The narrative at the time was that the cause of inflation was interruptions to the supply chain because of COVID-19,” Kritzman said. “But that didn’t show up in producer prices

In other words, if supplies became scarce, then the prices of those supplies would go up, which we don’t see in our results at that point in time.”

The narrative should have been that all prices went up because of the scarcity of oil, food, shipping, metals, lumber, computer chips, labor, etc. That is the whole point:

We had inflation, not because of “excessive federal spending” but because of COVID-related scarcities.

Guidance for policymakers

The researchers’ findings indicate that the government and the Fed sometimes operate at cross purposes, Kritzman said. When the federal government overstimulates the economy, the Federal Reserve has to delay lowering interest rates. 

The data refute the “overstimulates” notion. There was no historical relationship between federal spending and inflation.

“The more overstimulation there is, the more hawkish the Fed has to be to keep inflation under control,” Kritzman said. 

Keeping inflation under control is not the Fed’s job. The Fed doesn’t have the tools. It’s Congress’s and the President’s job to prevent and cure the shortages of goods and services that cause inflation.

Taking the same approach that the researchers did, the Federal Reserve might be able to gain a deeper look at “the dynamics that are going on” — not just that inflation is up or down, he said. Instead, it offers insight into how the drivers of inflation change in importance through time. 

Yes, sometimes a shortage of oil drives inflation. Other times, it’s a shortage of food, labor, or other production factors.

“I think that the Fed would be well advised to take this methodology and make it operational in how they monitor inflation and other things that they’re interested in,” Kritzman said. 

No, Congress and the President should stop avoiding their responsibilities. They should assume control over inflation by preventing and curing shortages.

For example, encouraging and aiding oil drillers and refiners and releasing oil from the Strategic Petroleum Reserve were primary factors in ending the most recent inflation.

The same encouragement and aid should be given to all products and services, the shortages of which cause inflation.

Rodger Malcolm Mitchell

Monetary Sovereignty

Twitter: @rodgermitchell

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MUCK RACK: https://muckrack.com/rodger-malcolm-mitchell;

https://www.academia.edu/

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The Sole Purpose of Government Is to Improve and Protect the Lives of the People.

MONETARY SOVEREIGNTY

Believe it or not, the government lies to you.

I’m sure you will find this difficult to believe, but the U.S. government lies to you about many things, this time about its finances. The following is from the government Bureau of the Fiscal Service:

Executive Summary of the Fiscal Year 2022 Financial Report of the U.S. Government An Unsustainable Fiscal Path An important purpose of this Financial Report is to help citizens understand current fiscal policy and the importance and magnitude of policy reforms necessary to make it sustainable.

A sustainable fiscal policy is defined as one where the ratio of debt held by the public to GDP (the debt-to-GDP ratio) is stable or declining over the long term.

That is the definition of a “sustainable fiscal policy??? Who in the government invented such a definition? First, the debt/GDP ratio is a ridiculous, meaningless number with zero analytical or predictive power. A high ratio says nothing. A low ratio says nothing. A rising or declining ratio says nothing. The Debt/GDP ratio is a classic Apples/Oranges measure. GDP (Gross Domestic Product) is an annual, usually one-year measure of productivity. Debt is a decade-long measure of net deposits. GDP begins every year at 0. Debt is cumulative. Mathematically, it’s a silly fraction, no better than butterflies/butter churns. But it gets worse:

DEBT/GDP RATIOS BY COUNTRY

Countries with the Highest Debt-to-GDP Ratios (%) Venezuela — 350% Japan — 266% Sudan — 259% Greece — 206% Lebanon — 172% Cabo Verde — 157% Italy — 156% Libya — 155% Portugal — 134% Singapore — 131% Bahrain — 128% United States — 128%

Countries with the Lowest Debt-to-GDP Ratios (%) Brunei — 3.2% Afghanistan — 7.8% Kuwait — 11.5% Congo (Dem. Rep.) — 15.2% Eswatini — 15.5% Burundi — 15.9% Palestine — 16.4% Russia — 17.8% Botswana — 18.2% Estonia — 18.2%t

Do the above ratios tell you anything about whether a government’s fiscal policy is “sustainable”? Is Russia’s economy more “sustainable” than Japan’s and the US’s? Then there is this graph. What does it tell you about sustainability (whatever that supposedly means)?
Gross Federal Debt / DGP is red. GDP is dark blue. Real (inflation-adjusted) GDP is light blue.
The debt/GDP ratio rose during World War II. Then, for about 35 years, it declined until 1980, when it began to rise. In 1996, the ratio had a 5-year decline, after which it grew until 2020 and a short decline. Meanwhile, GDP has had relatively steady growth. So, what did the debt/GDP ratio tell you about the economy? What did it predict? What did the ratio say about “sustainability”? Nothing.

GDP measures the size of the nation’s economy in terms of the total value of all final goods and services that are produced in a year.

Considering financial results relative to GDP is a useful indicator of the economy’s capacity to sustain the government’s many programs.

I keep reading and rereading that phrase, “the economy’s capacity to sustain the government’s many programs. “ I can’t visualize what it means. Does it mean the government is running out of money (which, for a Monetarily Sovereign government is impossible)?

Former Federal Reserve Chairman Alan Greenspan: “There is nothing to prevent the federal government from creating as much money as it wants and paying it to somebody.” 

Does it mean the government doesn’t have enough people to run its programs? (Just hire enough people.) Or what? World War II tested the government’s “capacity to sustain many programs.” It merely spent more money, hired more people, and sustained very nicely, thank you. Since then, despite repeated claims that the federal debt is a “ticking time bomb,” and much to the consternation of the debt Henny Penny crowd, the economy keeps growing and remaining healthy. Even COVID was only a short-term setback for the U.S. economy.

This report presents data, including debt, as a percent of GDP to help readers assess whether current fiscal policy is sustainable. The debt-to-GDP ratio was approximately 97 percent at the end of FY 2022, down from roughly 100 percent at the end of FY 2021.

The long-term fiscal projections in this report are based on the same economic and demographic assumptions that underlie the SOSI.

The Statement of Social Insurance (SOSI) presents the projected actuarial present value of the estimated future revenue and estimated future expenditures of the Social Security, Medicare, Railroad Retirement, and Black Lung social insurance programs which are administered by the SSA, HHS, RRB, and DOL, respectively. In short, the government is comparing probable expenses of these social programs with projected revenue — mostly tax receipts. There’s one small problem with that comparison. The federal government’s finances are nothing like the finances of monetarily non-sovereign entities like you, me, businesses, and local governments, which require income to pay bills. The federal government requires, and indeed uses, no income to pay its bills. Being Monetarily Sovereign, it creates new dollars every time it pays a creditor. In fact, paying creditors is how the federal government creates dollars.

To pay a bill, the government sends instructions (not dollars) to the creditor’s bank. The instructions are in the form of a check or wire, telling the bank to increase the balance in the creditor’s checking account (“Pay to the order of”).

When the bank does as instructed, new dollars are created and added to the M2 money supply measure.

Thus, even if the federal government received $0 taxes and any other revenue, it could continue spending forever simply by sending instructions to banks.

The current fiscal path is unsustainable.

To determine if current fiscal policy is sustainable, the projections based on the assumptions discussed in the Financial Report assume current policy will continue indefinitely.

The projections are therefore neither forecasts nor predictions.

Nevertheless, the projections demonstrate that policy changes need to be enacted for the actual financial outcomes to differ from those projected.

I don’t know what the above paragraphs are supposed to mean, but I’ll take a guess. See if you agree with this translation:

“The government can’t keep increasing deficits the way it has been for the past eighty years. We don’t know why, but it simply can’t.

“Although this isn’t a forecast or a prediction (if there is any difference between the two), something has to change, just because we say so.”

If there is another meaning, please let me know.

The debt-to-GDP ratio ratio was approximately 97 percent at the end of FY 2022. Under current policy and based on this report’s assumptions, it is projected to reach 566 percent by 2097.

The projected continuous rise of the debt-to-GDP ratio indicates that current policy is unsustainable.

Let’s return to the Debt/GDP graph. In 1974, the Debt/GDP ratio was 23%. By 2022, 48 years later, the ratio was 97%, a 4.217-fold increase. The government forecasts and predicts (Oops, supposedly it isn’t a forecast or a prediction) — let’s say it’s a WAG (wild ass guess) that by 2097, which is 75 years later, the ratio will be 566, which represents a 5.8% increase from the 97% of 2022. In short, we had a 4.217-fold increase in 48 years, and the WAG is for a 5.8-fold increase in 75 years. And that is supposed to be “unsustainable.” Except . . . Except the Treasury’s WAG is that future ratio growth proportionately will be less than the past ratio growth. Apparently, Wild Ass Guesses aren’t as accurate as they used to be. Not that it matters because, as we have seen, Debt/GDP for a Monetarily Sovereign entity is meaningless. Federal “debt” isn’t federal, and it isn’t debt. It’s deposits into T-security accounts that are wholly owned by the depositors and never invaded by the federal government. That’s right. The government doesn’t own or even touch those dollars. They belong to depositors. The government merely holds them in safe keeping, like it holds whatever is in your bank safe deposit box. To “pay off” the misnamed “debt,” the government merely returns the depositor’s’ dollars to the depositors. It does that every day. Think about it. Do you really think the government of China would turn over ownership of billions of their dollars to U.S. government usage? In summary, the Treasury supports the lie that the growing “Federal Debt/ GDP is in some way “unsustainable,” without ever saying what they mean by “unsustainable.” There never has been a time when the U.S. government has not been able to “sustain” (whatever that means) its “debt” (whatever that means). So why the lies? For much of the government, it’s pure ignorance. The people writing this stuff simply do not understand Monetary Sovereignty. But for some, it’s malevolence, paid for by the rich who run America. “Rich” is a comparative. There are two ways to become richer: Get more for yourself or make those below you have less. A millionaire is rich if everyone else has a thousand dollars. But a millionaire is poor if everyone else has a billion dollars. It’s the income/wealth/power Gap that determines whether you are rich or poor. Cutting the Debt/GDP ratio requires cuts to such programs as Social Security, Medicare, and/or other benefits for those who aren’t rich. Or it requires increases in FICA and income taxes — the taxes that most affect the not-rich. You seldom hear recommendations to reduce the tax loopholes enjoyed by the rich. By impoverishing the middle and the poor, the rich make themselves richer. So, they bribe the media, the politicians, and the university economists to tell you your benefits must be cut and your taxes increased because “the current policy is unsustainable.” They rely on the public’s ignorance about Monetary Sovereignty, and so far, that has worked. Rodger Malcolm Mitchell Monetary Sovereignty Twitter: @rodgermitchell Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell

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The Sole Purpose of Government Is to Improve and Protect the Lives of the People.

MONETARY SOVEREIGNTY