Of course, never leave a good crisis to take advantage of pushing your own agenda forward. When everybody's back is turned towads Japan and to our own nuke plants which are all running great, that is the time to begin pushing things through.
$10BB may not seem like that much, but I think it was the way in which the proposal was presented that raised my eyebrows a bit.
First, everything I reference in the blog is in the article here.
Kerry first tries to pull at the frugal in each of us by claiming that nice roads, rails, and infrastructure isn't a luxury, but rather the lifeblood of the economy. (I paraphrased so I wouldn't have to bother with all the quotes. Check it out if you think I'm lying.) Not a luxury? Of course nice roads and rails are a luxury! These are not fundamental characteristics of the human condition in nature like air and water and trees and rocks and animals. This is a man-made tool that has only gotten better over time, especially when private companies are allowed to develop it. There is no entitlement to these roads that anyone living or breathing has or deserves or ever will. They exist only because of the place we are right now that capital accumulation and private property have taken us, in spite of governmental regulations, restrictions, and taxation. Road and such are not built because of government, but in spite of government.
So please spare us you tugging on our heart strings and small brains, trying to convince us that with out you, Mr. Kerry, looking out for all of us naive public. Without you we would apparently be driving our cars to work each morning through the nearest field.
And if we take Kerry's public/private melding of funds together to complete the project, wouldn't there be something to say about government efficiency at that point? If they were so efficient at everything, why would the government need the private sector to participate in the funding? After all, isn't it the evils of the market economy that we are trying to save the hapless public from in the first place?
On the other side of the coin, isn't all the money used whether public and private, really private to begin with? I mean, where doesn't the government get all that "public" money to work with? Hmmmm.
Now think about what would happen if a new bridge was put up with money from the public sector and money from private sector The cash flows began to ebb considerably from the project, it is not bringing in nearly as much as they projected it would. Now, the private investors are stuck with their capital in a very illiquid investment, one that now has little chance of ever showing them a return, and the entire project must be written off. Capital would be lost and it would be determined that the consumer didn't value the bridge being built more than the extra dollars in their pockets.
This is slightly different than from what the public sector will do with their portion of the funds. If the cash flow decreases, they don't really care because its not their money. They simply tax the people because "they want projects like this." If it goes completely under, the workers and managers do not care one bit, they will simply move on to the next job, funded again by the producers of the country. Or perhaps more money needs to be raised to finish the project. The public sector can just go raise more money from the tax payers, print more money, or issue more debt which will then inconvenience the population in many different ways.
The capitalists wouldn't have the same options, but neither would have they gotten themselves into the situation to begin with. Not without being forced to suffer a huge loss on their own and abandon the fruitless project. But in the public sector, these projects go on.
What a great example of government throwing more money on those activities which they seem to do an absolutely fabulous job on already!! Roadways, railways, airports, and seaports. Amazing examples of government efficiency and necessity in practice.
I guess you would have to be a fool not to support that stimulus bill.
March 16, 2011
March 15, 2011
"Sir, May I Have Another Potassium Iodide Pill Please?"
On Tuesday, Fox News printed This Article on Congressman Edward Markey (D-MA) pleasing in desperation for the Obama Administration to pass a law that would provide everyone within a 10 mile radius of a nuclear power plant Potassium Iodide pills. This pills help prevent Thyroid cancer should small to moderate doses of radiation be absorbed.
The absurdity of the law, and the idea of Markey's, is that evacuation is not his first choice for dealing with radiation leakage from a nuke plant, but rather taking a pill and staying to eat some glow in the dark food apparently.
And because he brings it up, I will have to make the correlation to the fact that this policy seemed vaguely familiar to what happened during Katrina and the mentality afterwards. The people somehow had a right to stay where they were come hurricane, tornado, or killer asteroid, and it is up to the government to ensure the implementation of this right, apparently this time by doling out little pills.
Markey originally wrote to Obama in December 2009 urging him to implement the law, but Holdren's office upheld the Bush administration's position in a letter to Markey last July. In his letter, Markey argued that evacuation and protection from contaminated food "would certainly prove to be woefully inadequate or ineffectual in the face of a major nuclear emergency.
"We need only remember the tragic events following Hurricanes Katrina and Rita -- events for which we had advancing warning," he wrote. "Even with notice, the local and state governments were unable to evacuate effectively, or provide adequate food and water to those who remained behind."
I have to wonder, if even Markey admits that the advanced warning did the people of New Orleans no good, then how much good is millions of dollars on little pills going to do if something completely unexpected happens?
Do you think he has a family member in the Potassium Iodide business, or is he just winning the award for Nanny Of The Month?
March 14, 2011
Any Comments on Japan, Pelosi? We're Waiting!
It's been three full days from the quake and all is quite in Camp Pelosi, either that or she is still looking for a new economics adviser. Preferably one that had his education after the 1930's.
After the comments about Haiti during last years quake, you can almost feel that it's coming. Just like the aftershocks, its just a matter of time.
But why not embrace the disaster like Pelosi suggests? After all the quake in Haiti is expected to be a real boon to the construction industry down there. Forget about the billions in damage, the immense loss of life, and total devastation to the infrastructure of virtually the entire country. The construction industry is looking up.
The "Broken-Window" fallacy has been refuted so long ago and so many times over the years it is absolutely amazing that we still hear absolutely ignorant statements from one of the key drafters of the biggest economic bills in history.
Destruction of wealth and property and capital goods is great, right? After all, how else did we get out of the Great Depression? Or is Haiti going to rebuild? Or Ford going to be able to sell Green cars if not for clunkers?
I am just waiting for Pelosi or Reid, or someone with absolutly no idea what rational thought is, to come up with another ludicrous statement saying that yeah, the earthquake was bad and the nuclear disaster was worse, but the concrete industry over there is going gangbusters, so in all not so bad.
Well, according to that logic, we should just destroy as much of everything we have just so we can spend money to rebuild it. That would be Pelosi's ultimate stimulus plan. If you traded in a clunkers for cash, you had the privileged of participating in the scheme.
The amazing thing to me is that Pelosi is completely and utterly incapable of seeing anything beyong step one in reasoning. How is it then that she can put the cause of the disasters completely out of her mind while talking about the recovery of one industry in a suffering region? Tens of thousands of lives mean nothing when compared to all the union concrete jobs that will be made due to these unfortunate circumstances.
And that's what matters.
After the comments about Haiti during last years quake, you can almost feel that it's coming. Just like the aftershocks, its just a matter of time.
But why not embrace the disaster like Pelosi suggests? After all the quake in Haiti is expected to be a real boon to the construction industry down there. Forget about the billions in damage, the immense loss of life, and total devastation to the infrastructure of virtually the entire country. The construction industry is looking up.
The "Broken-Window" fallacy has been refuted so long ago and so many times over the years it is absolutely amazing that we still hear absolutely ignorant statements from one of the key drafters of the biggest economic bills in history.
Destruction of wealth and property and capital goods is great, right? After all, how else did we get out of the Great Depression? Or is Haiti going to rebuild? Or Ford going to be able to sell Green cars if not for clunkers?
I am just waiting for Pelosi or Reid, or someone with absolutly no idea what rational thought is, to come up with another ludicrous statement saying that yeah, the earthquake was bad and the nuclear disaster was worse, but the concrete industry over there is going gangbusters, so in all not so bad.
Well, according to that logic, we should just destroy as much of everything we have just so we can spend money to rebuild it. That would be Pelosi's ultimate stimulus plan. If you traded in a clunkers for cash, you had the privileged of participating in the scheme.
The amazing thing to me is that Pelosi is completely and utterly incapable of seeing anything beyong step one in reasoning. How is it then that she can put the cause of the disasters completely out of her mind while talking about the recovery of one industry in a suffering region? Tens of thousands of lives mean nothing when compared to all the union concrete jobs that will be made due to these unfortunate circumstances.
And that's what matters.
Want to Increase Your Standard Of Living? Get Rid of the Inheritance Tax.
It seems to be common knowledge and public forum talking points that a heavy tax on the descendent of the "rich" would only serve to benefit those less fortunate. After all, the less wealthy are much more inclined to spend that redistributed wealth, as opposed to the greedy, rich hoarders.
It is still not clear to me why the IRS and Congress have messed about so much this past decade with the inheritance tax, estate tax, or what many who think it robbery aptly call it, the "Death Tax".
Without digressing into an expose on the structure of production in a capitalist society, it is safe to say that we live in a division of labor society. And in that society, that division of labor is dependent on the accumulation and addition to the capital stock of goods.
The more capital goods that are available, the longer the production process can be without putting in jeopardy the necessary consumer goods used on a day to day basis. Also, the more labor that can be employed as a result of the lengthier process, which in turn, produces more goods at a lower overall cost. As these new consumer products come out at a lower price level, more consumers are willing to buy them, and are able to do so thanks to the employer who, through the wonders of capital, was able to give them a job in the first place.
The inheritance tax is nothing but a tax on capital. It is a tax on the quality of life that all of us, not just the rich, but the less fortunate as well, have come to expect in our current day and age. As more and more public opinion is seen shifting towards "entitlements", this standard of living is highly desirable and most want it maintained at any cost.
However ironic, these champions of the poor are so economically ignorant that they themselves are slowly bringing about a decline in the standard of living simply through the policies their lobbies bring about.
Read a couple of quotes from Reisman in Capitalism :
and...
The estate tax first off takes away more and more incentive for a businessman or woman, or even a wage earner to produce for his or her lifetime. They only reason they would produce in the first place, or for any job for that matter, is that they expect to take home and keep what they earn. If they are instrumental in the innovation of some company or invention, they are motivated by both the good that product or service will bring, but also by the financial reward that it will bring them. Take away this financial reward and you will loose virtually all innovation in the economy.
Secondly, because of the tax reducing the profit motive, it directly decreases the amount of capital goods currently used(because it consumes them), and used in the future(because there is no longer any incentive to invest resources into long-term capital goods). When the capital stock is not continually grown, that stock of capital is "consumed" and can no longer be used to make vase quantities of the goods that consumers desire, especially at the prices which they demand them. By taking from the "capitalists and rich" the wage earners(and I am just using them as abroad reference, not to any particular group here) believe that the little extra money that they and their friends may get will be a much bigger benefit than if the capitalist would be allowed to pass on his life's work to his offspring.
Obviously, the offspring do not need, and will not use to the extent, the money in question in ways the wage earners will. And to that point, they are absolutely right. For the most part, the wage earners will spend or "consume" all of the capital that is given to them, which will not help increase the supply of capital goods because there is no increase in the savings rate. Everything is now being spent, even that which once was in the banks, factories, and other investments of the capitalist.
Now, demand for labor is down, which hurts the wage earner. Prices for consumer goods are higher because of the increased demand for one-time consumer goods, and it becomes subsequently harder to find labor employment because the capitalists now have a much less incentive to put their money to use when it is merely going to be confiscated from them at the end of their life, or at another arbitrary point in time designated by the state. Why would they put all the time and effort in just to have it stolen at a later point in time?
I will end with another excerpt from Reisman's Capitalism regarding the estate tax issue and its effects on all people:
It is still not clear to me why the IRS and Congress have messed about so much this past decade with the inheritance tax, estate tax, or what many who think it robbery aptly call it, the "Death Tax".
Without digressing into an expose on the structure of production in a capitalist society, it is safe to say that we live in a division of labor society. And in that society, that division of labor is dependent on the accumulation and addition to the capital stock of goods.
The more capital goods that are available, the longer the production process can be without putting in jeopardy the necessary consumer goods used on a day to day basis. Also, the more labor that can be employed as a result of the lengthier process, which in turn, produces more goods at a lower overall cost. As these new consumer products come out at a lower price level, more consumers are willing to buy them, and are able to do so thanks to the employer who, through the wonders of capital, was able to give them a job in the first place.
The inheritance tax is nothing but a tax on capital. It is a tax on the quality of life that all of us, not just the rich, but the less fortunate as well, have come to expect in our current day and age. As more and more public opinion is seen shifting towards "entitlements", this standard of living is highly desirable and most want it maintained at any cost.
However ironic, these champions of the poor are so economically ignorant that they themselves are slowly bringing about a decline in the standard of living simply through the policies their lobbies bring about.
Read a couple of quotes from Reisman in Capitalism :
"Its effect is that substantially more capital exists than would exist without it. Everyone in a division of labor society benefits from the existence of this additional capital, whether he himself is an heir or not. He benefits both in his capacity as a buyer of products and in his capacity as a wage earner."(pg.306)
"As previously pointed out, however startling it may seem, the simple fact is that in a division of labor society one benefits from the property of others when those others are one's employers or suppliers, because the effect of their property is a greater means of buying what one sells and producing what one buys. The institution of inheritance enhances these sources of gain." (pg.306)
The estate tax first off takes away more and more incentive for a businessman or woman, or even a wage earner to produce for his or her lifetime. They only reason they would produce in the first place, or for any job for that matter, is that they expect to take home and keep what they earn. If they are instrumental in the innovation of some company or invention, they are motivated by both the good that product or service will bring, but also by the financial reward that it will bring them. Take away this financial reward and you will loose virtually all innovation in the economy.
Secondly, because of the tax reducing the profit motive, it directly decreases the amount of capital goods currently used(because it consumes them), and used in the future(because there is no longer any incentive to invest resources into long-term capital goods). When the capital stock is not continually grown, that stock of capital is "consumed" and can no longer be used to make vase quantities of the goods that consumers desire, especially at the prices which they demand them. By taking from the "capitalists and rich" the wage earners(and I am just using them as abroad reference, not to any particular group here) believe that the little extra money that they and their friends may get will be a much bigger benefit than if the capitalist would be allowed to pass on his life's work to his offspring.
Obviously, the offspring do not need, and will not use to the extent, the money in question in ways the wage earners will. And to that point, they are absolutely right. For the most part, the wage earners will spend or "consume" all of the capital that is given to them, which will not help increase the supply of capital goods because there is no increase in the savings rate. Everything is now being spent, even that which once was in the banks, factories, and other investments of the capitalist.
Now, demand for labor is down, which hurts the wage earner. Prices for consumer goods are higher because of the increased demand for one-time consumer goods, and it becomes subsequently harder to find labor employment because the capitalists now have a much less incentive to put their money to use when it is merely going to be confiscated from them at the end of their life, or at another arbitrary point in time designated by the state. Why would they put all the time and effort in just to have it stolen at a later point in time?
I will end with another excerpt from Reisman's Capitalism regarding the estate tax issue and its effects on all people:
"Finally, the use of the inheritance tax to finance such expenditures as welfare payments and outlays for defense, which is what, for the most part, it is actually used for, is nothing but an unmitigated assault on the foundations of a country's standard of living.
"In every case, an inheritance tax reduces the demand for labor that business firms are able to make and thus either the wage rates or volume of employment that they are able to offer. Simultaneously, it reduces the economic system's overall degree of capital intensiveness, and thus its ability to implement technological advances. Equally important, it reduces the demand for capital goods and thus the economic system's degree of concentration on the production of capital goods, and, consequently, the ability of the economic system progressively to raise the productivity of labor and real wages. An inheritance tax always represents a diversion of funds from capital to consumption and is thus a force working against both economic progress and the share of total consumption in the economic system that goes to the employees of business firms, whose wages are paid out of capital. Thus, inheritance taxes are against the interest of everyone, non-heirs as well as heirs."
March 13, 2011
No Professionals In Financial Planning
Typically I write about some ludicrous comment made by an economic or media pundit, or perhaps some ridiculous action taken by some government agency that I feel compelled enough to comment on. Historically, these have been the easiest targets per-say, in drawing attention to economic fallacies, and their eventual consequences.
However, this week, Chuck Jaffe, (another commentator on MarketWatch) wrote an interesting article about financial planners and financial advisers.
Apparently the GAO, or Government Accountability Office, issued a report concerning financial advisers and planners saying that additional regulations over these working individuals is not necessary.
Jaffe was arguing, and rightly so, that there are virtually no standards whatsoever for financial advisers or financial planners. And while the State and Government regulatory bodies do not specifically endorse any advisers, they are sure happy to collect both the testing, licensing, and annual renewal fees from every single adviser and planner every single year.
Couple that with the fact that the government prohibits advisers from making statements such as, "I can do a better job in this way or that way than your current guy is doing", or any sort of claim or any manner at all, and you wind up with a situation where all financial planners and advisers are licensed and recognized in the exact same manner without any quantitative differences in them whatsoever. The prohibitions set against advisers prevent the intelligent, competent ones from shining, and propels by default, the crud at the bottom of the barrel up to the same level of professionalism as the best in the business.
Jaffe, and several other certification organization were hoping for a bit more. A way for consumers to more effectively weed out the massive numbers of bad and incompetent advisers that are practicing today.
As it stands right now, the only real way an investor can determine if an adviser is bad, makes poor or selfish decisions with their client's money, or is simply too incompetent to own an E-Trade account much less manage other people's money, is only after some travesty has taken place.
The sad reality is that even some o the most grevous offenses are not prosecuted to the full extent of the law, or renumeration provided for the client becaseu the regulatory body which oversees the vast majority of financial advisers, FINRA, is completely funded and run by the very advising firms that are under investigation.
Imaging if the FDA were funded and ran by pharmaceutical companies on behalf of "consumer protection" mandated by the government? Doctors, pharma companies, and everyone in between would realize that if the FDA put too many Merck's out of business because of bad practices, the FDA itself would look incompetent and lazy for not preventing these poor practices in the first place, but for each one they put out of business, they would be lessening their own income and threatening their very own existence.
So how much real scrutiny do you think takes place over your friendly neighborhood adviser before a slough of investors are swindled out of their money? But each and every year the state and federal agencies send multiple reminders, electronically and by postal mail, ensuring that not a single penny of licensing fees are forgotten or unpaid. To what end is up in the air.
Jaffe is right when he says that the ways the laws are currently set up are confusing and don't assist the end investor in any way at all. Rather, it causes confusion with the investor. They ask themselves, "Both the Crook and the Diligent Advisor were licensed ny the same government organization, and are constantly regulated by them. How is it then that so many people end up not only disliking their adviser, but dispising them? And how can I differentiate between a good adviser and a poor one?"
The government gives no help whatsoever, but rather makes the investment process expensive and confusing.
The lesson Jaffe, and myself included, are trying to get across is that no matter how many different sets of acronyms are behind your adviser's name, it ultimately ends up being your responsibility to perform due diligence on your financial adviser.
Because ultimately, no one on earth cares about your money more than you do.
However, this week, Chuck Jaffe, (another commentator on MarketWatch) wrote an interesting article about financial planners and financial advisers.
Apparently the GAO, or Government Accountability Office, issued a report concerning financial advisers and planners saying that additional regulations over these working individuals is not necessary.
Jaffe was arguing, and rightly so, that there are virtually no standards whatsoever for financial advisers or financial planners. And while the State and Government regulatory bodies do not specifically endorse any advisers, they are sure happy to collect both the testing, licensing, and annual renewal fees from every single adviser and planner every single year.
Couple that with the fact that the government prohibits advisers from making statements such as, "I can do a better job in this way or that way than your current guy is doing", or any sort of claim or any manner at all, and you wind up with a situation where all financial planners and advisers are licensed and recognized in the exact same manner without any quantitative differences in them whatsoever. The prohibitions set against advisers prevent the intelligent, competent ones from shining, and propels by default, the crud at the bottom of the barrel up to the same level of professionalism as the best in the business.
Jaffe, and several other certification organization were hoping for a bit more. A way for consumers to more effectively weed out the massive numbers of bad and incompetent advisers that are practicing today.
As it stands right now, the only real way an investor can determine if an adviser is bad, makes poor or selfish decisions with their client's money, or is simply too incompetent to own an E-Trade account much less manage other people's money, is only after some travesty has taken place.
The sad reality is that even some o the most grevous offenses are not prosecuted to the full extent of the law, or renumeration provided for the client becaseu the regulatory body which oversees the vast majority of financial advisers, FINRA, is completely funded and run by the very advising firms that are under investigation.
Imaging if the FDA were funded and ran by pharmaceutical companies on behalf of "consumer protection" mandated by the government? Doctors, pharma companies, and everyone in between would realize that if the FDA put too many Merck's out of business because of bad practices, the FDA itself would look incompetent and lazy for not preventing these poor practices in the first place, but for each one they put out of business, they would be lessening their own income and threatening their very own existence.
So how much real scrutiny do you think takes place over your friendly neighborhood adviser before a slough of investors are swindled out of their money? But each and every year the state and federal agencies send multiple reminders, electronically and by postal mail, ensuring that not a single penny of licensing fees are forgotten or unpaid. To what end is up in the air.
Jaffe is right when he says that the ways the laws are currently set up are confusing and don't assist the end investor in any way at all. Rather, it causes confusion with the investor. They ask themselves, "Both the Crook and the Diligent Advisor were licensed ny the same government organization, and are constantly regulated by them. How is it then that so many people end up not only disliking their adviser, but dispising them? And how can I differentiate between a good adviser and a poor one?"
The government gives no help whatsoever, but rather makes the investment process expensive and confusing.
The lesson Jaffe, and myself included, are trying to get across is that no matter how many different sets of acronyms are behind your adviser's name, it ultimately ends up being your responsibility to perform due diligence on your financial adviser.
Because ultimately, no one on earth cares about your money more than you do.
No Inflation "Sweet Spot" for Stocks
Mark Hulbert, founder of Hulbert Financial Digest, wrote a column for Marketwatch a couple weeks ago, elaborating on the interrelationship between stock prices and the inflation rate.
Although he mentions the fact that once inflation gets going, its difficult to stop, Hulbert maintains that there is an arbitrary "sweet spot" for inflation for stocks. Apparently, if inflation is at a certain rate for a certain time, it gives a certain amount of goodness to stocks.
The data set her refers to was compiled by Robert Schiller at Yale University. The table is below.
Initial thoughts gravitate to the fact that the exact dates of the inflation and monthly returns are not given. It would not take much persuading to place a sizable wager on the assumption that the vase majority of the high inflationary periods took place after the Federal Reserve was created in '14, and concentrated primarily after Bretton Woods in 1971.
Inflation doesn't come about magically, or as some irrevocable and unavoidable condition of nature. It must be propegated by an expansion of the money supply, which raises the general price level of goods.
The fact that Schiller used a 12 month trailing indicator for his interrelationship between inflation and stocks actually makes his premise weaker.
The author of the paper inherently realized that the inflation was not immediate and widespread at its onset, but rather takes an amount of time, (arbitrarily set by Schiller at 12 months) to spread across all industries.
What this actually is demonstrating quite clearly is that when new money is created and doled out, it benefits the first receivers of the money the most. They are able to use newly created dollars to purchase goods at a price level that is relatively low compared to what it will eventually rise to when the money is disseminated throughout the economy.
Hulbert assertains the "sweet spot" for stocks is when inflation is between 2-3%, and that inflation's heating up is not necessarily bad for stocks.
Nothing is mentioned however, about the stocks inflation-adjusted returns after such an inflationary period, or how the S&P's performance tracked to commodities during those same periods.
The .96% monthly return he refers to is quite simply to explain: As prices rose for at least the past 12 months, it subsequently cost more to produce those goods. The new money that was created initially bid up the producer's basket of goods, and finally filtered through circulation to such a point where a sufficient number of people now had a higher number of dollars at their disposal.
This doesn't mean that people were wealthier overall, merely that there was a higher numner on the stock index or on their yearly investment statement than there way the year before. It's a rise in the nomical value of stock prices only, not a rise in true wealth.
The boom-bust cycle is easy to identify through this symple table as well. Inflation is difficult to stop once it gets going, and if it rises too fast, people are increasingly unable to purcahse goods in the same quantities they previously were able to.
The same percentage of months are shown for periods when inflation was 0% or below, and 4% and above. Notice the difference in returns between the two time periods.
Recognizing the fact that inflation tends to gain momentum once it starts, it's hard to believe that Hulbert would recommend a "sweet spot" of inflation of between 2-3%. Realizing how the inflation needle tends to swing from one extreme to another as more or less new currency is being printed, it would be extremely difficult, if not impossible, to recommend anything other than 0% inflation for ideal conditions for the economy.
Simply math shows the obvious benefit of having your portfolio increase at .61% inflation as apposed to higher inflationary-adjusted time periods.
Although he mentions the fact that once inflation gets going, its difficult to stop, Hulbert maintains that there is an arbitrary "sweet spot" for inflation for stocks. Apparently, if inflation is at a certain rate for a certain time, it gives a certain amount of goodness to stocks.
The data set her refers to was compiled by Robert Schiller at Yale University. The table is below.
Initial thoughts gravitate to the fact that the exact dates of the inflation and monthly returns are not given. It would not take much persuading to place a sizable wager on the assumption that the vase majority of the high inflationary periods took place after the Federal Reserve was created in '14, and concentrated primarily after Bretton Woods in 1971.
Inflation doesn't come about magically, or as some irrevocable and unavoidable condition of nature. It must be propegated by an expansion of the money supply, which raises the general price level of goods.
The fact that Schiller used a 12 month trailing indicator for his interrelationship between inflation and stocks actually makes his premise weaker.
The author of the paper inherently realized that the inflation was not immediate and widespread at its onset, but rather takes an amount of time, (arbitrarily set by Schiller at 12 months) to spread across all industries.
What this actually is demonstrating quite clearly is that when new money is created and doled out, it benefits the first receivers of the money the most. They are able to use newly created dollars to purchase goods at a price level that is relatively low compared to what it will eventually rise to when the money is disseminated throughout the economy.
Hulbert assertains the "sweet spot" for stocks is when inflation is between 2-3%, and that inflation's heating up is not necessarily bad for stocks.
Nothing is mentioned however, about the stocks inflation-adjusted returns after such an inflationary period, or how the S&P's performance tracked to commodities during those same periods.
The .96% monthly return he refers to is quite simply to explain: As prices rose for at least the past 12 months, it subsequently cost more to produce those goods. The new money that was created initially bid up the producer's basket of goods, and finally filtered through circulation to such a point where a sufficient number of people now had a higher number of dollars at their disposal.
This doesn't mean that people were wealthier overall, merely that there was a higher numner on the stock index or on their yearly investment statement than there way the year before. It's a rise in the nomical value of stock prices only, not a rise in true wealth.
The boom-bust cycle is easy to identify through this symple table as well. Inflation is difficult to stop once it gets going, and if it rises too fast, people are increasingly unable to purcahse goods in the same quantities they previously were able to.
The same percentage of months are shown for periods when inflation was 0% or below, and 4% and above. Notice the difference in returns between the two time periods.
Recognizing the fact that inflation tends to gain momentum once it starts, it's hard to believe that Hulbert would recommend a "sweet spot" of inflation of between 2-3%. Realizing how the inflation needle tends to swing from one extreme to another as more or less new currency is being printed, it would be extremely difficult, if not impossible, to recommend anything other than 0% inflation for ideal conditions for the economy.
Simply math shows the obvious benefit of having your portfolio increase at .61% inflation as apposed to higher inflationary-adjusted time periods.
Austrian Economic Blog
Hello all. The following are a collections of thoughts and ramblings on current events from an Austrian-Libertarian Perspective.
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