Today I wish to return to what was my earliest theme when I stepped into the online world nearly 6 years ago. Back on the 17th of November 2009 I argued that there were problems with the simple concept of what is a price and used some examples from my own shopping bag to demonstrate this.
For example own brand wine gums have varied between 27 pence and 85 pence. On Sunday a 300 gram tin of garden peas cost 25 pence whilst a 142 gram tin cost 30 pence. So what is the price of these two articles and what level of inflation would we get from them? As the world has changed as a nation we shop more at supermarkets. Everybody who does so will realise that they manipulate prices quite a lot.
This was on my mind the other day when I noticed that the price of a supermarket own brand pot of yoghurt seems to bounce backwards and forwards between 90 pence and £1.10 for no apparent reason.
I pointed out that if we were struggling at times with what is a price or more formally price discovery then we were on dodgy ground when we tried to calculate inflation. I will go further now and say it is one of the reasons why we get caught out more often by inflation numbers and it was nice of Bavaria statistics to illustrate my point on cue this morning by publishing an inflation number rising by 0.5% and catching the “experts” out (again).
Subsequently I went onto other areas where modern life had made price discovery ever more difficult.
Now if we leave the supermarket who has recently compared mobile phone tariffs? How easy are they to compare? I can confirm that domestic energy prices (electricity and gas) are very difficult to compare even on websites that are supposed to help you. Suppliers are clearly making comparisons difficult. There are many other examples of this. This is quite a serious market failure.
Bringing this up to date the TalkTalk scandal which may cover me as a customer poses its own questions as my custom got sold on from AOL to Carphone Warehouse and now maybe whoever! But the truth is I lost touch a bit with both what was happening and the price. Here is another awkward bit as one of the reasons I did that was because internet service reliability is important to me.
This brings me one of the fundamental credit crunch issues which is that as price discovery was failing pre credit crunch so was much economic theory. We had no equilibrium or if we briefly did we were unaware of it. However it has got much worse in the credit crunch era
This time it is the official bodies which have failed to discover price and inflation numbers as the UK Office for National Statistics have reminded us this morning.
We have designated the IPHRP (Rents) as experimental statistics. The results presented in this article are subject to revisions if improvements in the methodology are identified.
You see they had a series which did so badly it found itself stopped and redacted and sent to whatever place you find abandoned and friendless statistics. It did not stop the UK economics establishment (Consumer Prices Advisory Committee and others) from recommending it. So everyone – apart from those who read my blogs – were sent in the wrong direction on rental and indeed owner occupied inflation. Of course nobody is to blame and indeed many of those responsible have been promoted! But the point is that we were misled as to another price.
These are another form of price and we have seen an emergency interest-rate of 0.5% in the UK for over 6 years now. This has been accompanied by QE and other measures to drive down longer-term interest-rates as well. So in terms of Bank Rate we have no signal of a recovery from the price.
What we do have though is plenty of hype and I note that Bloomberg classify Mark Carney as a “hawk” ignoring the fact that he has yet to actually cast a vote for an interest-rate hike. So let me through in something more subtle. As we struggle to know what a price is central bankers are acting on expectations of price changes via Forward Guidance and expecting that to work. What could go wrong?
Also there was the Li(e)bor scandal.
One can debate the issue over control of short-term interest-rates as central banks have of course intervened in them for decades and decades. Although driving them negative is a new venture. However the advent of large-scale QE and the way that government bond prices and yields have been influenced is new outside of Japan. Let me show you something which illustrates this. From the Financial Times
Italy has sold two-year debt at a negative yield for the first time………Investors accepted a guaranteed loss to buy €1.75bn of Italian debt at a yield of minus 0.023 per cent .
I pointed out last week that such bonds were trading at negative yields but Tuesday was the first time that the Italian Treasury and taxpayer had a guaranteed profit from it.
Now back as 2012 began the ten-year yield in Italy was popping above 7% and back then the national debt had been 116% of GDP (Eurostat 2011). Now the national debt is 136% of GDP and the yield is 1.4%. We need also to factor in the economy but it shrank by 2.8% in 2012 then 1.7% in 2013 and by 0.4% in 2014 followed by growth of 0.9% so far in 2015. So as you can see but for the fact there has been some recent growth everything is worse! Accordingly we see that the “everything it takes speech” and subsequent actions of Mario Draghi have driven this. There is no price discovery here beyond what the European Central Bank wishes us to see.
Only yesterday Sweden announced another effort in this long-running game as it announced another 65 billion Krona of government bond purchases. After that Swedish bond yields went negative out to the five-year maturity chasing Germany (6 years) and Switzerland (15 years). The FT puts it like this.
Sub-zero club now encompasses €2.6tn of debt, up from €2tn in a week.
In a recovery? How is the price discovery system working right now then?
Here we obviously have the issue of currency wars. In the last week we have had the Open Mouth Operations of Mario Draghi followed by an interest-rate cut in China, more QE in Sweden and “next time” promises from Janet Yellen and the US Federal Reserve. So we have had some action but mostly talk. But my point is that exchange-rates follow central banking pronouncements like dogs on a short lead. The Euro fell for Draghi and the US Dollar rose for Yellen making a win double of course for the former. Does anybody believe that either of these two individuals have any idea where the equilibrium or market-clearing exchange-rate is? Actually we could go deeper and argue that it is a bit like Heisenberg Uncertainty Theorem but that is for another day.
For now let me just point out that as exchange-rates are a zero-sum game then as a total the effort is pointless unless of course Blondie were prescient here.
And out comes a man from Mars
Rather than “we come in peace” I fear we would try to devalue our currencies against the Martian currency even quicker than Paul Krugman would be able to ask him/her for a fiscal boost.
I am reminded of the 1983 Yes Minister episode which discussed manipulation of numbers so some of this has been going for a long time. But my contention is that it has got worse and just as we would hope to know more via price discovery we in fact know less as they are manipulated. This leads us to Goodhart’s Law.
When a measure becomes a target, it ceases to be a good measure.
Prices? inflation? Interest-Rates? Bond Yields? Exchange-Rates? Oh and I have not even got onto how the QE era and the flow of funds seems to have influenced both commodity and equity prices. Is it a fluke that as bank trading desks withdrew from commodity markets prices fell?
Actually today has seen a more basic manipulation in another sphere apparently come to an end. From Xinhua News.
China abandons one-child policy, allows two kids for all couples