Quote of the Day 20th October

“In every government there must be somewhat fundamental, somewhat like a magna charta, that should be standing and unalterable...that parliaments should not make themselves perpetual is a fundamental.”

(Oliver Cromwell)

Comments

Jim said…
oooo, Fundamentals. AWesome, I like fundamentals.

There are others to look at when you look at an economy,

Human Action this is the thing that triggers and determines the behaviour of any economy.

Inflation this is an increase in the money supply (more accuratly its an increase in the Money supply + credit)

Savings this is a phenomenon of under consumption, or more accuratly defered consumption, and is the only way a loan can be made available to a person unable or unwilling to defer their own consumption.

Money a univesally (or almost universally) commodity used to facilitate trade without the limitations of barter. - a universal comodity that eases indirect exchange if you prefer.


Above are some fundamentals. So what can we learn from the above fundamentals?

Well firstly a good measure of how an economy is growing is the amount invested in capital goods, or in savings.

so to take (Exports - imports) + government spending + consumer spending + buisness investment
then calling it nominal GDP would give a very misleading measure of the state of an economy

to measure inflation look no further then the M1 figure. (as savings + captital investments measure growth)

And to measure inflation by the rise in general prices would also be very misleading.

so to take the GDP and then adust it for CPI measured inflation would tell you nothing.

never the less some economists have looked at the relationship of price increases (lets stick with that term to mean a general raise in prices or CPI) and inflation (increase in m1)

Most famous of all was Milton Friedman who spent years looking at the relationship, He finally anouced his findings by fundamentally saying "inflation is always and everywhere a monetary phenomenon"

What he was saying is that whenever and wherever he found large and rapid price increases it was acompanied by a rapid increase in the money supply (m1)

What friedman has found was that CPI will always track M1 but it can fall much higher or lower than M1 for relativly short times. More simply if there is a very large difference the economy is in disruption, and if the M1 is high and rapidly raising, and the CPI is slowly falling or severly lagging then expect rapid price increses.

This is the classic sign of a bubble. (to save some trouble the bubble is in treasury bonds, but this is fundamentals so we can leave that for another discussion)

Here is the M1 of the UK over the last 12 months
http://www.tradingeconomics.com/united-kingdom/money-supply-m1

Here is the CPI that matches the same graph.
http://www.tradingeconomics.com/united-kingdom/inflation-cpi

now, use the fundamentals and what do you see?
Jim said…
i like to think of a bubble as a baloon slowly inflating behind the sofa in a sitting room, the balloon will inflate and infate (lets assume its not inflating with helium) to keep it out of sight and out of mind, sure a few know its there, but if the mainstream reporters are saying other wise then no one takes much action, But if there is a pin prick, then Boom, and its presense is all too clear to everyone and Human action kicks in.

thus the bank runs on Northern rock happened over night (the crash) but the bubble in housing had been inflating for years.

The dot com bubble was a large kids party balloon.

the housing one was the size of a hot air balloon.

The treasury bubble is currently about the size of a Zeppelin airship.

Fundamentals they tell you a lot
Jim said…
Now, you probably realised, that was not specifically aimed at you Chris, it was aimed at other readers who would like to understand what is really going on. One of the best books i can recommend is "how an economy grows and why it crashes" by peter and andrew Schiff.

Do a google search its easy to find, but it expains the basics of economics in such an entertaining way its a must read. Its so simple a five year old could understand it, but it really is the best (and funniest. most entertaining) way to start. Hey its so easy even a person with a PhD in Economics like some certain News reporters could get it. (you know the ones always saying we need to spend more on consumer goods to boost the economy) I am not going to name any as i dont want Chris to get into any trouble by posting a comment by which i am referring to any particular news economist, I am not actually referring to any particular one, but the whole Keynesian idea is complete rubbish.
Jim said…
p.s.

People sticking to the simpler rules of classical, real or Austrian economics (what ever you wish to call it, but it just means staying to fundamentals) are the only ones who accuratly predicted the dot com bubble, and the housing bubble in advance. Most were laughed at and ridiculed, on screen at times, but so far the funamentals have always had the last laugh.

there is never a jump from micro to macro, the rules are the same. does not matter if you are a single person, a family or a giant country the rules of your economy are the same. Sure the bigger you are, the more flexibility you have but thats not infinte, and when it does end, the bigger you are the harder you fall. The longer you kick the can down the road the worse the damage when you get to the end of the road.

History tells us this, time after time.

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