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Inflate Your Way to Victory

In keeping with the topic of the month, I present this chart.

worldcupinflationI really wanted to make the x-axis the compounded inflation rate since the World Cup began, but the data is just too difficult to find for many of these countries. Nevertheless, we see the broad outlines of the thesis in this chart. If you want to be excellent at soccer, inflate your economy.

The correlation between soccer wins and inflation (I arbitrarily decided to only include countries which have appeared in eight or more World Cups, so that there is some chance that they have some wins) is only 0.31, but notice the two blue dots at the upper left. I would argue that at least Germany has an inflation-driven history, although since the 1980s they have had fairly low inflation. One might argue the same with Italy, albeit to a lesser extent. If we exclude those two aberrations, the correlation rises to a whopping 0.67!

Ok, sure, this is somewhat spurious – it is largely driven by the fact that two of the winningest teams are Brazil and Argentina, which have quite a history of inflation as well as of soccer. But if the ECB discovers this, it should make sure all of the retail shops in Europe know…and they’ll have widespread support for inflation.

  1. HP Bunker
    July 1, 2014 at 4:24 pm

    Unrelated to this article but very much related to inflation… I’ve been house-hunting over the past few months, and had lots of time to consider what it would mean to put essentially all my liquid net worth into a single illiquid investment (I plan on largely paying cash to avoid silliness like a 1% mortgage recording tax and assorted other fees; also due to not having much else to do with my cash).

    So my question/comment is this. One often hears real estate discussed as an “inflation hedge”. Sort of like gold, except you get to live in it. But it seems to me that this is incorrect. The land component is finite (let’s assume we’re not talking about Vegas exurbs jutting out into vast, empty desert, but rather a more densely settled area with available water), so I can understand its more or less keeping up with CPI, or even some other metric, like CPI + population growth. However, if you look at most residential property assessments, the land component is only 10 – 20% of the total.

    The other 80 – 90% of the assessment is of course the house itself, and I have trouble seeing why that structure, essentially a manufactured product, should pace CPI. For example, if I bought a microwave today and kept it sealed in its shipping box, would I expect to be able to sell it a decade from now for today’s price + cumulative CPI? Of course not. It would have to compete with new cooking appliances, using newer technologies and materials, made in increasingly automated factories. So my question is, why should a house (absent any particular historic appeal) be any different? A decade from now, would one not reasonably expect new houses to be built using newer and better technologies, or at least more efficiently, with a greater prefab component?

    • July 1, 2014 at 10:32 pm

      Well, technology in housing doesn’t change very much, does it? However, the BLS recognizes that a 10 year old house is worth less than a 1 year old house, and hedonically adjusts the housing stock for this (pushing measured inflation higher for any given change in rents)…which is the opposite of the hedonic adjustment they make for microwaves. So you’re right on.

      • HP Bunker
        July 2, 2014 at 12:49 am

        Yeah, it’s sort of funny that technology doesn’t change much in housing, when you think about it. We do see a slow, steady evolution, such as double-paned windows, radiant floor heating, etc., but so much of the work is still done by hand (and often not very well). I would happily pay the same price for the same house built by robots rather than human contractors, who in my experience are almost universally ethically challenged, if not outright incompetent.

        Anyway, what you mention regarding adjusting housing stock for age isn’t really the same thing. What I was arguing is is that productivity improvements over time should help to keep the price of any good, such as housing, relatively steady even as overall inflation, which appears to be mostly driven by services, marches ever onward. Perhaps that is not the case, but it seems like it should be.

  2. July 2, 2014 at 7:34 am

    Let’s look at it this way. Suppose that we are thinking about the number of bars of gold that you can exchange for your house at any given time. Assuming you keep your house in a constant state (making needed repairs, etc), that exchange rate should remain roughly constant, right? But now suppose that we discovered that we could make gold by mixing Red Bull with Tang. The amount of gold in the world would suddenly be a million times what it was, and I think we would all agree that the exchange rate should change – your house should now buy a LOT more gold.

    It’s the same thing with money, which is all that inflation is – a decrease in the exchange rate of money for goods. Now, with goods or services that get naturally more valuable over time (due to improving technology, say), the exchange rate should deteriorate FASTER, which is to say they should inflate more, but you can see that in such a world the price of your house should gradually be worth more dollars simply because the supply of dollars is rising relative to the supply of (your unique) house. So inflation will happen to all goods, but the REAL exchange rate such as that between houses and silver, for example, is driven by changes in their relative productivity.

    Does that make sense? More importantly, does it answer your question!?

  3. HP Bunker
    July 2, 2014 at 6:07 pm

    Yes, and no. I’ve been reading your column for a long time, so I understand the basic dynamics of inflation. My question, simply put, is “why should house prices, apart from the land component, increase at a greater rate than those of other manufactured goods, such as computers?” For example, I bought my first computer in 1999, for $1200 (including a 17-inch CRT monitor). I bought my current computer, which runs approximately 1,000 times faster, in 2008 for $600, and this year bought a 27-inch LED monitor for $300. All these prices are not inflation-adjusted, of course. So with computers, and electronics generally, also to a lesser extent pretty much every other manufactured good, we have for the past decade or so had stable to falling prices, in combination with quality improvements. So productivity improvements in manufacturing have greatly outpaced growth in the money supply, holding down prices in nominal terms. Why should this not also be the case with houses?

  4. July 2, 2014 at 9:41 pm

    Well, to put it simply there just hasn’t been much in the way of increased housing productivity! You’ve increased your computer clock speed 1000x, but what in your house has improved by a factor of 5 over the same period? Don’t say square footage, because that’s a quantity adjustment not a productivity adjustment (like changing the size of a candy bar). Energy efficiency? I can’t imagine that’s more than 2x.

    • July 2, 2014 at 9:42 pm

      P.S., thanks for equating “reading your column” with “understanding the basic dynamics of inflation!”

  5. HP Bunker
    July 2, 2014 at 10:03 pm

    Well, technological improvements in housing have been slow. But it’s also hard to understand why it’s still so minimally automated. Watching guys making $45 an hour (about average for “skilled” carpenters in my area) bumble around, making obvious, sloppy mistakes, makes me wonder why we don’t see more robots arrive on the scene (or more manufactured, prefab components used). The local supermarket has had self-checkout lanes for years, replacing minimum-wage employees, but the carpenter robots are nowhere to be found, even though the potential savings on labor are far greater. In other words, there appear to be real savings to be had even building houses of the same technological level, only with less human labor input.

    The idea of plunking down hundreds of thousands of dollars on a largely handmade product that might soon be forced to compete in the marketplace with equivalent (or better) machine-made products is a concern for me. At some point, with the stagnating skills of contractors and rising costs of wages, benefits (thanks Obamacare!), and my state’s insane worker’s compensation system, it seems like prefab construction has got to catch on. Most home buyers don’t need a unique architectural masterpiece; they just want something well-built and affordable.

    • July 3, 2014 at 7:17 am

      Maybe, but remember that pre-fab house (which they’ve had since the 1970s, you know!) must compete with already-built houses that cost zero to build (because they’re already built). In any event, productivity in homebuilding isn’t the same as productivity in housing. I suspect productivity in homebuilding HAS advanced quite a bit over the last few decades, with just-in-time delivery of materials, nail guns, screw guns, etc. Also it’s now common to have some components pre-fab offsite and assembled onsite. But it isn’t only the labor cost that drives the cost of a new home. And it isn’t just materials. Home prices aren’t just cost-plus: they’re driven, like most other prices, by the prices of competing and substitute goods. So if all the houses in the neighborhood are $1mm, and you build a house for a penny, you’re not selling it for a nickel. You’re selling it for close to $1mm. That’s probably why there is so much high-end construction, is that the difference of market price to construction price is at its widest there.

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