Suddenly, we seem to have forgotten the most basic of lessons: that inflation is a monetary phenomenon. However, given that inflation remains low, in spite of low unemployment, the absence of inflation is dubbed a mystery. In the opposite direction, a few years ago when unemployment was high, the absence of disinflation/deflation was also dubbed a mystery. The chart shows that inflation, measured by the PCE-Core has remained stable and low for a very wide range of unemployment rates. This should give pause to proponents of the Phillips Curve. Unfortunately, it doesn´t and the reason for that may be, as… Read More
When the editor of the Journal of Economic Perspectives writes “Mysteries of Modern Inflation”: The theory of inflation that I learned long ago suggested that inflation should creep up when an economy is running near full employment, but will come back down during a recession. However, for almost two decades now, the rate of core inflation (that is, inflation not counting the volatile movements in oil and food prices) has stayed low and hasn’t budged by very much. At one level, low and stable is clearly good news. But at another level, it raises a question of whether we really… Read More
We stress nominal GDP in our posts, for reasons that are at this point well established. This shouldn’t be taken to mean we don’t care about real output, other’s simply cover it so much that we tend to leave the subject alone, unless there’s good reason not to. Real GDP is a tricky concept. In a modern economy of such vast complexity a concept like real GDP certainly has a meaning, but we shouldn’t think it comes close to fully describing the ‘magnitude’ of the economy, which is what it’s about: size. It might be better if RGDP were thought… Read More
Alex Tabarrok is just the latest, but softer, example. He writes: …Yet it is now clear that the great recession interrupted but did not end the great moderation. Since the great recession ended, growth in real GDP has been much less volatile than in the 1950s to 1980s. Indeed, volatility has been lower even taking into account the great recession. In the graph, for example, I simply bound the peaks and valleys. More sophisticated measures show the same thing. My version of his graph also shows the big (50%) reduction in real output growth volatility. Tabarrok continues: Of the possible… Read More
Week ending Friday October 27th 2017 Lots of noise in equity markets make working out if any macro influences were at play very tricky. We know NASDAQ surged to record highs on Friday after the Thursday-night release of estimate-busting numbers from the big tech stocks. But … the broader S&P500 index was only flat over the week, as non-tech stocks had less exciting results earlier in the week. That meant the Friday gains merely cancelled out the earlier losses. Tax cuts and Fed Chair still dominate The big move in the S&P500 happened during the previous week on the hope… Read More
That distinction, however, is lost in the eagerness many have to paint a brighter future (or, maybe, the need for rate hikes). Comments like this one are common: The U.S. economy grew robustly in the third quarter despite two hurricanes, propelled by steady spending from American businesses and households. The charts clearly attest the hyperbole in the statement. Moreover, if spending is steady, how can it propel anything?
That distinction, however, is lost in the eagerness many have to paint a better future. Comments like this one are common: Robust demand for long-lasting U.S. factory goods suggests business investment is strengthening, contributing to broader economic growth. Reality, however, is not that rosy. As the chart indicates, the “recovery” petered out six years ago. Since then the trend has been flat, with frequent and sometimes persistent bouts of “underperformance”. And there´s absolutely no sign that this will change. Given policy, the downside risks are overwhelming.
The U.S. Federal Reserve’s Beige Book came out this week, with a fresh cover but the contents increasingly tired and dog-eared. Fedsters want you to know this: Labor markets are “tight,” and have “shortages,” but housing markets are “strong.” In what is becoming a laughably recurrent refrain, the Fed continuously contends labor markets have been drum-tight to the ripping point and are getting tighter and tighter (but oddly wages are flat). From the Fed’s Oct. 18 rendition: “Labor markets were widely described as tight. Many Districts noted that employers were having difficulty finding qualified workers, particularly in construction, transportation, skilled… Read More
Week ending Friday October 20th 2017 Fascinating tensions playing out in markets. Undoubtedly, the biggest driver of market movements was the progress towards a big tax cut in the US Senate with seemingly little offsetting spending cuts in prospect. Normally such a deficit-raising, unbalanced outcome would drive an offsetting tightening of monetary policy. This time the tax cut is being played out against a background of leadership change at the Fed that leaves the Fed response uncertain. Does Trump understand monetary offset and is seeking to prevent it with one of his famous deals? Obviously not. Could it be an… Read More
That´s the feeling you get when reading stuff with titles such as: Central bankers have one job and they don’t know how to do it Or How should recessions be fought when interest rates are low? Further, it seems central bankers are quick to fall prey to an old and discredited theory and think inflation is “always and everywhere a cost phenomenon”. It is either of the “cost-push” variety, as was popular in the 1960s and 1970s, or of the “cost-pull” variety in vogue today. The former, through oil producers, oligopolies and unions, was the wisdom behind high/rising inflation. The… Read More