Robert Murphy's Bet That Inflation Was Just Around the Corner Has Gone Absolutely Horribly Wrong
Terrifying to see:
Robert Murphy: October 2011: Update on My Inflation Bets: I know that a while ago I made two inflation bets… [with] David R. Henderson… [the] terms:
At any point between now and January 2013, if there is a year/year increase in seasonally adjusted CPI that is at least 10%, then [Henderson pays Murphy] at that time $500.
If we get to January 2013, and there has not been any 12-month stretch in which the above happened, then [Murphy pays Henderson] $500 at that time….
I made the above bets in December 2009. Things are obviously not progressing on the timetable I had thought…. If it weren’t for the crisis in Europe (which is pushing people to flock into dollars), I would still be fine [as of October 2011[!!!!]] with [the bet with Henderson], but it may turn into a nail biter…
The most terrifying thing of all is that being completely, comprehensively, unmistakably, fundamentally, fatally, totally wrong has not led Robert Murphy to rethink or modify any of his analytical positions or ideological beliefs by even one iota.
I mean, one would expect an announcement on his weblog like: "I have been totally wrong, about everything. I am closing down this weblog for five years to avoid misleading readers while I intellectually retool. You will find me sitting at the feet of Paul Krguman, chanting 'om mani padme hum' until I achieve enlightenment."
Not gonna happen...
Great post. When right and wrong cease to matter, societies fall.
Magical thinking cannot fail. It can only be failed.
The Fed has barely printed enough money to offset the post-2008 shadow bank deleveraging — a massive, massive deflationary force. Austrians of all people should have understood this — Hayek created a model in the 1930s of inflationary pseudo-money (i.e. shadow securities) leading to deflation — but I guess (with a few exceptions) they didn't.
Mr. Murphy's analytical positions and ideological beliefs appear to have some predictive power if you simply reverse the prediction. He may yet make a valuable contribution to our understanding of how the world doesn't work.
So I have to admit this was probably not wise, but I chased down the link to Murphy's blog you posted above, and he does have another related bet for lower stakes that runs out to 2016. Knowing a bit about how people rationalize such things, the obvious claim to make Is the usual "my timing was off, but this other bet will be in the money". Also, the bet was on "seasonally adjusted CPI" whereas you are plotting CPI less food and energy costs. I am pretty sure that Murphy wants and expects to use every shred of volatility in the outcome measure he can get since he made a threshold exceedence bet. and the point there is that if he gets one spiky month that is sort of/kind of within the ballpark of 10%, the claim will be that the model was not quite correctly calibrated, but that he *would* have won if only blah blah blah. As you note, he is already invoking "unforeseen events" in the 2011 note although of course the event was foreseeable and, indeed was one of the things that should have given him confidence that hyperinflation was not going to hit.
I'm hoping for a big next week.
Empiricism? We Austrians don't need no stinkin' empiricism!
And Daniel Kuehn at: http://factsandotherstubbornthings.blogspot.com/2012/12/delong-on-murphy.html :
"Wow - I forgot the bet was over 10 percent inflation by January 2013! Brad writes:
"'The most terrifying thing of all is that being completely, comprehensively, unmistakably, fundamentally, fatally, totally wrong has not led Robert Murphy to rethink or modify any of his analytical positions or ideological beliefs by even one iota. I mean, one would expect an announcement on his weblog like: "I have been totally wrong, about everything. I am closing down this weblog for five years to avoid misleading readers while I intellectually retool. You will find me sitting at the feet of Paul Krguman, chanting 'om mani padme hum' until I achieve enlightenment." Not gonna happen...'
"I think it's fair to say that he hasn't changed his perspective on how the economy works to date (he certainly hasn't dropped dismissing Krugman), although he has acknowledged how badly this has gone at a couple points.
"Even more embarrassing for Bob is that he lost a potential bet he seemed curious/eager about with an MMT commenter on his blog about 5 percent inflation too.
"One of the nice things about Brad DeLong is that he regularly lays out where he was wrong in the past and has changed his mind. I'm curious if any Austrians who were predicting things similar to Bob have thoughts along these lines as well. Bob is not alone, after all. Peter Boettke recently suggested that the crisis confirms Hayek's position. Is there any grounds for these sorts of claims? Should they be revising any viewpoints in the way that DeLong did much earlier in the crisis?
"Often you'll hear Austrians say that we're at the zero lower bound because the central bank is pinning us there with easy money policy. That explanation begs a lot of questions itself, of course, but you certainly can't say that and then also explain how low inflation is consistent with your theory. The Keynesian story, of course, has an answer for both the low inflation and low interest rates.
"What's interesting is that in Bob's defense of himself (a year ago!) he cites the eurozone crisis and the flight to quality. This is quite close to admitting the Keynesian position, if only he would make that leap. A flight to quality in the face of revised expectations about returns to capital investments of any sort in an uncertain future is precisely the mechanism here. That will give you what we observe today - not the realization of a discoordinated capital structure followed by expansionary monetary policy.
"Brad DeLong doesn't think Bob can come to terms with all this. I'm not so sure. Bob was able to embrace Sraffa over Hayek. And if you thought the lefties liked Keynes, wait until you see what they think of Sraffa! Bob knows when to aknowledge the other side has a point without abandoning the good points that the Austrians make. So will he do it this time?"
Bob isn't quite as crazy as Greenspan though. Greenspan would say, "It is unfortunate that we haven't had 10% inflation because the markets might stop expecting inflation, producing a sense of complacency, and could render them ill-prepared when it does happen."
Translation: "The markets are wrong." Perhaps he wants to use 'central planning' to force people out of bonds... oh, wait... that is what the debt ceiling default is for! The Republicans are central planners who wish to plan the end of the USA.
Austerianism is quite simply a death cult and not a scientific (or scholarly) theory, so this is hardly surprising.
So do you think he will now double down on his 2016 bet?
Year-on-year AND seasonally adjusted?! How can you trust a man who can't even trust his own pants?
"Reality is an Illusion" Oooomm.
Can we all head over there and get a piece of the action??
Meanwhile at...
http://factsandotherstubbornthings.blogspot.com/2012/12/delong-on-murphy.html#comment-form
A substantive debate rages.
Notice the uptick after 2010. Was that the effect of the QEs and the Fed creating inflation? Are inflation expectations the signal which the Fed is watching and everything else is just noise?
Mr Murphy should try the chant of self-awareness: "o-wah tahfoo lyam"
Another thing about Mr. Murphy and other Conservative-Libertarians (for which Austrians economics is simply convenient to the ideological preferences of a a winner take all, neo-feudal, society), is the play they make with numbers. For instance, the "Fiscal Cliff" and spending restraint was only an agreement to cut Defense and Non-Defense Discretionary spending. The deal did not apply to Social Security, Veterans, Medicare, and Medicaid benefits. And large part, these were excluded because Republicans refused to "own" any current cuts in these areas which gore large parts of their white, elderly base. Because entitlements spending continues to rise in response to both inflation and and increase in beneficiaries (a low 2% increase for inflation adjustment and the addition of more aging baby boomers becoming eligible for benefits and the adddition of several hundred thousand diabled veterans created by our recent wars), the $58 billion dollars in discretionary spending cuts nets out to only a total $9 billion dollar cut in spending. (If you go back to 2011, the discretionary budget falls $115 billion from the 2011 in nominal dollar terms, and a total $49 billion in spending cuts in nominal dollar terms. In real terms, adjusting for the low inflation rate of 2% per annum, the cuts are 10% in real terms from the 2011 budgets). It would be nice if Mr. Murphy and Mr. Greenspan would be honest with the "real" cut to Government spending and the people who will be hurt by those cuts. Instead they play games to create sound bites for talking heads.
See William Black on the Austerity roadblock we are in.
http://www.ritholtz.com/blog/2012/12/deprogramming-austerity-supporters/#comment-650952
This is how dumb the bet was: it was even money.
Actually I suspect the rationalization, if he is ever forced to give one, will be that "*I* personally averted the catastrophe. Through my selfless publicizing of the dangers of inflation, I got politicians, financiers, and the Fed all to moderate their policies and be more careful".
This IS the traditional behavior of religious nutcases after the apocalypse fails to arrive.
No, one does not have to go till the Heritage Foundation to find people who are incapable of recognising that this is a good time for the US government to borrow money, since people are currently buying bonds on negative rates.. One needs to go only up till the centrist haven called "third way", an organisation who has a lot of influence on President Obama's world view, in order to find paranoia over looming inflation.
Although third way's ideas would make a lot of sense for the case of my native Greece, these ideas are a hard fit for the most advanced and dynamic national economy of the planet. These ideas are an impediment to actual growth and a theoretical disgrace to neoclassical synthesis.
Perhaps Dr Murphy's goal is to increase his share of the right wing blogosphere.
Under the current meme that the web is causing our society to splinter into little groups of like mind, and the psychological finding that facts don't change how true believers think (in fact, false prediction increase belief in the prophet), we would expect Dr Murphy to become more shrill, as his claims are shown to be false (or, with respect to the order of the shrill, antishrill ?).
We can expect Murphy to assert that unless we return to specie money (not those statist backed by gold greenbacks, but real specie), our entire civilization is at risk....
One of the classic problems in artificial intelligence is "the fly at the window". The poor fly has no mechanism for dealing with facts that conflict with it's knowledge base, such as a physical barrier that it can't see. So it crashes into the window again and again until it exhausts itself and dies, or gets distracted and flys off in another direction. Austerians are apparently trapped in exactly the same way.
Personally I've come to view this is a Generals always fight the last war thing. When all the old guys were young back in the seventies the big hoary problem of the day was persistent baseline inflation. So they now think of their jobs as preventing the return of inflation. So they are trapped in a low inflation good, high inflation bad mindset. So if your 60 years old and using your life experience in the US as your historical record, you think 70's inflation as the worst ever. If you're used to looking deep back into the actual historical record of both the US and other countries, the 70's period doesn't look that bad. Instead you fear a problem of a different sort, you fear deflation.
Basically, yes. I guess so. To be honest, I am not very familiar with Murphy, but he did make the post last year acknowledging he was in a deep hole for the 2012 deadline bet, which shows some integrity (how many people just completely bury inconvenient facts?) but, as you note, no hint of changing his approach or analysis.
Its like if the people who predicted Nibiru was going to come and cause all kinds of catastrophes on Dec. 21 are insisting that it will still come in the near future.
Excellent! Flies sometimes do go off in another direction,so does that make them more intelligent problem-solvers than the Austerians?
Phil Koop wrote:
Year-on-year AND seasonally adjusted?! How can you trust a man who can't even trust his own pants?
For what it's worth, that was the vestigial clause from my bet with Bryan Caplan (which Henderson wanted a piece of). I just wanted to make it year/year, Bryan for some reason phrased it as the above.
Don't worry, I don't expect you to announce to the world, "I have been wrong about everything."
He's blaming it on Europe. He thinks he's been had by a bunch of pseudo-communists posing as socialists.
Can't think where I read it, but Third Way is yet another Pete Peterson front. It seems clear that Pres. Obama has drunk their Kool-Aid, but he's supposed to be a smart man so I can't figure out why. More likely, to my mind, he has some other reason, which he does not want to share with us
Indeed, the correct (Wall Street) response. Stubborn, wrong, and willing to put up real cash? Ranks right up there with the German savings banks.
This is interesting, because I am sure many people (economists and non-economists alike) would not have been surprised if QE 1-4 had caused some noticeable inflation by now (although 10 percent seems a bit high). In other words, the monetarists out there would ordinarily expect some inflation to follow an increase in the money supply.
Clearly, Murphy got it wrong. Very wrong. We are currently at (or slightly below) 2 percent inflation.
I'm curious as to why inflation has remained so low in the face of money supply increases. Murphy blames flight from the Eurozone crisis to the US dollar. Others attribute the low inflation to the US dollar's reserve currency status. One commenter above suggested that the new QE money increases were offset by decreases to the money supply as a result of deleveraging. Alan Blinder suggested last summer that it was the 0.25% guaranteed return on excess reserves. If you ask a banker, they will tell you that all that new money doesn't do any good because there are not enough credit worthy borrowers to loan money to.
What is the right answer?
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