Exponential Decay of Inflation

The graph shows how inflation drops as net corporate profits rise. (quarterly data since 1958 to 1st quarter 2016)

Net corporate profit rate = Corporate profits/GDP - nominal interest rate

The trend line (bright red curving downward) implies an exponential decay of inflation.

We have been at the decay extreme since the crisis. Currently the net profit rate has backed off a bit from the extreme to around 6% to 7%.

Comments

[JimH]

Edward,

It seems to me that the driving factor has been stagnant incomes causing fewer real dollars available to chase goods. When consumers are a little short of money they will reduce discretionary purchases.

For the most part corporations make their incomes on consumer spending. Getting caught with insufficient inventory is a 'faux pas' which is generally avoided, but that leaves corporations with the likelihood of accumulating unsold inventory when the economy turns down. That inventory adds an additional expense and suppresses retail prices, so profits would tend to fall.

That same scenario has played out as consumers have seen their purchasing power degraded over the last 20 years or so.

So it seems to me that the results plotted in your graph were inevitable.

As a side note, this morning I read in Bloomberg:
"A pay increase is the right thing to do," JPMorgan Chief Executive Officer Jamie Dimon said earlier this month, announcing a bump in minimum pay for 18,000 of his workers. "Above all, it enables more people to begin to share in the rewards of economic growth."
See: http://www.bloomberg.com/view/articles/2016-07-28/let-wages-take-off-not-helicopter-money

The rationalization is nonsense, this is not about sharing in the rewards. It is about maintaining the economic system and avoiding deflation.

[Edward Lambert]

Jim,
Profits are up. Labor income is down. GDP is slow.

The US has become a Latin American country. If Trump wins, we will then have a Banana Republic government with a Latin American economy.
Have you ever traveled through any of those countries?

[JimH]

Edward,

I spent 40 months in the Panama Canal Zone while I was in the US Army. I spend a good deal of my off duty time in the Republic of Panama. (Waking hours anyway.) I taught myself some Spanish and carried an English/Spanish dictionary everywhere.

I grew up in a poor American family but I had never seen the level of poverty that I saw in Panama city. I had heard my father mention tar paper shacks but I had never seen one until I passed thru Panama city.

As is usual, you do not see the reality of a country until you travel inland, away from the capital city.

A fellow GI and I often went to a small town, more than 50 miles from the capital. There was a town square centered on the Catholic Church, clean paved streets, and what seemed to be city water and septic systems. But I ended up with gastrointestinal problems a few times when I was careless in some way. (I usually drank colas or beer, but I did not brush my teeth with those!) That little town was large enough to have a very small movie theater where they ran 2nd rate US movies. We went to festivals and Saturday markets in the nearby villages, and cheered on the traditional Panamanian dancers in the local school auditorium.

The people that I met there were what I would have expected in the US, decent hard working people. I watched a Panameño replace a universal joint in a 1962 Chevrolet drive shaft with a hand full of tools, while working on the street. The operation went smoothly and quickly.

Having lived in Chile you will understand that life for people there, was not the best of times nor the worst of times.

In the mid 1960s, Chile and Costa Rica were considered the best of South and central America. I guess that Panama would have ranked high on that list. I always considered Guatemala to be THE 'banana republic' but the rest of central America between Costa Rica and Mexico would not have been far behind. (The Somoza family controlled Nicaragua.)

I am not as pessimistic about the country as you seem to be in your reply above. (But we are on our way to having an entrenched oligarchy, which is a hallmark of a banana republic.) I would be even less pessimistic if I thought we were going through some temporary economic phase, but I do not believe that. I believe that we are deciding whether we will return to the US economy of the 1946 to 1980 period or if we will continue with the destruction of the middle class. At the moment, the issue is in doubt.

Trump is not the ideal candidate, but he is the only candidate who has spoken out forcefully against free trade. We should not expect voters to choose the same tried-and-failed remedies if a reasonable alternative is available. The 2 major political parties have created the Trump candidacy, either by their ineptitude or malfeasance.

[Edward Lambert]

I do like Trump's position to control trade with China.

So you know latin america. Only a small percentage of americans have seen what you have seen. I do not want to see that type of government in the US. Russia was voted the most corrupt nation by politicians and business leaders in Europe. I do not like the words of respect that Trump has for Putin. Trump has his own corrupt history. The mix does not sit well with me.

[JimH]

Edward,

We should fear any hint of oligarchies here. So it worries me when the party faithful of either party speak disparagingly of populism. What do they think majority rule is?

I think that the voters like Trump's stance on free trade, illegal immigration, and political correctness. You can disagree with them but they have a right to their vote. I think the voters just tolerate his bizarre remarks.

He will get the electoral votes from Kentucky, so my vote is irrelevant.

From time to time, I reassure myself with the thought that the President can not enact laws and treaties have to be ratified by the Senate.

I don't see how our economy will recover without some renegotiation of our trade treaties. Labor share needs to be increased. We are coming up on 9 years of a pretend economic recovery.