My Position on the Current State of the Economy
I have neither the time nor the stamina to continue with the arguments in the comments of my last post. So let me clarify my position in case anyone cares:
1) Right now we are in the midst of the Great Recession, or the Second Great Depression if you prefer, in the same way that Americans in 1936 were still in the Great Depression. Notice how all of the things you guys are using to ridicule Schiff and me, could have likewise been used to ridicule someone in 1936 saying, “The economy is awful, all of these interventions are making it worse, we are still in a depression.”
2) Suppose there were an economy that initially had a GDP of $1 trillion and an unemployment rate of 5%. Then a year later GDP was down to $100 million, and the unemployment rate had shot up to 90%. The following quarter, annualized GDP was $101 million (which consisted of $50 million in private output and $51 million that the government spends on a single laser gun that the Pentagon assures us will fend off [nonexistent] alien invaders), while the unemployment rate had declined to 85%. According to some of you, not only is that economy now out of the recession, but anybody who said, “This economy is awful, we’re still in a recession” deserves to be mocked.
Does that strike anyone else as weird?
Notice how all of the things you guys are using to ridicule Schiff and me, could have likewise been used to ridicule someone in 1936 saying, “The economy is awful, all of these interventions are making it worse, we are still in a depression.”
False. The equivalent to Schiff would be someone in 1936 who claimed that the economy had never stopped shrinking.
“This economy is awful, we’re still in a recession”
Peter Schiff didn’t say that. He went beyond that. He said ““The economy is shrinking. Is just that we can’t see it’s shrinking because we’re measuring it with a bad ruler because the GDP deflator is too low.”
This will help your confusion
“My Position on the Current State of the Economy”
The last chart I remember seeing showed us at 4 or 5 million less full time jobs than in 07.
This economy sucks.
The reason why we kept on asking you to make your position clearer was because we weren’t sure if we should mock you. You kept on quoting Sumner specifically on the “shrinking” part, but the only evidence you gave was of a weak and slow growing economy. Very ambiguous. Your now clearer position of a weak economy is defensible. On the other hand, Schiff’s position of a contracting economy is not. We were shocked at you for coming at Schiff’s defense, but now we know that you don’t even agree with him!
“You kept on quoting Sumner specifically on the “shrinking” part, but the only evidence you gave was of a weak and slow growing economy.”
>> I agree. Bob should not have the used the word “shrinking” when describing Sumner’s position, because that’s not exactly what he said. Here’s Sumner:
“I wish I’d had more time to address Schiff’s argument that inflation was much higher than the CPI showed. That would mean RGDP growth would be far below 2%, probably below zero. But that conflicts with about a zillion other data points:
1. More than 2 million new jobs a year in recent years, and (contra Schiff) the average work week is stable.
2. Rising industrial production and rising output in all sorts of other sectors like housing and oil and autos and retail and services.
Is all the output and employment data also being faked, just like the CPI? To me that seems about as likely as the theory that no plane actually hit the twin towers and it was all a CIA plot.”
Couple things here:
1. Sumner was trying to prove Schiff’s inflation claim was incorrect because “RGDP growth would be far below 2%, probably below zero.” Sumner didn’t explicitly state that this would mean contraction, but that it would mean real output would have to be lower than the govt stated number, not necessarily negative. I’d have to go back and watch, but I don’t think Schiff mentioned what he thought inflation actually was, so therefore, we don’t know what the implied decrease in real GDP would be.
2. Sumner then descends to the tinfoil hat argument throwing out a couple stats to support the government’s published number. First, there’s a significant difference between claiming that data is “faked” and claiming it’s inaccurate. Sumner decided to make the former charge. Second, Sumner’s main point in the quote above is that there are other data points that back the government GDP number. Schiff’s main point seems to be the government GDP number is overstated. Sumner is critizing Schiff for questioning the accuracy of the government’s numbers, not his statement that the economy was “shrinking.” In fact, Bob explicitly titled his previous post: “Questioning the GDP Numbers,” not something like “Questioning whether the GDP number is positive.”
Furthermore, there are a “zillion” other data points that would suggest the GDP number could be overstated. Commenters on both Murphy’s and Sumner’s respective blogs have been pointing out some of these data points. So comparing the questioning of the GDP numbers to the “theory that no plane actually hit the twin towers and it was all a CIA plot” is a despicable debating tactic.
3. Lastly, we need to agree on a starting point when analyzing economic trends. Should it be the past quarter? past year? past 5 years? past 15 years? I don’t think that’s been established either, although Murphy essentially hits on it in his point #2.
Bottom line is that those who are charging Murphy with being loose on interpretation are guilty of the same thing by trying to defend Sumner specifically against Schiff’s “shrinking” comments even though that was not the thrust of Sumner’s argument, which was dismissing Schiff as a conspiracy theorist for daring to question the government’s published numbers.
I don’t think Schiff mentioned what he thought inflation actually was, so therefore, we don’t know what the implied decrease in real GDP would be.
Except that Schiff explicitly said he thought the economy was contracting right now.
Also, remember that Schiff was responding to the charge that he was wrong when he’d previously claimed QE would lead to lots of inflation. Countering that the CPI is understating inflation is only an effective rejoinder if you think that it is understating it by quite a bit.
Sumner is critizing Schiff for questioning the accuracy of the government’s numbers, not his statement that the economy was “shrinking.”
Nope. Sumner wasn’t criticizing Schiff for daring to question the Almighty Government. He was criticizing him for claiming that inflation was much higher than the CPI when all the evidence shows that it’s not.
“Except that Schiff explicitly said he thought the economy was contracting right now.”
>> I’m talking about within the context of Sumner’s narrow point in his blog post. From the first sentence in that same paragraph I wrote: “Sumner was trying to prove Schiff’s inflation claim was incorrect because “RGDP growth would be far below 2%, probably below zero.” In other words, Sumner never explicitly referenced, directly or indirectly, Schiff’s specific comments about a contraction.
“Nope. Sumner wasn’t criticizing Schiff for daring to question the Almighty Government. He was criticizing him for claiming that inflation was much higher than the CPI when all the evidence shows that it’s not.”
>> I disagree. Re-read the quote I provided from Sumner’s blog post. He’s arguing against Schiff’s higher inflation claim by pointing to data points that support the government’s real GDP number and then adds: “Is all the output and employment data also being faked, just like the CPI?” He’s quite explicitly criticizing Schiff’s questioning of the government published numbers, and worse, implying insidious motives to warrant that conspiracy theory claim.
Here was Sumner’s argument in a nutshell:
1. Inflation is not as high as you [Schiff] suggest
2. If it were, real GDP would be lower than reported
3. Here are a couple data points that support the published real GDP number
4. Therefore, inflation can’t be as high as you think it is
I’m talking about within the context of Sumner’s narrow point in his blog post.
The context is that Sumner and Schiff were on a TV program where Schiff was called out on the fact that he had predicted high inflation and it hadn’t happened. Schiff responded that inflation was high, and that the CPI was inaccurate. Sumner pointed out that if inflation was as high as Schiff claimed, then the economy would be contracting. Schiff agreed, and claimed that the economy was in fact contracting. So afterwards Sumner wrote up his blog post pointing out some of the absurdities involved in claiming this.
Ok, I watched the video and it’s pretty clear that Schiff is saying a) RGDP is negative, and/or b) RGDP is a bogus stat altogether. And not just by his explicit claim that the economy is still in recession (he also said it was expanding/recovering, but that it was phoney), but by saying CPI is “much higher” than reported, it’s safe to say he means higher than 4% which would push RGDP into negative territory.
So, I guess it comes back to determining how well RGDP accurately reflects the health of an economy.
I’ll be curious to see the results from Murphy’s next post on extracting the private / government components of GDP.
Sorry. I should clarify my previous comment that bold was not in the original quote. I added it for emphasis.
I’m hoping someone has a better direct answer to #2 than: that’s not how a recession is defined.
Please also consider the de facto / de jure distinction.
I’m hoping someone has a better direct answer to #2 than: that’s not how a recession is defined.
I don’t even understand the relevance of #2. Are we suppose to believe that scenario 2 would mask the real inflation rate?
Here is my sympathetic understanding of Schiff, and I could be way off base:
1. The official inflation numbers have systemic bias
2. The official GDP numbers have systemic bias
3. Those biases make derivative “economic numbers” look good, despite the real economic situation
4. By gaming the system and the definitions, we can declare we have exited the recession, when in fact the real economy is still in the shitter.
Bob’s #2 shows an extreme example of how my #4 can manifest, particularly with Very Serious People with Very Serious Tribal Affiliations making unserious arguments in a flippant manner.
Schiff explained yesterday that first quarter GDP was first reported much higher than it was later revised to.
So now we have 1.7 Q2 GDP reported with 1% inflation — his point is that it will likely be revised down again, and that inflation is really more than 1%.
So, let me get this straight. The economy is not contracting, but, for some reason, the FED still sees the need to hold the FED funds rate well below the rate of inflation, which it has been doing for going on five years now, by the way, and also to continue vastly expanding its balance sheet by creating eighty five billion dollars every month and using all of them to purchase U.S. treasuries and mortgage backed securities in an effort to raise the prices thereof. Yes, one would reasonably think that we are well on the road to recovery, given that our financial leaders are able to implement such an unaccomodating monetary policy. NOT!
You guys are dreaming if you think those numbers you’re citing can continue if the FED applies less pressure to the accelerator. If the FED were to actually increase QE next month to 100 billion per month and the data came out even stronger than ever, you guys would probably say “Wow, I can’t believe how strong the economic recovery is becoming.” This QE stuff really works!” Get a grip. Face reality. We’re inflating our last bubble. That’s all.
The Federal Funds rate is cut to .25% because unemployment is too high, not because the economy is contracting.
Yeah you’re right. The unemployment rate has no correlation with whether the economy is in recession or not.
In principle it is possible for a small number of ultra-productive individuals to suddenly do the work of many, thus both expanding the economy and also reducing the requirement for labour. I think Obama’s example was ATM’s which reduce the need for bank tellers, while doing the same job faster and better.
That said, although that sort of stuff is happening, I have trouble believing it fully explains the current situation in the USA. Places like Detroit are much less productive than they were in their heyday. It’s not that one plant in Detroit suddenly went nuts with automation and now produces way too many cars, quite the opposite, they didn’t automate enough and now they are totally uncompetitive.
The unemployment rate has no correlation with whether the economy is in recession or not.
Sure there’s a correlation, it’s just not a correlation of 1.
I’m reminded of what Mises wrote about the meaningless of the term “inflation” is in a modern context. We are using the same value (GDP) to determine the inflation rate, the rate of economic growth, and the health of the economy. It’s no wonder everyone seems to be in disagreement while simultaneously being equally as correct as everyone else.
I’m a nobody with no credentials and no valid thoughts on the economy… BUT! here’s what I think:
(1) No one in their right mind could make the claim that RGDP is increasing substantially.
(2) NGDP certainly looks like it’s increasing.
(3) According to a Sumner, (1) and (2) happening simultaneously = price inflation.
(4) According to Sumner, Krugman, Bernanke, and lots of other people, NGDP isn’t increasing as fast as they would prefer.
(5) Most people agree that the Fed is largely responsible for what is going on with NGDP.
(6) Taken together, (1), (4), and (5) lend credence to Schiff, et al.’s claim that the economy is deflating but we can’t tell because the Fed is inflating.
Where have I gone wrong? Anyone?
Again I think the point I made in the last post that RGDP per capita has gone down is a valid indicator of contraction that has not passed where we were in 2007. So if we were $44,000 per capita RGDP in 2007 and we are now $43,400 RGDP then we are still in ‘a recession’ though we are coming out of it.
So here are my bullet points that everyone can tell me how I am wrong ( since that is what everyone seems to do lol )
1 ) The economy is not contracting, but it is not REALLY growing as of yet.
2 ) By the rate of growth we have not exited where we need to be on a per capita basis. so we are still poorer now in RGDP than in 2007.
3 ) The future growth rate is murky due to the Fed easy monetary policy that is inflating the equities market
I see Bob’s point and think it is valid. In 1936 everyone thought the worst was behind them because things had ‘picked up’ but by our standards today they were still in the midst of the depression. Right?
Under your definition of contraction, an economy can expand and contract simultaneously. So your definition is obviously wrong.
The word recession refers to the time between the peak and trough of the business cycle. So obviously there is quite a bit of time after the recession ended where output is below it’s pre-recession peak.
The business cycle dating committee looks at 4 economic indicators to date the business cycle:
1) real GDP
2) non-farm payrolls
3) industrial production
4) personal income less transfer payments.
Real GDP returned to the pre-recession peak in Q4 2011, and has hit new post-recession highs for six consecutive quarters
Real personal income less transfer payments is still 3.3% below the previous peak.
Industrial production is still 2.1% below the pre-recession peak.
Payroll employment is still 1.8% below the pre-recession peak
Yes I know, I am playing both sides. But the real question is that definition wrong? If per capital your real money is shrinking while at the same time you have an expanding economy isn’t that a shrinking economy? If today everyone had a per capita RGDP value of $100.00 and next year you had one of $90.00 did you expand your economy?
Now that is not to say we are not moving OUT of this issue but if you have more people and less money per person in RGDP then where are you?
Where did you go wrong? Pretty much everything you said was wrong.
1) Everyone is not equally correct. Schiff is ridiculous wrong on all counts.
2) Most do not agree that the Fed is generating most of the nominal GDP growth.
3) Nominal GDP and real GDP can both increase without price inflation. Real GDP is calculated from nominal GDP using a GDP deflator which is not the same as PCE inflation or the CPI published by the labor department.
In Q2, Nominal GDP grew 2.3%/year and real GDP grew 1.67%/year. So the GDP deflator is .7%/year. In Q2, PCE inflation was .3%/quarter or 1.2%/year.
Nominal GDP:
Q2 16633.4
Q1 16535.3 = 2.3% annual growth rate
Real GDP:
Q2 15648.7
Q1 15583.9 = 1.67% annual growth rate
With respect, joe, I am learning so let’s presume I am very stupid. You say that everything I said is wrong.
Thus, this means the following:
(1) RGDP is growing substantially
(2) NGDP does not look like it’s growing
(3) Scott Sumner does not believe that in cases where RGDP is flat and NGDP is increasing, we are seeing price inflation.
(4) NGDP is in fact growing as much as most mainstream famous economists want it to.
(5) Most people believe the Fed has not been responsible for any or most of the recent NGDP growth
(6) Thus, there is absolutely no credence to Schiff’s point.
I can see that you disagree with (6), but can you explain to me why the other points are incorrect?
“Notice how all of the things you guys are using to ridicule Schiff and me, could have likewise been used to ridicule someone in 1936 saying, “The economy is awful, all of these interventions are making it worse, we are still in a depression.””
As people above have noted, Schiff’s argument was quite specific: he said the economy has been *shrinking* since 2008.
Therefore an honest analogy would be:
“Notice how all of the things you guys are using to ridicule Schiff and me, could have likewise been used to ridicule someone in 1936 saying, “The economy has done nothing but contract in real output terms since 1929 (including all years from 1933 to 1936), all of these interventions are causing this continuing contraction, we are still in a depression.”
This argument pursues a Pyrrhic victory. Yeah we get it, maybe the GDP numbers didn’t contract continuously from 1933 to 1936, and the same may be true now. It depends what you use as a deflator to get from NGDP to RGDP.
That doesn’t mean that Schiff isn’t spot on. It is not implausible that large damage to the country’s capital structure was done between 1933 & 1936, just as it is plausible that similar damage is occurring now.
We can literally see the Fed intervening in the markets, and the prices for bonds, stocks, and houses going up. That is the definition of inflation. So maybe it hasn’t hit the CPI yet, that doesn’t mean the damage isn’t being done. In this case, using the CPI as your deflator will give misleading results. Schiff’s analysis tells us a lot more about what is actually going on.
I don’t really understand why it’s hard to believe that insofar as the Fed does QE, CPI will eventually go up. There’s a reason why the Yen lost 25% of it’s market value this year over the course of just 3 months.
Put another way, perhaps I can still (mostly) buy the same amount of bread and the same amount of eggs and the same amount of gasoline with my Dollar as I could before the Fed’s intervention. We’ll concede it for the sake of argument.
However, it’s not really deniable that I can’t buy nearly as much in stocks, bonds, or house with the same Dollar as I could before Fed intervention. This is a result that directly impacts the wealth of Americans in some way. So it shouldn’t surprise us if that translates to Americans owning fewer real goods at some point in time – that is, noticeable CPI increases down the road.
The point is, the inflationary acts are happening now, and a cogent economic analysis should account for that fact.
Massive deflation was averted. Your USD would have purchased more bread, instead of the same amount.
The official figures don’t show what the CPI would have been absent of interventionist policy.
It’s like banning Black Friday sales and mandating a price increase of 1-2 % instead.
Put another way, perhaps I can still (mostly) buy the same amount of bread and the same amount of eggs and the same amount of gasoline with my Dollar as I could before the Fed’s intervention.
But this is precisely what Schiff denied.
It’s possible that Schiff didn’t need to make a stupid argument in support of his position. Perhaps there were other better arguments he could have made instead. That doesn’t change the fact that the argument Schiff actually made was stupid.
Now hold on a minute here… Even Scott Sumner admits that there has been food price inflation.
First he denied it:
http://www.themoneyillusion.com/?p=8158#comment-48393
But eventually he did admit it:
http://www.themoneyillusion.com/?p=15919&cpage=1#comment-180261
I think it’s more of a quibble over semantics…
When you say “Inflation”, you’re thinking about the CPI. When Schiff says “Inflation”, I think he means the general price level, including stocks, bonds, houses, industrail raw materials, all of which have gone up.
I also think it’s plausible that the CPI increases have genuinely been understated, but probably not drastically.
So anyway, you think Schiff is wrong because the CPI doesn’t seem to support his claims. But Schiff says that the government is lying, because inflation, by his definition, is much higher than CPI indicates.
The takeaway is that solely using the CPI as a measure of how much money is printed may be very misleading. It is conceivable that CPI increases are low, AND the general price level is increasing, AND the economy & capital stock are indeed contracting.
If you deflated GDP by a rate including the price increases to stocks, bonds, & houses, you may very well see a contracting real economy.
Mr. Graves,
I’m going to make a bold conjecture here, which is that you aren’t familiar with Schiff’s statements on this subject generally. If you were, then I think you would see that the interpretation you have constructed to defend Schiff is not tenable.
I think Graves is correct in this:
“When Schiff says “Inflation”, I think he means the general price level, including stocks, bonds, houses, industrail raw materials, all of which have gone up.”
“We can literally see the Fed intervening in the markets, and the prices for bonds, stocks, and houses going up. That is the definition of inflation. So maybe it hasn’t hit the CPI yet, that doesn’t mean the damage isn’t being done. ”
>> Yep, similarly how the CPI was relatively low averaging around 3% during the late 90’s and mid 00’s, despite soaring asset prices during both periods that then preceded sharp downturns.
Right. CPI has been relatively low from late 90s until present, and yet gold, even after its recent crash, has more than doubled in price over same time period. So do you believe the CPI, or do you believe the actual prices?
According to the CPI, prices should only be 43% higher than they were in 1997, but I don’t think that’s what we actually see. The doubling of prices which I think reflects the reality, is consistent with an inflation rate of 4.5% EVERY year for 15 years. So CPI definitely seems understated, if not drastically.
Murphy, you were right in your last post and you’re right in this post.