The debate over productivity rages on. Some believe productivity is understated. Others believe it is overstated.
Janet Yellen believes a lack of strong productivity gains may be responsible for tepid wage gains.
Financial Times writer Edward Luce is confused, as are many others. Luce discusses The Mystery of Weak US Productivity.
Osborne on Productivity
In 2105, then UK chancellor George Osborne made boosting UK Productivity a Priority.
“Let me be clear: improving the productivity of our country is the route to raising standards of living for everyone in this country,” he said. “Our future prosperity depends on it.”
Greenspan on Productivity
In an Interview with Gold Investor Alan Greensppan blamed the aging of baby boomers.
We have been through a protracted period of stagnant productivity growth, particularly in the developed world, driven largely by the aging of the ‘baby boom’ generation. Social benefits (entitlements in the US) are crowding out gross domestic savings, the primary source for funding investment, dollar for dollar. The decline in gross domestic savings as a share of GDP has suppressed gross non-residential capital investment.
Output per hour has been growing at approximately 1⁄2% annually in the US and other developed countries over the past five years, compared with an earlier growth rate closer to 2%. That is a huge difference, which is reflected proportionately in the gross domestic product and in people’s standard of living.
As productivity growth slows down, the whole economic system slows down. That has provoked despair and a consequent rise in economic populism from Brexit to Trump. Populism is not a philosophy or a concept, like socialism or capitalism, for example. Rather it is a cry of pain, where people are saying: Do something. Help!
Yellen on Productivity
On May 22, 2015, Janet Yellen pointed a finger at the recession while also blaming low productivity for lack of wage growth in her Outlook for the Economy.
I have mentioned the tepid pace of wage gains in recent years, and while I do take this as evidence of slack in the labor market, it also may be a reflection of relatively weak productivity growth.
Economists debate how optimistic to be about our nation’s productivity prospects. Some argue that the decade starting in the mid-1990s was exceptional, with unusually large advances in information technologies, and that the more recent period provides a better guide to the future. Others are more optimistic, suggesting that recent technological innovation remains as impressive as ever, and that history shows it may take some years to fully reap the economic benefits of such innovations.7 I do not know who is right, but I do believe that, as a nation, we should be pursuing policies to support longer-run growth in productivity.
It also is possible that a portion of the relatively weak productivity growth we have seen recently may be the result of the recession itself.
G7 Productivity 1975-2015
Chart from the Resolution Foundation.
Myth #1 Shattered
Yellen blamed the recession and lack of productivity for poor earnings growth. Greenspan blamed the aging of baby boomers.
Given real earnings have been nearly flat since 1979 while real output is up 94.9%, those theories are obviously faulty.
Doesn’t the Fed bother to test their theories against actual data? You have the answer.
The Fed is puzzled over rising income inequality. It ought to look in the mirror. Its bubble-blowing tactics and insistence on 2% inflation in a technological price-deflationary world are to blame.
Myth #2 Shattered
Economists and writers are puzzled by the decline in productivity. I can explain in a series of charts.
The decline in overall productivity is tied to a slowdown in manufacturing productivity. This too should not be hard to figure out.
Despite all the talk of burger robots, trucking robots, Amazon robots etc, productivity enhancements in the service sector are very slow
- We need the same number if not more teachers, policeman, firefighters, etc.
- We need an increasing number of nurses due to aging and poor diets.
- We have not seen any enhancements in trucking or limo services.
- Amazon likely boosted productivity but that is at the expense of a decline in productivity at brick-and-mortar stores. It takes a minimum number of people just to open the doors.
Why the Slowdown in Manufacturing?
In the first quarter of 1979, there were 17.465 million manufacturing employees. The index of real output was 69.789.
In the fourth quarter of 2016, there were 12.235 million manufacturing employees, a decline of 5.23 million jobs. Meanwhile, the index of real output jumped to 86% 129.665.
The law of diminishing returns is in play. Robots are not going to eliminate every job.
Profit Warning
Manufacturing shipments are down vs the index of aggregate wages. This is a strong profit warning.
Productivity Overstated or Understated?
Many believe productivity is understated. They cite cell phones and other technological advances.
That’s actually a reason to believe productivity is declining. People are tied to their phones for work. How many hours do people spend on the phone while on vacation, on weekends, or on their days off answering corporate emails?
There are no numbers on the above, nor are there any numbers on the hours that supervisors at McDonald’s, Target, Macys etc, put in. Given performance pressures on big box retailers, pressures to work more than 40 hours while getting paid for 40 hours must be intense.
Myth-Shattering Conclusions
- Declining productivity is not responsible for tepid wage gains as many, if not most economists believe.
- Declining overall productivity is directly tied to declining manufacturing productivity.
- Service sector productivity is likely overstated due to off-hours work by email or phone.
- The Fed’s serial bubble blowing efforts, bank bailouts, and insistence on 2% inflation in a deflationary world are to blame for stagnant real wages.
- The Fed cannot do a damn thing to increase productivity other than to get the hell out of the way. Abolishing the Fed would be an excellent start.
Those who are baffled by productivity never bothered to put their theories to rudimentary tests.
Nonetheless, Greenspan is correct on some things, especially social benefits crowding out genuine investment. Thus, those proposing some sort of guaranteed minimum living wage are totally off base.
Entitlements are already a massive problem, let’s not make them worse. Massive handouts have never solved any economic problems, and never will.
Missing Data
Unfortunately, there is no data prior to 1979 for my Myth #1 chart.
It is quite possible, if not highly likely, the productivity mess that appears to have started in 1979 has its actual roots in 1971 when Nixon closed the gold window.
Regardless, the above charts show the secular stagnation theory of Larry Summers and Brad DeLong is highly suspect.
Secular Stagnation Thesis
Brad DeLong discusses Larry Summers’ “secular stagnation thesis” in Three, Four… Many Secular Stagnations!
DeLong list 17 reasons and his number one reason is “High income inequality, which boosts savings too much because the rich can’t think of other things they’d rather do with their money.”
Pin the Tail on the Donkey
At no point does either DeLong or Summers pin the tail on this donkey. Neither can, because income inequality is a symptom of the problem.
That problem started the moment Nixon closed the gold window. The event is now described as “Nixon Shock”.
Indeed it was. Unencumbered by a need to redeem gold, credit exploded.
Credit Market Before and After Gold Window Closed
Gold Window Synopsis
- Total credit exploded from $1.7 trillion to $63.5 trillion at the end of 2015.
- To service that growing pile of debt, the Fed had to keep slashing interest rates.
- Instead of allowing consumers to benefit from technological advances that are inherently price deflationary, the Fed sought to increase inflation. This is to the benefit of the banks and already wealthy.
- A policy of 2% inflation coupled with no restraints on trade deficits (thanks to removal of the gold window), encouraged the outsourcing of jobs.
- After the dot-com bubble burst in 2001, the Greenspan Fed stepped on gas blowing the biggest housing bubble on record. Then the Fed bailed out the banks, the asset holders and the wealthy. This chain of events left the median person being worse off than before.
- Given that executive pay is based on performance, rising share prices further benefited the top 1%.
- Fed policy itself, coupled with a rampant expansion of credit thanks to Nixon closing the gold window is totally responsible for the rising income inequality from 1971-present.
Attacking Symptoms
Instead of attacking the symptoms of the problem, as Summers and DeLong do, let’s be honest about the real problem. Let’s also be honest about the alleged scourge of deflation.
My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.
The BIS did a study and found routine deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?
The final irony in this ridiculous mix is central bank policies stimulate massive wealth inequality fueled by soaring stock prices.
Grasping Reality With Both Hands
Delong’s blog is entitled “Grasping Reality With Both Hands“. It would behoove, Delong, Summers, and Ben Bernanke to do just that.
A good starting point is “why” income inequality is rising as opposed to investigating ridiculous wealth-transfer schemes and government stimulus projects in a fool’s mission to fix a problem that Summers, DeLong, Bernanke, Krugman, and Yellen all fail to understand.
Finally, it would be a good idea to consider what happens when service sector productivity picks up (and it will, led by driverless trucks).
Here’s a hint for Yellen: Millions of workers will be displaced and demand for jobs will pick up. Wages pressures will be to the downside, the opposite of what Yellen believes.
Mike “Mish” Shedlock
Back in the 80’s and 90’s computers were flooding in to businesses on sales promises of increased productivity. At the same time, hands were continually rung because productivity statistics showed no gains.
It was a puzzler to those who lived by such stats and believed in their efficacy.
They questioned the sense of buying all those computers.
They did not question their stats nor their use of such stats.
I doubt if such statistics’ reflection of reality has changed.
But, in a world that gleefully repeats to itself, “1% blah blah collapsing middle class blah blah income inequality blah blah”, misusing misleading statistics has become the norm.
I ran the planning section of a large multinational firm in the ’80’s. The headcount on $450 million in sales was 123 when I started. The headcount on $975 million in sales was 56 when I left – and the 56 were doing LESS work in a day than they were prior to the headcount reduction. All about setting up the computers right and letting them do most of the work. By the way, 90% of the RIF was done through retirements, people who actually worked there before I was even born!
Would poor productivity be the price to pay to maintain even the existing employment and demand levels?
Need to be careful what is wished for as a wall of pain is waiting.
Say productivity increased and with it unemployment but demand fell, will taxes on profit increase to fund the mess and the State get bigger?
Someone has a big bill to pay.
Many up to their necks in debt and the better off ones reliant on bankrupt municipal pensions in future.
Might it be too late to put a fix in place without trashing many unsuspecting innocents that have hardly benefited from the distortions?
Tighten money via new gold standard or rate rises and the edifice collapses and with it credit driven demand.
Extreme caution needed as the system is abounding with unintended consequences waiting to blow.
A huge factor in stagnant wages and disposable income is our disaster of a health care system. Singapore has one of the highest quality of care systems in the world, in which the cost of care is cheap enough for average people to afford it. None of my employees have monthly premiums under $500 anymore. This is also the major factor that is blowing up the municipal budgets and pension systems (not that ZIRP is helping). https://market-ticker.org/akcs-www?post=231949 This is the only rational solution that I can see actually working. After all, adding the costs of a bureaucracy on top of unsustainable health costs makes no sense whatsoever. https://market-ticker.org/akcs-www?post=231959 Implement this, and we take a GDP hit for 6-12 months, but that’s because the health care system needs to go from its current 20% of GDP down to 5%. We all will reap the benefits from that. It’s an immediate pay raise.
Productivity can be summed up in three metrics: labor , efficiency (tools), resources (energy). The problem is the resources, which are less in quantity and quality each passing year. Efficiency or labor cannot compensate fast enough for the fall of resources, and to keep them up, we need resources as well.
Complex issue and I have written extensively on the matter on my website theplanningmotive.com Firstly until the middle of 2016 deflation created a realisation problem which undervalued production on which productivity is based. Secondly, the growth in inequality has seen the rapid expansion of the department producing luxury goods. Luxury goods production like armaments are always a drag on productivity as they never re-enter production, in contrast to say new means of production. Thirdly tepid investment. Fourthly the expansion of the service sector where capital to output ratios are half that of manufacturing. With regard to US manufacturing a quarter of its productivity gains emanated from the under-pricing of Chinese inputs. This is recognised by the BEA in its calculations on productivity. Now that China is moving up the value chain that benefit is being cut off. Of course on a world scale, if we include Chinese productivity growth up to 2016, there has not been the fall economists are describing.
– Yeah, sure. It’s the usual claptrap. Blame the FED for those pesky falling interest rates. right ?
But in the timeframe 1971 up to 1981 interest rates ROSE from about 7% in 1970 to over 15% in 1981. Is Mish also going blame the FED for that ?
– Just look at the formula for productivity:
Output / ( per worker * per hour)
– Increased productivity reduces demand. Reduced demand puts a downward pressure on output prices. If companies are unable to raise prices then the component “Output” (gauged in USD) won’t rise too much as well.
I thought price was compensated for in the equation, much like it is in calculating real GDP.
“Increased productivity reduces demand.”
Yeah, man, if I find a shovel, so I am twice as efficient at digging up gold (Or farming. Or producing anything at all), I will then be able to demand less from others in trade…..
According to your “theory,” simply getting rid of ev every tool, every road, every anything; and going back to human powered subsistence farming, would boost “demand” through the roof. Do you honestly believe that?
– It’s the other way around. Tepid wage growth is responsible for tepid / slowing productivity (growth).
True. A profitable company has little necessity to invest in productivity enhancing tools if labor costs aren’t increasing. As Mish shows decisively above, wages aren’t growing.
Productivity always comes first. Wages follow (assuming a free market, not a theft racket). Otherwise you could boost productivity to Start Trek levels by simply paying a tool less dirt farmer more ad infinitum, without bothering to upgrade his tools.
Instead, you CAN go the other way. Improve his tools, and he’ll produce more. Leaving him more to trade with others. Allowing him to take home more pay.
wages clearly did NOT follow productivity
Hence theft racket. Not free market.
Gross productivity has increased substantially, but net productivity has been flat or slightly down.
US Workers (both white and blue collar) are carrying a LOT more government bureaucrats compared to the past, two new classes of leaches known as non-profit groups and “NGOs”, and for this time in the economic cycle a rather large amount of traditional welfare.
Factoring in these added drags on the economy, one would expect productivity to have cratered. The fact that productivity measured with traditional tools is reporting “flat” (or close to flat) suggests that workers are much more productive before taking into account all the dead weight that socialists have added.
“I didn’t leak nothing to nobody!!”
This might have been a quote from a low level thug in a mafia movie, but it is in fact Susan Rice, Obama’s functional equivalent of Watergate “burglars”.
Not only was Obama illegally spying on Trump during the election, thugs like Rice even went so far as to document that they wanted to undermine the US government post Obama…. like 3rd world rebel forces.
Just when you thought Obama couldn’t show less class and be less presidential — his Chicago corruption roots show
Here’s a theory …
Grafting millions of people from low productivity 3rd world countries onto a 1st world country moves the 1st world country towards being a low productivity 3rd world country.
And commoditised labour is the result.
Strange socialists are so keen on it, I thought their mantra was “power to the workers” when the result is quite the opposite.
“Social benefits (entitlements in the US) are crowding out gross domestic savings, the primary source for funding investment, dollar for dollar.”
ZIRP devastated savers. ZIRP was a policy of the FED.
“Alan Greensppan blamed the aging of baby boomers.”
Greenspan blames anything but himself.
What are savings? If I put money aside for retirement, and that money goes into a low-interest bank account, is that savings? How about I move up in risk to CDs? How about a 401K with my cash going into an SPX index fund? Is it still savings?
If my 401K represents savings, why wouldn’t the entire stock market represent savings? And if the stock market is at the highest level in history, how can we say that savings are being crowded out by anything?
We need the same number if not more teachers, policeman, firefighters, etc.
I would argue that the one sector of society that is by definition non-productive is the government sector.
Now, I would like to argue that teachers should be counted as productive, but that is not the reality. The proof is this: class size keeps shrinking. If teachers were actually productive, they’d be effectively teaching more students, not fewer. One could argue the quality of the education has improved, but even teachers don’t actually believe that which is why they keep striking for smaller class sizes.
So the non-productive sector of society is the only sector of society that is growing. An increase in government jobs and government subsidies can only come by taking from the productive sectors of society.
Wages are prices; modest productivity increases will not boost wages much. Add in the taxation required to support the above – even debt-fueled demand eventually levels off because of it.
The logical conclusion is this: government taxation increases are outpacing productivity gains. This isn’t anything new – nearly every historical collapse of governments/communities/empires has occurred for exactly the same reason. Central bankers, being de facto government employees, will insist that the cause is anything but.
Detroit, Venezuela, Illinois, Zimbabwe, Soviet states, Greece… all collapsed for the same reason.
And yet government taxation, at all levels, in the United States are at some of the lowest levels since 1950. Though we have traded tax receipts of treasury bond issuance.
Those pushing the low-tax meme only look at federal individual income tax rates – and quietly ignore how many millions of people are swept up in AMT every year. State income tax rates are up, property taxes are up, corporate income taxes are up, and sales tax rates are double what they were 40 years ago.
Regulations are also a massive tax, as they raise the costs of doing anything. Want to buy a car? Cough up the bucks for federal regulations for items you don’t want like air bags, backup cameras, etc. If you want them, fine. If your insurance company gives you a discount for them, fine. No need to have the government force for those things.
The list of this productivity-killing crap is in the millions.
“It is quite possible, if not highly likely, the productivity mess that appears to have started in 1979 has its actual roots in 1971 when Nixon closed the gold window.”
Pegs are always broken, as they cannot be maintained in a cyclical environment. Nixon closed the gold window due to the roots of what came before the closing. There are lots of roots to be found if one wants to dig up the past.
http://hussmanfunds.com/wmc/wmc170403.htm
more Hussman:
Productivity growth
Let’s look at that second piece of the growth puzzle, which is productivity growth. Decades of financial distortion and malinvestment have had cumulative effects that can only be reversed by decades of productive capital accumulation. It’s here where Wall Street’s exuberance is most evident. Even assuming massive and productive new spending initiatives were financed by increasing the existing $930 billion annual deficit that is now being run across federal, state and local government (the federal deficit currently accounts for about $430 billion of that annually), the impact over a small number of years would be quite limited as a percentage of GDP. The differences in growth that actually matter are those that only become significant over decades.
Since the 1940’s, the 8-year growth rate of U.S. labor force productivity has rarely exceeded 3%, and the recent trend has been progressively lower. Over the past decade, productivity growth has declined from a post-war average of 2% to a growth rate of just 1% annually, with growth of just 0.5% annually over the past 5 years. The gap between dismal productivity and the most productive economic environment in U.S. history is only about 2.5% annually.
If one studies the productivity figures, there have actually been two peaks in U.S. productivity growth during the post-war period. One was in the decade leading up to the late-1960’s, which was driven by a legitimate expansion in the productivity of U.S. workers, as measured the capacity of labor to produce output. This was something of a “golden age” for the U.S. in terms of improved living standards. There was a second, lesser peak in the decade leading up to 2003. But the reason for that surge in “productivity” was much different.
As I detailed in my November 2003 comment, titled The U.S. Productivity Miracle (Made in China), part of U.S. productivity growth actually represents the import of foreign labor by U.S. multinational companies. A significant portion of what we “import” from foreign countries actually represents intermediate goods produced by foreign affiliates of U.S. companies, which we incorporate into our final output. But we don’t count those foreign jobs when we calculate productivity (and the deduction to GDP on account of imports is generally smaller than the corresponding loss of U.S. employment), so foreign outsourcing has the effect of boosting measured productivity. As a result, I observed at the time that most of the productivity “miracle” in the decade leading up to 2003 could be explained by import growth in excess of consumption growth:
“Import growth captures both the ‘true’ part of productivity growth (since increased capital investment typically requires an expanding current account deficit) as well as the illusory part of productivity growth (resulting from the failure to account for foreign labor input in the productivity numbers). In both cases, it is misplaced optimism to expect rapid and sustained growth in U.S. productivity when the U.S. current account is already at a record deficit.”
Measured U.S. productivity, not surprisingly, has collapsed since then, and while the current account (essentially the U.S. trade balance) has narrowed as a fraction of GDP, it remains substantially negative.
ergo while trade deficits narrow productivity falls. that chart Mish put up of the G7 productivity missed the elephant in the room. Trade deficits are falling, additionally the speed up in technology (in this case consumer technology – 2x ergo the ubiquitous smart phone, which is smart but not secure and now companies with online business are redesigning their websites – 3x ego if it still takes people to maintain the building, but if the locks cost 5x as much as they used too that cuts into investment – increases the rate of obsolescence negating Domestic Investment. the Service economy is as Mish notes LOW tech, and therefore it has been growing nicely because there is no technology drag.
Productivity is higher in Germany and in China
Productivity is production divided by time basically
High productivity countries are the richest in the world we need more innovation to produce
news objects new products new services therefore future jobs
countries with high number of robots have the lowest rate of unemployment like south Korea
Japan the USA or Germany so robots should not be considered as scapegoats in the media
To enhance improve productivity you need to foster patriotic values among the workers population instead of socialism and welfare state values then you need to reward financially best working people as an incentive for their extra hours.
Rienhart & Rogoff showed that excessive debt depresses GDP growth.
Since GDP growth is productivity growth plus labor force growth, it follows that excessive debt depresses either productivity or labor force, or both.
My guess is most of that is on productivity, as debt prevents productivity-enhancing investment.
Printing misallocates capital. As capital is gradually depleted from the country, its back to doing things manually. Simply printing service inflation doesn’t actually add anything to GDP.
A”t no point does either DeLong or Summers pin the tail on this donkey. Neither can, because income inequality is a symptom of the problem.”
Good comment…and why? The explosion of the money & credit supply since 1971, if not earlier.
But robots and technology won’t play much of a role, either in manufacturing or service. An increasing quantity of goods produced, even at a lower price (in increasingly debased “dollars”, whatever they actually ARE…), does NOT indicate “increasing productivity”.
What “jobs” will be created by technological advancement? They won’t pay breadwinner salaries or, if they DO, the number hired will be a drop in the bucket.
So…the EARNED income won’t be there to purchase the new goods, which leads me to call “increased productivity” what it actually is: cheap “money”-induced capital misallocation.
Jobs are not productivity, only output is productivity – and only output that is demanded.
JOBS are not output. No productive endeavor installs robots to raise overall capital expense. So automation should reduce the cost of output. Certainly the price of the output is determined by supply and demand – and automakers have increased output. But it is not output demanded – Cash For Clunkers and related regulatory actions do not create aggregate demand over a long period, they only pull demand forward in the period from later in the period.
It shouldn’t matter that “breadwinner” jobs are reduced because the price of the output is also reduced commensurately. The disconnect is that government has enacted hundreds of promises to pay – otherwise known as entitlement programs, subsidies, etc – (also otherwise known as Ponzi schemes) – and those require increasing taxation. Fifty years ago the price of an automobile was nearly 100% due to the engineering and manufacturing effort needed to satisfy customer expectations. Today only 40% is for the effort in satisfying the customer – the other 60% is to satisfy government regulations. For example, 0% of the cost of a 1960 Cadillac Couple DeVille went into engineering and testing EPA requirements – because the EPA did not exist. Today 25% of the cost of a 2017 Cadillac Escalade is due to the effort required to meet EPA regulations. Take away all that crap and people would be doing 36-month financing on cars like they used to; the ever-increasing lengths of car loans are directly attributable to ever-increasing government regulations. Essentially people are financing their taxes!
Guess what? We’re now “later in the period” and no more demand can be felched from later in the period. The best a productive enterprise can do is replace more workers with more automation, but even that would be a waste as an idle robot wastes money just as much as a feather-bedded human job does. So the end result is fewer new companies are formed because the reduced demand coupled with the additional government red tape kllls the value proposition.
(Quote:)
My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.
(End Quote)
I am willing to take up the challange and I will answer to that (misplaced) notion. It’s actually surprisingly simple to rebuff that notion.
– I am a Keynesian and proud to be one AND proud to NOT be an “Austrian School” nutcase.
– There’s here a misconception. Falling prices is NOT equal to (Price) Deflation. It’s simply “Falling Prices”. That’s a mistake A LOT OF people make, including one Mike “Mish” Shedlock.
– Deflation is a reduction of money & credit and that’s something entirely different. But it requires falling prices to get (credit) Deflation, like rising prices are needed to get (credit) inflation.
– So, rising prices are needed for (credit) inflation. I’ll give an example how rising prices are an economic benefit.
– Let’s assume there’s a iron ore deposit in Australia that’s worth $ 1 billion with the iron ore price at $ 40. But building a new mine costs say $ 1 billion. That means that with iron ore at $ 40 it’s not profitable to build that mine.
– We saw that iron ore rose in 2009 through 2011 to about $180 – $ 200 in mid 2011. With iron ore at $ 200 then iron ore deposit is now worth 5 times as much ($ 5 billion) but building a mine still costs $ 1 billion. Potential profit (excluding operation costs) is then $ 4 billion. This simple math is seen by both the mining company and the (australian) banks. The mining company now borrows $ 1 billion to build that mine and spends that money on several things (machines, vehicles, etc.) to build that mine. That generates work, turn over, revenues & profits for companies that design, build equipment for that iron ore mine.
Dear “proud to be a Keynesian”
Please refute the BIS study instead of providing nonsense.
Please also tell me why paying more for something can possibly be a benefit for anyone but the asset holders when real wages have not gone up since 1979.
You lose
You are the nutcase
“Janet Yellen believes a lack of strong productivity gains may be responsible for tepid wage gains.”
– Yellen got it backwards. See my reply above.
–” There’s here a misconception. Falling prices is NOT equal to (Price) Deflation. It’s simply “Falling Prices”. That’s a mistake A LOT OF people make, including one Mike “Mish” Shedlock.”
If prices are falling, they are deflating. Falling prices are price deflation.
Deflation and price deflation are two different things and Mish knows the difference.
– I should have written:
Falling prices is NOT the same as Deflation. And I am talking about “Credit Deflation”. Falling prices is what the words say “Falling Prices”. But falling prices is required to get “Credit” Deflation.
A similar story can be told for rising prices. Rising price inflation is NOT the same as Credit Inflation. But Credit Inflation requires risng prices. See my “iron ore” story above.
In 1970 we began to move wives from homemakers to industrial workers. Increase any commodity; decrease cost of that commodity. Wages have stagnated due to excess credit, automation and excess work force.
Both secular strangulation and stagflation are caused by the same theoretical, empirical, and political mistake. Remunerating IBDDs induces non-bank dis-intermediation (an outflow of funds or negative cash flow). It retards money velocity (actually savings velocity) where savings are matched with non-inflationary, real-investment, outlets.
All savings originate within the commercial banking system. And savers never transfer their savings outside of the banking system unless currency is hoarded or converted to other national currencies. Savings flowing thru the NBFIs never leaves the CB system. Monetary savings, funds held beyond the income period in which received, can never be “activated” and put “back to work” unless they are redirected thru non-bank, savings-investment, conduits.
From the standpoint of the macro-economy all bank-held savings are thus un-used and un-spent. They are lost to both consumption and investment. Commercial bank deposits’ financial innovation plateaued in 1981. And Greenspan’s conjecture, beginning in 1965, coincided with the S&L credit crunch (lack of funds, not their cost). It was thus the prologue and paradigm for remunerating IBDDs.
Thus, contrary to Lester V. Chandler’s theoretical conjecture, there stopped being a monetary offset. Chandler’s theoretical explanation was: (1) that monetary policy has as an objective a certain level of spending for gDp, and that a growth in time (savings) deposits involves a decrease in the demand for money balances, and that this shift will be reflected in an offsetting increase in the velocity of demand deposits, DDs.
From the standpoint of the entire system, commercial banks never loan out, & can’t loan out, existing funds in any deposit classification (saved or otherwise), or the owner’s equity, or any liability item. Every time a DFI makes a loan to, or buys securities from, the non-bank public, it creates new money – demand deposits, somewhere in the system. I.e., deposits are the result of lending and not the other way around. The NBFIs are the DFI’s customers.
All boom/busts since the Great Depression are entirely the Fed’s fault. Monetary policy objectives should be formulated in terms of desired rates-of-change, roc’s, in monetary flows, M*Vt, relative to roc’s in R-gDp. Roc’s in N-gDp (though “raw materials, intermediate goods and labor costs, which comprise the bulk of business spending are not treated in N-gDp”), can serve as a proxy figure for roc’s in all transactions, P*T, in Professor Irving Fisher’s truistic: “equation of exchange”. Roc’s in R-gDp have to be used, of course, as a policy standard.
– Michel de Nostredame
“The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2017 is 0.6 percent on April 7, down from 1.2 percent on April 4”
——
As rates rise during a typical policy induced cycle (now exacerbated by remunerating IBDDs), the proportion of savings deposits, to those balances preparatory for spending within the payment’s system, increases (broadly metastasizes), so money velocity falls, R-gDp falls, and the FOMC (the policy formulating arm of the Fed), falls victim to FOMC schizophrenia, do I stop? (because inflation is accelerating), or do I go? (because the economy is slowing).
The last 3 rate hikes have now made it necessary to ease monetary policy. That’s why longer dated bonds have risen lately (the remuneration of IBDDs engenders an excess of savings over investments, and compresses real rates of interest).
Paul Krugman probably still thinks the Fed’s caught in a liquidity trap. See NY Times: “The Fed Does Not Control the Money Supply”
As rates rise during a typical policy induced business cycle (now exacerbated by remunerating IBDDs), the proportion of savings deposits (funds held beyond the income period in which received), to those balances preparatory for spending within the payment’s system, increases (broadly metastasizes).
So money velocity falls (actually predominately savings or non-bank Vt), R-gDp falls, and the FOMC (the policy formulating arm of the Fed), falls victim to FOMC schizophrenia, do I stop? >because inflation is accelerating; or do I go? >because the economy is slowing.
If the Fed pursues a restrictive monetary policy, interest rates tend to rise in concert. This places a damper on the creation of new money, but, paradoxically drives existing money (voluntary savings) out of circulation into stagnant commercial bank-held savings deposits (creating disequilibria / instability).
In a twinkling, the economy begins to suffer (as evidenced by a deceleration in R-gDp during the same period), and / or with a monetary offset, subsequently generates higher levels of stagflation (drop in incomes).
The recent rate hike by the Fed is prima facie evidence – as the FRB-ATL’s GDPNow model’s forecasts have been repeatedly revised downward (the first quarter of 2017 is just 0.6 percent on April 7). I.e., large CDs on the H.8 release increased by 16.9 percent in January.
It’s déjà vu. There was also a dramatic contraction in credit velocity (actually confined to savings velocity, the transfer of title of non-bank assets within the commercial banking system), following the rate hike on 12/15/16 (which swallowed up R-gDp). Same for the hike on 12/17/15 (which swallowed up R-gDp).
There is already another dramatic contraction in DD Vt following Yellen’s latest rate hike on 3/15/17 (again swallowing up R-gDp).
The bond market has already foreseen this. Haven’t you noticed the U.S. 10yr Daily Treasury Yield Curve rates @ 2.6% on 3/14 and @ 2.38% today?
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2017
The remuneration of IBDDs not only engenders an excess of savings over investments, but also compresses *real* rates of interest inducing secular strangulation.
The last 3 rate hikes have now made it necessary to ease monetary policy (in the face of an acceleration in stagflation).