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06/17/2016

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Edward,

"The Fed rate should be able to go to 0% but then lift off according to the cycle of effective demand. "

It seems to me that taking the Fed rate to 0% and keeping it there for 3 or 4 years makes some sense. (In something worse than a run-of-the-mill recession.) After all, providing as much stimulus as possible can limit the damage to the economy. But at some point the economy has to stand on its own. They are encouraging new debt and that must be repaid. Extend and pretend can not go on forever.

The Fed has been unwilling to allow the economy to settle to some lower/slower GDP. They have been masking reality, and that has allowed some parts of the economy to act as though all was well and that real adjustments did not have to be made. Rosy projections were made with impunity. (No laughter!) State governments have allowed themselves to be lulled into a false sense of security.

If the Fed had begun raising rates in 2011 or 2012, the economy would have slowed and any assertions that the economy was back to normal would have been exposed as nonsense.

This has allowed the US Congress to stick their collective head in the sand. Ben Bernanke said more than once, that the Fed could not do it all, but under his leadership the Fed enabled inaction on the part of the US Congress.

The US Congress will not address the problems with the free trade treaties until they detect that the economy is NOT going to recover back to its state in 2007. We need our 1937 moment, it was a reality check.

How could any intelligent being have believed that large trade deficits were sustainable, especially year after year after year?

Our economic health did not fail, they killed it!

Industrial Production: Consumer Goods is still lower than it was in 2007.
See: https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=4JCu

Add that stat to all the others which scream that our economy is not a vibrant economy capable of producing inflation. And that is with the economy on life support.

Jim,
Your words say so much. You show why the Fed will have to soul-search what they did.
Thanks for a great comment.

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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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