Free-market medicine and the ‘74-week rolling average’
Medical doctor Tim Ryan responds to my recent column on medical costs:
“I have just such a medical practice in Cartersville, GA. I have the nicest office, most up-to-date EMR, digital EKG, next-day turnaround for any lab known to man and my prices are the lowest around. Office visit: $50. EKG, Labs, Injections, are all a small fraction of what you would pay anywhere. I make house calls. Check us out at thephysicianspractice.com.
“I take payment at time of service only, have almost no overhead and pass my savings on to the patient. I have been open for 18 months and my wife and I are the only staff we have and we are doing just fine. …
“I’m not the best doctor, I just have the best system: the Free Market! Everyone else is asleep and having a nightmare.
“If Universal Healthcare passes, my practice will BOOM! Oh wait … unless they make it illegal for me to work outside the system. If that happens, Nevada here I come!”
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Stephen Shipman, CFA, a portfolio manager at a big outfit in Los Angeles, writes in that he enjoyed my recent piece challenging the official government rate of inflation. But he doesn’t stop there.
“Though many Rockwellians are Austrians, please allow me to demonstrate the true classicist methodology of determining inflation,” Mr. Shipman says, rolling up his sleeves. “This, too, disproves the government’s notion that inflation is somewhere around 2 percent per year.
“The classicists, basically drawing upon the insights of David Ricardo, would determine the inflation rate in a discretionary money regime like ours by the following formula: Current Price of Gold divided by the Equilibrium Price of Gold, then solved by compounding over the duration of total debt of the United States,” Mr. Shipman begins.
“Now, establishing the current price can be debate as using the spot price or some rolling average. I prefer a 74 week average, but you choose what you are comfortable with.
“The Equilibrium Price is sometimes the legislated price (as it was $35 during the Bretton Woods era) or, again, some other average price. I like to choose the average price of gold under Greenspan.
“The duration of total debt in the U.S. is roughly 12.5 years.
“Thus, for me, a classicist, the inflation rate is: 801/365 ^1/12.5 = 6.49%.
“The key is that this 6.49 percent represents the average price adjustment of all goods and services that will take place over the 12.5 year period. Goods and services with short duration contracts increase first, then those with longer contract rates follow. It has been a very helpful too in seeing through the government’s balderdash.”
Ah. And replacing it with a new and better brand of balderdash?
On page 8 of “Eat the Rich,” P.J. O’Rourke accurately describes the prose style of the typical college “Classical Economics” text as “at once puerile and impenetrable” not to mention condescending. “No idea, however simple — ‘when there’s more of something, it costs less’ — can be expressed without rendering it onto a madras sports coat of a graph and translating it into a rebus puzzle full of peculiar signs and notations,” all to make this stuff seem “as profound to outsiders as organic chemistry does.”
O’Rourke, writing in 1998, quotes Samuelson’s standard “classicist” college text “Economics,” then in its fifteenth edition, to the effect that “Marx was wrong about many things … but that does not diminish his stature as an important economist.”
“Well, what would?” Mr. O’Rourke sensibly asks, “If Marx was wrong about many things AND screwed the baby-sitter?”
For starters, I begin to feel the ground shifting beneath my feet when Mr. Shipman, above, purports to offer us a formula for determining the rate of inflation that doesn’t even ask how much new money they’re actually printing or otherwise creating out of thin air each month, or the rate at which this increases the money supply, which I (in my naivete) still believe must have something to do with the “inflation” of the currency.
Instead, he seems to prefer an indirect method which will tell us how much they theoretically NEED to inflate the currency by measuring how big a debt they NEED to pay off — a bit like measuring rainfall not by setting out a beaker and then measuring the contents with a ruler, but rather by ignoring the actual raindrops falling on your head in favor of trying to cipher out how much water the crops NEED to grow properly.
Does this really seem like a good time to assume Ben Bernanke and Shifty Paulson have the slightest idea what they’re doing?
What does it mean to say “The duration of total debt in the U.S. is roughly 12.5 years”? Does anyone really think Washington is going to get it paid off in 12.5 years? The “duration of total debt in the U.S.” is the length of time between today and the date when the federal government defaults, either de facto or de jure, which is a time span on which I don’t believe even the oddsmakers at the Flamingo have a reliable line.
I can’t even figure out how Mr. Shipman proposes to derive the “price of gold.” I derive it by checking the Kitco Web site, which tells me the stuff is now selling at an absurdly low $736 an ounce, and then checking with my friendly local pawn shop to find out how big a premium above that “paper price” I’ll have to actually pay. Mr. Shipman prefers a “74-week moving average”, which seems more likely to approximate the rate of inflation nine months ago — assuming his formula works at all.
But wait! Then we have to divide his “74-week rolling average,” by the “equilibrium price of gold,” which Mr. Shipman fails to either define or tells us how to derive, except that he prefers the “average price of gold under Greenspan.”
Well heck, I’m all set now. Just tell me what rate of inflation you want me to come up with, I’ll set the “equilibrium price of gold” by choosing the average during the tenure of whichever former Fed director seems to work out best (Paul Volcker? Eugene Black?), and produce whatever answer you’re looking for. And if that doesn’t work out right, maybe I was being a bit arbitrary when I picked that “74-week rolling average.” We can always try a “296-week rolling average” and see if it stabilizes our results a bit.
Alternatively, I believe I can get just as close by dividing the average rainfall in Zimbabwe by the number of days of full sunlight in Iceland during the just-concluded Icelandic fiscal year, the only problems being a) solving for an “equilibrium sunlight day,” which is no longer conveniently set by law by the Icelandic Althing (personally, I prefer the average number of sunlight days in the crater of Snæfellsjökull under Arne Saknussemm); and b) rassling those darned Zimbabwean precipitation statistics — which they insist on recording in milliliters per metric hectare — back into some kind of sensible English measurements.
I’m sure it’s going to work out. I’ll get back to you. Meantime, if you want to invest your life savings with Mr. Shipman and his pals based on his assurance that any nominal return above 6.5 percent will keep you ahead of the current rate of actual inflation, caveat emptor and God bless.
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Speaking of 6 percent returns, in a recent column I used a passing example of banks offering 5 to 6 percent interest on savings accounts.
Doc Ellis writes in to ask “What banks offer 5 to 6 percent interest on savings accounts? California Bank and Trust dba Antelope Valley Bank quoted me an interest rate of less than 2 percent when I looked into getting a savings account. I chose to invest the money in manure forks and other tools for my animal care service. So, who offers 5 to 6 percent on a savings account?”
Good point. I was overly generous. Now for the harder question; Why does anyone still put their money in a bank at 2 percent (which currently loses you 3.6 percent per year even by the government’s figures), when I can currently buy 90 percent “junk silver” mercury dimes — whose value have been keeping pace with inflation since they sold for a dime, back in 1964 — down at the pawn shop for a dollar apiece, and throw them in the safe?
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On that topic, John writes in, from somewhere in e-mail land:
“Please tell us how we would actually use gold and silver in a time of hyperinflation. Would we take a gold coin to a dealer who would then exchange it for a stack of Federal Reserve Notes that we would then take to the grocery store? Or will clerks who don’t know how to calculate change today be expected to take our barter on changing price of gold? How does such an economy work on a day-to-day basis?”
Hi, John — I will suggest a way to start “acclimatizing” folks to this reality.
Next time you have a yard sale, post a sign that says “Price tags valued in current Federal Reserve Greenbacks. Pay 1/10th the price if you give us pre-1965 silver coin.”
Hey, we gotta start the “Great Re-awakening” somewhere.