The Tomato Soup Index - Inflation Sucks

[Roger_Murdock]

You could buy a can of tomato soup in 1950 for a dime. In 2012, you can buy somewhere between 2.5 and 3 cans of tomato soup for a dime. Oh, but it has to be the same dime. (The current melt value of a 1950 silver dime is around $2.50.) It occurs to me that people see inflation and get angry, but most of them don't see the deflation that would have occurred if people were freely allowed to use a sound currency. The theft is bigger than you thought.

[Dalkore]

You could buy a can of tomato soup in 1950 for a dime. In 2012, you can buy somewhere between 2.5 and 3 cans of tomato soup for a dime. Oh, but it has to be the same dime. (The current melt value of a 1950 silver dime is around $2.50.) It occurs to me that people see inflation and get angry, but most of them don't see the deflation that would have occurred if people were freely allowed to use a sound currency. The theft is bigger than yoou thought.

Bottom-line is that inflation and continual reduction of your purchasing power is baked into the cake.  Our leaders have decided this is the proper way to run economies.  Unless you change our system from debt based into asset based, this will happen over and over again.  No debating that, it is basic math.  This is why I think Bitcoin is so interesting and worth the risk.  At this point, we can not create more Bitcoins so it can preserve wealth (purchasing power) so BTC is in the initial stages of becoming a wealth reserve asset.

[Grinder]

You could buy a can of tomato soup in 1950 for a dime. In 2012, you can buy somewhere between 2.5 and 3 cans of tomato soup for a dime. Oh, but it has to be the same dime. (The current melt value of a 1950 silver dime is around $2.50.) It occurs to me that people see inflation and get angry, but most of them don't see the deflation that would have occurred if people were freely allowed to use a sound currency. The theft is bigger than you thought.

Not really when it's so easy to adapt. If you put it in a savings account you would could buy just under 2, and if you put it in 1 year bonds you could buy about 5 after taxes. If you put it in an S&P index fund you could buy more than 50. Why anyone would want a system that would discourage people from investing and creating such a fantastic wealth increase is beyond me.

[Roger_Murdock]

You could buy a can of tomato soup in 1950 for a dime. I :'(on 2012, you can buy somewhere between 2.5 and 3 cans of tomato soup for a dime. Oh, but it has to be the same dime. (The current melt value of a 1950 silver dime is around $2.50.) It occurs to me that people see inflation and get angry, but most of them don't see the deflation that would have occurred if people were freely allowed to use a sound currency. The theft is bigger than you thought.

Not really when it's so easy to adapt. If you put it in a savings account you would could buy just under 2, and if you put it in 1 year bonds you could buy about 5 after taxes. If you put it in an S&P index fund you could buy more than 50. Why anyone would want a system that would discourage people from investing and creating such a fantastic wealth increase is beyond me.

Apples and tomatoes. You can't compare the return on savings in a deflationary currency with the return on riskier investments in an inflationary currency. As I pointed out in another thread, when you simply save your money (e.g., in a safe), you're making a "loan" of that money's purchasing power to the rest of the economy, but it's a kind of loan with no risk of default and that can be recalled at any time. The fact that you can tread water or do slightly better than that return in an inflationary currency by making riskier, less flexible loans is hardly surprising. Nor does it prove anything. Because you could do EVEN BETTER THAN THAT in a deflationary currency by making similar investments. There's just no getting around the fact that when a government or central bank prints new money, it gives the recipients of that new money real purchasing power without  creating corresponding value. That purchasing power has to come from somewhere. And it does. It comes from everyone else holding that currency. Some people call that "inflation." Some call it "theft." (But I see that as sort of a "tomato" / "tomahto" thing.  )

[Grinder]

That purchasing power has to come from somewhere. And it does. It comes from everyone else holding that currency.

No, it comes from there being lots people who have something they want to sell. Deflation discourages that, because it's easier to just hold on to the money than to invest them to create something new, or buying something so others can create something new. The evidence is that that's pretty much what you say you want to do with your dime.

[Roger_Murdock]

That purchasing power has to come from somewhere. And it does. It comes from everyone else holding that currency.

No, it comes from there being lots people who have something they want to sell. Deflation discourages that, because it's easier to just hold on to the money than to invest them to create something new, or buying something so others can create something new. The evidence is that that's pretty much what you say you want to do with your dime.

Right, it's easier (and safer) to just hold onto the money. It's also less profitable. And yes, I'd prefer to invest most of my money for a higher rate of return (even with a deflationary currency). So would most people. Gold is (sort of) available today as a deflationary currency that can be used for "pure savings" (despite unfair tax treatment). But most people don't just hoard gold, and the capital markets haven't ceased to function (yet, and if they do, it won't be gold's fault). So where's the problem?

[justusranvier]

That purchasing power has to come from somewhere. And it does. It comes from everyone else holding that currency.

No, it comes from there being lots people who have something they want to sell.

This sounds like a case of, "It is difficult to get a man to understand something, when his salary depends upon his not understanding it."

[Roger_Murdock]

That purchasing power has to come from somewhere. And it does. It comes from everyone else holding that currency.

No, it comes from there being lots people who have something they want to sell.

This sounds like a case of, "It is difficult to get a man to understand something, when his salary depends upon his not understanding it."

Do you think Grinder is Bernanke, Geithner, or Krugman?

[Fjordbit]

You guys don't understand inflation, okay. You can't just go by one single item to calculate a consumer price index. You see, you've got to use item replacement because as tomato soup gets more expensive, people will switch to something else, like a boiling pot of cherry Kool-aid, which only costs about $.10. That plus the fact that you can get a first generation iPhone on ebay for $50, a 90% reduction in cost, means we're spiraling into a deflationary liquidity trap we at the Fed call "con-flation." So, we're cranking up the printers and buying all the homes in America. It won't cause a bubble: Trust Us(tm).

/Bernanke.

[knight22]

You guys don't understand inflation, okay. You can't just go by one single item to calculate a consumer price index. You see, you've got to use item replacement because as tomato soup gets more expensive, people will switch to something else, like a boiling pot of cherry Kool-aid, which only costs about $.10. That plus the fact that you can get a first generation iPhone on ebay for $50, a 90% reduction in cost, means we're spiraling into a deflationary liquidity trap we at the Fed call "con-flation." So, we're cranking up the printers and buying all the homes in America. It won't cause a bubble: Trust Us(tm).

/Bernanke.

Is that a real quote from Bernanke?

[kjj]

You guys don't understand inflation, okay. You can't just go by one single item to calculate a consumer price index. You see, you've got to use item replacement because as tomato soup gets more expensive, people will switch to something else, like a boiling pot of cherry Kool-aid, which only costs about $.10. That plus the fact that you can get a first generation iPhone on ebay for $50, a 90% reduction in cost, means we're spiraling into a deflationary liquidity trap we at the Fed call "con-flation." So, we're cranking up the printers and buying all the homes in America. It won't cause a bubble: Trust Us(tm).

/Bernanke.

Is that a real quote from Bernanke?

A paraphrase.  And he isn't really responsible for the CPI manipulation, BLS does most of that.

[justusranvier]

Do you think Grinder is Bernanke, Geithner, or Krugman?

Who knows?
https://bitcointalk.org/index.php?topic=112881.0

[Dalkore]

You guys don't understand inflation, okay. You can't just go by one single item to calculate a consumer price index. You see, you've got to use item replacement because as tomato soup gets more expensive, people will switch to something else, like a boiling pot of cherry Kool-aid, which only costs about $.10. That plus the fact that you can get a first generation iPhone on ebay for $50, a 90% reduction in cost, means we're spiraling into a deflationary liquidity trap we at the Fed call "con-flation." So, we're cranking up the printers and buying all the homes in America. It won't cause a bubble: Trust Us(tm).

/Bernanke.

Bottom-line is that inflation will always be under-reporting because that is the best thing to do politically.  We take out things like food and gas even though most of our extra incomes goes into these items.   Inflation has been rising and it doesn't matter if LCD TVs are $100 if you don't have $100 to spend on them.   You don't deploy trillions of dollars into the economy and then tell people truthfully it is not causing inflation.   

The really boogie monster all status-quo supporters fears is DEFLATION.   Why, because it hurts creditors and god forbid a creditor takes a hit.   It started with Confidential of Illinois in 1984 when we bailed out the creditors and sense then, that is how we operate.   Risk is imaginary unless your not connected to the establishment.   People who decry class warfare are the same people perpetrating it on a daily basis.  Once the majority of people realize this and wake up to do something, that will be the day things CHANGE.

[OneVillain]

This is why we need a currency that cannot be printed at whim...

Note that it took 30 years for the price to double (1950->1980), and now it's doubled again in just the last five years (2007->2012).

And that's even despite improvements in technology to make the soup and to deliver it (and gas being cheaper than ever in terms of things that aren't dollars), and maybe even a cheapening of the product or a smaller profit margin to service a poorer market.

[Etlase2]

Nor does it prove anything. Because you could do EVEN BETTER THAN THAT in a deflationary currency by making similar investments.

You are begging the question. Accepting something as truth with no evidence. There are people and businesses on the other ends of those investments that must pay the price if investments provide a unilaterally better return in a deflationary economy. The rate of deflation *must* be taken into account to provide an accurate real interest rate, just as banks take into account inflation.

http://fskrealityguide.blogspot.com/2008/11/interest-rates-in-true-free-market.html

"Suppose the free market interest rate is 2%. I predict I can earn a 4% rate of return on my business. Therefore, it pays for me to borrow at 2% and invest in my business yielding 4%. Of course, I should include a margin of error in my calculation.

Suppose the free market interest rate is 6%. I predict I can earn a 4% rate of return on my business. Therefore, it does not pay for me to invest in that business. I'm better off doing something else."

The real interest rate will be interest + deflation, just like the real interest rate in a typical economy is interest - inflation.

Since bitcoin is a free market currency, the interest rate will be determined by how willing people are to borrow money vs. how much is available. If deflation is 5%, do you really think anyone trying to borrow money is going to pay 5% + the nominal interest rate? Or are they going to say "I'm better off doing something else"?

And of course the issue economists fear is what happens if the deflation rate makes a big leap one year? Say 8 or 10%? A whole lotta bankruptcies.

There's just no getting around the fact that when a government or central bank prints new money, it gives the recipients of that new money real purchasing power without  creating corresponding value. That purchasing power has to come from somewhere. And it does. It comes from everyone else holding that currency. Some people call that "inflation." Some call it "theft." (But I see that as sort of a "tomato" / "tomahto" thing.  )

You are right that the government/central bank unfairly favors certain institutions with new purchasing power without creating any new value. But you're ignoring the fact that Bitcoin does the same thing for wealthy holders. And it also comes from everyone else using bitcoins.

Say person A is a wealthy businessman who maintains a running personal savings of about 1000BTC. He spends a lot of it but brings the balance back up through his business venture.
Say everyone else has a total of 1000BTC that moves around the economy.

MV = PQ
M = money supply equals 2000 BTC
V = velocity of money, we'll just call it 1
P = price level, we'll call it 1
Q = quantity of real goods and services in the economy

2000*1 = 1*2000 (solving for Q) is our status quo

Now say wealthy businessman A wants to retire, but just for the sake of example spends no money whatsoever and removes his 1000BTC from the economy. So the velocity of money drops by half, and the price level drops by half (we'll completely ignore the unemployment implications and the fact that the businessman is unlikely to announce his plans to give the market perfect information to account for this collapse).

2000*0.5 = 0.5*2000

10 years later, new products, new people, new whatever has entered into the economy and it has doubled. To adjust for this, the price level has fallen further.

2000*0.5 = 0.25*4000

Now the wealthy businessman decides he's going to go on a spending spree and put his money back into the economy. Now:

2000*1 = 0.5*4000

He got to buy everything before the prices double to account for his money being put back in circulation. The market can't possibly adjust instantaneously. And everybody who saved a dime now has a nickel's worth.

How is this thematically any different from the current system?

Even if the economy stays even, even if removing his portion of the money causes no problems, he can still buy stuff for half price while everybody has been making half-wage and whatnot and cause a major upset in savings. Do you think the Bit Street elite don't get this? Do you really believe that increased purchasing power happens in a vacuum?

[Fjordbit]

How is this thematically any different from the current system?

The old man benefits because he planned for his future by saving, and also incurred years of opportunity cost by not employing his dollars in a different way, allowing him to get a limited advantage that will approach an equilibrium, versus the current system where the advantage is manufactured from thin air and awarded not based on foresight, risk management, and sacrifice, but on nepotistic cronyism employed to bail out the most egregious risk takers, creating a moral hazard that forces an continuous exponential expansion with no chance of equilibrium.

But other than that, I see how it's kind of the same.

[Grinder]

The old man benefits because he planned for his future by saving, and also incurred years of opportunity cost by not employing his dollars in a different way, [...]

Why do you think it's right that those who don't waste their opportunities should effectively be taxed to pay for his opportunity costs?

[deeplink]

How is this thematically any different from the current system?

The old man benefits because he planned for his future by saving, and also incurred years of opportunity cost by not employing his dollars in a different way, allowing him to get a limited advantage that will approach an equilibrium, versus the current system where the advantage is manufactured from thin air and awarded not based on foresight, risk management, and sacrifice, but on nepotistic cronyism employed to bail out the most egregious risk takers, creating a moral hazard that forces an continuous exponential expansion with no chance of equilibrium.

But other than that, I see how it's kind of the same.

+1 This is an excellent way of explaining why the current fiat money printing ponzi sucks.

It looks to me two things should be separated:

1) Arbitrary monetairy expansion or money printing => fiat only

2) Change in currency value due to large players (wealthy people) leaving and entering the market => same goes for both fiat and Bitcoin

Wouldn't you need really, really big players for 2) to have any noticeable effect at all?

Wouldn't 2) reach an equilibrium, because many large players will be entering and leaving at random points in time, so the effect would be even less noticeable?

[Grinder]

Wouldn't 2) reach an equilibrium, because many large players will be entering and leaving at random points in time, so the effect would be even less noticeable?

Not as long as new players are literally born every day, and those who invest make the economy become more productive.

[DanielBTC]

Roll (pão francês) in Brazil:

1995 - $0.05 (BRL),
2012 - $0,40 (BRL)