« Jump in Base Fed Rate would have continued for July... | Main | Summary of Effective Demand Monetary Rule »



Feed You can follow this conversation by subscribing to the comment feed for this post.

Hi Edward - I have two questions, if you have time: 1) Just what would be needed for the advanced countries to "coordinate a reversal of falling labor share" and, 2) since this coordination (or even individual action) is unlikely, what happens next? Thanks.

Agreed... the coordination is not likely. What happens next?
Economic potential is stunted. But now the million dollar question...
Does that mean there is more slack?... Well, no.
There is pretty much the same amount of slack as before in terms of what the economy will use by the end of the business cycle.
Therefore, there is slack out there that the Fed has no power to fix. The Fed's low rate shows that they think they can fix it. But they can't. The Fed rate should rise in relation to the slack left before the end of the business cycle. Yet, it won't rise enough by then.
There is a dramatic situation taking shape...

Heck, based on the Fed minutes from the July meeting, I don't think the rate is going to rise at all if the economic recovery, such as it is, slows down or stops making progress. So we likely face the end of the business cycle and a zero fed funds rate. What is this "dramatic situation" of which you speak?

The dramatic situation is just that... reaching the end of the business cycle with the Fed rate still stuck on the ZLB. There will either be a great deal of soul-searching by many economists, or blame on unforeseen things. Some economists will accept their failing to see it coming, others will not accept that they missed it.


I agree with you on the "dramatic situation".

Before this is finished, I believe that some economic theories are going to be exposed as based on certain assumptions which are not always true.

Japan seems to be the "canary in the mine". Japan's economy is export based, they import raw materials, manufacture products, and export a large percentage of that production to the developed world including the US. More accurately, to the worker/consumers in those countries. Their fundamental problem has been that after 1985 they faced increasing competition for the developed world's import market.

Their primary response to that problem was a monetary one and later Keynesian stimulus. But none of their policies have brought their economy back to health. At best, their policies provided some temporary relief from time to time. And over time left their government massively in debt. Japan can not force the developed world to buy from them, so logically, they will have to change their economic paradigm. The essential question is how do they purchase the raw materials to meet at least their domestic needs?

American economists were critical of the Japanese response to their problem but in the end we have done just about what they did.

Our fundamental problem is that we have outsourced production to countries with cheaper labor costs and in the process left American worker/consumers unemployed, or underemployed, or just underpaid. For about 25 years, our problem was masked by consumers borrowing more and more equity out of their homes or finding other ways to run up more debt. When that was no longer possible, reality came to the front.

Lowering interest rates as policy, assumes that there is a ready supply of credit worthy and willing borrowers.That is not true when debt becomes excessive. Stimulus as policy, assumes that you can continue that policy forever because it seems in most cases that when the stimulus ends so does the benefit.

In our case the essential point is that either government policies improve the economic health of most American worker/consumers or the effects of those policies will be temporary.

Obviously the limits of monetary policy and the limits of Keynesian stimulus have not been understood. Excessive debt seems to trump both.

The news says that there are some papers being presented at Jackson Hole which say that monetary policy is unable to fix the labor trends...
That is good to hear.

Well, sooner or later they will have to face reality. The sooner the better, so it is good to hear.

It has been over 6.5 years since the beginning of the Great Recession.

I began complaining about the potential severity of the downturn at the very beginning, and began using the phrase "Consumers can not spend what they do not have."

The Greenspan and Kennedy study about home equity withdrawal had gotten my attention. It should have caused everyone to take notice of the consumer debt levels and their significance.

The comments to this entry are closed.

Data as of 3rdQ-2018
Effective Demand = $18.433 trillion
Real GDP = $18.671 trillion
Productive Capacity = $24.872 trillion
UT index is at effective demand limit = -0.92%
Effective demand limit = 74.1%
TFUR = 75.1%
ED Fed rate rule = 4.0%
Estimated Natural Real Interest rate = 2.3%
Short-term real interest rate = 2.8%

There is no recession for 3rdQ-2018. Chance of recession is growing as economy has now reached 2nd effective demand limit in this business cycle. I am forecasting that economic conditions will begin to contract in the second half of 2018.

Click on Graphs below to see updated data at FRED.

UT Index (measure of slack):

The UT Index



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



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:

My Photo
Edward Lambert: Independent Researcher on Effective Demand. Graduate of Atlantic International University where independent research was developed.
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
Blog powered by Typepad
Member since 03/2013