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  • The iPad2 is So Much Better If You Have Any Money Left to Buy One

    Posted by Shannon Love on March 19th, 2011 (All posts by )

    The Wallstreet Journal on the Fed’s new media campaign to spin its inflationary policies:

    The former Goldman Sachs chief economist gave a speech explaining the economy’s progress and the Fed’s successes, but come question time the main thing the crowd wanted to know was why they’re paying so much more for food and gas. Keep in mind the Fed doesn’t think food and gas prices matter to its policy calculations because they aren’t part of “core” inflation.
     
    So Mr. Dudley tried to explain that other prices are falling. “Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful,” he said. “You have to look at the prices of all things.”

    Here’s the thing: The iPad was always going to provide more bang for the buck regardless of what the Fed did or didn’t do. The cost drop for the iPad is due to the rapid technological change in the computer field. Moreover, without the Fed destroying the value of the money in people’s pockets, the cost to performance ratio change for the iPad would have been even more dramatic.

    How can the Fed claim they aren’t causing problems by pointing to a factor over which they have no influence. Shouldn’t we hold the Fed accountable for the factors they do influence?

    Improving technology automatically improves the standard of living but that has nothing to do with inflation. Yes, it’s great that you can buy a much more powerful iPad2 for the same price as an iPad1 but it’s not so great if you can’t afford even the price of an iPad1 now because your food and gas prices have increased to absorb all the excess income you had budgeted to get a new iPad!

    Inflation is the most dangerous of all financial strategies. It destroys real wealth and utterly disrupts the price mechanisms that drives the entire economy. To the extent it works, it does so by transferring vast amounts of wealth from ordinary people to those who get the inflated currency first. In this case, it is the large banks that the Fed are trying to re-inflate after the housing bust sucked all the capital out of them.

    Even if is necessary, and I’m not saying it is, the Fed should have at least have the good grace to explain things straight to us instead of trying to convince us that our rapidly decreasing purchasing power is nothing to worry about. Inflation is just a form of taxation. They are taking money from us to prop up our financial institution. That taking will leave us all with a lower standard of living than we would have had otherwise. They should be honest about that.

    Just because Steve Jobs is very good at his job doesn’t mean the Fed doesn’t suck at theirs.

     

    8 Responses to “The iPad2 is So Much Better If You Have Any Money Left to Buy One”

    1. David Foster Says:

      Inflation is also very destructive of the social order. From Sebastian Haffner’s memoir of growing up in Germany between the wars:

      “But the mark now went on the rampage…the dollar shot to 20,000 marks, rested there for a short time, jumped to 40,000, paused again, and then, with small periodic fluctuations, coursed through the ten thousands and then the hundred thousands…Then suddenly, looking around we discovered that this phenomenon had devastated the fabric of our daily lives.

      Anyone who had savings in a bank, bonds, or gilts, saw their value disappear overnight. Soon it did not matter whether it ws a penny put away for a rainy day or a vast fortune. everything was obliterated…the cost of living had begun to spiral out of control. ..A pound of potatoes which yesterday had cost fifty thousand marks now cost a hundred thousand. The salary of sixty-five thousand marks brought home the previous Friday was no longer sufficient to buy a packet of cigarettes on Tuesday.”

      The only people who were able to survive financially were those that bought stocks. (And, of course, were shrewd or lucky enough to buy the right stocks and to sell them at the right times.)

      “Every minor official, every employee, every shift-worker became a shareholder. Day-to-day purchases were paid for by selling shares. On wage days there was a general stampede to the banks, and share prices shot up like rockets…Sometimes some shares collapsed and thousands of people hurtled towards the abyss. In every shop, every factory, every school, share tips were whispered in one’s ear.

      The old and unworldly had the worst of it. Many were driven to begging, many to suicide. The young and quick-witted did well. Overnight they became free, rich, and independent. It was a situation in which mental inertia and reliance on past experience was punished by starvation and death, but rapid appraisal of new situations and speed of reaction was rewarded with sudden, vast riches. The twenty-one-year-old bank director appeared on the scene, and also the sixth-former who earned his living from the stock-market tips of his slighty older friends. He wore Oscar Wilde ties, organized champagne parties, and supported his embarrassed father.”

      Haffner believes that the great inflation–particularly by the way it destroyed the balance between generations and empowered the inexperienced young–helped pave the way for Naziism.

      In August 1923 the dollar-to-mark ratio reached a million, and soon thereafter the number was much higher. Trade was shutting down, and complete social chaos threatened. Various self-appointed saviors appeared: Hausser, in Berlin…Hitler, in Munich, who at the time was just one among many rabble-rousers…Lamberty, in Thuringia, who emphasized folk-dancing, singing, and frolicking.

    2. onparkstreet Says:

      Inflation is scary. It makes a mockery of hard work and savings. It makes more than a mockery, when things get really bad as in David Foster’s example above….

      – Madhu

    3. Petrer Says:

      Just from simple observations, Milton Friedman was generally right about government intervention, especially
      on the federal level in product markets, as well as loan markets.

      The markets where quality either is stagnant or decreasing while prices increase are almost always where the government has tried to “help,” namely health insurance, college loans, housing loans, and to a lesser extent, food products and commodities.

      Legislation going back to 1948 encouraging employer driven health insurance, and in turn, third party paying.
      Legislation enacting medicare under a system of third party paying.
      Federally insured loans and explicit policies meant to encourage home ownership through effective subsidies, and the countless subsidies to mostly large farm companies.

      The “Core inflation” indicator is practically broken for the above reasons. Which is why a person in the audience quipped, “I can’t eat an ipad.” It may be easier to go from steaks to spam, but when you are paying college loans, a large mortage, and high health insurance premiums, you really can’t do “hedonistic” substitution.

    4. Brett_McS Says:

      Food is not a core component of the inflation calculation, but iPads are? Winning The Future?

    5. Shannon Love Says:

      Petrer,

      …but when you are paying college loans, a large mortage, and high health insurance premiums, you really can’t do “hedonistic” substitution.

      Yes, and the same applies to sudden increases in taxation. Someone making $250,001 a year might have a much better lifestyle than the rest of us but that doesn’t mean they can easily swallow a 5%-10% tax increase. They have long term structured cost just like the rest of us.

    6. Petrer Says:

      Shannon,

      I concur on income taxes, but I don’t see as much stress for that person. With the payroll tax, the total income tax is flatter than the brackets make it. However, the total net (effective) tax I have read, in a study, ranges from 20-40%, going from 50 grand a year to 500 grand a year. The study calculated all taxes like sales, property, and negative taxes like medicaid. So there is a progressive total tax. Now, I see very little worth in messing around with the brackets, since federal tax receipts since the 50’s have actually gone up, as a % of GDP. What needs to be talked about is the average effective tax on everything, and then you change accordingly.

    7. Shannon Love Says:

      Petrer,

      I concur on income taxes, but I don’t see as much stress for that person.

      Why not? If they consume roughly the same percentage of their income as a middle-class person does on housing, transportation, education debt, business clothes, saving/paying for kids education etc plus their current tax bill were does their slack come from to easily pay the new tax?

      Other financial commitments don’t go down just because taxes go up. Upper income people have higher incomes but unless they live far below their means, they don’t necessarily have more slack as a percentage of their income. There seems to be this idea that upper income people make $250,000 a year and then only spend say $100,000 and then they squirrel away the rest in their Scrooge McDuck vaults.

      Suppose you make $50,000 and your taxes go up 10% so that you have to pay $5,000 and suddenly get buy on $45,000. That would hurt quite a bit but would your neighbor down the street that gets by on $45,000 a year give you much sympathy? Would his neighbor even further down the street who lives on $40,000 a year give him much sympathy? I think it’s same thing.

      Given years to plan, of course, upper income people could dial back their spending just like anyone else but that doesn’t mean they can turn on a dime anymore than the rest of us can.

    8. Petrer Says:

      I totally agree on not raising income taxes, but “living below your means” becomes easier as you make more income, hence lesser stress, I didn’t mean no stress!

      The raising of the brackets is simply a legislative game, at least in the aggregate sense, since tax receipts really
      fluctuate with the economy rather than the tax bracket. There is a lot of sense in the Laffer Curve, but as we approach lower marginal brackets, there is diminishing marginal return. We need to look at the “all-in” marginal rate,” which is 40% according to “Does it pay, at the margin, to work and save.” However, from the graphs, you can calculate the total effective tax from incomes of 0-500 grand.