Categories:
Monetary Policy
Like co-blogger Bryan, I am much less pessimistic about inflation than Bob Murphy is. I think inflation will rise, but there’s a lot of room between its current level and 10%. Also, I’m less optimistic about inflation long-term than Bryan is. So here’s the bet that Bob and I have agreed on:
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 I pay Bob 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 Bob pays me $500 at that time.
We will use the standard CPI, not the nonsense CPI excluding food and energy.
READER COMMENTS
Guan Yang
Dec 20 2009 at 8:19pm
Why don’t you adjust the payout for the change in CPI?
MikeM
Dec 20 2009 at 8:27pm
There’s some interesting personal irony to your post: A professor of mine I was having a conversation with recently predicted that the inflation will really start taking hold in 2013 or 2014. We really didn’t get into it on justifications for the date, but I’m rather sure it’s because he expects recovery to be very slow.
It would be unfortunate for someone to have to lose a bet and still be correct.
Steve
Dec 20 2009 at 8:52pm
If the two events are equally likely to happen, then Bob has the advantage. You should have specified that the amount paid would be equal to whatever the present value of a $500 payment on 1/1/13 evaluated on the date of payment.
You’d have to agree on a discount rate, of course. Using CPI or treasuries (which somewhat track CPI, among other variables) might be a good start.
Or, to make matters simple, the bet could have been settled on 1/1/13. But of course you and Caplan know this; this just shows the supreme confidence you have in your position.
JohnW
Dec 21 2009 at 2:45am
What is it with the low inflation guys and seasonally adjusted CPI year over year change?
Robert Arbon
Dec 21 2009 at 3:36am
Surely Mr Henderson has the upper hand here? Nominal $500 is worth less after a bout of 10% p.a. inflation surely?
Tom
Dec 21 2009 at 7:36am
I guess I’m impressed that you included the “nonsense” CPI (you just can’t get through a post without at least a gentle poke in someone’s eye, can you? You either understand why it’s not always nonsense, or we shouldn’t bother reading you) which makes it a lot more likely you’ll have to pay up.
I’d be more impressed if you bet a more substantial amount of money — or possibly included some sort of prescribed public embarrassment/admission of being wrong in addition to the payoff.
Ryan Vann
Dec 21 2009 at 12:31pm
The comments on this post are a carbon copy of Prof Caplan’s post. Mr. Arbon, they somewhat adjust for CPI by making the bet payable to Mr. Murphy as soon as a yearly CPI of 10% or more is observed. If anything, Mr. Henderson is at a disadvantage because he has to wait till the end of the betting period to be paid. Say, inflation where an average of 4% for the next 3 years, at the end of 2013; $500 would be worth $443.37. Now suppose in 2010 inflation hit 10%. Mr. Murphy would be paid at the end of 2010; $500 would be worth $450. I would calculuate FV for all three years, and do an average, but I think my point is pretty clear. The difference in inflation rates are countered by the payout schedule.
Tom,
I’m sure you will hear about the results of the bet on this very blog, and over at Mises (Murphy still blogs there yes?). Likewise, core CPI is nonsense CPI. It is used to make models more stable/clean, but nobody thinks it actually represents the total increase in consumer spending prices.
Rod
Dec 21 2009 at 5:11pm
“nonsense” CPI
Gee, Doctor, after all these years of teaching at the Naval PG School, I’d have thought you’d be able to find a more imaginative modifier than that! I’ll be glad to help!
Bob Murphy
Dec 22 2009 at 1:53pm
I’m Bob Murphy, and I approve this blog post.
Comments are closed.