Good as Gold? There is much discussion/debate about how to both define and to correct for inflation. It is claimed that *all* economists know that the official Consumer Price Index (CPI) over corrects. But there is not much agreement about by how much. There are many problems and much subjectivity in trying measure price indices. Different people buy different things. The products for sale at different times are different. Is a CD better than a vinyl LP? Most would agree that it is. By 1.63 times? Or is it 3.71 times better? How much is the air bag in a car worth? The probability of it saving your life, times the value of your life? And there is not even a universal price for a given item (in a given year). Consider the range of prices for a bottle of Budweiser beer for example. There is probably at least a factor of 5 difference between the price in a fancy restaurant or international airport, or a convenience store, or on sale in a big liquor store. Others have pointed out that the same item may cost less at a discount store, but it may be farther away and cost time and gas to get it there. A RADICAL SUGGESTION Perhaps we should look at this problem from another perspective. Money is usually thought of in terms of what you buy. But how about trying to look at this from the "value of the currency unit", as measured by some objective standard of value? The obvious value standard is gold. It has been considered to be money by practically every civilization. Instead of viewing the value the dollar in terms of its purchasing power for consumer goods, think of its value in terms of how much gold it is equivalent to. An ounce of gold is THE SAME for Ramses II, or for Cleopatra, Nero, Henry VIII, George Washington, or you. What can bought with it is what is different for these different people. Some could buy slaves, or a trip to Paris, or a Beatles CD; others could not . What is for sale, (and prices), change, but the gold does not. In the 1930's, gold was $35 per ounce. Today it is $350 per ounce. Rather than saying that a dollar is a dollar, but the price of gold is up by a factor of ten, lets consider instead that gold is gold whether 1935 or now, but that the DOLLAR is worth now only what a dime was worth then, in terms of it's "gold content". Inflation could be viewed not as a rise in prices, or as an overly rapid expansion of money supply, but rather as a fall in the value of money. This may seen like a radical concept today, but I suspect that most of the people from the past and from other civilizations would think it perfectly reasonable: those green papers with pictures of people on them are worth exactly the gold they can be exchanged for. SO WHAT? So where does this idea lead? Well, the "factor of ten" difference between 1935 and now is approximately what some others have observed from consumer index thinking. But one interesting observation: the price of gold has remained about constant for the past 12 years (10 of them while Alan Greenspan has headed the Federal Reserve!). This would say that even the Boskinized CPI over corrects for inflation: there has been NONE since 1985! (ASIDE: You cannot track the fall of the value of the dollar from 1935 to the present this way, since FDR issued an order prohibiting the exchange of dollars for gold back in the 1930's and that remained in effect until the 1970's. Is some sense, the dollar had no value during that interval). So, to put this another way, if workers had been paid in gold instead of paper since 1985, it would be obvious that wages are much higher now. Looking at the Census Table F-3 (linked to my web page "Falling Wages" file, Economics Section) the average income of the families in the lowest quintile would have risen from $7869 in 1985 to $11265 in 1995. (The "current dollar" table). Another result of this view of the inflation situation: Every time Greenspan does or does not raise or lower the rediscount rate, he has been denounced in the press and in the newsgroups for acting both "too little-to late" and "too-much-to soon." But by the "Keeping the Value of the Dollar Steady" criteria, he has been doing his job PERFECTLY. ,,,,,,, _______________ooo___( O O )___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) For a good time call Subject: Re: CPI: Good as Gold? Date: Wed, 21 May 1997 08:56:55 -0700 From: jim blair Newsgroups: sci.econ, alt.politics.economics, alt.politics On Mon, 19 May 1997 13:40:49 -0700, jim blair wrote: >An ounce of gold is THE > SAME for Ramses II, or for Cleopatra, Nero, Henry VIII, George > Washington, or you. Mason A. Clark wrote: No. We're talking economics. What is "gold"? The persona of gold changes from time to time and from culture to culture. AND, the availability of gold can change radically. The importation of New World gold (and silver) greatly reduced the value of gold in Europe. The stuff can't be trusted. > In the 1930's, gold was $35 per ounce. Today it is $350 per ounce.--jeb And one day it was $800. Panic buying occurred that day. The next time it goes over $800 for more than three months we'll re-open the numerous California gold mines and drive the price down. Remember, they were closed by fiat in WWII, not by economics when the price was fixed at $35. > This may seen like a radical concept today,--jeb Not radical. Gold Bugs are commonplace but they don't realize that money is now manufactured in banks, not in mints. Have you kissed your Visa Card today? Hi, Gold too unstable or variable to be trusted as money? Compared to what? Paper? This is a joke, right? The US dollar started out as worth $20.67 per ounce of gold at the time of Alexander Hamilton, and by the time of FDR it was $35. Really radical. But when the dollar was disconnected from gold for about 40 years, and "floated", the value dropped by 90%, or to put it another way, gold resumed at $350 per ounce in the 1980's. The brief price peak of $850 in February 1980 was while it was swinging wildly after being "off the market" for over 40 years. But it soon stabilized at $350 and has remained there for the past 11 years. And NOT as a result of a price fixing decree, but as a result of a Federal Reserve policy of "keeping inflation in check while promoting economic growth". The constant price of gold was not the intent of the policy, just a byproduct. In the meantime, many paper currencies all over the world have changed by many orders of magnitude. Often within a few months. Even some of the relatively "stable" ones. When I first went to Israel in the 1960's, the Shekel was about 3 to the US dollar. Last May there were still 3 to the dollar; but they were NIS: NEW Israeli Shekels. How many OLD Shekels in a NEW one? 1000. I can remember when the Jamaican dollar was worth $1.30 US, and the Mexican peso was 25 cents. No, not the current peso, but the OLD peso, that the current one was introduced as equal to 1000 old ones. So tell me, if gold is not stable, what is? And as you point out, there is a feedback mechanism to help keep the gold price stable: if it goes up (not enough gold?), some closed mines reopen. But when the price rises, it is less profitable to mine marginal deposits. So unless either a flood of money reduces its value, or there is a big increase in the amount of gold, the price will tend to be stable. The supply COULD expand because of a new find of cheap-to-mine gold, or as likely, an alchemist finds a way to make it from other elements. Theoretically, gold could be made from lower atomic number elements and energy released at the same time. But in either (unlikely) event, the "value of the currency unit" could be switched to something else. PS You might take a look at the "Gold Polaris" articles at this URL (also linked from my web page as SUPPLY SIDE U): http://www.polyconomics.com -- ,,,,,,, _______________ooo___( O O )___ooo_______________ (_) Del wrote: > This is a little over simplified, I think..... Gold had >been "on the market" in the US > since 1975. In January (2nd) of that year gold was > $174.50. By Oct. it was below $140, primarily because > US investors didn't jump at their first chance to buy > gold since 1933. > > Also gold actually hit $875.00 in January of 1980 and > was still over $600 by the end of the year. This had > more to do with inflation fears than with it being "off > the market for over 40 years" (since by 1980 it had > been "on the market" for nearly 5 years).. Hi, OK, so I abbreviated the history a bit. But the bottom line is that gold is a far more stable indicator of wealth than paper money. And the price had been stable in US dollars for about 130 years until 1930 when it jumped from $20.67 to $35. Or the dollar lost about 40%. After being out of connection to gold for 40 years, the dollar dropped to 10% of its 1930's value. After about 5 years of wild swings it has been stable for the past 11 years. Now compare that to what happened to various other currencies that were not linked to anything. Here, we do not discuss factor-of-two changes, but orders of mangitude. -- ,,,,,,, _______________ooo___( O O )___ooo_______________ (_) AND this very interesting Q & A from Supply Side University Lesson Number 10, Fall Semester 1997. Professor Reuver Brenner of McGill University in Montreal had claimed in the previous lecture that the recent drop in the price of gold (to $310/oz by late November '97) was the cause of the Asian stock price drops (since the various Asian currencies are linked to the US dollar). QUESTION to Professor Brenner from Steven Piraino: The dollar having deflated against gold, from $385/oz. to $325/ oz., one would expect to see negative readings in the CPI soon. What determines the size of the time lag between movements in the price of gold and movements in the inflation indexes like the CPI? And when do you expect to see actual deflation in the U.S. currency if the gold price remains at $315-325/oz.? ANSWER: During the last weeks, commodity prices on the mercantile exchange tumbled, as you will see if you check the financial papers. When will deflationary pressures be reflected in the CPI? I have no idea. The reason is the CPI is an arbitrary measure, and many quantities may be adjusted before you will see adjustments in prices. Example: the deflationary pressures lead to bankruptcies. Governments have less tax revenues. They cut spending on schools, medicare, bridges, highways etc. All these being offered (as a first approximation) at a price of zero, do not appear today in any price index. The government will diminish the quantity of quality services. But nothing will show up in the price index. If you followed discussions on price indices over the last two years, in Greenspan's speeches and those of president appointed committees, you might have seen that they all acknowledge that they do not have a clue of what they are (mis)measuring (though they came up with that 1% a year overestimation - that I do not buy). If you are interested in all the price index debate, you may look at chapter 4 in my book, Labyrinths of Prosperity). Remember that the whole idea of changes in price indices reflecting anything of interest is based on the view that most goods and services are priced through trial and error by suppliers. It is not clear what changes in CPI or other price indices reflect when governments do the pricing. (Think as an extreme example about once communist countries: Did it matter if steaks were priced at a ruble, when no ordinary citizen ever saw even a memory of it?) So when do deflationary pressures show up in an index that has no good foundations? I do not know. The best guide to detect such pressures are futures markets. One of the points raised in that brief to which you reacted was exactly that: Once you do have a recognized price rule to anchor monetary policy, you do not have to calculate price indices. Today you have to use a lot of ingenuity, looking at futures, at lengths of already existing financial contracts, at how exactly official bureaus of statistics miscalculate price indices, etc., to try to figure out when deflationary pressures may show up in today's statistical mish-mashes. ,,,,,,, _______________ooo___( O O )___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) Madison Wisconsin USA. This message was brought to you using biodegradable binary bits, and 100% recycled bandwidth.