Why the Fed Chases Its Tail: Rent Measures vs. Case Shiller

link to pasutri-makassar.com

Of coarse, one size doesn’t fit all. Rent and home prices have gone sky high in the San Francisco Bay area. — Uh they have been ‘sky high’ in the bay area for the past 5 years nothing new there. Check out rents in Manhattan and in the greater Boston area (which are much higher)

“The deflator doesn’t ever attempt to define what is or isn’t part of inflation; instead, each person that purchases a good or service defines what is or isn’t part of inflation.”

Including stocks, bonds and land titles, I presume……..

Probably not entirely fair, as those aren’t counted as part of GDP either, and the deflator was never intended to be relevant outside of the context of GDP. But that just gets to the crux of the problem: GDP itself. Or, more to the point, the unwarranted significance attributed to GDP as some sort of final measure of the health of “the economy.” GDP itself may be a useful measure for some things. (Although I’d be hard pressed to come up with exactly what, in an age of ever increasing activity being performed simply to not slip too far back on the treadmill of ever increasing roadblocks, mandates, taxes, pillage by ambulance chasers and others, and regulations. All of whom decrease utility without a similarly negative effect on GDP. As an aside, the result that “activity” is a valid approximation of economic health, is justifiable in a completely free world, where no choice is coerced, no act mandated nor encouraged above others, no action barred nor discouraged etc. Pretending the same holds true in of world of officially set prices; 5 year plans dictating production and mandating consumption; rules, regulations, taxes; as well as all outcomes being dictated by government policy rather than unconstrained market mechanisms; is just intellectually dishonest hand waving, obfuscation and sleight-of-hand.)

But I digress. Back to the deflator: Since GDP doesn’t include changes in the value of “assets,” neither does the deflator. Yet an increasing share of people’s de facto income (as in delta wealth + spending over a period), derive from just such asset price increases. While a similarly increasing share of people’s expenditures and economic activity, is directed towards buying, selling and researching things classed as assets. With the result that the supposedly “all inclusive” GDP deflator, not only is much less than all-inclusive; but is, in fact, becoming less and less all-inclusive over time; as a realistic measure of the change in prices for what people actually spend their money on.

“While a home itself is not a good or service, things that are included into a home, such as lumber, nails, glue, fixtures, appliances, carpets, etc would be goods.”

If the cost of a house in Pacific Heights could be determined by adding up its lumber, carpet and fixture prices, America wouldn’t be in the shambles it is in in the first place. And neither would what currently passes for “economics” necessarily be nothing more than a tragic joke.

The fundamental silliness is attempting to classify some things as part of inflation, some not. Not the specific details of how the that classification is broken down. In the real world, there is no God given delineation. Nor a delineation with economic relevance, at a population wide level. Heck, in the real world, there are no fixed classifications at all. Those only show up as part of the progressive canon, on account of progressives needing the world simplified to where they can pretend to understand it, by counting: One. Two. Many. instead of bothering to figure out how to get all fancy and stuff, and use their fingers.

Bubble gum and government bonds are not magically “different.” You can, in fact, walk down the street chewing on either one. Or, you can hold them to maturity. At which point, given current spending and debt trajectories, it’s anybody’s guess which one still retains the most value.

The problem with a CPI style measure of inflation is that you have to agree on a market basket, which brings up thorny questions of the appropriateness of substitutions, owner equivalent rent versus home prices, etc which people can argue about ad naseum. The deflator simply looks at the basket of all goods and services produced in a year. While a home itself is not a good or service, things that are included into a home, such as lumber, nails, glue, fixtures, appliances, carpets, etc would be goods. In actual practice, the CPI and GDP deflator are very close, so all the nit picking about what should or shouldn’t be included in the CPI strikes me as spurious. If the CPI was lower than the GDP deflator, and especially if it was significantly lower, then I would take arguments that the CPI is too low seriously, but instead the deflator confirms that the CPI is not significantly wrong.

That sucking sound is the next recession, which will once again expose the Fed’s willful blindness to the asset bubbles they continue to blow. Another accident is baked in the cake because there aren’t any adults in the room willing to take away the keys.

The GDP Deflator is a much better measure of inflation, and avoids all these kinds of problems entirely.

2nd mortgage defaults have been rising sharply for a few months: link to us.spindices.com