The Economist and Peak Oil... again

From the department of the straw man:

Others assume the reverse: that the price is bound to keep rising indefinitely, since supplies of oil are running short. The majority of the world's crude, according to believers in “peak oil”, has been discovered and is already being exploited. At any rate, the size of new fields is diminishing. So production will soon reach a pinnacle, if it has not done so already, and then quickly decline, no matter what governments do.

Just to clarify:

1. Peak Oilers do NOT assume that prices will keep rising indefinitely.
2. Peak Oilers do NOT believe that oil production will "quickly decline".

Informed "Peakniks" know that oil prices go up and down and that there is no magical formula inherent in Peak Oil that will ensure a continual and indefinite growth in oil prices. Even taking into account the effect of a production ceiling, any drop in demand will see prices fall - and many Peakniks (myself included) foresee a drop in the price of oil at some point to below $100 per barrel.

The Economist's assumption here is that Peak oilers know nothing either about economics or oil production. In actual fact, it is The Economist who has proven itself to know little about either the Peak Oil movement or the science underlying its assumptions.

Drop in US house prices the fastest in history

From the department of life was so much better during the depression:

...new figures this week reveal that house prices have already fallen by more over the past 12 months than in any year during the Great Depression. The S&P/Case-Shiller national index fell by 14.1% in the year to the first quarter. Admittedly, other property indices show smaller drops, but most economists now favour this measure. The index goes back only 20 years, but Robert Shiller, an economist at Yale University and co-inventor of the index, has compiled a version that stretches back more than a century. This shows that the latest fall in nominal prices is already much bigger than the 10.5% drop in 1932, at the worst point of the Depression.

And things are even worse than they look. In the deflationary 1930s, America's general price level was falling, so in real terms home prices declined much less than they did nominally. Today inflation is running at a brisk pace, so property prices have fallen by a staggering 18% in real terms over the past year. In nominal terms, the average home is now worth 16% less than at the peak in 2006, and the large overhang of unsold houses suggests that prices have further to fall. If so, this housing bust could well see a bigger cumulative fall in prices than the 26% real drop over the five years to 1933. Most people would call that a pretty destabilising contraction.

Smug prophet mode... begin

From the department of getting big things right:

I am one of the 17 people who participate in Federal Open Market Committee (FOMC) deliberations and provide Ben Bernanke with “conflicting counsel” as the committee cobbles together a monetary policy that seeks to promote America’s economic prosperity, Goethe to the contrary. But tonight I speak for neither the committee, nor the chairman, nor any of the other good people that serve the Federal Reserve System. I speak solely in my own capacity. I want to speak to you tonight about an economic problem that we must soon confront or else risk losing our primacy as the world’s most powerful and dynamic economy.
...
I have been scanning the horizon for danger signals even as we continue working to recover from the recent turmoil. In the distance, I see a frightful storm brewing in the form of untethered government debt. I choose the words—“frightful storm”—deliberately to avoid hyperbole. Unless we take steps to deal with it, the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets that we are now working so hard to correct.
...
Purging rampant inflation and a debased currency requires administering a harsh medicine. We have been there, and we know the cure that was wrought by the FOMC under Paul Volcker. Even the perception that the Fed is pursuing a cheap-money strategy to accommodate fiscal burdens, should it take root, is a paramount risk to the long-term welfare of the U.S. economy. The Federal Reserve will never let this happen. It is not an option. Ever. Period. - Richard W. Fisher, May 28, 2008.

I wonder if fisher has been reading my blog? (End smug prophet mode)

Zero Tax Economics - the final cut?

(If you're new to this blog you will not understand this post unless you read my original post here. Read also the comments at Angry Bear regarding my proposal here. It was further critiqued at Megan McArdle's blog here. A detailed critique of my proposal was written by Gavin Putland here. I respond to these critiques here. Recently I wrote another blog post which used economic equations here.)

After some correspondence with the former "Cactus" from Angry Bear, I have refined even further my zero tax idea. Mike helpfully pointed out a number of flaws in my reasoning - but was able to confirm that the equations themselves were correct.

Before I continue I need to thank Cactus for writing back to me. He is in the process of moving house and has probably stopped running his consulting business for a while. Responding to my email should have been low on his list of things to do but I've always found him to be quite accommodating to an amateur economist from a "fictional country".

Cactus pointed out that the problem with using the Reserve Requirement is that it is, in essence, a loan that commercial banks make to the central bank. Being a loan, therefore, means that it can be called upon by commercial banks in times of trouble (ie a liquidity crisis). Thus, Cactus pointed out, in order for the government to access the money to use it for general revenue it would mean that the government would be borrowing the money from the central bank.

So the result would be that a reserve requirement would continue to build and be loaned to the government and on and on and on... which means that those who critiqued my proposal in this area are actually quite right when they say it wouldn't work.

Nevertheless I was (and still am) convinced by the basic measures that I had been talking about - namely the hyperinflationary effect of money printing being balanced out by a reduction in commercial bank money creation. I therefore had to find out a different way of doing it, and I have.

The basic thrust of my argument is that if government revenue is to be sourced simply through the process of money creation, then the only way to prevent a repeat of Weimar Germany or Mugabe's Zimbabwe is to constrict commercial bank money creation. I was convinced that the reserve requirement was a way to do this but I am now convinced (thanks to Mike and others) that it would not work. Nevertheless the idea that a balancing-out could still occur, and I have worked out what it is:

I call it the "Fractional Lending Rate".

Commercial banks currently create the majority of money in our economy. Through the money multiplier, fractional reserve banking allows for a small amount of central bank money to be turned into large amounts of commercial bank money. This broad money supply (called M3), while having its basis in the central bank's creation of money, is essentially a result of the activities of commercial banks.

Nevertheless, even though commercial banks have this right given to them - that they can lend out money that they have had deposited with them which then is re-deposited back and then lent out again, thus creating the money supply - it is the central bank that really controls the amount of money created. Through tools like the reserve requirement and open market operations (raising or lowering interest rates), a central bank can alter inflation by removing or inserting money into the marketplace.

So when a bank gets money deposited with them, how much of it are they allowed to lend back out again? In the US, with the 10% reserve requirement, banks are allowed to lend out 90% of their deposits. Here in Australia (and in other parts of the world) the reserve requirement is no longer used, which means that banks are allowed to lend 100% of their deposits.

This is where my "Fractional lending rate" comes in. Instead of being allowed to lend out 100% or 90% of their deposits, the central bank mandates that they be limited to lower percentages. If the "Fractional Lending Rate" was set at 65%, then it means that banks are only allowed to lend out 65% of the amount they have deposited with them.

But what happens with the remainder? If the central bank mandates the FLR at 65%, what happens to the 35% remaining? Is it "given" to the central bank? No.

We need to remember that, in reality, if a commercial bank does not lend out that money, then that money is prevented from entering the money supply, and thus is prevented from re-entering it via the fractional banking process.

Thus while it functions in the same basic way as the reserve requirement or open market operations (it removes money from the money supply), it is neither a "loan" given to the central bank, nor is it a "tax" on money already deposited. It is simply money that has been prevented from entering the money supply.

And what would the equation look like now?

FLR = "Fractional Lending Rate" - the percentage of deposits that commercial banks can lend out (applied to M3)
G = Government Spending
GDP = Gross Domestic Product

Let me give some examples here.

The United States
Current US government spending accounts for approximately 20% of America's GDP. In order for the Federal Reserve Bank to supply the government with all the money needed to run its operations (money which is "created"), then America's FLR will be 80%. This means that commercial banks in America will be allowed to lend out 80% of their deposits. The equation is FLR = 100 - (20/100 x 100) = 80

Australia
Australian Federal government spending accounts for approximately 33% of Australian GDP. The FLR will thus be 66%. FLR = 100 - (33/100 x 100) = 66.

Sweden
Swedish government spending accounts for approximately 55% of Swedish GDP. The FLR will thus be 45%. FLR = 100 - (55/100) x 100) = 45.

In each of the countries I list above, the Fractional Lending Rate will effectively balance out any hyperinflationary effect of central bank money printing upon the money supply - no matter how "big" or "small" that government is. Since Commercial banks will be restricted in what proportion of deposits they can lend out, the effect will essentially be "hyperdeflationary" since it will effectively prevent a significant amount of of commercial bank money creation. Thus the hyperinflationary effect of money creation for government spending will be balanced out by the "hyperdeflationary" effect of preventing commercial banks from lending out significant percentages of their deposits.

When understood along with the money multiplier (see the previous article here) it can thus be proven that, while central bank money will increase, the reduction in the money multiplier will ultimately mean that the Zero tax/FLR process has a neutral impact upon the money supply.

Update 28 June 2008:
Again I get it wrong - the reserve requirement is NOT a loan a commercial bank makes to the Central bank. This means, of course, that the FLR I propose is pretty much the same as a Reserve Requirement on M3. This is problem of terminology and has no impact at all upon the basic idea of my zero tax proposal.

Moreover, the equation should actually be Government Spending as a percentage of M3, not GDP. So it should look as follows:

Money and teachers

From ABC News:

A Griffith teacher has welcomed a proposal for higher pay rates as a step in the right direction towards retaining quality teaching staff in the Riverina.

The Business Council of Australia is calling for a pay rise for some teachers to more than $130,000 a year, saying talented people avoid the profession because of low pay.

Education Minister John Della Bosca has rejected the proposal as ludicrous because of its cost.

But Griffith High School's teachers' federation representative, Richard Wiseman, says the proposal has merit if rewards are shared fairly.

"We're ... one of the schools in the country areas that have no rental incentives, we get no incentives for transfers so ... something has to be done to make some of our locations a bit attractive for teachers," he said.

While I think the idea of raising wages of teachers to $130,000 is a bit steep, Richard Wiseman (a teacher I worked with at Griffith High School and a good bloke) is spot on when he talks here about a lack of incentives for difficult and/or out-of-the-way schools.

There just isn't enough teachers to serve the kids at Griffith. In places like Sydney and Newcastle, it is highly unusual for a school to not locate a casual teacher needed to cover lessons for any teacher who comes down sick. In Griffith, a lack of casual teachers was normal, and it was not unusual for entire classrooms of kids to be sent into the playground for the period to entertain themselves because no teacher was available to look after them.

I'm not saying that increasing wages to $130,000 will magically solve this problem (though it might eventually solve it over time), but that schools in remote and/or difficult places need some way to attract not just good quality teachers, but teachers in general.

When I moved to Griffith in 2006 to work at Griffith High School, I was welcomed with open arms by the staff at the school. They went out of their way to welcome me and make me feel at home and went overboard to ensure that I stayed for the two terms that I was working for (replacing a teacher who left suddenly at the end of term 2, who had also replaced a teacher who had left suddenly at the end of term 1). Moreover, they did this without knowing if I was actually a decent teacher or not. It made my decision to move there while leaving my family behind in Newcastle much easier to bear.

Had there been more incentives - covering the cost of moving, given a place to rent at a low price, having an extra week of summer holidays (common in outback schools where the summer heat is unbearable), the guarantee of a permanent position - then it would have been very difficult for me to want to leave and return to Newcastle.

In many ways money was not really the main issue - it has to do with job/income security and job satisfaction.

St Paul and Inflation?

From the department of economic orthodoxy:

For those of you who are unfamiliar with (Paul) Volcker, he served as Fed Chairman from 1979 to 1987. Volcker came in when the US was experiencing the worst inflation since the Civil war and left when the Fed experienced the worst protests and political backlash since the Great Depression.

Simply put, Volcker kicked off a serious recession in order to slay inflation. From an objective standpoint, his decision made economic sense, but it was a political death knell. Volcker’s clearly aware of the fact, joking that the “greatest strategic error” in his life was not the recession, but taking his wife fly-fishing in Maine for their honeymoon.

...

And what is Volcker’s real concern? His old arch-nemesis, and the white elephant in the living room of the financial media, inflation.

The mainstream financial media has talked our heads off about “bottoms,” GDP growth, recessions and other news items. Amazingly, inflation, which is currently in the double digits (more on this later), hardly gets any mention. When it does, it’s the usual blather that it’s “better” or “worse than expected.”

A far more informative approach — and one that would be much more helpful to investors — would be to stop discussing inflation relative to expectations and start talking about inflation relative to reality. The Fed has changed its measure of inflation twice in the last 30 years; both times it chose to become more lenient. In fact, if you measured inflation today as you did when Volcker was Fed Chairman, you’d find inflation was in the double-digits.

One of the more common themes running through the internets today is this idea that inflation is being "under reported". This implies two things. First, that things are worse than it appears. Second, that the newer methods of reporting inflation are somehow fatally flawed while the "older" ways are more accurate.

It's that second point I want to focus on - are newer methods of discerning inflation somehow worse than the old ones? If so, then the reason is either deliberate obfuscation (in other words there is a deliberate attempt to cover up bad news) or stupidity.

As much as I distrust certain elements of statistical gathering, I have to give the "new method" the benefit of the doubt. On the other hand, I do dislike the idea of removing food and petrol/gasoline from the mainstream CPI figures. The argument for their removal is that these two items tend to sway the CPI too much - my argument against is that the CPI should reflect as broad a measure as possible on price rises and should be the basis by which monetary policy is acted upon.

Nevertheless, if the above graph is correct (and I have no idea whether it is or not), it would be rather important to compare inflation levels now to when Volcker increased interest rates and the period before. According to the Minneapolis Fed, inflation peaked at 13.5% in 1980. A cursory comparison of inflation figures between 1974 and 1980 do show a remarkable similarity with the 2001-2008 inflation rate in the graph above when measured in the pre-1983 model.

Again, this assumes that the graph above is accurate and the methods they used to generate the data is identical to the pre-1983 inflation measuring method. If it is (and there would be reasons why not) then America is in a similar stagflationary environment to that experienced in the 1970s.

Which is all the more reason why another Volcker is needed at the Fed. The way Ben Bernanke is going, he might as well be another Arthur Burns. Removing Bernanke and replacing him with an inflation hawk with the courage to raise rates and do the right thing regardless of the public backlash is what is needed. This side of 20 January 2009, I can't see that happening.

Space 1999 - A Matter of Balance

A disembodied head floats in the corner of some poor girl's room on Moonbase Alpha.


"I'm too sexy for this room, too sexy for this room, boom boom boom..."


"Dang it! I keep forgetting to remove the drill bit from the lens of this digital camera! "


Warning. Studying the theory of money creation can do awful things to your body.


Maya completes her sophisticated gang tag.


The advantage of cross breeding flowers with Cannabis.


"Oh no! I think I put the eye in upside down..."


"Laugh not at my superior clothing mortals!"


"Commander! Your flatulence problem is getting serious!"


This is a disturbing image.


This is an even more disturbing image...


Just another 1970s fondue party about to get underway...

Space 1999 - A Matter of Balance

Zero Tax Economics - The Equation

I've done more thinking about my Zero Tax proposal and, as a result of studying how the money multiplier works in factional reserve banking, I believe that my proposal has a very good chance of working.

To summarise:

1. Government removes all taxes - income tax, sales tax, corporate tax... all of it.
2. Government spending is funded by money creation - seigniorage. The Central bank creates this money for the government.
3. To prevent inflation, the Central Bank increases the Reserve requirement and applies it to M3 - the broadest money supply.
   

The most common critique I had of this proposal was that increasing the reserve requirement would not stop inflation, and that, as time increased, the reserve requirement would approach 100%. These discussions can be found at Angry Bear and at Megan McArdle's blog (the latter with the heading "craziest idea I have ever heard"!).

Despite the fact that this idea is so radical that people think it "bonkers" (as one commentator at Megan McArdle's blog describes it), I have tested the idea against the actual equations contained in the money multiplier - and it works. In other words, it is possible for the Central bank to create money out of thin air to fund government spending and still maintain zero/low inflation with an elevated reserve requirement.

Here is the equation:

RM3 = "Reserve requirement on M3" - the reserve requirement needed to maintain zero/low inflation.
G = Government Spending
GDP = Gross Domestic Product
r = Current reserve requirement on M1
M1 = M1 narrow money supply (currency+deposits)
M3 = M3 broad money supply

To put it simply, when the central bank creates money for government spending, the money created is equivalent to a percentage of GDP. In order to remove any inflationary effects of this money creation, the reserve requirement increases by this same percentage. If government spending is 20% of GDP (as is the case in the USA) then the Reserve requirement on M3 needs to be 20%, plus the reserve requirement already in place on M1.

Now for a short explanation of how the money multiplier works. Here is the equation:



Whereby m is the multiplier and R is the reserve requirement. If the reserve requirement is 20%, then R looks like this:



Which means:



Which in turn means that when the reserve requirement is 20%, then the money multiplier is 5. If the central bank creates $100, then the total amount of money created through commercial bank money creation will be $500.

But when money is created by seigniorage, the amount created at the beginning increases. If we retain the current model of $100 central bank money and a 20% reserve requirement, and then add to it the relative size of the US government (20% of GDP), then we are increasing the central bank money to $200.

So if the reserve requirement increases to 40%, then R looks like this:



Which means:



Which in turn means that when the reserve requirement is 40%, then the money multiplier is 2.5. If the central bank has created $200, then the total amount of money created through commercial bank money creation will be... $500.

Yep, that's right, the same amount as before. Even with creating twice the amount of money, reducing the money multiplier by increasing the reserve ratio ensures that no inflationary pressures will ensue.

As I pointed out before, this taxless system is not a "free lunch" - the tax burden remains in the form of higher market interest rates. Moreover, the larger the government is in proportion to the economy as a whole (Around 20% for the US, 34% in Australia, 53% in Sweden), the higher the market interest rates will be.

As a monetary tool, the reserve requirement has become outdated. Many countries (including Australia) have a zero reserve requirement, preferring to use central bank interest rates. In the taxless system I propose, the reserve requirement would be solely for the purpose of balancing out government spending, which means that current reserve requirements must be dispensed with. This, of course, means that the last part of my Zero Tax equation (the first diagram) about the reserve requirement on M1 divided by M3 can be dispensed with in economies that do not currently run a reserve requirement.

In a simple sense therefore, the reserve requirement on M3 - the percentage amount - is identical to the percentage of GDP that government spending takes up.

Reactions to the Budget

I was working tonight so I didn't get to watch it live and have instead had to rely upon the SMH's less than stellar online coverage and comment. So here's my comments:

1. Surplus of A$21.7 billion. I still can't find on the SMH website what Rudd and Swan are going to do with this money. It represents 1.8% of GDP and Australia's net public debt was erased 2-3 years ago so I'd like to know what they're going to do with it. Is it going into Howard's future fund? Will it be invested overseas?
   
2. The income tax cuts are modest but are likely to be universal in scope, thus reducing the tax burden upon every Australian wage earner, but affecting low wage earners the most (a nice change from all the tax cuts for the rich made under Howard). High wage earners do get a cut as well, which doesn't really bother me much.
   
3. Environmental spending is a joke. Rudd's environmental credentials have been shot out of the water with this budget. A$2.3 billion sounds like a lot, but it is peanuts compared to other areas of spending. If Peter Garrett doesn't resign in protest at this there is no point in supporting the guy's political career any further. Bob Brown is rightly "concerned".
4. $250 million on roads isn't really a huge amount but there's little, if any, money going towards any form of post peak oil infrastructure. It's as though oil is still around $25 per barrel in Rudd's mind.
   

In short, there is nothing in this budget that could be called daring or far-sighted. There are some good things but there's a whole heap of incorrect assumptions they have made over the environment and the effects of high oil prices. Cutting spending and keeping a big budget may sound nice from an inflationary perspective, but does little in actual solutions.

Don't get me wrong - I'm glad that Howard is gone - it's just that Rudd and the ALP have not managed to go beyond the symbolic (saying sorry to Indigenous Australians, signing Kyoto) and actually done anything of substance. The budget was the ALP's chance to do something really different - instead we got a few nice things thrown together with a bunch of blinkered decisions.

My verdict? 4 out of 10. Fail.

Stiglitz - "Let's inflate!"

Joseph Stiglitz is one of the world's most pre-eminent economists. He has qualifications and professorships coming out of his ears. He even won the 2001 Nobel Prize for economics. I, on the other hand, am an economic hack who occasionally makes embarrassing mistakes like asserting that GDP figures don't include inflation.

Nevertheless, let me now publicly say that Stiglitz's latest column attacking inflation targeting is dead wrong. Of course no one is likely to listen to me if arguments were based upon respect and qualification alone - but I would say that I have a very good argument against his views, so it would be important to take arguments like mine on the basis of content alone rather than simply saying that Stiglitz must be right because he has a Nobel Prize (though it goes without saying that his achievements in economics probably do deserve such high honours and therefore anything he says about economics is probably worth listening to).

One thing I'm noticing about my travel into the study of inflation is that my examination of the subject seems to differ at a very basic level from many others, including Stiglitz's. It seems to me that when economists look at inflation they view it from a very restricted perspective. Such a perspective results in conclusions that, while based upon hard data and empirical research, fail to take into account certain basic factors, namely a) that money's value is in its ability to quantify costs of goods and services, thus allowing individuals and businesses to use it in exchange for the procurement of these goods and services, and b) that the marketplace's most important function is to accurately and objectively value goods and services - a process that involves the use of a monetary amount.

The reason why I am such a hawk is because I see inflation as seriously harming the reason for money's existence and a way of confusing the market's need for accurate valuation. This, however, does not mean that I am a deflation lover - far from it. Deflation and inflation are two sides of the same coin: both result in imbalances that harm the economy. Price stability - whereby prices neither inflate or deflate over the long term - is where I'm coming from.

Milton Friedman, perhaps the most important economist in the second half of the twentieth century, spoke of inflation this way: Inflation is always and everywhere a monetary phenomenon. I may not agree with most of Friedman's philosophies (I'm reasonably left of centre in politics and economics), but I would argue that this adage of his is of vital importance.

My understanding of inflation may be problematic at this point, but I have always seen inflation or deflation as a result of a change in the supply and/or demand of money. The money supply - whereby money is created via the money multiplier inherent in fractional reserve banking - should "always and everywhere" be treated as a marketable good that is subject to the effects of demand. Thus if the supply of money exceeds its demand, then naturally the "price" of money goes down. When this occurs in reality, it means that the price of goods and services grows in relation to money, which is inflation. Conversely, if the demand for money exceeds its supply, then the price of goods and services in relation to money decreases, showing the growing value of money, which is deflation.

I may be mistaken at this point, but it seems to me that too many people equate an increase in the money supply as inflation, which assumes that any form of deflationary effect must be a result of a contraction in the money supply. This is incorrect because it fails to take into effect the demand curve has upon money supply. When this is taken into account, you can have four different possible scenarios:

• Deflation + An increase in the money supply
• Inflation + An increase in the money supply
• Deflation + A decrease in the money supply
• Inflation + A decrease in the money supply
  

Such phenomena can quite easily be discovered by historical economic research. Although I do not have the facts at hand, I would argue that Japan's deflationary episode in the late 1990s was accompanied by a growth (albeit small) in the money supply. Why was it that Japan managed deflation at a time of monetary growth? Easy - the money supply did not keep up with demand.

Inflation can thus be caused by two factors - the first being money creation over and above what the market requires, the second being the demand for money dropping below what is being created. This is why Friedman's adage is so true - if supply problems, for example, caused prices to rise the result would naturally be inflation, even if money creation isn't out of control.

In terms of evidence, I submit to you the latest graphs from The Economist. First click here to see the latest inflation figures. Then click here to see the latest Broad money supply graph.

What stands out like a sore thumb in the latest broad money graph is that money growth in the Eurozone is substantially greater than in the US. Yet the inflation figures show that Eurozone inflation is lower than the US. Why is it that money growth in the Euro is about 40% greater than in the US, while inflation is around 70 basis points lower? The reason is simple - the demand for money in the EU is much higher than the demand for money in the US.

Another feature of the broad money supply graph is that Japan's money supply is only growing slowly - however, it is still growing. The supply of Yen is not contracting. Yet even back in 2005 Japan was having slight deflation.

Now the reason why I have spent so many paragraphs on this issue is because I believe that Stiglitz and others simply do not understand how money supply and its demand is related to the current inflationary problems developing around the world.

It's time I quoted Stiglitz, so here goes:

Raising interest rates can reduce aggregate demand, which can slow the economy and tame increases in prices of some goods and services, especially non-traded goods and services. But, unless taken to an intolerable level, these measures by themselves cannot bring inflation down to the targeted levels. For example, even if global energy and food prices increase at a more moderate rate than now - for example, 20% per year - and get reflected in domestic prices, bringing the overall inflation rate to, say, 3% would require markedly falling prices elsewhere. That would almost surely entail a marked economic slowdown and high unemployment. The cure would be worse than the disease.

Notice here what Stiglitz is saying - if interest rates were used to keep inflation below a certain amount (say 3%) the result would be "marked economic slowdown and high unemployment". Stiglitz's view seems to be clear - if inflation is due to supply problems (rather than an overheating economy), then the practice of "inflation targeting" will do more harm than good:

Today, inflation targeting is being put to the test - and it will almost certainly fail. Developing countries currently face higher rates of inflation not because of poorer macro-management, but because oil and food prices are soaring, and these items represent a much larger share of the average household budget than in rich countries. In China, for example, inflation is approaching 8% or more. In Vietnam, it is expected to approach 18.2% this year, and in India it is 5.8% . By contrast, US inflation stands at 3%. Does that mean that these developing countries should raise their interest rates far more than the US?

What Stiglitz's article doesn't mention is a solution to the problems he poses. If, as he argues, inflation targeting will do more harm than good, then what is his solution? There's no doubt that he thinks that inflation targeting should be abolished... but that is not a solution, just the removal of a certain policy. What should replace it? What should central banks do to ensure price stability?

Stiglitz is essentially arguing that inflation should be let loose, that central banks and governments should just sit back and let prices rise. The justification for this argument is that price stability should only be maintained by central banks when inflation is not the result of supply problems.

And that, of course, is where he is dead wrong on inflation.

Let's go back to the reasons why money is so important. The first reason is that money is unique in that is the only commodity that exists solely as a means of exchange. Money's raison d'être is that individuals and businesses can buy and sell goods and services. When money loses its value, the inflation that follows causes price rises, money's usefulness begins to be lost, which then affects the second reason why money exists - as the sole way the market is able to value and compare the importance of goods and services. Inflation of any amount will confuse the marketplace's ability to buy, sell and invest.

When the market is confused, it will inevitably make wrong decisions. Whenever price stability is not maintained (either as inflation or as deflation) the market's ability to make mistakes increases. Investment bubbles are always likely to occur during inflationary periods, as will long periods of "noninvestment" during periods of deflation (as witnessed during the depression).

I can just imagine having this argument with Joseph Stiglitz. "Mr Cameron", he says, "are you therefore proposing that countries raise interest rates at the moment, knowing the economic damage it will cause?". Yes Mr Stiglitz, that is exactly what I am saying.

The problem is that Stiglitz can't see beyond the current inflation/interest rate issue. Food and oil, not to mention other commodities, are causing a massive increase in world inflation. Chances are these twin problems are caused not by speculators but by real supply issues. I have argued elsewhere, for example, that oil supplies are facing a worldwide decline due to supply peaks being reached (Peak Oil). The inflation caused by oil prices is due mainly to supply problems.

If economies are going to go into recession, it will be due to the effect of oil and food supply problems. All things being equal, any reduction in vital commodities will cause a worldwide drop in the standard of living (a drop that can be measured in terms of GDP and GDP per capita). Inflation and the money supply just doesn't come into it.

What is important is not whether economic contraction can be avoided in the face of such severe supply shocks (it can't), but whether or not an economy can weather such a downturn in such a way as to prevent secondary issues from making things worse.

The problem with Stiglitz's "solution" (lets inflate!) is that it can do nothing to prevent an economic contraction from occurring, while messing things up for the economy as it tries to recover. High levels of inflation will cause the market to inaccurately respond to price signals while at the same time punishing those who choose to save money.

Of course, those who advocate inflation targeting (or those very few who advocate absolute price stability like myself) cannot prevent the economic contraction from occurring either. That's because the nature of the contraction has nothing to do with the money supply (it is not cyclical) and cannot be avoided by either increasing or decreasing interest rates. Nevertheless I would argue that by enforcing price stability - even through an economic contraction - would result in a better outcome for the economy as it recovers. Keeping prices low and ensuring that interest rates exceed inflation will reward those who have chosen to save money through the contraction, while at the same time keeping money's raison d'être intact. This will ensure that when the economy recovers from the contraction, individuals and businesses will be able to properly and accurately value the prices of goods, services and investment opportunities - a process that becomes increasingly unmanageable during high inflation.

Stiglitz argues that "inflation targeting" has no empirical basis to back it up:

This crude recipe is based on little economic theory or empirical evidence; there is no reason to expect that regardless of the source of inflation, the best response is to increase interest rates.

Yet I would point out that the solution he proposes (let's inflate!) results in shorter boom/bust cycles that increase long-term unemployment while eroding the purchasing power of the currency, a situation that impoverishes everyone. I use as the basis of my evidence the experience of the US and the world during the late 1960s to early 1980s, a period of time that saw three recessions, high unemployment and high inflation, much of it caused by supply problems.

It disturbs me that not only figures like Joseph Stiglitz can forcefully argue that price stability is no longer to be maintained under certain circumstances, but that such ideas can be seriously put forward during a period when inflation is beginning to bite. Stiglitz and others who argue for the "lets inflate" model argue that, well, Milton Friedman was evil and things will change and the economy these days is different and can handle bursts of inflation. The problem with such an attitude is not that it is somehow a new critique of an "out of date" monetary model, but that it is in actual fact a return to a pre-monetarist mindset that brought us long term stagflation.

Those who argue against inflation targeting are essentially wanting a return to the 1970s, where double digit inflation was common, where recessions were plentiful, and where unemployment blighted the social landscape. Their "solution" is not workable either in good times or in the bad times that we are entering. Moreover, they have assumed that inflation is not solely a monetary phenomenon, and that it is possible to keep an economy "growing" in the midst of a serious supply shortage through the use of inflation, thus giving money both a value it does not have (the ability to "cure" a recession) and reducing the value it does have (its power to exchange and value goods, services and investments).

I will say this - those economies which have central banks which judiciously maintain price stability will be the ones who will successfully endure the current downturn. Conversely, economies whose central banks are less judicious (including Bernanke's Fed) will only make things worse over the long term.

This photoshopped image has been shamelessly stolen from Something Awful.

File sharing and the Music Industry

Days ago, Nine Inch Nails released its new album, The Slip. What made the album notable was not that it was released digitally, but that it was released for free (if you want to download it, click here).

What possessed Trent Reznor (who is essentially the entire band) to release his hard work free over the internet? Surely such an act is one of absolute stupidity - he is giving away for free an album he has worked on for months, a process that has cost him money in studio time, musician hire and the inability to make money by playing live shows.

While Radiohead's In Rainbows was the first instance of a high profile band releasing an album for free, it has been Reznor's two releases with Nine Inch Nails (The Slip and Ghosts I-IV) that have shaken the music world to its core. The reason? While Radiohead and other bands have maintained complete copyright control over their musical work (which, despite being offered for free, precludes any form of legal file sharing), Reznor has licensed both The Slip and Ghosts I-IV under a Creative Commons Attribution-Noncommercial-Share Alike license. What such a license does is release many of the rights that Reznor has over his work. Put simply, the license allows anyone to copy, distribute and modify his work free of charge. Thus if I decided to burn ten CDs with The Slip on it and give them to friends, I am acting well in the bounds of the license that Reznor has placed his work under.

Of course, there are limits to the particular license that Reznor has chosen to use. The most important limit is that no one is allowed to use copies of the music for commercial gain. This means that I can give away those ten CDs to friends, but I can't sell them.

So what is Reznor thinking? Not only is he giving away the album for free, he has also given up much of the rights he has over his work - and has done so permanently. Is he committing financial suicide? Is such an activity merely a faddish attempt at gaining popularity? Is he an anarchist or socialist who believes that private property rights should be given up to the masses? There's no doubt that Reznor is not a fan of the music business. He has publicly called upon music fans to break the law and steal music via filesharing - including his own. But surely such actions would cut his own throat?

In order to understand these questions, we need to delve into the "product" itself and work out important things about it. For starters, music for most people is an emotional experience. Whether your preference is to lie back and listen to Beethoven or bang your head to Iron Maiden, the fact is that music has the capacity to affect human emotions. That is why certain musical groups and certain musical genres have committed fans who generally hate other musical groups and other musical genres - hearing music you do not like results in a negative feeling, while music you do like results in a positive feeling.

The fact that music grabs our emotions is important - it means that a person's taste in music has little to do with objectively derived facts measured in a scientific manner, and more to do with the way in which a particular tune, group or genre affects the way they feel. In that sense, music is almost wholly subjective in its effect. So while some people who argue that classical music is "better" (or that punk music is "better") they are people who have made wholly subjective choices, while at the same time making wholly subjective judgements upon songs, groups and genres that they don't like. (Except, of course, for Country and Western music, which must be destroyed if mankind is to progress.)

The result of this emotional and subjective approach to music means that people begin to emotionally attach themselves to certain songs, groups or genres. In layman's terms, this means they become a fan of a particular band or genre.

And this happens all over the place and occurs multiple times. While a person may like one certain band over and above all others, it is more usual for a person to have quite a few different bands that they like - particularly if these bands share a common musical genre. This commitment to groups and genres means that the individual is likely to feel a sense of loyalty towards their musical likes, much in the same way as sports fans might support a certain team. Merchandise like posters and clothing often supplement a musical group's income because fans are more than willing to spend money on supporting their favourite bands.

All this is important to take into context when you examine the rise of free downloads, especially in light of the previous two releases by Nine Inch Nails.

When Ghosts I-IV came out in March 2008, I was one of those who immediately downloaded the album. More than that, I used bit torrent software to download the album in CD quality. A few days ago I saw this same album at a CD shop... and I bought it.

So while you might wonder about Reznor's sanity in releasing the CD for free, you might now even wonder about my own sanity in purchasing a "legitimate" copy of an album I already had sitting on my hard drive - and not just some low bitrate copy, but a CD quality one.

But if you're concerned about my own financial sanity, you must therefore question the sanity of the probably hundreds of thousands of people worldwide who have done exactly the same thing, including those who pushed the album to number 15 on the Australian music charts. Who were all these people who bought the album? Were they merely ignorant of the fact that they could get it for free, or were they insane enough to buy what they already owned?

The answer is that fans of bands will still wish to own a "physical" copy of the music they like, even if they have a copy (legal or illegal) sitting on their hard drive. And this physical copy mustn't just be a burned CD, it must be legit.

Of course this sort of argument isn't completely universal - people's own finances will still dictate what they want or not, which means that poorer fans are probably more likely to be happy owning illegally burned CDs or illegally downloaded files while richer people are more likely to own legit CDs that they have ripped onto their own hard drives.

It might be tempting to label Reznor a fool for making his music free and labeling his fans as saps for buying what they already own - but understanding these strange forms of market behaviour is essential in working out what file sharing is doing to the music industry.

Bands have traditionally had three forms of income - income from recordings (CDs, singles, radio play), income from concerts and income from merchandise (Posters, T-Shirts, etc). There are obviously other ways musicians can earn a living, but these three are the ones that I want to focus on here.

I started buying CDs in 1986. It wasn't until about 2004 that I had the ability to burn my own CDs and it wasn't until 2005 that I finally discovered how to transfer my CD collection onto my hard drive. Moreover, it wasn't until this year that I began to download full length albums from the internet. It was, in fact, this latter experience which really affected the way I thought about file sharing and also my own behaviour.

The first album I downloaded over the internet was Methodrone by The Brian Jonestown Massacre. The band had made the album available to download for free at their website. The quality of the file - its bitrate - was, at 80kbps, low enough to make the file small but high enough to enjoy the music without any obvious shortcomings. I enjoyed Methodrone immensely, and began listening to it on a regular basis. I was excited by the music and thus an emotional connection between myself and the band developed - I became a fan. Knowing that I wanted to listen to the album at its highest level of quality, I eventually ordered it from Amazon and it now sits in my CD collection.

Nevertheless, by buying what I already owned, I realised that my own behaviour seemed quite illogical. I asked myself many times what the point was - was I making a rational or irrational choice? In some respects, purchasing any music is irrational (do we really need it?) but I felt that my choice to buy a physical, high quality copy of something which was simply software was actually rational. After all, hard drives fail and burnt CDs aren't all that reliable. Owning the actual CD was therefore similar to having a "back-up" of important software. Just as everyone has their Windows CD (or Linux CD) sitting in a drawer somewhere just in case they need a reinstallation, so do music fans need to have a reliable, physical copy of their music, just in case they need to rip them again in the future onto their hard drives and/or mp3 players. Besides, the album pictures look nice.

And herein lies one reason - whether it is rational or not - why Trent Reznor is happy to make his albums free to download and why so many people these days practice illegal file sharing. Making it free to download, copy and distribute does not necessarily result in the death of the album and does not necessarily result in an inability to sell CDs of these freely available albums.

Albums, traditionally, have been the music industry's main money earner, which is why illegal file sharing has led many in the industry to attempt prosecution of file sharers. In the case of big bands, the strategy would be for a band to tour live in support of an album. Thus, by appearing live in concerts, bands would be able to significantly lift the amount of people "committed" to the band, which would then result in more albums being sold.

There is still a lot of money, however, that can be made by bands from touring alone. Paul McGuinness, manager of U2 and an ardent opponent of illegal file sharing, revealed in a January 2008 speech that (U2's) Vertigo Tour in 2005/2006 grossed $355m and played to 4.6m people in 26 countries. Obviously that figure is not a net figure, but you can see just how much money fans are willing to pay to hear their favourite band play. This revelation by McGuinness shows that the music industry is far from dead, and that, even with CD sales declining due to file sharing, well known bands can continue to make a profitable living.

In this context, therefore, it seems possible that bands could actually use free music downloads in order to augment their touring income. In this sense, rather than the tour supporting an album (as it was done in the past), the free album ends up supporting the tour. This is exactly what is occurring with Nine Inch Nails. The day before The Slip was released onto the internet for free, Nine Inch Nails' North American tour dates were announced. While it may be almost impossible to stop illegal file sharing, it is, in effect, quite easy to prevent people from entering a concert hall without paying for the ticket, which means that the 2008 North American tour is likely to be quite a profitable one for Nine Inch Nails.

The third area of income - merchandise - is unlikely to be affected in any negative way by the availability of free downloads. "Official" merchandise is available to purchase directly from the band's website, and, because merchandise is physical, it is impossible to "copy" without it losing its legitimacy. Gone are the days of bootlegging merchandise - if you want legit merchandise, you go to the band's official website.

The profitability of merchandise was central to the initial release of Ghosts I-IV by Nine Inch Nails. Apart from the free download, fans had the choice of paying for additional items, ranging from a direct delivery of the CD ($10 plus postage) to an "Ultra deluxe limited edition" that included a Data DVD containing each individual track available for remix, a Blue-Ray disc with the album in high-definition 96 kHz 24-bit stereo, a 48 page booklet, high quality photo prints and even a vinyl pressing of the album that can be played on old record players ($300). This latter edition sold out within minutes of the release. It was later claimed that Reznor had made at least half a million dollars from this merchandise within the first few days. Not bad for a free release!

The fact that Reznor has now twice released musical work for free - and has benefited from it financially - means that many artists and recording company people are taking notice. Initial disbelief about the profitability of such actions is beginning to dissipate. People have already taken notice of Radiohead's release last year and a host of smaller bands have used similar methods, though none as thoroughly well thought out as Ghosts I-IV and The Slip. Reznor's actions have sent a shockwave throughout the industry since it is presenting a completely new and counter-intuitive business model that takes into account the reality and advantages of the internet.

Of course there are many within the music industry who will resist. Dinosaurs like Paul McGuinness will continue to argue for complete copyright ownership and the importance of law enforcement to prevent illegal file sharing on the internet. Moreover, even artists themselves, so wedded to the system after so many years, will argue that the old ways should remain. This was essentially the argument of Billy Bragg, the socialist singer/songwriter who argued that musicians are like workers whose work should be compensated for, while file sharing "robs" them of their hard earned cash.

I have one thing to say to all these people - adding machines. Previous to the invention of cheap transistors, accountants all over the world needed expensive mechanical adding machines. These adding machines were reliable and indispensable. However, with the invention of calculators, mechanical adding machines were rendered obsolete. The factories which made adding machines were shut down and the workers were laid off. The businesses who made adding machines had to diversify or shut down. This was a difficult time for the industry, yet the result - cheap, reliable electronic calculators - made the world richer. If you look at the amount of money lost by businesses and individuals who benefited directly from the production of mechanical adding machines, and then compared that to the amount of money saved by businesses and accountants the world over, the result is that it was a net benefit.

If you look at the current problems with file sharing and the music industry, you'll see a similar pattern emerging. A new technology requiring new business models begins to make old technology and old business models obsolete. Where the music industry is at the moment is like the world between the mechanical adding machines and the transistorised calculators. The old business model of record companies and musicians with copyrighted music is coming to an end, a new business model of individual artists and bands and smaller music companies releasing free music while relying upon live concerts and internet merchandise sales is the one beginning to exert itself.

As I finish up here, let me just explain how my own thoughts have changed over the years. I was never a Napster user and I did not have a personal opinion about what was going on. While I think the law is important to obey, I realised a few years ago that the file-sharing phenomenon was so massive and widespread in the online world that it would be impossible to police. Laws that cannot be enforced eventually get changed, though I would guess that those whose salary depends upon that law being enforced (ie the music industry) will not go down without fighting, hence the occasional lawsuit against file sharers in the US.

As it dawned on me that this new business model was emerging - one that is actually of more economic benefit to the artists and to their fans - I realised that my own inhibition against file sharing needed to change. Thus I can confirm now that I have not only downloaded music from the net that I have not paid for, but have, in fact, copied some of my own CDs and placed them online for others to download for free.

Nevertheless I do admit that my own conscience (I'm an evangelical Christian) is still uneasy about this new behaviour of mine. Have I become a thief? Have I allowed others to become thieves by making copies of some of my CDs available to illegally download?

Yet despite this unease, I actually believe that I am simply doing only what is going to inevitably become legal in the future. Moreover, while I can certainly say that I fully intend purchasing the CDs of music I have downloaded (assuming I like it - if I don't I'll just erase it from my hard drive) it would be foolishness to simply take me at my word. Nevertheless I am convinced that one natural result of making albums free to download will be the eventual purchase of these CDs by those who become fans as a result of listening to these free downloads. Thus I have been busy telling people online about how great certain bands and/or albums are while pointing them to a url that they can download them from - and I have done this knowing that once a person becomes a fan they will likely want to buy the CD. So while it might seem that my actions result in musicians losing money, it is likely that the opposite is true - more people are likely to buy the CDs, even though they already have it sitting on their hard drive. In this sense I am actually doing these bands and musicians a favour by making their music freely available. I'm helping them move out of the old business model and into a new one. The only people who make money out of this are the musicians themselves.

Moreover, while those in the industry may point to falling CD sales as evidence that file sharing is destroying the industry, I would point out that people / consumers / fans are becoming more discerning in their taste and are downloading music files as a way of "try before you buy" - if they like it they buy it, if they don't they erase it from their hard drives. Gone are the days of buying an album on impulse alone and then regretting it later. Furthermore, the overwhelming evidence is that those who download music files are from the younger generation (under 25) who are likely to retain their love of certain bands and/or musicians as they get older, thus making it likely that they will continue to spend money in the long term going to concerts and buying merchandise and buying CDs of music that is already sitting on their hard drive

This is the way music is headed. The old ways are dying and the new ways are thriving. Unfortunately there is still a lot of "clout" amongst the music industry, and they will continue to make life difficult for file sharers.

(Much of this article was written whilst listening to downloaded music)

New Nine Inch Nails Album

It's called The Slip, and it's free.

This is a different release to the one a few months ago. For starters, it actually has lyrics (it's not an instrumental).

You can download it here.

Conversion

It was after the church service when there was a tap on my shoulder.

"Hey Neil, just letting you know that you converted me" said the voice.

I turned around. There before me was Gary (not his real name), a member of our church. Before I had the brainpower to wonder why it was that a Christian in our church had just announced that I had converted him, he continued.

"I'm using Linux"

Gary continued the story. A month or so ago our two families had lunch after church together and we got talking about operating systems. Gary, a doctor, had an Mac Laptop running Leopard and a desktop running Windows XP. I remember him complaining about how difficult XP was getting for him, how frustrated he was at how slow it was running, how annoyed he was at certain programs.

At this point I naturally began talking about Linux and my own experiences. Gary listened and asked questions - he had heard about Linux and had considered running it in the past - but had never gotten around to doing it because he didn't have much information.

Having both a Mac and a Windows PC meant that he could see the massive problems with Windows XP in comparison with his Mac. He wasn't about to go off and buy himself a Mac desktop and replace his Windows machine just yet.

After that lunch I didn't give it another thought, but Gary obviously did. The other day he upgraded to Ubuntu 8.04, the most popular Linux distro.

"I'm loving it" he said to me at church, "it does exactly what I want it to do with a minimum of fuss. Actually, the person who seems to enjoy it more is Larissa (wife)."

Another person joined us in our Linux conversation. He mentioned just how hard it would be for him to stop using Windows and to use something else. Gary and I both agreed that any move to Linux requires a re-learning and settling in period, but once you have gotten over that hump, you never look back.

While talking to Gary I mentioned what a unique position he was in - he had experience in both Mac and Windows before removing Windows and replacing it with Linux. Here is a man who can use three different operating systems - and who waxes lyrical about Linux.

Gary, of course, is not about to ditch his Mac laptop. He's very happy with the Mac software and knows enough about it to realise how similar it is to Linux (both are based upon Unix). He also knows that there are things that Macs do which Linux can't do yet... which is another reason why he is happy to keep both computers running different operating systems.

Of course, Gary is still new to the Linux world and is bound to experience some ups and downs. Nevertheless I am reasonably confident that he, like me, won't regret the move at all.

This photoshopped image has been shamelessly stolen from Something Awful.

Who to trust?

Caspar Ammann is a climate scientist.
David Archer is a climate scientist.
Eric Steig is a climate scientist.
Gavin A. Schmidt is a climate scientist.
Michael E. Mann is a climate scientist.
Rasmus E. Benestad is a climate scientist.
Raymond S. Bradley is a climate scientist.
Raymond T. Pierrehumbert is a climate scientist.
Stefan Rahmstorf is a climate scientist.
Thibault de Garidel is a climate scientist.
William M. Connolley is a climate scientist.

And what do all these climate scientists have in common? They run a blog called Realclimate.org, the purpose of which is "climate science by climate scientists".

And these climate scientists are convinced that anthropogenic global warming is happening and will lead to serious consequences.

I don't know people, but if some guy with a Bachelor's degree in geology starts telling me that some growth in my neck is nothing to worry about, while a General Practitioner tells me that the same growth in my neck will kill me if I don't get it removed, who should I trust?

(BTW - I don't have a growth in my neck!)

You could, for example, say that there is no consensus as to what the experts say. One "expert" says that the growth is fine, while another "expert" says that it is deadly.

You could also argue, for example, that a medical-industrial complex requires people to undergo unnecessary operations in order to keep the medical industry going. Thus the GP could, in fact, be simply scaremongering in order to get money.

But, in the end, you have to trust an expert. And if you don't trust one particular expert, then go to another. After a while, going to all these experts should give you some idea of what to do. In this case, it would be to get the growth removed.

So when it comes to Global Warming, people should go to the experts. They should go to climatologists. And anyone who goes to climatologists for advice on this matter will realise that a consensus does exist.

And that consensus is that anthropogenic global warming is happening and will lead to serious consequences.

Global Warming Deniers

From the department of yes there is a conspiracy but it is on the other side and here is evidence:

Something phenomenal has happened in the last 24 hours. Our friends over at DeSmogBlog took it upon themselves to see what the scientists who are on the famed list of “500 scientists who don’t believe in global warming” actually think and as it turns out, many of them didn’t know they were on it.

Now, in the past, there’s already been plenty of fun to have with lists of global warming deniers–Sen. James Inhofe took a list of 400 to the Senate floor, not realizing that when he was fact-checked it would come out that he had enlisted 44 TV weathermen. However, this takes the cake. Why? Because the already-incredible result that DeSmogBlog has produced is only 24 hours old.

And here's some quotes from some of these scientists:

I am horrified to find my name on such a list. I have spent the last 20 years arguing the opposite.” - Dr. David Sugden. Professor of Geography, University of Edinburgh

I have NO doubts ..the recent changes in global climate ARE man-induced. I insist that you immediately remove my name from this list since I did not give you permission to put it there.” - Dr. Gregory Cutter, Professor, Department of Ocean, Earth and Atmospheric Sciences, Old Dominion University

I don’t believe any of my work can be used to support any of the statements listed in the article.” Dr. Robert Whittaker, Professor of Biogeography, University of Oxford

Global Warming deniers have to come to terms with the fact that lying to people is not going to help their cause one iota.

Being wrong

Well, the comments are in and the assumptions behind this post of mine suck quite hard. For whatever reason, I assumed that GDP is not inflation adjusted but it has been pointed out fairly clearly to me that it is.

This is one of those basic mistakes that I am not fond of. Simply put, I had my mind elsewhere when I wrote this and it was a lazy piece of research.

For those who might therefore question my economic credibility and thus my ideas, all I can say is that such questioning is entirely justified. It was never my intention to come across as an uninformed hack, and I know in my heart that I am not - nevertheless, you, dear occasional readers, have every right to wonder.

It was said to me that this was a case of "econ 101" - a very basic premise that was not understood by myself. Well, guilty as charged I'm afraid. I'm not going to shy away from taking the heat on this - I take full responsibility for everything I publish here on my blog. More than that, I'm not going to silently remove the offending post from my blog but rather keep it here as a reminder of my own ignorance and laziness.

For what it's worth, I still stand by all of my major economic predictions and ideas. I'll let the passage of time be my witness on this - which means that if I'm terribly wrong I'll happily admit to it and stop trying to be a wannabe economist. But if I'm right - both in my economic predictions and in the unorthodox ideas I have proposed - then I am certain that the basic "econ101" error I made with GDP and deflation will not really be a problem.

I realise that one thing at stake here is my credibility - whether or not my ideas and commentary on economics can be trusted. Well, that's something that I'll just have to "take on the chin". It's something that anyone who ever reads my economics posts must now take into consideration.

However, the one person who benefits the most from this is myself. I hate being wrong. Absolutely hate it. I hate it when people make pronouncements and decisions that are so obviously wrong - like Bush and co with Iraq, or with global warming sceptics, or with ideological right wingers who think tax cutting and small government is the solution for everything. As a result of not wanting to be wrong, I always try to do the required amount of research in order to have a well-thought out position. Oftentimes, though, I learn through experience that my assumptions and beliefs are wrong. This is one of those times.

As a result of this, I'm going to be cutting down my output of economics related articles. It's not that I've lost confidence in myself (I certainly haven't), it's just that I'm finding it harder to find time to do the required research. Moreover, my mother in law has cancer, I am working as a teacher again and my time at Last.fm leading a group of fans of my favourite band has given me a great deal of online satisfaction.

More than that, I will still be blogging - but just at a reduced rate.