Tag Archives: inflation

The US economy flies into the “coffin corner”, but we don’t mind!

Summary: Every year Wall Street economists see a spike in a few indicators and announce an imminent boom. This slowly fades away, leaving another year of slow growth — preventing full recovery from the crash. Readers of the FM website have seen this accurately reported since the crash, avoiding the boom-bust cycle of of crushed euphoria. Here’s a new update, as we start another slowing cycle. Eventually, inevitably, we will hit a bump that pushes slow growth to outright decline. Then, when we no longer can prepare, economic news will become exciting.



  1. Seeing the US economy as it is
  2. What might spark a crisis?
  3. Graphs: see the pulse of America’s economy
  4. For More Information

(1)  Seeing the US economy as it is

Slowly economists see the dilemma facing the Fed’s governors): they’re desperate to raise interest rates, but the US economy can grow only slowly, and so remains vulnerable to a shock that knocks it into a recession (probably a severe downturn, given its weakness).

Seven years of the Fed’s Zero Interest Rate Policy (ZIRP, since December 2008) have distorted America’s large and dysfunctional capital markets. Not just in the obvious bubbles in the stock market (e.g, biotech and social media stocks), in equity investors’ mad belief that bad news is good news (small cap stocks up 5% after the ugly jobs data), but also in ways we can only dimly see today.

Worse, ZIRP means that in the next recession the Fed will have to take America to negative interest rates — with consequences impossible to foresee (so far only small nations have crossed this Rubicon). Long experience in the US, Europe, and Japan has proven the ineffectiveness of their only other tool, quantitative easing.

On the other hand, the data suggests that raising rates now would be insane: near-zero inflation, a too-strong US dollar (already depressing exports), and slow growth (even slower on a per capita basis).

We’re in the coffin corner: can’t accelerate, can’t continue at this speed, and can’t afford to decelerate. All that maintains public confidence is the happy talk of the Fed governors and Wall Street’s gurus, at the long-term cost of destroying their credibility when it proves false. The only hint the Fed has given us is the slow downward ratchet in their forecast of US long-term growth.

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3 graphs tell the story about the US economy, hidden amidst the noise of the jobs report

Summary:  We’ve reached a critical point in this business cycle. We enjoyed the years of fiscal and monetary stimulus; now comes the dismount. Only after the stimulus ends will we learn the true strength of our economy. Today we look at the monthly jobs report, perhaps the single most important indicator. Three graphs tell the story, cutting through the fog of confusion spread by the news media.




  1. Why we’re ignorant and confused
  2. The weak good news: more employed
  3. The bad news: percent employed
  4. More bad news: wages
  5. For More Information


(1) Why we’re ignorant and confused

Reports about the monthly jobs report illustrate why we’re confused and so often ignorant about important aspects of our lives.

  1. We get numbers without context. Raw numbers by themselves tell us little; the percent change has meaning. Also useful are descriptions of the trend and adjustments for inflation (vital when looking at long-term changes).
  2. We get detailed analysis of noise, lavish attention to tiny monthly fluctuations — changes usually smaller than the data’s error bars.

Instead let’s focus on the big things. Three graphs tell the story about the September jobs report. I have been showing readers these numbers for years. The first big story is that these trends have not changed.

Before we start, remember the price paid for this expansion. Five years of near-zero interest rates (since December 2008) — ending in Q2 or Q3 of 2015). Three rounds of quantitative easing — ending this month. And an mind-bending expansion of the Federal public debt — $809 billion added during the fiscal year just ended (a 6.8% increase, equal to 4.7% of GDP). That the economy needs such large stimulus in the sixth year of an expansion is unprecedented (usually by now the economy has overheated from too-fast growth) — and is the second big story.

Now comes the dismount, when we must dial the stimulus down to zero. Understanding the trend helps us prepare for what might happen next.

(2)  The weak good news: more employed

Steady slow growth at about 2% now in its fourth year. We’re not in a recession. No signs of the often-predicted acceleration.

Jobs: percent change


(3)  The bad news: per cent employed

The percent of people in their prime years (16 – 64) who are employed peaked in 2006, fell in 2007 – 2011, and has only weakly recovered since then (back to the level of 1984, reversing much of the long increase from women entering the work force). There are many factors affecting this, but the trend since 2006 probably reflects weakness not strength in the US economy.

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The Economist recommends taking the easy path to inflation. But what if it’s closed?

Summary:  If the great monetary experiments underway in Japan and America succeed, then the world will change. Aggressive fiscal and monetary stimulus will become routine, even normal. For better or worse. Already the normalization process has begun by people unaware that in this new century the easy path to inflation has been closed, with as yet unknown consequences.

Money whirlpool

Christian Science Monitor, 8 November 2010



  1. The world has changed, yet they still dream of monetary magic
  2. About inflation
  3. The Boomers’ secret lust for inflation
  4. For more information


(1)  The world has changed, yet they still dream of monetary magic

QE3 will raise the Federal Reserve’s assets by almost 40% in its first year. Japan has adopted an even bolder strategy. One of the two arrows of the three arrows to Abenomics is doubling the money supply in two years in order to raise inflation to 2%. If these monetary experiments work, then the world will change. Already the yearnings for inflation, simmering since the crash (but expressed in euphemisms), are now expressed openly.

Secular stagnation: The second best solution“, The Economist, 21 January 2014  — Excerpt:

WITH a string of talks and op-ed columns, Larry Summers has revived discussion in the “secular stagnation” hypothesis. Income has become concentrated in the hands of groups, like reserve-accumulating foreign governments and the rich, with low propensities to consume, the thinking goes. That has generated excess saving and pushed down real interest rates until they are substantially negative at many durations. That, in turn, has made life very difficult for central banks, which have struggled to stoke up adequate demand with nominal interest rates wedged up against zero.

Mr Summers identifies three broad solutions to the problem.

  • One is to do nothing, or not much anyway, on the demand side. This is not a particularly attractive solution, as it implies a very long slump in which incomes are lower than they need to be, unemployment is higher, and the economy’s potential is eroding.
  • Another is to raise inflation expectations in order to reduce real, or inflation-adjusted, interest rates until demand is where we’d like it to be. This policy is not without its downsides …
  • The last option to address stagnation is to have the government soak up excess savings and boost demand through deficit-financed public investment.

The third option is quite clearly Mr Summers’ preferred course of action. And it is a very attractive option. It is a rare rich country that doesn’t have a list of infrastructure needs that could justifiably be addressed in the best of times. Pulling those off the shelf and taking them on amid rock-bottom interest rates and weak demand is a no-brainer. Unfortunately, governments are discinclined to seize these opportunities. That makes it very important to sort out the relative attractiveness of alternative solutions to stagnation.

My sense is that Mr Summers reckons the inflation strategy is not as easy to deploy successfully as I make it out to be. QE purchases focused on safe assets might have an ambiguous effect on the economy: boosting asset prices through portfolio balance effects but limiting lending growth by sucking up the supply of good collateral. And as Brad DeLong notes, high inflation could conceivably undermine the safe-asset status of some government securities. Meanwhile, central banks might not be comfortable mustering the bluster to convince markets that higher inflation is ahead. And if they did, increases in long nominal rates could create their own financial difficulties.

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Are we following Japan into an era of slow growth, even stagnation?

Summary: Understanding events requires not just see what’s happening today and guessing about the future, but also grading past expectations vs the actuals. Otherwise we live in the now, like cats, with little ability to shape our world. This is one way, perhaps the best way, to evaluate experts in fields other than our own. Doing so takes us from the warmth of their confident words, and opens us to see surprises, valuable since experts seldom confess to them. Today we’ll examine the big macroeconomic surprise in 2013, and its warning.

Japan: Help

Ask not for whom the bell rings, for it rings for thee

“Perchance he for whom this bell tolls may be so ill, as that he knows not it tolls for him; and perchance I may think myself so much better than I am, as that they who are about me, and see my state, may have caused it to toll for me, and I know not that.”
— John Donne (1572-1631), Devotions Upon Emergent Occasions


  1. The big macroeconomic surprise of 2013
  2. The ECRI points to Japan
  3. Larry Summers points to Japan
  4. Other economists speak up
  5. For More Information

(1) The big macroeconomic surprise of 2013: falling inflation

This graph of  US inflation tells an interesting story. In 2011, as inflation rose, conservatives prepared themselves for the I-told-you-so rapture of dollar collapse and hyperinflation (this was the opening salvo, on 11/15/10). Niall Ferguson cleared a space on his mantel for a Nobel. But inflation peaked in January 2012, entering a steep decline. In the 4th quarter of 2012 everybody expected that the Fed adding a trillion dollars to its balance sheet would change that. So far it has made little difference.

This is Core Personal Consumption Expenditure Index, which provides one of the best available measures of inflation and its momentum.

FRED: PCE core

This is a shocking surprise. The Fed began the third round of quantitative easing (QE), a form of unconventional monetary policy, in September 2012 at $40B/month, and boosted it to $85B in December. Here’s what economists expected to see in 2013, as measured by the Core Personal Consumption Expenditure Index:

After a year of QE, the Fed pumping out a trillion dollars, economists have lowered their forecasts for inflation. We live in a world of wonders.

Take a moment to absorb this. For five years inflation has been below the Fed’s 2% floor, despite three rounds of QE. That’s bad. They set a floor for a good reason: deflation is lethal for a high-debt economy like ours. A steady 2% inflation does little or no harm (despite giving conservatives reason to whine about the 20th century’s drop in the US dollar (during which time the US became the world’s superpower). A 2% floor gives the Fed a cushion of time to act when it’s breached, and time for their actions to have effect.

What insights can we draw from this? Opinions differ. There is one theory, obvious for several years but seldom mentioned (too scary): we now follow Japan down a path of slow growth and deflationary tendencies. In June 2010, during the euphoria about our “V” shaped recovery, I wrote about it: We are following Japan’s path of decline. The real test comes later this year.

After three years of slow growth despite intense stimulus, now a few bold economists warn us of this danger.

(2)  The Economic Cycle Research Institute points to Japan

Becoming Japan – part 2“, ECRI, 4 November 2013:

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Let’s learn about hyperinflation. Who knows what the future holds for us?

Summary:  What makes an experiment is uncertainty about the outcome, no matter how great people’s confidence. That applies to the great monetary experiments now in progress by China, Europe, America, and Japan. Europe since 2008, the USA since 1998, and Japan since 1988 all have common histories: confident leadership, unexpected crises, and repeatedly wrong forecasts.

After all that it will astonish historians how we worship the power of central bankers. But that power neither makes them omnipotent, nor their theories accurate. Today’s post by Nathan Lewis discusses one of the possible outcomes.

“Unless you expect the unexpected you will never find truth, for it is difficult to discover.”
— Heraclitus, the pre-Socratic “Weeping Philosopher” of Ionia

Today’s guest post:

What is “Hyperinflation”?
By Nathan Lewis at New World Economics, 13 October 2013
Reposted with his generous permission

Bernanke Green Lantern


  1. A history of hyperinflation
  2. Hyperinflation: not what you might think
  3. What hyperinflation looks like
  4. USA in the 1970s; Mexico in the 1980s
  5. Other lesser-known episodes
  6. Why not us? Or rather, why not us yet?
  7. About the author
  8. For More Information
  9. A Last Resort, if all else fails …

(1) A history of hyperinflation

The word is tossed around, and many have an opinion about it, without having any real clear idea of what it means.

We all probably have some mental picture of the “billion dollar banknote” or “price of coffee rises as you drink it” kind of hyperinflation, as happened in Germany especially in 1923.

Children - 1923 Germany

Children learning to manage money, Germany 1923

But, this is somewhat rare. Not as rare as you might think, but it constitutes only a small portion of those events which I think are legitimately labeled “hyperinflation.” This table lists fifty-three of the most intense hyperinflations in recent history:  The Hanke-Krus Hyperinflation Table.

The least intense hyperinflation listed on this table is a 55.5% increase in “prices” in a month in Kazakhstan in 1993, which works out to a doubling of prices every 47.8 days. However, this table leaves out many hundreds of events which are legitimately called “hyperinflation” in my opinion, and in the opinion of those who lived through them, and historians.

You see what I mean when I say that it is “not as rare as you might think.” Here’s Wikipedia on various hyperinflations.

(2) Hyperinflation: not what you might think

Extreme hyperinflations like these tend to grab people’s attention. However, I would suggest that they are actually less relevant than some milder cases.

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Lessons from the failed forecasts of inflation since the crash

Summary: How we handle our fears shows much about ourselves, our ability to see and think. Such as fear of inflation, a major obsession of Right since the crash. Here we look at the warning, see what actually followed, and briefly review the basis of these fears.



  1. The inflationistas’ story
  2. What inflation?
  3. Warning: velocity
  4. A scary lesson from the past: the Weimar inflation
  5. Measuring inflation
  6. For More Information
  7. Giving Conservatives the last word

(1) The inflationistas’ story

Few things pay as easily and well as feeding people’s fears (not nearly as much work as raising food to feed people’s bellies). It’s a simple process: tell a story that validates people’s political beliefs and gives a simple account of complex phenomena (otherwise people will see the con).  Forecasts of hyperinflation do both quite well.

  • Slamming those that conservatives don’t like: Obama and the Federal Research
  • Slamming policies that your wealthy backers don’t like: anything that risks inflation (creditors love mild deflation, like that during the Gilded Age).
  • Telling a simple story about the mind-bendingly complex dynamics of money.

During the past five years many people have ridden this horse. Let’s look at one example. Red emphasis added.

(a) HYPERINFLATION SPECIAL REPORT“, Issue Number 41 by John Williams’ Shadow Government Statistics, 8 April 2008 — Excerpt:

  • Inflationary Recession Is in Place
  • Banking Solvency Crisis Has Opened First Phase of Monetary Inflation
  • Hyperinflationary Depression Remains Likely As Early As 2010

The U.S. economy is in an intensifying inflationary recession that eventually will evolve into a hyperinflationary great depression. Hyperinflation could be experienced as early as 2010, if not before, and likely no more than a decade down the road. … The U.S. has no way of avoiding a financial Armageddon.

(b) HYPERINFLATION SPECIAL REPORT“, Commentary Number 263 by John Williams’ Shadow Government Statistics, 2 December 2009 — Excerpt:

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Conservatives were correct: we have record-breaking inflation! What’s next?

Summary: Today we look at inflation, past and present. It tells much about who to trust for economic analysis, the current state of the US economy, and what we can expect in the future.

The world as it appeared in 2008

What some saw in 2008, before the deflationary bust



  1. Introduction
  2. The inflation picture
  3. Implications
  4. Why has inflation fallen since 2011?
  5. Others see the rise in real rates
  6. For More Information


(1) Introduction

During 2010 and 2011 the media overflowed with confident and dire warnings from conservatives of inflation — or even hyperinflation — coming quite soon. They were totally wrong, as economists such as Paul Krugman said at the time. Instead inflation has slowed, by some measures hitting record low rates. As the posts at the end show, readers of the FM website saw the correct side of this debate (this has been added as a win on the Past Predictions page).

Today we look at what actually happened, and what this might mean for our future.

(2) The inflation picture

The public looks at the CPI to measure inflation. Many economists (e.g., Alan Greenspan) prefer the Personal Consumption Expenditures (PCE) price index. The April numbers (annualized):

  • overall PCE: -3.0%
  • core PCE (excludes food & energy): +0.1% (the YoY change of 1.05% is the lowest on record, back to 1960)
  • trimmed mean PCE (another measure of the core rate): -0.1% (lowest since record begins in 1977)

Three of the most important economic factors appear on this graph:

  • Treasury interest rates (blue, here that of the 10 year bond),
  • inflation (green, here using the CPI), and
  • real interest rates (red, here measured by the difference between the two).
Blue: Treasury rates; Green: CPI; Red: real rates.

Blue: Treasury rates; Green: CPI; Red: real rates.

We see the effects of the Fed’s increasingly aggressive monetary policies, intended to boost CPI inflation and lower real interest rates. They have not done these because the recovery is wonderful, but because it is too slow. Note that one of these is unlike the other two.

  • QE1 from November 2008 to June 2010 — it broke deflation, boosting the CPI and forcing down real rates.
  • QE2 from November 2010 – June 2011 — another boost to CPI, further depressed real rates.
  • QE3 from October 2012 — still running, but with inflation falling and real rates rising.

Houston, we might have a problem.

(3) Implications

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