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Low inflation conspiracy theories

Hi Cullen. Nice post. You just have to love the irony behind supposedly "free market" thinkers who believe that millions of traders and companies are pricing their assets wrong because they're stupid enough to believe the government is duping them. How could any rational person believe this? It's nuts.

Why do you think these conspiracy theories persist?

Honestly, I think it’s mostly bias. First, people don’t really know what “inflation” is (an aggregate measure of ALL prices). Second, people are biased to see the largest price increases because it evokes the strongest memorable emotional response. It’s classic case of “sticker shock”. You don’t notice that your iPhone is now a camera, computer, flash light, phone, camcorder, recorder, music device, watch, calculator, etc all of which would have cost you tens of thousands of dollars to buy 10 years ago for $500-$1,000 today. But if the price of a cheeseburger goes up by 10% we’re like “ooh shit, the world is ending!!!!”

Additionally, because real wages have been somewhat slow the median income earner is having trouble keeping up with the Joneses. So, even though inflation is in fact low real wages are making it harder for many people to obtain the lifestyle they want. Which is another sort of conundrum. Modern life, by almost any measure, is better than ever. Our living standards have gone up for everyone. But so have our expectations. So you have a massive disparity between what we can afford in the things we NEED and what we can afford in the things we WANT.

So there seems to be a lot of bias impacting the way we internalize these changes.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Inflation is more money chasing after the same amount of goods.   The median income earner is seeing their income increase by 1.5% per year.  That’s pretty much where inflation is as well.

All of the growth in money at the top is going into financial assets (and expensive toys), not consumable goods.  For the moment, rich people have to earn decreasingly lower yields to take the same amount of risk.  What other choices do they have?  Buy yachts, jets, art, or other collectibles.

This probably leads to malinvestment => overproduction of goods and services => more deflationary pressure.

Real estate as a prime example.

Technology is another.

Maybe the irony in all this is that the malinvestment by the rich will ultimately lead to cheaper stuff and a better quality of life for everyone else.


Ok, I get your view about inflation and commodities. Makes sense to me. But, are commodities the only thing that matters when it comes to inflation ? What about rent, education, and health care ? Because these increased..so I am not saying I don't believe in the inflation data for commodities, but I tend to think that the inflation number of less than 2% is not a good representation of the increase of costs for most households in the USA.

It's not rational to assume the free market is always rational about the government and inflation.  There's massive group-think and herding behavior pressures that keep a super majority in line with the mainstream cultural zeitgeist for years, if not decades.  Recall how long inflation expectations were high after 1980-1982 simply because everyone believed it to be.

What's important is that as long as metaphysical reality is co-shared by enough people, it becomes a self-fulfilling prophecy.  ShadowStats might be true in its claims about BLS inflation adjustments just as tax protestors may be true in their claims about unconstitutional color of law, etc..  But until enough of the mainstream believe it to be true also, it has no real effect other than to get yourself into trouble.