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Chapwood Index

Hi Cullen,

I just got started reading your material so please forgive me if this has been covered before. From my understanding it seems like your position is that QE has not caused inflation over the last decade or not as much as people think. This is true when you look at the official CPI but what are your thoughts on the Chapwood Index (http://www.chapwoodindex.org/).

I guess a possible explanation is that people in larger cities have done better than people in other cities and that's what has driven up demand + other factors that are completely irrelevant to the money supply. I'd like to hear your thoughts on the super high cost of living over the last decade versus incomes.


Hi @ladiesman540


The Chapwood Index has some pretty serious flaws. I outline them in the piece attached below.  The three big problems in their index:

  1. It's impossible for inflation to be as high as they imply given all the other data that is consistent with real growth. I mean, 10% annual inflation would imply that the real economy has been shrinking by an unfathomable amount over the last 10 years. It's not even possible.
  2. Bond and commodity markets cannot be wrong all this time. Bond yields and commodity indexes have cratered in the last 5-10 years. These are huge global markets. There's no way these markets are wrong.
  3. There's a huge amount of sampling errors in their data. You can actually doublecheck a bunch of their items and they are pretty consistent with the BLS data. But somehow they're sampling data that results in much bigger price changes. Not to mention, some of the prices they're including are flat out ridiculous (BlackBerry services and ballet shoes?).

Bottom line, the CPI is far from perfect. But as far as inflation metrics go it seems to be much more consistent with broader data than these alternative metrics.


Is Inflation Really 10%?

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

Thanks Cullen. To your points you do talk about national GDP but from my understanding of the Chapwood Index it tries to relate to individual cities and regions where inflation is higher than the rest of the country so it's more localized. I'm sure we can come up with reasonable explanations for why this is (tech, finance and healthcare jobs have disproportionally benefited in the last decade) but do you think that QE has played a role in this at all? Have the central bank policies created winners and losers in our society?

When you speak of asset inflation in your example you have two winners - you the homebuilder and the buyer of the home. If homes are increasing at a rapid rate and much past salaries of the average person - do we not become more of an unequal society and lose our edge.

In third world countries, assets like real estate go up an insane amount every year based on the average workers salary. This leads to massive wealth inequality, which leads to high crime and essentially, a hopeless future with little chance of getting ahead. I'm speaking only in terms of living in big cities right now but can we sure that these won't eventually trickle down to tier 2 and tier 3 regions.

Essentially what I'm trying to figure out is if the "perceived" unaffordability and inflation in the assets (stocks & real estate as well as rent) versus salaries of the average person is due to the fed's printing as the all the crypto supporters say or is it due to other factors.


CPI-U price index is based on average urban(U) cities (5.0%), not large metropolitan cities.  However, BLS also has a price index for selected metropolitan areas, which actually have lower price increase,  for example.

Chicago-Naperville-Elgin, IL-IN-WM 4.7%

Los Angeles-Long Beach-Anaheim, 3.9%

New York-Newark-Jersey City, NY-NJ-PA 3.2%

BLS data is here

Hi @ladiesman540

There's no doubt that Fed policy has helped some more than others. The Fed is, after all, a bank for banks so its policies are designed to help the banks the most. So, saving Goldman Sachs in 2008 undoubtedly helped a lot of rich investment bankers. There was also a huge multiplier effect across the entire economy, but it disproportionately helped bankers.

Most people make a mistake on "asset inflation" since rising asset prices doesn't hurt everyone. Rising stock and home prices make some people worse off in relative terms, but rising consumer prices make everyone worse off in absolute terms.

Personally, I think the rising asset prices of the last 12 months are mostly the result of fiscal policy, not the Fed. The Fed certainly had an impact, but I would say that the fiscal stimulus played a much bigger role in boosting asset prices. People blame the Fed because they think the Fed is the entity that "prints money", but the Tsy is really the entity that prints money for practical purposes. The Fed mostly just supports the banks and makes loans on occasion. The Tsy's policies are much more permanent in terms of their impact.

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

Hi Cullen,

I'm now starting to understand the difference between the Fed and fiscal policy. Curious though, how correlated are the Fed's action and fiscal policy? During the 2008 crisis where banks were bailed out - were they bailed out by the Fed independently or on the politicians directions?

Do you think that meme stocks and crypto have born out of these conditions where people with very little to lose are betting a lot on trying to get ahead or do you think these highly speculative plays always existed? Or that's just retail investing going main stream

Hi @ladiesman540

Most people get the relationship backwards. The Fed and Tsy coordinate their activities closely, but there's a very specific order of operations. For instance, when the US govt sells debt they first issue that debt from the Tsy. If the Fed comes in later and performs QE then they're just changing the composition of that debt. They're not actually adding more debt. Most people get this backwards. The debt issuance from Tsy is the proper "money printing". The QE is just a change in the existing composition of money/assets. Does it have an impact? Sure. But it's not like the Fed pumped new assets into the economy....

I think the crypto and meme booms are way overblown. Crypto is 1% of global financial assets. The meme stocks are a handful of weird narratives. These are extremely small parts of a very very big market. If you look close enough there's always weird shit going on in certain parts of the economy. This doesn't strike me as something unusually strange. It's just getting more attention because people have been bored at home scrolling their phone all day....

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