Tuesday, May 16, 2006

First there is no inflation, and then there is

Today brings another report of an inflation number that appears to be high, but which, we are then told, is not high.

So today we hear that April's Producer Price Index (the PPI ) came in at 0.9% overall, but only 0.1% at the core. The difference, the standard lingo says, is that the core excludes food and energy prices, which are highly volatile and which tend to be more noise than information.

[Aside: there should be a rule among metrics-folks
and journos to always label growth rates accurately
and completely. Is that 0.9% a year-over-year growth
figure or a month-to-month growth figure? I think in
this case it is month-to-month, but . . . we should not
have to decipher and guess, should we?]

I, for one, though, cannot remember the last time I heard about the overall rate being much lower than the core rate, which is a situation that should arise fairly often (about half the time, say) if we are correctly ignoring the overall rate and focusing instead on the core rate.

The CW here, then (that's conventional wisdom to most folks), might just be delusional.

It is, though, straight from the horse's mouth (or, in this case, from the mouth of one of the horse's in the corral).

* * *

Most people I know, and most clients with whom I work, are not experiencing a low inflation world.

Yes, garments and electronics and things that can be manufactured overseas and brought over and then bought here are incredibly low-priced -- thank you (kinda) China, you manufactured-good pusher-man to the world you, addicting a globe-full of people (or at least major chunks of the globe) to manufactured goods that have embedded within them labor wages that would not, and could not, cut it in the places where the bulk of those manufactured goods are destined to be consumed/enjoyed.

Just like banks make their money on the spread between their cost of capital and the interest they charge on loans, so, too, are we making our material world on the spread, but this time it's the spread between our wages (with which we buy the goods) and the wages of the folks who manufacture the goods that constitute our material world (low enough relative to our wages to generate a sweet sweet spread).

In the Jared Diamond parlance, then, now quite well known (did you get all the way through that book?) (not many did . . . ), we're doing great with cargo. We've always been good at cargo, as we are, as Harrison told us, Living in the Material World.

* * *

But how about non-cargo? How about something that cannot be manufactured overseas -- something that we have to put together right here, using labor wages that can and do cut it right here right now via wages that can float someone's boat in the good ol' you ess uv A?

Yea, how about that -- the situation where low wages elsewhere can't save our high-wage-butts right smack dab here?

Well, by golly, that's the key, isn't it? Our cargo-excellence can't save us here, can it?

For instance, how about education and health care and housing? Not one of them can be manufactured by relatively low-wage workers overseas and brought here to be consumed/enjoyed by all us high-wage workers, can they?

And what of inflation for these three immobilities?

Most people have seen their health care costs rise about 25% to 40% per year over the past several years -- a doubling in a handful of years. The price of housing has seen similar increases and, here in Northern California, over the past forty or so years has increased at a rate of about 8% per year.

And what of tuition inflation? Well, during the years 1979 through 2001, tuition inflation ran at about double the overall rate of inflation in the U.S. (about 8% for tuition vs. 4.4% for the CPI) (yes, I have done tuition and Northern California real estate inflation numbs; please contact me if you'd like to see them).

And that's what we are all facing and fearing and fretting: the most top-of-mind/top-of-pocketbook/scary-as-all-get-out financial health issues for most Americans right now are all in-our-backyard-only sorts of services that no number of people elsewhere willing to provide cheap labor can support. These are issues about housing our families, and about guiding our children, to the extent we can, towards a well-educated, healthy entrance into the world we leave to them.

And, my oh my, isn't inflation vis a vis those three crucials just terribly frightening to all of us!

How fast can you run? Faster than the Red Queen (the RQ in JFRQ)? Can you earn your way past these issues? Can you grow your money-in faster than inflation takes it away?

That is where the real fear lies. That's where inflation, as measured by the PPI and the CPI and the CPE and the inflation deflator, don't really tell us very much about what it is to be living in 2006 in this lovely ol' world of ours.

* * *


So what of the future?

Well, health care and education can be, after all, imported, can't they? Here, though, importing involves the customer moving to the services, rather than the goods coming to the customer. Both are, if my macroeconomic teachings/failings serve me well here, imports (just as travel abroad is an import in terms of money flows).

So look for more than just plastic surgery pulling patients into Mexico and Southeast Asia. And look for lots of students going abroad for education.

And what of housing? Hmmm . . . let's see. I don't have much to offer up there, other than this: if you are living in the general area in which you want to be living over the long run, and if you are renting, you are on an unhealthy trajectory. You are apt to end up needing to export yourself to a place you find less desirable.

Here that means people getting Ellis Acted out of their SF apartments and finding that they have to move out of the city, due to affordability considerations. Or it means having to buy a first home somewhere other than where you'd like to be -- way Way WAY other, not just a bit off, a bit away.

And, typically (though not always), in the real estate context things get worse with time, so it's a matter of: do it now, take your medicine, bite the bullet, because, the more time goes on, the worse the medicine is going to taste, and the harder to swallow the bullet is going to be.

Why?

Because of the spread between two different types of inflation, but of course, and because few will see our incomes inflating commensurate with core inflation (the one that includes our China bonuses and the Walmart deep discounts -- the one that is low . . . ), let alone keeping up with the Made-Only-in-the-USA type of inflation that hits all of us in our health care, housing and education pocketbooks.


* * *

Look, also, for China to give way to other places, for, just like bigger boats, someone somewhere can just about always be found to provide inexpensive labor (as Bush gets the country into a politically-driven immigration-fear-mongering tizzy, all the while with all the powers that be having their lawns cut by, as they say, illegal aliens, this last sentence has a certain irony to it right now).

Look for the last great bastion of cheap labor to be Africa (Antarctica and the Arctic are out of the question, yes?). So maybe 25 years from now (50?) Africa will take China's place as the inexpensive manufacturer of choice, just as China took that mantle from Korea and just as Korea took that mantle from Japan.

* * *

Perhaps the cheapest labor of all time is the labor that built a good chunk of this nation. I refer, of course, to slaves.

The Wall Street Journal just reviewed a book called Inhuman Bondage by a fellow named David Brion Davis. You can read reviews of this book all over the place, but the WSJ, in its review (subscription required), as only it can, made the whole thing sound like a Harvard Business School business case.

Ever the financial wonk me, I found it fascinating

Here are two paragraphs:

Slavery was once the cornerstone of America's future. In 1860, as investment capital, the value of the nation's slaves far exceeded the cash value of all the farms in the South and represented three times the cost of constructing all the railroads that then existed in the U.S. At the time, the South grew more than 60% of the world's cotton, supplying mills and markets from Manchester to Moscow and making not only Southern planters but also Yankee bankers, insurers, commission agents and shipowners very rich. Meanwhile, since 1800 the number of enslaved African-Americans had quadrupled, from one million to four million. As late as 1863, a North Carolina railroad executive could optimistically assure his stockholders that the price of slaves would double by the end of the Civil War, which he confidently expected the South to win.

* * *


In 1860, the total value of slaves in the U.S. was $3.5 billion -- the equivalent of $68.4 billion today. Mr. Davis observes stunningly: "A more revealing figure is the fact that the nation's gross national product in 1860 was only about 20 percent above the value of slaves, which means that as a share of today's gross national product, the slaves' value would come to an estimated $9.75 trillion." About 360,000 Union soldiers died, in part, to set slaves free. In the process, they also overthrew the traditional -- and morally repellent -- underpinning of the nation's economy.


* * *

So today, just as has been true in one way or another always for humans, there are those who are purchasing the efforts of others at prices that, to the purchasers, look extremely low. Some things (health care, housing, education), though, can't benefit from that spread, and in those realms inflation runs just like it did when Juhmmy Cotter was running the show.

Currently, then, we are getting a great deal in terms of dollars and maximization of our consumption of goods (if not services). But is that a long-term good?

Was cheap gas during the 80s and 90s and the first five years of the new millennium a good thing?

Time will tell, but my hunch tells me no . . .






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