Wrong Measurement, Wrong Macro Call

measurement-header

We have written much on the topic of economic measurement. Does the dollar measure gold, is it appropriate to say that “gold went up”? Or does gold measure the dollar?

Does a line of gummy bears laid out on the kitchen table measure the ruler? Does one stretch some rubber bands one day, and say that “the steel meter stick is 6.8 rubber bands long”, but the next day observe that it has gotten longer and is now 7.1 rubber bands long? Does the sinking ship in the stormy seas say that the lighthouse is going down and up, but mostly up?

Consumer Prices & Wages

If you drop both a brick and a board over the edge of a cliff, they both fall. But the brick falls a bit faster, thanks to its higher mass to surface area ratio. Now, picture a camera mounted on the brick. It would see the board going up. This is an excellent analogy for consumer prices and wages respectively. Both have been falling for decades, with consumer prices falling a bit faster than wages.

As an aside, the conventional measure of inflation blinds one to this phenomenon. That’s because it treats the hypothetical real consumer prices as a constant, and attempts to measure the money and everything else based on it. In reality, consumer prices are anything but constant. And therefore, any methodology that assumes they are is fundamentally flawed.

Mainstream Prevailing “Wisdom”

To be admitted inside the mainstream Overton Window, it is practically a requirement that one must categorically refuse to measure the dollar in gold. One must talk of gold going up and down as if it were a volatile commodity like oil or cocoa.

However, it’s perfectly acceptable to measure the dollar in terms of paper currencies that derive from the dollar. Even though these currencies have a fraction of the dollar’s stocks, a fraction of its flows, and a fraction of its stocks-to-flows ratio.

In other words, the dollar may not be measured in gold but it may be measured in pounds and yuan. Or a basket of such currencies.

The truth is that the dollar may not be fit for measuring gold. But it’s an adequate measure for the euro and yen.

The difference between the measurement paradigm that we propose, and the mainstream, is not merely ideological, pedagogical, tendentious, or pedantic. It is that they lead to opposite conclusions.

Imagine believing that your steel meter stick has grown in length. Or the disaster that would befall if one thought that an object falling off a cliff were actually rising. Imagine the macro view that would come out of thinking that the dollar is falling based on watching the rise of the euro and the Brazilian real.

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