Nostradamus was not an Economist, but he could have been---Inflation is a Self-fulfilling Prophecy...

Inflation is not a problem in the US...now.  The question amongst economists is what is the root cause of current inflationary trends around the world.  Is it demand driven because of scarcity of resources? Are price increases in one area off-set by price decreases somewhere else in the economy, rendering the overall effect neutral? Or is it "too much money chasing too few goods", the classic explanation of inflation?  My opinion is it is a combination of the first and second reasons, with the first one taking precedent.  I have read too many articles lately about the world-wide demand for resources to not give it credence.  Here is another one excerpted below. What do you think?

WSJ: Companies Stock Up as Commodities Prices Rise

""Companies contending with rising commodity prices are stockpiling rubber tires, cotton clothing and other goods, a maneuver that is aimed at insulating them from inflation but also could contribute to it.""

""Purchases made more because of perceived inflationary pressures than a response to demand are important because they signal that inflation expectations are climbing. Economists often focus on inflation expectations, because they can spur people to speed up their purchases, in turn driving prices higher.""

"The price increase then becomes a self-fulfilling prophecy," said Zach Pandl, an economist at Nomura Securities. Once the cycle ends, prices can collapse, he said.""

My Defense of Anderson Cooper in Eygpt...

Keller ISD sure ain't no Chicago Public School System---How often have THEY cancelled school in the last 12 years? Surprising answer!

Midwest buckles under major winter storm

""In Chicago, airlines canceled more than 2,200 flights at O'Hare International Airport, and 400 flights at Midway International Airport. Public schools closed for the first time in 12 years and almost 80,000 ComEd customers in northern Illinois were without power.""

Rent-Seekers---Yes, it is as bad as it sounds---Hint: It involves Ethanol...

RENT SEEKING: "Textbook" definiton:

""The opportunity to capture monopoly rents provides firms with an incentive to use scarce resources to secure the right to become a monopolist. Such activity is referred to as rent-seeking. Rent-seeking is normally associated with expenditures designed to persuade governments to impose regulations which create monopolies. Examples are entry restrictions and import controls. However, rent-seeking may also refer to expenditures to create private monopolies.""

RENT SEEKING: Real-Life Example: A Recovery In Ethanol Helps A.D.M.

''Archer Daniels Midland, the agribusiness conglomerate, said on Tuesday that its quarterly profit jumped 29 percent, a result driven by a recovery in the ethanol industry and an increase in demand for grains.""

""The company’s outlook was bolstered by a recent ruling by the Environmental Protection Agency to allow for a higher percentage blend of ethanol into gasoline. But the company’s chief executive, Patricia A. Woertz, warned that the new regulations would not be a short-term bonanza. She said many older vehicles still had not been approved to use the higher 15 percent ethanol blend.""

BUT with a little more lobbying that inconvenience will be solved too...

Price of a LaQuinta Hotel room THIS weekend (Super Bowl) versus NEXT weekend in Arlington, Texas...

Prices of a LaQuinta Hotel in Arlington, Texas for THIS weekend versus NEXT weekend...Is this a case of capturing Consumer Surplus or simply Quantity Demanded is greater than Quantity Supplied? :)

Nice graph showing the relationshp between GDP and Employment. The evidence shows hiring HAS to increase soon, doesn't it?

Carpe Diem

The above graph shows the relationship between Real GDP (RGDP) and Employment since the official beginning of the recession. There is a direct relationship between the percentage decrease in RGDP and employment. Makes sense. Produce fewer goods and services businesses need fewer people.  In the spring of 2009 we see the two lines intersect. At this point RGDP starts an upward trend.  Recovery is at hand!! As businesses pick-up the pace of production, we might expect employment to stop dropping and level off as businesses cease laying-off/closing.  However, the relationship between RGDP and employment turns INVERSE at what appears to be an accelerating rate. RGDP increases at an increasing rate, but employment recovers only slightly and stays relatively constant. Looking the last points to the right on the graph, RGDP is now back to pre-recession level BUT employment is severely lagging behind to the tune of 7+million fewer workers employed compared to prior to the recession.

Gotta think that something is going to give. If RGDP continues to improve, the productivity of existing workers is going to be milked for all it is worth. They may be evidence that worker productivity is declining currently.  Businesses will have to hire more workers to keep up productivity and meet existing demand for goods and services. 

Barring a major crisis or escalating oil prices, I have to think we will see an improvement in the employment situation...Perhaps I say this because I want my (YOU!!) students to be optimistic and see there is still a future for them, even in these tough times...

Nice graph showing percentage of income spent on food and gasoline at different income levels...Are we that much different than Egypt or Tunisia?

A statement of the obvious: Rising food prices disproportionately hurt the poor/lower income groups.  In the US this does not have the major political consequences that it has in many other parts of the world. In percentage terms, we have smaller part of the population classified as poor. The graph below shows approx. how much, in percentage of income, households in the US spend on food and gasoline. These are two major commodities we consider necessities and use everyday.  Roughly 20%-25% of the US population falls into the lowest income levels.  This is much less than in countries where we see social unrest or out-right rebellion.  Does the US have a "tipping point"  where we could descend into mass protest?  But for the grace of God, there go I...

Source HERE



Enter your birth year and see how prices have changed compared to then---Man, I am OLD!!!

Go HERE to enter your birth year to see how much several staple items cost in your birth year compared to today...Not an exact measurement but interesting...



Source HERE

HT: Chartporn

I don't know what will happen in Egypt, but it might be worth re-reading key excerpts of The Declaration of Independence as a reminder...

These are self-selected excerpts from The Declaration of Independence that jump out at me when I read them and think about the change today in Eygpt and last week in Tunisia.  The parts in bold are my emphasis:

""When, in the course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the laws of nature and of nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation...""

""...whenever any form of government becomes destructive to these ends, it is the right of the people to alter or to abolish it, and to institute new government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their safety and happiness.""

""...But when a long train of abuses and usurpations, pursuing invariably the same object evinces a design to reduce them under absolute despotism, it is their right, it is their duty, to throw off such government, and to provide new guards for their future security...""

Video of a conversation with my wife today---Cabin Fever is setting in...

Do you have a sweet tooth? Find out why government policies and industry "rent-seeking" make it expensive for you to enjoy your vice...

Through a combination of Tariffs and Quotas, the supply of sugar coming from foreign sources to the US is less than what it would be without these market interventions.  The graph below shows the result of these policies on the price of sugar, domestically and internationally:

Source: Carpe Diem

You can see a significant difference between the World price and the USA price through time. Using a basic supply and demand graph,  we can analyze why this is so.

Let's just look at supply first. Below we have one supply curve for Domestic Supply  and one supply curve for Domestic Supply PLUS Imports.  At P* we see the Domestic Quantity Supplied is "QS1" (Point "A") and at P* we see the Domestic Quantity Supplied PLUS Imports is "QS2" (Point "B").

The amount of sugar imported at P* is QS2 minus QS1.  Now we must insert a Market Demand curve, "Demand*" that intersects "Supply 1 Domestic + Imports" at Point "B". This assumes NO tariffs or quotas on sugar. The market is relatively free to set the price world-wide. The price is re-labeled "Pworld".

Assume the worst case scenario--the Federal government imposes tariff and quotas to the point where NO sugar is imported into the US at all.  In the graph below we take away "S1 Domestic + Imports" curve from the graph above.  We are only left with the Domestic Supply curve "S*Domestic".

FREEZE!!! Assume the market does not immediately recognize what just happened and the market price STAYS at "Pworld". At "Pworld" the Domestic Quantity Supplied is "QS1" BUT the Quantity Demanded is still at "Qd1".  The Market QUANTITY SUPPLIED IS LESS THAN the Market QUANTITY DEMANDED. If we subtract QS1("A") from Qd1("B") we will find there is a SHORTAGE of sugar in the market:

How does a market solve a shortage? Look at the nice neat triangle formed between Points "A", "B", and a new Point "C".  The market inertia will be for the price to INCREASE.  The price increases and consumers DECREASE their quantity demanded at the higher price, move from Point "B" to Point "C" (Law of Demand) and suppliers INCREASE their quantity supplied at the higher price, move from Point "A" to Point "C" (Law of Supply).  Both sides of the market will MOVE ALONG there respective Demand and Supply curves until a new market equilibrium is achieved at Point "C":

At Point "C" we have a new domestic price for sugar, "Pdomestic" and a new market equilibrium "Q*":

The result is the US has LESS sugar at a HIGHER price. 

Using welfare analysis, consumers have lost some Consumer Surplus. This means consumers get to enjoy less sugar ("Qd1 minus Q*) at a lower price ("Pdomestic minus Pworld").  The graph below shows this area of lost Consumer Surplus:

Domestic producers of sugar gain some Producer Surplus--at a higher price, "Pdomestic minus Pworld", they increase their quantity supplied "Q*minus QS1". The area of additional Producer Surplus reaped by producers is shown in blue below:

However, the producer gain in surplus is actually a net loss for society.  The additional domestic resources, the difference between Q* and QS1, allocated to produce sugar could have been used for something else--OPPORTUNITY COST of producing sugar that we could have imported.  If we had imported readily available sugar from foreign sources, consumers (domestic producers of products that use sugar) could have consumed more sugar at a lower price AND domestic resources could have been freed up to produce something else. The area of Producer Surplus is the opportunity cost to society for not engaging in trade with the rest of the world.

On the other hand (famous Economist hedge)...MAYBE this is a GOOD thing overall!  Extra Credit on the next test if you can find the bright side to the policies of tariffs and quotas on sugar...

Convenient chart on how much the average Egyptian spends on Food...You will hear more and more about the link between food and upheaval...

This is a chart of roughly how much the average Egyptian spends on needs and wants.  I assume this is typical of a citizen in a relatively low income country.  Food is a very large part of their budget and when prices increase it imposes a disproportionate burden on the family budget. 

Source HERE

Inflation in China reduces our trade deficit with them and brings jobs back to the US, right? I REALLY hope not!!

The other day in class I referred to Inflation as a thief in the night that takes money out of your pocket.  Not literally, but it does reduce the purchasing power of the money you possess, so you are in some measure being robbed.  It not only robs individuals, but whole countries. You might be surprised by which country, in my opinion, will be hurt the MOST by inflation in China---The US!

This article in the NYTIMES: Inflation in China May Curb U.S. Trade Deficit suggests that inflation in China will help reduce our trade deficit with them and that this might be a good thing. Yes, with higher prices for Chinese goods we will buy less (the Law of Demand) from them.

I. am. waiting. for. the. good. news...

This means the "stuff" we do buy from them, and will continue to buy from them, will be more expensive.

Inflation in China does not benefit us. It makes us pay more for staple items that meet our "needs" and we have less to buy things we "want". How is that a good thing?

Many of the consumer goods mentioned in the article produced in China are goods that are low tech in nature and have reached a routine manufacturing stage where it does not take a lot of skill or resources to produce them. THOSE JOBS ARE GONE FROM THE US AND WILL NOT COME BACK.  No amount of hand-wringing and politicking will change that.  Nor should we covet them.  Rather, we must invest in and prepare for the jobs of the future, not invest current resouces in trying to recover the jobs of the past.  I don't teach so you can re-gress. I teach so you can pro-gress.

More on Food Security and Toppling Governments---look for the underlying "trigger"---I propose we send in Matt Damon--He has the solution!!

I disagree with the "Malthusian" comparison in the article below but I agree with the underlying "trigger" for this potential domino effect of regimes falling across the Middle East---Food security.  You can always get young people in the streets to protest, well, most anything. But to get the bulk of the population, that just wants to stay under the the radar of the authorities, to go out and angrily demand change, then mess with the food supply and food prices. The article mentions other authoritarian governments purchasing additional grain supplies (which in turn will drive up the price and exacerbate the situation).  I suppose those countries should have focused on economic policies instead of creating police states  (See video below)---Do monarchs and dictators understand opportunity costs?? Rhetorical question...

The Guardian: Egypt and Tunisia usher in the new era of global food revolutions

""Political risk has returned with a vengeance. The first food revolutions of our Malthusian era have exposed the weak grip of authoritarian regimes in poor countries that import grain, whether in North Africa today or parts of Asia tomorrow.

The surge in global food prices since the summer – since Ben Bernanke signalled a fresh dollar blitz, as it happens – is not the underlying cause of Arab revolt, any more than bad harvests in 1788 were the cause of the French Revolution.

Yet they are the trigger, and have set off a vicious circle. Vulnerable governments are scrambling to lock up world supplies of grain while they can. Algeria bought 800,000 tonnes of wheat last week, and Indonesia has ordered 800,000 tonnes of rice, both greatly exceeding their normal pace of purchases. Saudi Arabia, Libya, and Bangladesh, are trying to secure extra grain supplies....""

Syriana - Now that You are My Economic Advisor | Movies & TV | SPIKE.com

Interested in Economics? This TED Talk by a Behavioral Economist is entertaining and shows how you merge economics with psychology...