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Great post. I like that you're trying to tell a clear cause-and-effect story, a narrative, that explains the situation.

Just ran across this this morning, via the always-brilliant Josh Mason...

(3) The cumulative process of a general credit crisis bifurcates the economy. At the extreme, it ends up with two disjoint sets of agents – on the one hand, creditors who are safe, solvent and liquid, but uncertain about the realizable value of their claims and under the circumstances unwilling to lend; on the other, debtors who are illiquid, in peril of bankruptcy and trying very hard to run positive cash flows to service their debts even as they have problems financing current operations. If the bifurcation has proceeded very far, conventional monetary policy will be ineffective. The central bank transacts with the solvent and liquid private sector agents but can do little by such means to stimulate activity in the parts of the private sector that are in trouble.7


have you seen Roger Farmer approach to understand business cycle? One of the paradigm of modern macroeconomics is the notion of natural unemployment rate hypothesis, and I and convinced that have flaws and it is false. Employment is constrained by demand, demand is constrained by wealth, and wealth depends on what we expect about it, so effective demand can be a self-fulfilling phenomena of expectations. The only way to get out of this mess of demand scarcity is to influence in wealth expectations, and Farmer approach calls for active market intervention of the Fed, not only with the rates, but also with risky assets (equity as recently Japan experience). So, the size of the Fed balance sheets allow for the control of inflation while the composition of it (risk and free risk assets) allow for determination of employment through wealth expectation.

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Data as of 1stQ-2016
Effective Demand = $17.341 trillion
Real GDP = $16.505 trillion
Productive Capacity = $23.0 trillion
UT index is rising = +4.4%
Effective demand limit = 76.1%
TFUR = 71.7%
ED Fed rate = 2.4%
Estimated Natural Real Interest rate = 2.5%
Short-term real interest rate = 0.6%

There is no recession for 1stQ-2016. Risk is growing to see recession before end of 2016.

(UT index is rising which implies a recession is on the way.

Click on Graphs below to see new data by updating at FRED.

UT Index (measure of slack):

The UT Index

Recession Alert (developed at recessionalert.com):

recession alert



z derivatives in terms of labor & capital:

z derivatives in terms of labor & capital

Effective Demand, real GDP & Potential GDP:

ED, real GDP & pot rGDP

ED Output Gap:

ED Output gap

Regressed Output Gap:

Output gap

YoY Employment change:

YoY employment change

Speed of consuming slack: yoy monthly:

Speed of consuming slack

Speed of consuming slack: quarterly:

Speed of consuming slack quarterly

Real consumption per Employee:

real consumption per employee 2

Will real wages ever rise faster than productivity?:

Productivity & Real Wages

Real Wage Index:

real wage index



Productivity against Effective Demand limit:

Prod & ED limit

Bottom of Initial Claims?:

Initial claims

Tracking inflation expectations:

Fisher effect?

Measures of Inflation:

Measures of Inflation

M2 velocity still falling:

Measures of Inflation

Double checking labor share with unit labor costs & inflation:

My Photo
Edward Lambert: Independent Researcher on Effective Demand.
Some links for economic analysis
Fed Views - San Francisco Fed, around 10th of each month.
Well's Fargo monthly - around 10th of each month
Well's Fargo weekly
Well's Fargo Interest rate report
Well's Fargo Economic indicators
T. Rowe Price weekly market wrap-up
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