OFF: consumer economics (was: Hawkwind MP3's)

[M Holmes]

Doug Pearson writes:

> >Indeed, but this is the first disinflationary period since the 1930's
> >isn't it? So now both factors are present and bingo, we get a stocks
> >bubble a credit bubble and now after asset rotation out of stocks, a
> >housing bubble.  Coincidence?

> Inflation has certainly gone up and down plenty of times (but it's
> been pretty low overall at least since the '89 scare)

Which is what us Kondratieff fans would expect.

> and we're not
> seeing actual deflation yet (but it remains a likelier possibility
> than anytime since the 1930's).

Indeed.

> But I think the housing bubble is
> part of the same economic bubble that the stock market was, not a
> follow-up; it's just that it's more effort to sell a house than a
> share (or to change mutual fund distributions), and people are
> likelier to hold onto a house until they absolutely cannot.  That
> makes it act slower.  (Similar to what I describe with mutual fund
> managers vs.  individual shareholders.)

I largely agree, though I contend that there's been asset rotation from
stocks into housing as a result of the lag.

> >The Fed certainly has decided that it's better to try to keep the
> >bubble going that take the medicine that deflation will bring.
> >However, Austrian theory says that the longer you run a bubble and
> >the more people and debt that it involved, the worse the aftermath.
> >I'd contend that Greenspan has averted a recession at the cost of a
> >depression.

> You may be right.  Are they guilty of wishful thinking for a soft
> landing instead of a crash?

That certainly seemed to be the case a couple of years ago. Certainly
we'd be more likely to be talking about neo-Keynesians in charge than
Austrians and so deman theories of soft landings would be more
acceptable than money theories of busts following booms.

> The latest indicators would seem to make
> those pretty slim hopes ...

What's interesting is that because of the war, the numbers are pretty
much going under the radar.

> >> One can quantify the economic loss of taking the time to stop to
> >> smell the flowers (based on time spent and "potential wages lost"
> >> or something like that), but not the non- economic enjoyment that
> >> is gained by smelling said flowers.

> >Perhaps this is what you meant and we're actually in agreement here?

> More or less.  I think there *is* a difference between the economic
> worth of certain activities to different people, which can be
> quantified in economic terms; and the individual, subjective,
> enjoyment, of the same activities, which cannot be quantified, except
> in the broadest senses.  That's why there's no way to prove, as the
> article you cite mentions, whether being too rich makes you unhappier
> (or happier).

OK, we agree here more or less.

> >Economics is about choices not money.  Money is merely one way in
> >which we measure the value to people of different choices.  In that
> >this is about a choice, it's economics.  Economics is about human
> >behaviour when confronted with options, it's not necessarily about
> >money or finance.

> The problem, then, that I see with economics, is that it doesn't
> *offer* any ways to measure the value(s) of those choices, *except* by
> means of money.

No, it measures choices in terms of the choices not made. If you want an
ice cream instead of two Chicory Tip records then that tells us about
their relative values to you (at that time). We could only measure this
choice in terms of money if there were other choices offering you
amounts of money to forego both.

In that it's useful to have a unit of measurement other than scoops of
ice cream or Chicory Tip records, economists try to do this a lot, but
it doesn't make money any more privileged a unit of measurement, just a
more convenient one due to its common acceptance.

> >I see we disagree about even what economics is.  If you're saying
> >that some choices are made without recourse to money then I agree
> >(though I don't necessarily agree that it would be impossible to
> >determine monetary values to the individual of the various choices).
> >I do not agree that choices made irrespective of money are not
> >economics.

> There are already many other areas of science that deal with different
> aspects of human decision-making: linguistics & mathematics,
> philosophy & logic, psychology, and physiology & neural biology, to
> name a few of the heavies.  For any one field to claim it has all the
> answers would be a bit conceited.

That's not what's claimed. I merely say that if it's about human choices
then it's economics, not that if it's about economics then economists
have it taped.

[...]

> Also, when a large mutual fund dumps a particular stock, that can have
> an overall effect on the market indicators, while an individual
> shareholder's actions are negligeable, so those managers probably
> realize that if they dump the contents of one fund, it reduces the
> value of *all* their funds.

Assumptions of continuous liquidity were what blew LTCM out of the water
in a potentially 1,000,000,000,000 Dollar wrong bet. I expect more fun
and games from that particular gremlin before very long.

> >Rents have fallen in SF though prices have risen.

> Yes (although the price increases have dramatically slowed since the
> boom years).

> >This kind of "divergence" is actually very common in bubbles,
> >particularly at the peak phase.  There was similar divergence between
> >the Nasdaq and Dow indices just before the bust started.

> The other interesting thing is that, just as prices fall before rents,
> higher prices fall before lower ones.  The prices of *luxury* real
> estate in the bay area has been falling for several years now, but not
> yet enough to average out the price of middle class houses (partially,
> I'm sure, because people have sold the luxury houses they could no
> longer afford they payments on, and used the proceeds to buy
> considerably more modest ones).

I think economists call this "price compression" and as you hint, it
doesn't bode well.

> In the USA, where agricultural food is semi-socialized (those milk
> subsidies!), people aren't dying of starvation.  However, because
> medical services are (for the most part) not socialized, there *are*
> people dying because they're not getting medical procedures that they
> need but can't afford.

Whereas in our socialised medical system, they die queueing for
operations at zero price. If the price is too low then demand exceeds
supply and some of it goes unsatisfied. Happened with bread in the
Soviet Union and it happens with healthcare here.

> Other industrialized countries with socialized
> health care (Sweden, Canada, etc.) have longer life expectencies than
> the USA.

Due to infant mortality being higher in the US, rather than poorer
healthcare.  You guys have the best healthcare on the planet.  As ou say
though, not everyone gets it.  OTOH many people in the US without
insurance are fit young adults who'd rather spend their money on other
things and just take the risk.  Who are we to say they should do
otherwise?

> >PG&E went bankrupt because deregulation meant that they bought
> >electricity prices at the marginal cost at 24 hour spot prices (that
> >is they were barred from buying wholesale and from arranging
> >contracts to supply for say a whole winter)

> This was only a problem because the energy trading firms were able to
> fraudulently drive up the spot prices; there was nothing to force them
> to sell electricity, as you say below, "at around the price it costs
> to make it".

Why should we be able to use force to make people sell their produce at
a price we'd like? Would you like someone to use force to have you sell
them your record collectioon at their preferred price?

The way to have people sell close to cost of production is to have the
option of taking one's business elsewhere. That's where free markets
come in. They're called free markets because agreement to a deal is
voluntary and not subject to force.

Incidentally, it's because I'm opposed to force and believe that human
interactions should be voluntary and cooperative that I'm a libertarian
in favour of free markets. The idea of forccing someone to sell you
something at any price I find morally abhorent.

> The only thing "unfree" about that market was the
> manipulation by the energy traders.

Hardly. There are more rigged markets in existence, but people have to
work quite hard to create them.

> >and there were price caps on what they could sell on to customers.

> I did mention that this part was certainly not "free market".  I
> wouldn't deny that! And as I said, that's the firewall that saved the
> customers (i.e.  all the businesses and residents of California) from
> the same fate that befell PG&E.

In essence the shareholders of PG&E were forced to hand over cash to
customers to the point that their shares became worthless. Admittedly
though, they made a bet when they signed the contracts.

> >What it wasn't is an example of anything like a free market any more
> >than forcing AndyG to buy CD's individually at whatever price the
> >owner asked

> Isn't an owner selling good/services for the best price he/she can get
> the essence of the "free market"? That's what the electricity traders
> did to PG&E.

No. PG&E couldn't buy any one unit of electricity any cheaper than the
price they paid for the last unit they needed. In any normal situation
they'd have been able to buy bulk and forward at a discount and would
have been able to buy cheap units before paying more for the last units.
The arrangement stiffed them royally and created the incentives for the
very fraud you decry.

> >Jeese Doug, we're not talking Evil Geniuses here.

> Thanks for the demonstration of 20/20 hindsight.  Unfortunately, the
> Enron balance sheet debacle (completely separate from the California
> power crisis!) makes it pretty clear that the people in charge there
> were thoroughly evil, and pretty damned smart.

People like Doug Noland had this, and more, taped in 1998 but were
regarded as lunatics. I think the yank public decided to ignore all the
problems here; with stock options; with pension funds; with pro foprma
earnings statements, etc etc etc just so long as the share prices based
on the false information were rising. It's hindsight to me in the large
but it wasn't hindsight for everyone.

> >> Like I said, free markets for CD's = good; free markets for
> >> essential foodstuffs = bad (IMHO).

> >Hardly.  In our rigged milk markets for example, we pay farmers not
> >to have cows in order to cut down on the excess milk.  We pay a fixed
> >price to farmers above the market rate and so we still get more milk
> >than we need.

> Which prevents potential milk (or other foodstuff) shortages.  A good
> thing IMHO.  I've never live through a food shortage, but my mother
> grew up in rural missouri during the great depression.  I would not
> want to share that experience.

I suspect we're a little too late in the game to avoid that. It won't be
an exact rerun of course but it won't be any nicer either. By most of
the figures that matter, the bubble we've just had produced outlier
figures much worse than the 1920's one and history does seem to agree
with the Austrians about bigger bubbles producing bigger busts.

> >This also applies to butter, meat, etc and is why european food
> >prices are around triple US food prices even before the cost of
> >taxation for all the above is taken into account.

> I was wondering why I keep seeing all those photos of starving
> children in Europe who can't afford food.  It must be priced out of
> their hands by those evil socialist governments!

The thing is that if you pay triple prices for food then you have much
less money left over for the other enjoyable things in life. You can't
live without food the way you can without electricity. What you do see
regularly on TV is europeans who are poorer than Americans. A big part
of the reason for this is that we have enough milk to bathe in it and
more besides. Whatever you might imagine, more than enough is not a
benefit.

> I can live with shortages of CD's (heck, I'm living with a shortage of
> 'Hawklords/25 Years On' CD's right now with very little complaint),
> but living with shortages of food or electricity would really, really
> suck.

We have deregulated power markets here. Prices have gotten continuously
cheaper and absent some bad snowstorms, no power cuts here. The only
fuckups are in the nuclear markets, which are of course, rigged to the
eyeballs.

FoFP