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This is who leads us

Posted by Jeff (ILoveCapitalism) at 11:21 am - April 1, 2014.
Filed under: Debt Crisis,Depression 2.0,Economy

Janet Yellen, who is President Obama’s new chair of the Federal Reserve Bank (Politburo that plans our economy), and who is thus the most powerful woman in the world, gave a speech yesterday where she bemoaned the fact that inflation isn’t high enough (in her view).

To humanize her speech, she told about three people who are long-term unemployed. If only there were enough inflation for these poor people to find jobs. It’s Yellen’s noble job to manipulate the economy until they can. But guess what? Two of the three have criminal records. Might that have anything to do with their unemployment?

One was Dorine Poole, who lost her job processing medical insurance claims when the recession hit.

“When employers started hiring again, two years of unemployment became a disqualification,” Yellen said in her speech yesterday to a community development conference in Chicago. “Even those needing her skills and employment preferred less-qualified workers without a long spell of unemployment.”

Poole was convicted of felony theft 20 years ago after she fell in with a “bad circle,” she said in a telephone interview…

Jermaine Brownlee, a skilled construction worker and apprentice plumber, “saw his wages drop sharply as he scrambled for odd jobs and temporary work,” Yellen said.

Brownlee said in a telephone interview that he was convicted of possession of heroin last year and currently is on parole.

OK, so was Yellen just caught by surprise? Did her speechwriter goof? Nope:

Yellen met personally with both people and knew about their records before the speech.

So basically, the most important person in our economy is determined to create inflation until she sees even the least employable people of all – namely, convicted criminals – in demand as employees. “Fasten your seatbelts; it’s going to be a bumpy night.”

CAVEAT: Lest the excitable accuse me of being a doomsday theorist (gasp!), I shall duly warn that in no way am I predicting instant hyperinflation as of tomorrow morning. In fact, for now, Yellen has officially adopted a less-inflationary stance as she “tapers” the Fed’s recent inflation-creating efforts. I have said “for now” and “officially”, because I think it’s Kabuki theater. As the Taper progresses over the next several months, it will cause markets to drop – whereupon Yellen will revert to full inflation-creating mode (gladly, under political cover). The point here, about her speech, is that it tips her hand.

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47 Comments

  1. Well I do declare! Quick, y’all — get yer gold and yer guns! Ditch them thar non-liquid-i-tee!

    Comment by Ignatius — April 1, 2014 @ 11:36 am - April 1, 2014

  2. At least you’re trying to be funny :)

    Comment by ILoveCapitalism — April 1, 2014 @ 11:41 am - April 1, 2014

  3. Love the post, spot on.

    Comment by Marc Winger — April 1, 2014 @ 11:47 am - April 1, 2014

  4. I liked this post and I enjoyed the caveat at the end.

    Comment by Vince Smetana — April 1, 2014 @ 12:04 pm - April 1, 2014

  5. Sorry for the accidental handle switch. Posting on different device.

    Jury duty today.

    Comment by Cinesnatch — April 1, 2014 @ 12:05 pm - April 1, 2014

  6. Every day that I get up and the world hasn’t turned upside down and blood is not running in the streets, everything is just as peachy as I could possibly expect.

    I’m not unemployed. So, unemployment is not really a problem.

    I don’t have to sit in line to get gas, so gas is not a problem.

    When I go to the grocery store, it is full of groceries.

    People are buying cars.

    When I turn on the tap, clean water flows out.

    Lighten up. What could go wrong?

    Worse case scenario is that they will just have to print more money and pass it around to people so they can spend it. Simple as that. No problem.

    Comment by heliotrope — April 1, 2014 @ 1:15 pm - April 1, 2014

  7. Several judiciary-trust managers I’ve spoken-to have been spooked by the specter of a deliberate-return to inflation and hyper-inflation as a desperate means to “save” the Economy by fiat-devaluation of the huge piles of government securities and pension obligations. It’s easier to pay-off the Public-Employee Unions and the Chinese and other overseas US debt-holders when you can replay them dollar-for-dollar in devalued-dollars worth a-quarter.

    In buying-power, the US dollar is worth $0.20 of it’s value when I was in College in the 1970s. And in the 100-years of the Federal Reserve, the US dollar is worth about $0.02 of it’s 1912-value in buying-power. Against Gold at 1912 $20/oz. it’s now $1279.63/oz. (4-1-2014) being 1/63.98th it’s pre-Fed value…or $0.01556 it’s original value.

    Comment by Ted B. (Charging Rhino) — April 1, 2014 @ 2:02 pm - April 1, 2014

  8. In the imortal words of Alfred E. Neuman: “What, Me Worry?”

    Of course, when the pump jocky at the gas station, the clerk at the grocery store, the salesman at GM, and the water company refuse to take that silly U.S Greenback monopoly money for goods and services, the naysayers who laughed at that dastardly doomsday theorist ILC, will be wishing they listened to him and bought that sig sauer 9mmm semi automatic to protect their a$$!!!

    ILC, we in the industry fear Yellen in the way that she is such a lap dog(sorry Jman1961, that damn dog is back again) for obama. She will do everything in her power(which is big) to make his last 2 years go without an economic disaster. Our worry is what will happen to the dollar, rates, and inflation AFTER he is gone(can anybody say Jimmy Carter?). Soooo – ya got about two years befor the $hit starts hitting the fan.

    BTW – some inflation is a good thing – gives companies pricing power – but when it develops into hyperinflation, that is a different ballgame. We don’t think she will get into “full inflation-creating mode” until after he is gone. Then, look out!!!

    But, of course we may be wrong. Who cares? What, Me Worry!

    Comment by mixitup — April 1, 2014 @ 2:26 pm - April 1, 2014

  9. (sorry Jman1961, that damn dog is back again)

    Ha! Ha!

    WOOF! :D

    Comment by Jman1961 — April 1, 2014 @ 2:33 pm - April 1, 2014

  10. some inflation is a good thing – gives companies pricing power

    Well, that’s not an eternal principle of economics, it’s a cultural artifact. In our culture, you’re never supposed to cut someone’s wage or salary. So the only way you can reward other people is by raising theirs, and it takes some inflation to feed that upward bias.

    Comment by ILoveCapitalism — April 1, 2014 @ 2:50 pm - April 1, 2014

  11. I don’t know about it being an eternal principle of economics, but it was in the first chapter of my Samuelson’s economics text book I used in Econ 101 in college. It was the chapter on supply & demand and the elasticity curve of a product. Pricing power, and the ability to raise the price of a good or service can be a good thing for the company, investors and employees. At some point though, it becomes destructive to all 3 parties. That is, the lack of pricing power as well as rampant inflation of pricing both being destructive.

    Comment by mixitup — April 1, 2014 @ 3:42 pm - April 1, 2014

  12. I hate to tell Yellen and Obama but there are ”HELP WANTED” signs all over Utah.
    Yet there are unemployed people who choose to beg on the streets!
    And sometimes they are standing just feet from a HELP WANTED sign while doing so!
    No amount of raising inflation or the minimum wage or any other thing will get these few to go take up work for a living.
    They value their freedom too much.

    Comment by Nanny G — April 1, 2014 @ 5:18 pm - April 1, 2014

  13. Not all inflation is equal. There are aggregate measurements similar to a PPP but theoretically, monetary policy often tightens as a function of demand for labor as price inflation usually follows. So, the Fed attempts to curb inflation (short-term interest, usually) when triggered by certain thresholds in the labor market, not as a reaction to prices that have already risen.

    I don’t know the current labor figures but inflation can be ‘created’ (I prefer ‘allowed’, as I tend to think price fluctuation is normal — or should be) as a consequence of employment trends; so, Yellen must be awfully perplexed by a jobless recovery. What is it she proposes to do, exactly? Employment figures of the kind she needs to employ those she thinks are deserving aren’t created through inflationary measures. We’re suffering from structural issues, not a lack of sympathy.

    Comment by Ignatius — April 1, 2014 @ 5:22 pm - April 1, 2014

  14. Y’all are, of course, talking about forms of price inflation. In the lingo I use (more Austrian School), inflation is monetary: the expansion of the monetary base (M0), as such. Prices follow as but a consequence, and with “long and variable lags” (as a non-Austrian, Milton Friedman, once put it). In our case, huge amounts of monetary inflation have been (metaphorically) stored in the asset markets, and/or leaked abroad via our trade deficits.

    Comment by ILoveCapitalism — April 1, 2014 @ 5:32 pm - April 1, 2014

  15. Mixitup notes @ #11:

    It was the chapter on supply & demand and the elasticity curve of a product. Pricing power, and the ability to raise the price of a good or service can be a good thing for the company, investors and employees.

    I can not argue for or against this bit of Samuelson advice, but I can refute it as a universal economic “rule.”

    Oranges are a product. When the trees bud in the early spring, a great deal of what determines the size and quality of the crop in the fall depends upon water, wind, temperatures, bees, fungus and pests. At harvest time, the availability of labor can be a crush on marketing costs. A general bumper crop pushes the supply way up and the demand price way down. No matter what the circumstances, the sunk cost in getting the crop from bloom to ripe fruit is behind the grower. Under no circumstances, does the grower set the price of his fruit. It is sold at auction to the highest wholesale bidder. The grower can not store fruit waiting for an agreeable marker price. It can stay on the tree only so long and a freeze is always a potential crisis at the door. The concentrate market allows the excess crop to be held in freezers to be released when prevailing prices are attractive. But fruit sent to the concentrate market is very rarely at parity with the cost of producing the fruit. The concentrate market helps recoup costs, at best. Furthermore, the large concentrate producers have their own junk fruit groves which feed their basic supply chain to insulate them from having to raise the price on concentrate fruit bought on the open supply market.

    All of this is to say that “pricing power, and the ability to raise the price of a good” can be an impossible thing for the company, investors and employees.

    Comment by heliotrope — April 1, 2014 @ 6:06 pm - April 1, 2014

  16. Great post Jeff. I have most of my retirement in equities. I would not buy a CD or and type of debt instrument at this time. Interest rates are bound to rise as inflation hits.

    Comment by Charles — April 1, 2014 @ 8:55 pm - April 1, 2014

  17. And, for the reasons you used in your example heliotrope, is why the futures market, the mercantile exchanges and the options markets were invented:
    “A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. These types of contracts fall into the category of derivatives. Such instruments are priced according to the movement of the underlying asset (stock, physical commodity, index, etc.). The aforementioned category is named “derivatives” because the value of these instruments is derived from another asset class. [1]”

    There are few if any orange growers, steel makers, corn growers, etc. that don’t use forward contracts and futures to manage the risks that you outline:

    “Futures markets “provide partial income risk insurance to producers whose output is risky, but very effective insurance to commodity stockholders at remarkably low cost. Speculators absorb some of the risk but hedging appears to drive most commodity markets. The equilibrium futures price can be either below or above the (rationally) expected future price (backwardation or contango). The various effects futures markets can have on market and income stability are discussed. Rollover hedges can extend insurance from short-horizon contracts over longer periods.”(Newbery 2008)[1]”

    There is not a company or business today worth talking about that doesn’t use instruments on the futures or options exchanges to manage risk, protect prices, and lock in profits.

    They may not fall into an economic universal rule, but they are used every day in every economy in every corner of the world. And I should add, used quite successfully.

    Comment by mixitup — April 1, 2014 @ 10:10 pm - April 1, 2014

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  20. Y’all are, of course, talking about forms of price inflation.

    FTR, the points I made are: 1) there are various forms of inflation (“Not all inflation is equal.”); 2) the traditional relationship between the Fed and employment (“…the Fed attempts to curb inflation (short-term interest, usually) when triggered by certain thresholds in the labor market…”); 3) in this relationship, price is a consequence and not a catalyst (“monetary policy often tightens as a function of demand for labor as price inflation usually follows” and “… not as a reaction to prices that have already risen…); 4) the idea of ‘inflation creation’ (“…but inflation can be ‘created’ … as a consequence of employment trends…); 5) traditional Fed action via inflation, asking how Yellen proposes to achieve her stated goals (“What is it she proposes to do, exactly? … aren’t created through inflationary measures.”). My guess is that employment is the stated reason for public consumption but that the real reasons are political and international.

    Comment by Ignatius — April 2, 2014 @ 5:21 am - April 2, 2014

  21. There are few if any orange growers, steel makers, corn growers, etc. that don’t use forward contracts and futures to manage the risks that you outline:

    This is just not the fact. Lobster fishermen do not have this commercial agriculture conglomerate model, not do they have government subsidies to provide an artificial floor for their prices.

    New York City has a huge number of investors collecting farm subsidies because there are people who play the futures markets and the government subsidies simultaneously and never set foot on the soil. That crowd exists and fits your model.

    The dairy cow production crowd is perhaps the best fit your understanding of a market organized agricultural cartel. We can throw steel out of the discussion because it is not an agricultural commodity.

    Corn is a great example for your argument. There are giant corporation corn growing and processing organizations that have had great effect in marketing corn to help fuel automobiles. For the small farmer, the government subsidizes storage and insures a floor price when the corn is finally marketed. That does not work for apples, celery, strawberries, clams, roses, avocados, lobsters, or a multitude of perishables.

    All across America are small multi-production farms that do not get to play the game you have outlined. They are akin to mom and pop stores.

    Orange growers have formed coops and established their presence in their state capitals, and there is an orange juice futures market. But the juice market exists because oranges can be converted to “brix” with a very long storage life. There is no fresh fruit futures market.

    Suppose you have 50 acres devoted to growing strawberries. (That is a gigantic amount of land to turn one crop.) You build the mounds, install a trickle system, have the green house to propagate the roots and plugs, shield the whole 50 acres with bird netting, spray and fertilize and line up your stoop labor to carefully pick the ripe enough fruit and remove the damaged or overripe fruit. They do this every other day until the crop in harvested. So far, you have not made a dime.

    You have prevented powdery mildew and leaf spot and black root and kept the moles, aphids, fruit flies, slugs and caterpillars. Now this very fragile delectable is ready for the fresh fruit market where it will bring the highest price per pound. There is no cartel or futures market setting the bottom price. The strawberries are completely at the whim of corporate buyers who risk their investment of a profitable return.

    The strawberry farmer at the local farmer’s market sits all day with his perishable goods growing older. He can ask what he wants for a pint, but he can’t make the buyer pay it. That is especially true if the market that day is heavy on strawberries.

    My point has not changed. Dirt farming and fishing is essentially a gamble and in a great deal of it totally subject to market conditions and not something the producer can manipulate on the price level.

    The entire farm subsidy program under FDR was predicated on trying to “balance” dairy and grain production.

    Comment by heliotrope — April 2, 2014 @ 8:35 am - April 2, 2014

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  26. it was in the first chapter of my Samuelson’s economics text book I used in Econ 101 in college. It was the chapter on supply & demand and the elasticity curve of a product. Pricing power, and the ability to raise the price of a good or service can be a good thing for the company, investors and employees.

    A supplier has power to raise prices like that, to the extent that people are dependent on his product and it can’t be easily replaced, nor easily supplied. In heliotrope’s example, people may *want* strawberries that are in scarce supply this year, and so the price goes through the roof (to achieve effective rationing). But it’s temporary, and not anything in the farmer’s power, because the next year there will be a lot of strawberries, and/or they will be less in fashion as most people got accustomed to other fruits, etc.; so the price crashes.

    The larger point, I think, is that pricing power is neither good nor bad to the economy as a whole. To the extent that it’s good for a particular business, it is (in equal measure) bad for that business’ customers (although not so bad that they all stop doing the trade).

    As to whether inflation is good because it gives pricing power: I don’t think so. Since pricing power is economically neutral, it would not follow that something which gives it is necessarily good. I also think that inflation only gives nominal pricing power, not real pricing power.

    What I mean by that is, the distinction of nominal vs. real prices. My point earlier was that we live in a culture where people feel that they should not have to accept decreases in the price (nominal) of what they’re supplying; so we achieve real (or relative) price adjustments by having an upward bias to prices. Say it’s time for auto worker wages to go down, and oil to go up. That adjustment *will* come about in real terms; it can’t be stopped. But our auto workers may refuse to accept wage cuts, so what happens instead is, the Fed prints a bunch of money and the price of oil (or whatever is raring to go up) is sent up that much farther. So that the auto worker can keep the same nominal wage – although now it buys less; the auto worker did still get the real wage cut, that he had coming.

    Comment by ILoveCapitalism — April 2, 2014 @ 11:06 am - April 2, 2014

  27. Oh, but it is the fact:

    Hedging is one of the most important risk management decisions that farmers make and has
    a potentially large role in the level of profit eventually earned from farming. Using panel data
    from a survey of Georgia farmers that recorded their hedging decisions for 4 years on four

    Journal of Agricultural and Applied Economics, 42,4(November 2010):791–803
     2010 Southern Agricultural Economics Association

    Here is a link to the entire file: http://ageconsearch.umn.edu/bitstream/100519/2/jaae311.pdf
    crops, we examine the role of habit, demographics, farm characteristics, and information
    sources on the hedging decisions made by 57 different farmers. We find that the role of habit
    varies widely and that estimation of a single habit effect suffers from aggregation bias. Thus,
    modeling farmer-level heterogeneity in the examination of habit and hedging is crucial.
    Key Words: Bayesian econometrics, habit formation, hedging decisions, information sou

    Not every producer of things uses hedging – thus they are at the mercy of their market. Not every product has contracts they can use to hedge their product like the lobsters or small strawberry growers you point out – but, they are not a significant part of the huge US or global economy. Companies, businesses and individual growers and producers use sophisticated hedging strategies every day. They also use currency hedges as well to manage their risks.

    I thought we were talking about inflation and priceing of goods and services – steel is just as important as ag products.

    I understand that in the futures market it is FOJC that is traded – so on a technicality there is no fresh produce contract – yet the ebb and flow of the pricing of contracts, as well as the effects of speculators and hedgers has a material impact on the pricing of all products up and down the line – as well as a cold spell, a freeze or an insect infestation – they all matter in the pricing of produce, the cost of the product, and the eventual proffit made or lost up and down that products life cycle.

    Heliotrope, with all due respect, the 50 acre farmer growing strawberries, blackberries etc.. is a drop in the ocean when compared to the millions of acres used for corn, cotton, soybeans, wheat, oranges and so forth. The 50 acre farm is of little concern to the US or global economy or the rise and fall of interest rates and inflation. Agood example in recent years was how the price of corn caused a dramatic increase in corn meal, which in turn had a serious impact on the cost of food for third world countries that corn meal is a staple product.

    I think we can agree to disagree on the impact of the expansive futures and options market on the US and global economies.

    Comment by mixitup — April 2, 2014 @ 11:24 am - April 2, 2014

  28. Pricing power, and the ability to raise the price of a good or service can be a good thing for the company, investors and employees.

    Absolutely true.

    But inflation is not and cannot ever be pricing power from either economic perspective:

    - If one views inflation as an increase in price, that price increase also affects key inputs, thus raising the expense and cost of creating the product. It does not matter if a product that once cost 5 cents and could be sold for 10 cents now can be sold for 12 cents if the cost is now 6 cents.

    - If one views inflation as a reduction in the value of money, then it does not matter if you can now get more money for the same product; the money you are getting is of less purchasing power than it was previously per unit, so you have gained nothing.

    Pricing power comes solely from demand. Demand comes from building a superior mousetrap for the appropriate audience. Inflation does not make a superior mousetrap; it merely means you pay more for the same mousetrap. That is a net drain on efficiency and productivity.

    Comment by North Dallas Thirty — April 2, 2014 @ 11:32 am - April 2, 2014

  29. NDT, well said!

    Comment by ILoveCapitalism — April 2, 2014 @ 11:37 am - April 2, 2014

  30. ILC, I will disagree about the importance of pricing power:

    Buffett Says Pricing Power More Important Than Good Management

    He goes on to say:

    The single most important decision in evaluating a business is pricing power,” Buffett told the Financial Crisis Inquiry Commission in an interview released by the panel last week. “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”

    Link to the entire article:
    http://www.bloomberg.com/news/2011-02-18/buffett-says-pricing-power-more-important-than-good-management.html

    I didn’t read the entire article, but you may find it of interst as well as to the importance of pricing power:
    http://basehitinvesting.com/the-importance-of-pricing-power/

    As for pricing power and the consumer. Inflation/pricing power is not bad for the consumer when it is progressing at a reasonable rate. We don’t live in a static world, so as prices are rising on goods and services the employee/consumer’s income is also rising, giving the consumer the luxury to buy more, save more, and to keep expanding the economy. It is when inflation(remember Jimmy Carter) is out of control the system is sent into a tailspin. The it takes a Paul Volcker to set it right – and what did he do to right the ship – raised rates/cost of money/ prices:

    Paul Volcker, a Democrat,[12] was appointed chairman of the board of governors for the Federal Reserve System in August 1979 by President Jimmy Carter and reappointed in 1983 by President Ronald Reagan.[13]

    The Federal Reserve board led by Volcker is widely credited with ending the United States’ stagflation crisis of the 1970s. Inflation, which peaked at 13.5% in 1981, was lowered to 3.2% by 1983.[14]

    The Federal Reserve board led by Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981. The prime rate rose to 21.5% in 1981 as well. Thus, the unemployment rate climbed up over 10%. The economy was restored since the tight-money policy was over in 1982. According to William Silber [15] “His policy of preemptive restraint during the economic upturn after 1983 increased real interest rates and pushed Congress and the president to adopt a plan [the 1985 Gramm-Rudman-Hollings bill] to balance the budget. The combination of sound monetary and fiscal integrity sustained the goal of price stability.”

    Comment by mixitup — April 2, 2014 @ 11:50 am - April 2, 2014

  31. NDT, I think I understand what you are saying, but I will also respectfully disagree. This link will take you to a good, but succinct article on the different types of inflation – of which “pricing power inflation” is described.
    http://www.buzzle.com/articles/types-of-inflation.html

    Not meaning to ‘cry a river,’ but I have some trades to make and bonds to buy for some clients, so I will let the article stand on it’s own.

    Comment by mixitup — April 2, 2014 @ 12:08 pm - April 2, 2014

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  33. That article appears to have been written by a Keynesian. Where is the discussion of interest rates, printing, etc.?

    Comment by Ignatius — April 2, 2014 @ 12:18 pm - April 2, 2014

  34. mixitup – Basically, I disagree with the conceptual framework of those links. Different conceptual frameworks, so we’re probably not going to reach agreement.

    Just looking at the Buzzle link, for example, I think its taxonomy of different types of inflation has a fair amount of nonsense built into it. From the article:

    Demand-pull Inflation
    This type of inflation occurs when total demand for goods and services in an economy exceeds the supply of the same.

    No: because that can never, ever, ever happen in real terms (as opposed to nominal). The real demand for goods and services in an economy is one and the same as the real supply, by definition. The economy is a place where people produce and trade things, and the supply of one good constitutes the real income or real purchasing power by which the supplier is then able to trade for – that is, demand – other goods or services.

    It continues:

    This type of inflation affects the market economy adversely during the wartime.

    There is a semi-truth in there, but it’s not being thought about very clearly. What happens in wartime is, the government spends a lot of money, which directly or indirectly restricts the supply of consumer goods (as it works to divert resources to the war effort). Where does the government get that money it’s spending? If 100% by taxes, then people’s take-home pay goes down equally to the government’s spending increases, and the *overall* price level is quite unaffected. If, instead, the government borrows-and-prints the money as the U.S. did in WW2: then yes, there will be considerable inflation in consumer prices. But that’s because of the underlying monetary inflation, that is, the underlying devaluation of the currency from the government’s borrow-and-spend(-and-print) policy. And thus we return to the concept of monetary inflation.

    So, you see, there is no “demand-pull inflation” in the economy as a whole, apart from underlying monetary inflation (debasement or corruption of the currency, via government deficits and/or money-printing). But, the article continues:

    For instance, if a play is staged and it becomes popular, the cost of the tickets for the next show will increase.

    And that’s another semi-truth. It is true, on its own terms…but it’s a bait-and-switch. The article *was* just talking about inflation across the economy. Now all the sudden, it isn’t. Now it’s suddenly talking about inflation in the price of one particular good or service. And it’s true: if the demand for *that one thing* goes up (while its supply does not), that one thing’s price will increase. But that says nothing about general inflation in the overall economy.

    See what I mean? The level of thinking just isn’t very clear. And that is typical of mainstream macroeconomics. It has, over many decades, devolved into a junk science that actually discourages clear understanding of economic realities. Anyway, I just don’t use a lot of mainstream macro concepts (or pseudo-concepts, as I would call them).

    As for Buffett’s comments on pricing power, well, to the extent that his comments are true, they match what I said at comment #26:

    pricing power is neither good nor bad to the economy as a whole. To the extent that it’s good for a particular business, it is (in equal measure) bad for that business’ customers

    Buffett seems to be talking about how he uses pricing power to evaluate the position of a specific business. Great. He’s right. But that still doesn’t mean pricing power is good for the economy as a whole (and it isn’t; it’s neutral, to the economy as a whole).

    Comment by ILoveCapitalism — April 2, 2014 @ 12:34 pm - April 2, 2014

  35. Heliotrope, with all due respect, the 50 acre farmer growing strawberries, blackberries etc.. is a drop in the ocean when compared to the millions of acres used for corn, cotton, soybeans, wheat, oranges and so forth.

    Well, Mixitup, I owned and ran a 100 year old family citrus business in Volusia County, Florida until 1983. We had better than 220 acres of mature groves in production and I sat on the boards of the Florida Citrus Mutual, The Florida Citrus Commission, The Indian River Growers Association, The Mims Citrus Exchange and the Seald Sweet Corporation, the Governor’s Council of 100, among a half dozen others. We valued every well run 20 acre grove we could bring into our fold.

    We lobbied. We worked creatively on labor pools. We bundled our fertilizer, pesticide, pruning, etc. contracts. We shared irrigation piping. We were one hip bunch of dumb farmers who made up a bit over 10% of the state citrus output. The small grower begged to join and the large grower was an active big brother.

    I would give a million dollars cash money to know how to manipulate the price and profit margin on fresh produce. Better than that, I can raise that offer to really big money by making a few calls.

    Please, please do not consider this a smack-down or an argument by appeal to authority. The never ending nemesis with perishables is regional vagaries due to being blind-sided by acts of nature. A strong cooperative can help the small grower enormously. But when a grower watches his entire season get “vortexes” it is of precious little consolation to chit chat about economic models.

    I have consulted for over thirty years with “small” businessmen on how to buckle up and ride out the vagaries of the market. I don’t use models pumped up by economists. I assess the key players, the business plan, the emotional attachments and the approach to market forces beyond their control and help to devise a workable path forward. A guy making garage door parts in the United States has no known way to compete against a production competitor in China. A guy growing raspberries in the United States had better visit and understand what is going on in Chile.

    I recently consulted with growers of roses in Ecuador. They sell roses at 50 cents per one meter stem including air shipment through major terminals in the USA. Their mature stem greenhouses sometimes have come to maturity with color variations that flop on the market. That is a seven year bath. You can’t get from root stock to supplying demand over night. If “pink-peach” bombs, you have a seven year bad lesson to overcome.

    I have a favorite poem from the 1950′s to explain this misery:

    Probable-Possible, my black hen,
    She lays eggs in the Relative When.
    She doesn’t lay eggs in the Positive Now
    Because she’s unable to postulate How.

    That is akin to the advice from Gertrude Stein: “Whenever you get there, there is no there there.”

    That is what underlies the notion coined by Thomas Carlyle that “economics is ‘the dismal science.’” He was examining slavery in which human misery is an economic trade off. As much as we would like to believe that circumstance is behind us, remember that labor intensive and pollution abatement costs drive production to those places where labor and environmental protection are least costly.

    I have no beef with Samuelson. His theory is as good or better than the next. But, like all one-size-fits-all prognostications, they rarely actually turn out to be immutable.

    One additional point. You mention “corn, cotton, soybeans, wheat, oranges and so forth.” Every one of those, except oranges, has government floor prices and import quotas which protect the grower to some extent. If I were to “over plant” soybeans on my multi-crop 180 acre farm, I would receive an “order” from the Department of Agriculture accompanied with aerial photos ordering to mow down “x” number of rows of soybeans in order to qualify for government crop supports for my farm in general. However, the government takes no interest in my apples, celery, peaches, sweet corn, lima beans or chicken yard.

    I hope this is informative.

    Comment by heliotrope — April 2, 2014 @ 7:28 pm - April 2, 2014

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