Update on My Inflation Bets
I know that a while ago I made two inflation bets, one with Bryan Caplan and a much more serious one with David Henderson. Here are the terms with Caplan:
At any point between now and January 2016, if there is a year/year increase in seasonally adjusted CPI that is at least 10%, then [Caplan pays Murphy] at that time $100.
If we get to January 2016, and there has not been any 12-month stretch in which the above happened, then [Murphy pays Caplan] $100 at that time.
Then David R. Henderson wanted in on the action, and he exacted far harsher terms:
At any point between now and January 2013, if there is a year/year increase in seasonally adjusted CPI that is at least 10%, then [Henderson pays Murphy] at that time $500.
If we get to January 2013, and there has not been any 12-month stretch in which the above happened, then [Murphy pays Henderson] $500 at that time.
BTW, please spare me a lecture on the fact that I would be winning diluted dollars. I KNOW. Feel free to say I can’t tell when it’s coming, but please believe me when I say I know what price inflation is.
I made the above bets in December 2009. Things are obviously not progressing on the timetable I had thought (as has been well documented on these pages), but I’m still confident in my bet with Bryan and would make it again. The one with David is obviously looming much more menacingly. If it weren’t for the crisis in Europe (which is pushing people to flock into dollars), I would still be fine with it, but it may turn into a nailbiter.
Speaking of the euro, Bryan linked to his bet with Jeremy Rabkin who predicted (in 2007) that the currency would collapse by the end of 2010. What’s hilarious is this confident comment left by Barkley Rosser (written in January 2007):
[Bryan, the] odds are way in your favor. This has been one of the favorite fantasies of a subset of libertarians and conservative economists in the US, that first the euro would never get off the ground (they lost that one big time) and now that it will surely fail. Do these people go to Europe at all? The only country that has mumbled at all about getting out was Italy briefly under Berlusconi, who is now out and the talk has loudly stopped. If you lose, it will be Italy, but nobody else.
The euro is here to stay. Heck, it is the world’s strongest currency right now, with the possible exception of the UK pound, although it has been dipping recently. Even if Italy were to depart, it is slowly joining the US dollar as a main international reserve currency. The people predicting its demise are living in fantasy land, big time.
I expect you to lose both bets. I don’t think the CPI will ever be allowed to reflect such inflation rates, even if the inflation at that level actually occurs (which I am agnostic on for this time period).
And, sheesh! That Henderson is a tough negotiator!
Bingo. This is why I don’t bet on CPI. I would bet instead on a basket of specifically-chosen quality-invariant items.
n 2000 Milton Friedman gave the keynote address to a conference at the Bank of Canada on flexible exchange rates. A Q&A at the end of the talk featured David Laidler, Michael Bordo, John Crow and others.
Michael Bordo asked Friedman about the Euro:
Milton Friedman:…I think the euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them. Right now, Ireland is a very different state; it needs a very different monetary policy from that of Spain or Italy. On purely theoretical grounds, it’s hard to believe that it’s going to be a stable system for a long time. …
If we look back at recent history, they’ve tried in the past to have rigid exchange rates, and each time it has broken down. 1992, 1993, you had the crises. Before that, Europe had the snake, and then it broke down into something else. So the verdict isn’t in on the euro. It’s only a year old. Give it time to develop its troubles.
HT: Marginal Revolution
http://marginalrevolution.com/marginalrevolution/2011/09/milton-friedman-on-the-euro-and-qe3.html
Tsk, tsk, tsk.
Austrians don’t make forecasts, you of all people should know that.
Mises, Hayek and Rothbard would be spinning in their graves.
Shame on you. Shame.
Are you forecasting that they would be spinning in their graves? How can you predict human action?
er…. They are not human now, are they?
I would be willing to take the same bet for double the money, 2:1, and at 5% CPI. Easy trade. East money.
What are you saying AP? If we get at least 5% 12-month CPI increase by January 2013, then you pay me $1000, otherwise I pay you $500?
Yes that’s exactly the terms he proposed.
Actually double the money would be a 1k bet not 500. As he is laying you 2:1 he would be risking 2k to win your 1k.
That’s why I asked; it was ambiguous. Is it doubling how much he could lose or me?
Well the way it was phrased, I like my last description of the terms. Either way, I imagine you will be having some serious conversations about how to verify the loser actually pays up, so I’m sure clarification on terms would get discussed then!
Silly Austrians should stop making predictions. They fail to see how MMT rules the world or at least until MMT and too much debt makes us declare the jubilee and start over. (Remember the Lord’s Prayer where we “forgive us our debts, as we also have forgiven our debtors.”) Then, we pray that people finally will listen to the Austrians. For now though, stop making predictions. Your credibility will be shot when we need you most.
Yes’m massah. And are you predicting that my credibility will be shot when you need me the most?
Perhaps. People look at Cain and see how he predicted the economy was fine two weeks before the crash. Same with Laffer. I would think people would not trust them so much now, but I could be wrong. I think though that as long as people don’t see your Frank Sinatra imitation that you’ll come out okay. : )