More on inflation

This is a continuation of the last post. After looking at it, it seemed to me that the interpretation of the chart was a little oversimplified, and that was because the numbers had changed so much over the 18 years of the study that log scale would be more enlightening. No easier said than done (OK, a little easier said). Here is the same graph in log scale:

In this form, it seems clear that (other than some cyclical behavior) there was essentially no commodity price inflation from the beginning of the study (January 1993) until the end of 2001 --  beginning of 2002 (also known as the Dot Com crash). In those nine years, a conservative saver seems to have actually increased the purchasing power of his bank account quite considerably (by around 50%, in real terms). During that golden age (which we can call the Age of Clinton), there was a combination of the peace dividend, considerable technological innovation, a gridlocked government which actually managed to run a surplus, and fairly conservative fiscal policy. The chart below shows prevailing money market rates, which are closely tied to Fed Funds:

You will note that the "Greenspan put" coincides almost exactly with the end of the golden age (marked somewhat more memorably by the terrorist attacks of 9/11/2001). The massive money printing, did not wait to make itself be felt: tgold prices rise at a 1.5% a month clip -- the log scale graphs are amazingly linear (the F statistic, which shows the strength of the trend, is around 5000), commodity basket prices rise somewhat slower (1.1% a month clip), with more variability. During this period (the last ten years, approximately), our hapless saver's money market account gains around 20% in nominal dollars, but loses around 70% of its commodities purchasing power. Being no fool, our saver decided to invest her hard-earned dollars in real estate, but imagine her dismay when that investment did about as well (or poorly) as her neighbor's money market account (the graph below shows the change in the Case-Shiller index versus the Money Market account. You will see that nominally, Case-Shiller outperformed the money market account by around 15%, but all of that and more was eaten up by transaction costs, property taxes, and so on. I am only viewing housing as an investment, so am not counting the savings of rent or the mortgage tax deduction.

Since the move into housing was borne of desperation with the performance of the simpler ways of saving, it is not at all surprising that the returns are similar, though as we all know, the disruption caused by the fact that real estate investment is very far from risk free (as everyone now knows) has been rather considerable.

It is always harder to determine causality than correlation, so the graphs by no means prove that that monetary policy caused the end of the Golden Age of Clinton and the implosion of our savings, but they do provide some food for thought, I hope.