The US Recovery

[GVChamp]

Not sure I would consider inflation "harmless." Contemporary finance is built on several decades of stable, continually declining inflation in all the advanced economies. You're talking about a huge paradigm shift that may unanchor inflation expectations. Which we haven't had in, again, decades, and never had with a finance sector THIS big.
And, yeah, we killed inflation in the US, after an extremely painful, politically challenging double-dip recession. After which the savings rate plummeted and the over-financialization of US life began.

[astralis]

GVChamp,

Contemporary finance is built on several decades of stable, continually declining inflation in all the advanced economies. You're talking about a huge paradigm shift that may unanchor inflation expectations. Which we haven't had in, again, decades, and never had with a finance sector THIS big.

the difference is that the Fed has a huge weapon against inflation. we're at the zero lower bound, which means any creeping inflation can be easily fought as the effects are greatest when you're starting from...nothing.

against deflation, we have no good monetary weapon...precisely because we're at the zero lower bound.

[GVChamp]

You also have a good weapon against deflation, just print more money and drop it from the skies. :)

Your ultimate issue is that your money injection mechanism requires purchasing treasuries or (under QE) other assets. You're either substituiting cash for cash-like assets (zero% interest on treasuries) or you are bailing out investors who bought shitty bonds.

There's really no lack of imagination to creating inflation, there's just political road-blocks.

[astralis]

heh heh, if it were that easy then Europe wouldn't be going through deflation now, even if helicopter Mario can't hold a candle to helicopter Ben.

risk is minimal and the solution is simple: inflation's just not that big of a deal right now, or even in the medium-term. especially when the rest of the world is deflating.

[GVChamp]

I don't disagree on the relative risks, but inflation, if it comes, is not a simple beast to kill. It normally involves a painful adjustment. Yes, we killed inflation, but that was a tough fight for Volcker. It's just a politically challenging to fight as the current intractable problem of deflation, because democracies have a lot of inertia in general.

[astralis]

It's just a politically challenging to fight as the current intractable problem of deflation, because democracies have a lot of inertia in general.

not really. deflation requires both fiscal and monetary measures to properly fight, which is why europe is deflating despite what draghi is doing. inflation, -especially- given the rates we have today, merely requires monetary measures.

for volcker, the solution was simple (but not easy, two different things-- but to his credit Reagan did his job and shielded the Fed).

[GVChamp]

Right, Reagan shielded the Fed. The complicated part is always the politics, not the actual how. Problem is, based on the political consensus at the time, inflation was an unsolvable problem. We spent a decade fighting it, and tried every stupid decision including a mandatory price freeze across the entire country. Ultimately our solution was to abandon all monetary authority to the Fed, start the worst recession since WWII to show everyone we were serious, and appoint a bunch of people that embrace Russian-level paranoia when it comes to inflation.

That was a real tough problem to solve. Though so was the Great Depression, it took a while for the advanced economies to finally leave the Gold Standard, and they still stuck to Bretton Woods afterwards because they were terrified of fully leaving it.

Really, we just need a more flexible political system that can respond to economic changes more quickly. But then you take the risk of your leaders following whatever stupid fad is in vogue, essentially like South American ISI and massive borrowing that created a lost decade for them....

I mean, I agree with you and DOR, I don't think we should tighten, but, DAMN, these problems are still tough to solve, and there are major consequences if you screw up.

[DOR]

Right, Reagan shielded the Fed.

At least give Jimmy Carter credit for appointing Paul Volker.

[DOR]

The US recorded a second consecutive month of deflation in February.

Since 1948, there has been only one case of two straight months of deflation that was not followed by a third, and then another long string of months.
That single case was in February 2009, when the index crawled 0.01% above its year-earlier level. After that one, heroic but futile attempt, it sank again for another eight months.

The point is this: driving the main sub-indicies that make up the consumer prices index into deflation is hard, but once the momentum is underway, it will persist.

Some pretty (ugly) pictures of how this came to be:

[DOR]

Wonky study on different ways of measuring the health of the US labor market.

Conclusion (emphasis added)

The U.S. economy has recently experienced the largest economic downturn in postwar history. Five years have passed since the official end of the recession, yet the difficult question on how far we are from full employment remains.

With unemployment returning to normal levels, it has been argued that the unemployment rate may not properly capture the current amount of slack in the economy; as a result, labor market conditions indexes have been proposed as a new measure of labor market health. These indexes have the advantage of summarizing information from many different variables. At the same time, they are the result of a statistical procedure requiring several steps to compute and a nontrivial amount of judgment.

In this article, I showed that the unemployment rate is reflective of underlying labor market health, as represented by the indexes. In addition, a closer inspection of the figures suggests that this strong link between the indexes and the unemployment rate does not appear to have changed recently, which suggests that the unemployment rate is still as good at measuring labor market conditions as it has been in the past.

https://www.stlouisfed.org/publicati...-market-health

[JAD_333]

Dor:

the unemployment rate is still as good at measuring labor market conditions as it has been in the past.


As good or as bad, it's all relative. 'As good...' sounds rather tepid. One could say he means it isn't very good, but it's the best we have. That's good enough for me, as long as the same metrics are used all the time.

Yellen's belief that "the unemployment rate is probably the best single indicator of current labor market conditions" is scary to market investors. The lower the rate falls, the greater the chance the Fed will raise interest rates and suck some of the wind out of the stock markets.

What do you make of the sloppy market and Yellen's 'patient' remark when it comes to raising rates?

[Vargas]

I am not sure at all that the economy is getting better... The unemployment rate might really be getting closer to normal levels, but there is a bunch of problems about it:

I- We have the lowest labour force participation since the 1970s;

II- We see a bunch of business failing and even big retails are closing a very significant number of stores;

III- The biggest number of new jobs are low payment jobs that are mostly part-time;

IV- Most new college graduates continue unemployed or sub-employed;

V- The number of people in some type of tax credit already reached 52% and no matter how you look at it, it is an unsustainable rate;

VI- Deflation usually means people are not expending... What in the system of economics we have now usually means big trouble.

[DOR]

Q-2 2015 US Economic Data Point to Fed Delaying Interest Rate Hike

The first estimates for US economic growth in the second quarter of 2015 are out. The insights the data offer, however, will do little to reassure Fed Chair Janet Yellen that the time has come for the first interest rate hike in a decade. As such, I expect her to resist raising rates in September.

The economy grew 2.3% in real terms in Q-2, as compared to the same 2014 quarter. That’s down a bit from the revised 2.9% growth recorded in January-March. Still, the economy has expanded every single quarter for the past 5-1/2 years, which most developed economies should envy.

https://research.stlouisfed.org/fred...aph.png?g=1xIs

Private consumption, the backbone of the economy, turned in its fourth straight quarter of better than 3% real expansion. The 3.1% pace is down a tad from Q-1’s 3.3%, but very impressive nonetheless. Capital investment, which is barely one-quarter as large as private consumption, grew 4.5%, down from the three-year high, 7.6%, reported in the first quarter.

Factor in the lowest unemployment rate (5.4% in Q-2) in seven years and 76 straight weeks of declining weekly new unemployment claims and the scene appears set for tightening monetary policy, i.e., raising interest rates.

But, not quite. The dollar is 15% higher on a trade-weighted basis than a year ago, which shouldn’t tilt the balance in favor of holding the Fed back, but should be taken into consideration. More important, the Fed's favorite inflation indicator, the private consumption deflator, rose just 0.24% from a year earlier in each of the first two quarters of this year. That’s down – the wrong direction, if one is considering raising rates – from an average of 1.4% in both 2013 and 2014.

https://research.stlouisfed.org/fred...aph.png?g=1xIt

The main danger to the US economy at this time is pulling the monetary trigger too early, thereby killing off the modest but very real recovery from the worst economic and financial disaster since the 1930s. The indicators released this week clearly favor waiting a bit longer, at least until lower unemployment leads to faster pay rises and that, in turn, begins to drive inflation.

After all, if there’s one thing the Fed knows how to deal with it most certainly is inflation. Waiting a bit longer costs nothing, and helps stave off the very real threat of deflation and depression.

--DOR

[astralis]

still insufficient wage pressure.

also, given the news coming out of china recently, the Fed should be EXTREMELY leery of an interest-rate hike at this time.

[JAD_333]

Dor:

I think we'll have to wait for a European recovery before we break 3%, but I agree with you, considering the state of the world, the US is doing pretty well.