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06/22/2016

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Edward,

Figure 3 is confusing to me. How do you know the slope of the orange line? (I assume that its location is set so that it falls at the intersection of Real GDP and TFUR at some point.)

Is the slope for the orange line just the average slope of the measured data?

Figure 4 is also confusing to me. We have not had inflation anywhere that high. How are you plotting those curves?

The lines in figure 3 go to the crossing point of the x and y axes. So it is a straight line coming out from the origin.
Here is a post about the line...
http://effectivedemand.typepad.com/ed/2016/05/attractor-prod-cap-shift.html

The effective demand curve passes above and then drops to the AS curve at a larger real GDP.
here is a post to a picture of how it works...
http://effectivedemand.typepad.com/ed/2013/05/effective-demand-monetary-model-reinforcing-the-framework.html

Edward,

Okay, I read those but I am still confused.

I guess the level of abstraction is more than I can follow. The attractor explanation bothers me. I am not equipped to evaluate, how those slope lines were developed or why the percentages on the right change so randomly.

Figure 4 seems to be at least somewhat theoretical since we have never had inflation levels that high over the period of the chart.

These seem to me to be something like corollaries to your basic equations on effective demand. Or I am truly confused. :^)

So I return to your equations documenting effective demand as a limit. Since effective demand is calculated using Labor Share as an input, it helps to explain the world that I see today.

The figure 4... Why are the ED lines so high?
It is not high inflation.

Look at the equation...
rGDP*e*T/(U/(1+C))* (1 - (1 - 1/e)*T/(U/(1+C)))

The result gives production at certain values of C. The equation always gave a value near $16 trillion for all RGDP for 6 years. But what if you raise C (inflation) in the equation?
Then the result will decrease. That is why the ED curve slopes negative up and the left. As inflation rises in the equation, demand would decrease.

But you need to make the connection between figure 4 and figure 1. The red dot in figure 1 is where the economy currently is. The ED limit curve is a limit which sits at a distance from the red dot. The red dot moves toward the ED curve over time.

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Data as of 2ndQ-2017
Effective Demand = $17.222 trillion
Real GDP = $17.011 trillion
Productive Capacity is rising to next business cycle = $23.266 trillion
UT index is falling= +0.9%
Effective demand limit = 74.0%
TFUR = 73.1%
ED Fed rate rule (down from a peak of 3.8% in 2014) = 1.9%
Estimated Natural Real Interest rate = 1.6%
Short-term real interest rate (fallen from 2.8% peak in 2014) = -1.2%

There is no recession for 2ndQ-2017. Chance of recession is growing as economy heads toward 2nd effective demand limit in this business cycle.




Click on Graphs below to see updated data at FRED.

UT Index (measure of slack):

The UT Index

z-vertical:

z-vertical

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

Corporate profit rate over real cost of money:

Corp profit rate over real cost of money

Exponential decay of Inflation:

Corporate profits impact Inflation

Measures of Inflation:

Measures of Inflation

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:

Productivity

Productivity against Effective Demand limit:

Prod & ED limit

Bottom of Initial Claims?:

Initial claims

Tracking inflation expectations:

Fisher effect?

M2 velocity still falling:

Measures of Inflation

All in one:

All in one

Double checking labor share with unit labor costs & inflation:

ULC LS CPI
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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