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06/02/2016

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Edward,
“The Fed does not want inflation above target because higher inflation causes distortions and slows growth. “

This strikes straight at the heart of how we got to the current state of our economy.

The Fed wants what all bankers want. They want a low stable inflation rate because then they have a lower and more stable rate of devaluation of their capital. And they can depend on a more stable return on their capital.

The Fed pays lip service to employment because they have a mandate to factor unemployment into their decisions. But if they over stimulate consumption then workers will have more power to negotiate higher wages. They can quit and go to work for someone who has increasing demand for labor.

But that has not been a problem for the Fed since 1985, because free trade treaties insured that American labor would not be able to get higher wages.

The Fed could reduce interest rates with impunity.

Free trade treaties opened new opportunities for American corporations and American bankers. As more and more American corporations moved more and more of their production to foreign countries, more and more American workers lost the ability to quit a less than satisfactory job. Wages began to stagnate and workers only kept up consumption by borrowing. (After about 1995.) The key was to keep the payments low and that required lower and lower interest rates. In the final stage of consumption funded by debt, the housing bubble helped to create a huge debt bubble. When the housing bubble burst, it was no longer possible to run up large sums of new debt. By then only a miracle could have saved the American economy, the miracle being American corporations paying higher wages than they needed to attract the American employees that they absolutely needed. That did not happen.

Circular flows in the US economy were severely disrupted with free trade treaties. They will continue to be disrupted as long as our trade partners are allowed to export dramatically more than they import.

Creating higher demand by higher immigration into the US or expecting increased investment to create more and more jobs is delusional.

The vast majority of new immigrants will not be bringing millions of dollars, they will spend less than the average American and seek a portion of the existing American labor income pool. As American consumer’s incomes have decreased they concentrate more and more of the spending on the necessities of life. Exactly what new necessity would investors produce? And if some new entrepreneur designed lighted toilets, would they be produced here?

Why hasn’t anyone noticed that more and more young adults are living with their families? Does anyone believe that they are buying their own cutlery, flatware, or bed linen? (They used to do that.) Would they buy more stuff if the prices were lower? Will the cost of living be REDUCED any time soon?

Only your model of the economy offers any insight into the real problem in our current economy.

Wake any of the mainstream economists out of a sound sleep, and they will mutter some response that assumes supply side economics. INVESTMENT or DEREGULATION are just two of their instant cures.

Jim,
If there is ever a book written about this Effective Demand research, your comment above should be the foreword to the book.

Edward,

You doubt me when I say that we will thrash around in our current economic swamp for another decade or two. But how do you find solutions when you can not even bring yourself to accept the source of your problem? (Or worse yet, distract yourself with trivial arguments.)

The discussion in this article is a little scary.
http://www.bloomberg.com/view/articles/2016-06-02/no-one-is-quite-sure-what-causes-big-recessions

It is a little like saying that it is not the fall that kills you, it is the sudden stop. It trivializes the discussion.

We live on income, but in times of inadequate income, some of us run up debt instead of reducing our expenditures. But the debt must be repaid, so all we have done is to pull purchases forward. (With the blessing of the Federal Reserve.)

Then when it is no longer possible to run up more debt, reality strikes with a vengeance. Inadequate income is worsened by mandatory debt repayment. The Great Depression and the Great Recession stand out for their severity and both were preceded by a massive run up in debt.

Looking back, we should be able to agree that the debt only served to mask a growing problem. Alas, there is no such agreement.

In 2007, Greenspan and Kennedy released a study documenting the amount of Personal Consumption Expenditures which had been made possible by extracting equity from consumers' homes.
See: https://www.federalreserve.gov/pubs/feds/2007/200720/200720pap.pdf

And when that borrowing on homes slowed, the Great Recession was sure to follow. The only variable was the timing.

If the 'powers that be' refuse to recognize that GDP is limited by effective demand then they need to severely limit borrowing or accept semiautomatic depressions. (effective demand in the sense that you document.)

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Data as of 1stQ-2017
Effective Demand = $17.613 trillion
Real GDP = $16.842 trillion
Productive Capacity is rising to next business cycle = $23.285 trillion
UT index is rising = +3.9%
Effective demand limit = 76.2%
TFUR = 72.3%
ED Fed rate rule (down from a peak of 3.8% in 2014) = 1.4%
Estimated Natural Real Interest rate = 2.0%
Short-term real interest rate (fallen from 2.8% peak in 2014) = -0.3%

There is no recession for 1stQ-2017. I am expecting a recession by end of 2017.




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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