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Lost in Extrapolation
Lost in Extrapolation
Phillips Curve Fail
In the late 1970s the impossible happened. Inflation and unemployment simultaneously went vertical. The leading economists of the day were flummoxed.
Larry Summers favors us with his “eternal stagnation” shrug. The man is a sheer inexhaustible fount of truly atrocious ideas. As we have previously pointed out, when he’s around, the economy can only be deemed safe under certain circumstances.
Photo credit: Reuters
The Phillips curve said there’s an inverse relationship between inflation and unemployment. When unemployment goes down, inflation goes up. Conversely, when unemployment goes up, inflation goes down.
These are the data economist William Phillips originally studied – wage rates vs. unemployment in the UK in the years 1913 to 1948. Phillips’ study will forever stand as a monument as to why economic theory cannot possibly be derived from empirical data. In the wake of the 1970s experience, at least seven Nobel prizes in economics were awarded for work that debunked the Phillips curve-based assumptions of the Keynesians in some shape or form. Recently its long dead cousin NAIRU has risen from the grave again, like a zombie – click to enlarge.
How could it be that both were going up at once? Weren’t they mutually exclusive? Indeed, it took years of heavy handed government intervention to pull off such a feat.
When unemployment began creeping up in the 1970’s the U.S. Treasury, with backing from the Federal Reserve, did what Keynes had told them to do. They spent money to stimulate the economy and spur jobs creation.
According to the Phillips curve, with rising unemployment the planners could have their cake and eat it too. They could run large deficits without inflation.
Unfortunately, something unexpected happened. Instead of jobs they got inflation. Then, when they tried it again, they still didn’t get jobs. Astonishingly, they got more inflation.
…click on the above link to read the rest of the article…
The Mindless Stupidity of Negative Interest Rates
The Mindless Stupidity of Negative Interest Rates
Here we are in the midst of The Great Stagnation Middle Class Elimination and some central bankers and mainstream economists are promoting negative interest rates. One economist was quoted in a Marketwatch piece by Greg Robb as saying,
“…pushing rates into negative territory works in many ways just like a regular decline in interest rates that we’re all used to.”
OK. That’s false. We know exactly what negative interest rates do since Europe has made a fine case study of it. They don’t work just like a “regular decline in interest rates.” I mean not that a “regular decline in interest rates,” does what economists think it does, but that’s another story. The issue here is how negative interest rates work.
Negative interest rate proponents ignore the basic tenets of double entry accounting.
Because there are two sides to a bank balance sheet, negative interest rates are the mirror image of positive rates. The move to negative rates imposes new costs on the banks, unlike low positive rates or ZIRP which reduce bank costs.
The greater the negative interest rate, the higher the cost imposed, which is the same as a central bank raising interest rates when they are positive. When the Fed lowers a positive interest rate, it lowers the bank’s cost. But when there are trillions in excess reserves held by the banks as deposits at the Fed and the Fed lowers the interest rate to below zero, that becomes a cost to the banking system which it cannot avoid, except by using those cash assets to pay down debt.
…click on the above link to read the rest of the article…
One True Measure of Stagnation: Not in the Labor Force
One True Measure of Stagnation: Not in the Labor Force
This is a stark depiction of underlying stagnation: paid work is not being created as population expands.
Heroic efforts are being made to cloak the stagnation of the U.S. economy. One of these is to shift the unemployed work force from the negative-sounding joblesscategory to the benign-sounding Not in the Labor Force (NILF) category.
But re-labeling stagnation does not magically transform a stagnant economy.To get a sense of long-term stagnation, let’s look at the data going back 45 years, to 1977.
NOT IN LABOR FORCE (NILF) 1976 to 2015
I’ve selected data from three representative eras:
— The 20-year period from 1977 to 1997, as this encompasses a variety of macro-economic conditions: five years of stagflation and two back-to-back recessions (1977 – 1982), strong growth from 1983 to 1990, a mild recession in 1991, and growth from 1993 to 1997.
— The period of broad-based expansion from 1982 to 2000
— The period 2000 to 2015, an era characterized by bubbles, post-bubble crises and low-growth “recovery”
In all cases, I list the Not in Labor Force (NILF) data and the population of the U.S.
1977-01-01: 61.491 million NILF population 220 million
1997-01-01 67.968 million NILF population 272 million
Population rose 52 million 23.6%
NILF rose 6.477 million 10.5%
1982-07-01 59.838 million NILF (start of boom) population 232 million
2000-07-01 68.880 million NILF (end of boom) population 282 million
Population rose 50 million 22.4%
NILF rose 9.042 million 15.1%
2000-07-01 68.880 million NILF population 282 million
2015-09-01 94.718 million NILF (“recovery”) population 322 million
Population rose 40 million 14.2%
NILF rose 25.838 million 37.5%
Notice how population growth was 23.6% 1977-1997 while growth of NILF was a mere 10.5% As the population grew, job growth kept NILF to a low rate of expansion. While the population soared by 52 million, only 6.5 million people were added to NILF.
In the golden era of 1982 – 2000, population rose 22.4% while NILF expanded by 15%. Job growth was still strong enough to limit NILF expansion. The population grew by 50 million while NILF expanded by 9 million.
…click on the above link to read the rest of the article…
That 70s Show – Episode 2
That 70s Show – Episode 2
In Episode 1 we showed how the US labour market changed dramatically from the 1970s on back of excess money printing which allowed Americans to buy tradable goods on the international market, hollowing out its own manufacturing base, and essentially creating an unsustainable consumer driven economy where the broad masses get their employment within service sector.
We will now take that a step further and look at what this has meant for the US worker. As our first chart shows, non-supervisory real wages stagnated in the early 1970s and has essentially remained flat ever since.
Measured labour productivity on the other hand continued upward, but its rate of growth shifted down. More on this in our next blog post.
Source: Bureau of Labor Statistics (BLS), Bawerk.net
The American middle class, i.e. the non-supervisory workers, managed to grow their consumption in the midst of stagnating wages through
- moving to two income households (women constitute almost 50 per cent of the labour force today)
Source: Bureau of Labor Statistics (BLS), Bawerk.net
- by increasing debt
Source: Federal Reserve – Flow of funds Z.1, Bawerk.net
It should be clear that when the share of women in the labour force has reached 50 per cent and further leverage of a shrinking household income has become counterproductive the end-game has started. The only way to increase living standards from here will be the old fashioned way; consume less than you produce and productively invest the surplus.
…click on the above link to read the rest of the article…
The Earth’s Battery Is Running Low
The Earth’s Battery Is Running Low
We’ve drained our planet’s stored energy, scientists say, with no rechargeable plug in sight.
In the quiet of summer, a couple of U.S. scientists argued in the pages of the Proceedings of the National Academy of Sciences that modern civilization has drained the Earth — an ancient battery of stored chemical energy — to a dangerous low.
Although the battery metaphor made headlines in leading newspapers in China, India and Russia, the paper didn’t garner “much immediate attention in North America,” admits lead author John Schramski, a mechanical engineer and an ecologist.
And that’s a shame, because the paper gives ordinary people an elegant metaphor to understand the globe’s stagnating economic and political systems and their close relatives: collapsing ecosystems. It also offers a blunt course of action: “drastic” energy conservation.
It, too, comes with a provocative title: “Human domination of the biosphere: Rapid discharge of the Earth-space battery foretells the future of humankind.”
The battery metaphor speaks volumes and then some.
In the paper, Schramski and his colleagues at the University of Georgia and the University of New Mexico compared the energy state of the Earth to “the energy state of a house powered by a once-charged battery supplying all energy for lights, heating, cooling, cooking, power appliances and electronic communication.”
It took hundreds of millions of years for photosynthetic plants to trickle charge that battery. Those plants converted low quality sunlight into high-quality chemical energy stored either in living biomass (forests and plankton) or more lastingly in the dead plants and animals that became oil, gas and coal.
But in just a few centuries humans and “the modern industrial-technological informational society” have spent that stored chemical energy and depleted the Earth-space battery.
Society partly drains the battery by converting forests and grasslands into agricultural fields. It diminishes the battery further by burning fossil fuels to plow fields and build cities. Human engineering of one kind or another has left a mark on 83 per cent of the planet.
…click on the above link to read the rest of the article…
The Cost of Stagnation: We’re Living in Limbo
The Cost of Stagnation: We’re Living in Limbo
This erosion of opportunities to complete life’s stages and core dramas is rarely recognized, much less addressed.
The idea that human life subdivides rather naturally into stages is based on our natural progression from childhood into adulthood and eventual (if we’re lucky) old age.
Confucian thought views life as a developmental process with seven stages, each roughly corresponding to a decade: childhood, young adulthood (16-30), age of independence (30-39), age of mental independence (40-49), age of spiritual maturity (50-59), age of acceptance (60-69), and age of unification (70 – end of life).
Each stage has various tasks, goals and duties, which establish the foundation for the next stage.
Each stage is centered on a core human challenge: for the teenager, establishing an identity and life that is independent of parents; for the young adult, finding a mate and establishing a career; for the middle-aged, navigating the challenges of raising children and establishing some measure of financial security; for those in late middle-age, helping offspring reach independent adulthood and caring for aging parents; early old age, seeking fulfillment now that life’s primary duties have been accomplished and managing one’s health; and old age, the passage of accepting mortality and the loss of vitality.
The End of Secure Work and the diminishing returns of financialization are disrupting these core human challenges and frustrating those who are unable to proceed to the next stage of life:
1. Teenagers are being pressured to focus their lives on achieving a conventional financial success (see “Training for Discontent” in From Left Field) that is becoming harder to achieve.
2. Young adults without secure full-time careers cannot afford marriage or children, so they extend the self-absorption of late adolescence into middle age.
3. The middle-aged are finding financial security elusive or out of reach as they struggle to fund their young adult children, aging parents and their own retirement.
…click on the above link to read the rest of the article…
Currency Devaluation: The Crushing Vice of Price
Currency Devaluation: The Crushing Vice of Price
Devaluation has a negative consequence few mention: the cost of imports skyrockets.
When stagnation grabs exporting nations by the throat, the universal solution offered is devalue your currency to boost exports. As a currency loses purchasing power relative to the currencies of trading partners, exported goods and services become cheaper to those buying the products with competing currencies.
For example, a few years ago, before Japanese authorities moved to devalue the yen, the U.S. dollar bought 78 yen. Now it buys 123 yen–an astonishing 57% increase.
Devaluation is a bonanza for exporters’ bottom lines. Back in late 2012, when a Japanese corporation sold a product in the U.S. for $1, the company received 78 yen when the sale was reported in yen.
Now the same sale of $1 reaps 123 yen. Same product, same price in dollars, but a 57% increase in revenues when stated in yen.
No wonder depreciation is widely viewed as the magic panacea for stagnant revenues and profits. There’s just one tiny little problem with devaluation, which we’ll cover in a moment.
One exporter’s depreciation becomes an immediate problem for other exporters: when Japan devalued its currency, the yen, its products became cheaper to those buying Japanese goods with U.S. dollars, Chinese yuan, euros, etc.
That negatively impacts other exporters selling into the same markets–for example, South Korea.
To remain competitive, South Korea would have to devalue its currency, the won. This is known as competitive devaluation, a.k.a. currency war. As a result of currency wars, the advantages of devaluation are often temporary.
But as correspondent Mark G. recently observed, devaluation has a negative consequence few mention: the cost of imports skyrockets. When imports are essential, such as energy and food, the benefits of devaluation (boosting exports) may well be considerably less than the pain caused by rising import costs.
…click on the above link to read the rest of the article…
Kuroda Says BOJ to Mull Fresh Options in Case of More Easing
Kuroda Says BOJ to Mull Fresh Options in Case of More Easing
Bank of Japan Governor Haruhiko Kuroda signaled the central bank may need to look at fresh options if more stimulus is needed to propel inflation to levels unseen since stagnation set in two decades ago.
“If, really, our possible path to 2 percent inflation is significantly affected, then of course we can make adjustment to our monetary policy,” Kuroda said in an interview with Bloomberg Television in Davos, Switzerland, on Friday. Asked whether the BOJ will have to get more creative, he said “yes, I think so.” He declined to specify the options available.
Kuroda, 70, spoke days after the BOJ cut its inflation projection for the coming fiscal year, a move that reinforced forecasts for further stimulus by October. While Kuroda’s unprecedented scale of asset purchases has pulled the world’s third-largest economy out of 15 years of entrenched deflation, he’s confronting — like his European counterparts — mounting pressures depressing price gains, and subdued growth.
Kuroda and his colleagues have channeled most of their purchases into the government-bond market, sending yields on 10-year notes to a record low of 0.195 percent this week. The BOJ’s program also include exchange-traded funds and real-estate investment trusts.
…click on the above link to read the rest of the article…
How Japan Bankrupted Itself – The Globalist
How Japan Bankrupted Itself – The Globalist.
Following the start of Abenomics in 2012, Japan moved back to the center of attention of global financial markets. After two and a half decades of economic stagnation, hopes were high that Japan would escape its long stagnation and deflation.
Plenty of economists around the globe hoped that, in so doing, Japan would show the western world, mainly the Eurozone, the way to do the same and avoid a similar long period of low growth and stagnating incomes.
Conversely, the failure of Abe’s plan for Japan’s recovery would not only be a disaster for the country of the rising sun.
It would also be very bad news for central bankers and politicians in the west as well. It would prove that Keynesian policies don’t work in a world of too much debt and shrinking populations.
To assess the probabilities of these scenarios, it is worthwhile to have a deeper look on how Japan ended up in the current economic malaise.
