Mish's Global Economic Trend Analysis

Another Definition of Deflation: Antal Fekete Defines Deflation as a "Pathological Slowing in the Velocity of Money"
History Lesson for Hypocrites, Warmongers, and Fools
Right on Cue: Fed's Dudley Delivers Dovish Speech
Employment: What Age Group Gets the Jobs?

Another Definition of Deflation: Antal Fekete Defines Deflation as a "Pathological Slowing in the Velocity of Money"

Posted: 06 Apr 2015 11:05 PM PDT

In an interview with the Daily Bell that just came my way, Antal Fekete writes about Blowing Up Modern Austrian Economics ... in a Good Way.

Background on Velocity

To understand the interview discussion, one must first understand velocity. I discussed velocity at length in Will Prices Rise Significantly When Velocity of Money Picks Up?

The simple definition V = GDP/M where V is velocity, M is money supply, and GDP is Gross Domestic Product.

Problems With Velocity

The first problem is how to measure money supply (Is Money M1, M2, or TMS? Each gives a different measure of velocity).
The second problem with velocity is that GDP is a pretty nebulous concept given that government spending (no matter how useless) adds to GDP.
Finally, I do not believe prices can be accurately measured.

Interview Snips

I post snips of the interview below, followed by my own comments. Sometimes I agree, and sometimes disagree with Fekete.

Daily Bell: Please define deflation and disinflation from both a monetary and price standpoint.

Antal Fekete: Deflation is clearly not the same as a falling price level. Technological improvements in production cause a gently falling price level under sound money that is no deflation. Defining deflation as a contraction of the stock of money is plainly wrong. We have a vastly expanding money supply, yet a lot of economists (including myself) hold that we are in the midst of deflation. I prefer the definition of deflation as a pathological slowing in the velocity of money.

Mish: I agree with Fekete that "price deflation" is a natural occurrence based on technology and productivity improvements. I also concur that deflationary forces are huge. However, I disagree with his definition of deflation based on velocity. Given the clear and expanding bubbles in asset prices, I believe we are in a state of inflation. Nonetheless, I do expect another round of credit and asset deflation (my definition of deflation).

Daily Bell: We think monetary deflation over a long period of time is difficult to accomplish in a central bank , money-printing economy. Comments?

Antal Fekete: "Accomplish" is not the word. No one wants deflation any more than wanting a pathological condition in one's own body. "Occur" may be a better word. I disagree with your assumption that central banks' money printing is antithetical to deflation. I am in a minority of one in suggesting that just the opposite is the case: expansion of the money supply through open market purchases of government bonds by the central bank is the direct cause of deflation. I know this is counter-intuitive, yet true nevertheless.

Mish: It's not counter-intuitive at all. The Fed prints more money than consumers and businesses want to borrow, so the money sits as excess reserves. Velocity drops. Fekete's definition states that falling velocity is deflation, so in that sense, the Fed does indeed "cause" deflation. It's simply a truism based on Fekete's definition. That said, he's not a minority of one. By sponsoring asset inflation, the Fed will indeed cause deflation. Our difference is he calls the present environment deflation, whereas I say a very destructive asset deflation will eventually result from current Fed policies.

Daily Bell: Along with Rothbard , as we understand it, asset inflation itself leads to what seems to be deflation and disinflation. Money volume must go up to go down. Truth to this?

Antal Fekete: I would modify language slightly: money velocity must go up first so that it could come down.

Mish: Velocity does not need to do anything. It can go up or down or sideways. Asset inflation to the point of creating bubbles is another thing. The busting of bubbles would be a deflation event in my model and I would expect velocity to drop constituting deflation in Fekete's model as well.

Daily Bell: If third-party credit facilities like American Express collapse, does this constitute monetary deflation?

Antal Fekete: The collapse of any firm is a symptom of deflation, with a vengeance. It activates the 'domino effect'. Deflation breeds more deflation. The velocity of money spirals down.

Mish: His symptom is part of my definition. My definition is part of his symptom. But we are not saying the same thing entirely. I would say it's clear we are in a state of inflation right now even though I believe deflationary forces will soon override that inflation.The reason I see inflation is simple: asset bubbles are expanding, and that is a clear symptom of inflation by any rational measure.

Daily Bell: When central banks keep interest rates low, does this lead to disinflation and deflation? How so?

Antal Fekete: The word "disinflation," which suggests that the Fed can turn the spigot on and off, is not in my dictionary. In fact, the Fed has no such power. It can certainly turn the spigot on, but we have never seen the Fed turning it off. Worse still, it has absolutely no control over how people will be using the extra money spewed from spigots or dropped from helicopters. Well, the smart ones would buy bonds, not commodities as the Fed hoped. They knew they could always dump them on the Fed in the open market with a hefty markup. Risk free. To answer your question, the central bank does not "keep" interest rates low. In fact, it "pushes" them low through open market purchases of government debt, which increases the bond price. The other side of the coin is the simultaneous decrease of the rate of interest. Of course, the purpose of the exercise, on a Quantity Theory argument, is the fomenting of inflation, not deflation. The trouble is that the central bank does not know what it is doing. It sows inflation but reaps deflation. Its monetary policy is counterproductive, to put it politely.

Mish: I disagree with Fekete's notion the Fed wants to push commodity prices higher. I would say the Fed wants businesses to expand, wages to rise, credit to expand, and consumer prices to rise, most likely in that order. Higher commodity prices would be a very distant 5th, at best. However, I do like Fekete's explanation that the Fed does not keep rates low, it pushes them low with asset purchases. And I concur that the Fed has no idea what it is doing. Specifically, the Fed can print money but has no control over how it is spent (or if it is spent at all). Right now money sits as excess reserves and not spent. That is deflation in Fekete's book, but not mine. Fekete ignores asset prices (stocks, junk bonds, housing prices). While bubbles are inflating, we have inflation. In simple terms, expansion of asset bubbles is sufficient proof of inflation. The bursting of asset bubbles would typically lead to deflation, but I look at asset prices and the implied value of credit marked to market to make a determination.

Daily Bell: If central banks are keeping interest rates artificially low, how does this contribute to monetary deflation? What do the bond traders do that makes monetary inflation into a deflationary phenomenon?

Antal Fekete: It is not low interest rates that creates deflation but falling interest rates. The process is triggered by the central bank's open market purchases of bonds in an effort to pursue its inane policy of QE, eliciting the copycat action of bond speculators. A chain reaction is activated: bond purchases of the central bank alternating with bond purchases of the speculators. The central bank announces its time table for its bond buying program. Speculators preempt the central bank in buying first, dumping the bonds into the lap of the central bank while pocketing risk free profits afterwards. The expectation of the central bank, price inflation, does not materialize. It is frustrated by the bond speculators who hijack the freshly printed money on its way to the commodity market. Not to be deterred, the central bank prints more. To do that it has to go to the open market and buy more bonds, prompting speculators to preempt. The cycle now repeats and a vicious spiral is engaged. The upshot is a prolonged fall of interest rates that destroys capital across the board.

Mish: I agree with Fekete's front-running of bonds thesis. To that I would add "realization" that capital was destroyed happens during the bust. It cannot be prevented.

Daily Bell: Do you believe in the Misesian business cycle ? Does it have validity, in your view?

Antal Fekete: Certainly, with some reservations. It does not assign a very high IQ to businessmen in the field. Why don't they learn from experience and factor into their calculations the distortion in the rate of interest due to monetary policy? I improve on the business cycle of Mises, pointing an accusing finger to bond speculation motivated by risk free profits. Businessmen are the brightest people we have. They are being victimized through the insane monetary policy of the Fed.

Mish: Banks take risk-free profits for three reasons: They are capital impaired and cannot lend, creditworthy businesses do not want to expand, risk-free profits exceed expected profits from risk-taking. As far as victims go, everyone but those with first access to money are victimized by the monetary policies of the Fed.

Daily Bell: Was the Great Depression a deflationary depression? We note that junior mining prices apparently went UP during the Great Depression.

Antal Fekete: Most certainly it was. It is axiomatic that gold mining shares go up during a depression. Depression is just another name for capital destruction, and gold is the only form of capital that is immune to destruction. If you consolidate all balance sheets in a country (including that of the national treasury), then all liquid assets will be wiped out, with the sole exception of gold. Gold is the only asset that is not duplicated as a liability in the balance sheet of someone else.

Mish: Actually, a stockpile of any valuable commodity owned free and clear is an asset with no liability elsewhere. I do not believe it is axiomatic that gold mining shares rise in deflation, but I would expect gold to do well.

Daily Bell: Are we in a deflationary depression? Or are we in a kind of stagflation?

Antal Fekete: We are in a deflation that is metastasizing into a depression. The monster word "stagflation" does not appear in my dictionary.

Mish: Stagflation should have ended Keynesian theory right then and there. Keynes believed it was impossible to have a recession and inflation at the same time. The 1980s is a testament to the absurdity of Keynesian theory.

Daily Bell: Has money volume increased in the US and Europe? Have prices increased in response?

Antal Fekete: As I hinted a while ago, increasing the volume of money does not necessarily cause an increase in the price level. The Quantity Theory of Money is a false theory. In spite of an eightfold increase in the stock of money in America the price of crude oil was cut in half and the price of iron, copper and a number of other metals showed steep declines, thought impossible only a few months ago. If this is not deflation, then let me ask: How much farther do prices have to fall before we are allowed to use the D-word?

Mish: The Quantity Theory of Money says "money supply has a direct, proportional relationship with the price level." Fekete points to falling prices and says "If this is not deflation, then let me ask: How much farther do prices have to fall before we are allowed to use the D-word?" By Fekete's own definition, falling prices do not constitute deflation. I believe he is speaking from the reference of what most economists believe (that falling prices constitutes deflation). Unfortunately, most believe that constitutes deflation. I call it brainwashing by the Fed and academia. Regardless, Fekete also misses the boat on the theory. Prices have gone up, just not commodities. The bubble is in assets (equities, housing, junk bonds), things that are impossible to measure precisely. I call that inflation. Fekete calls it deflation. But we both seem to agree that a big deflationary bust is coming.

Daily Bell: Oil has apparently been manipulated down. Does this constitute price deflation nonetheless, or is it simply a kind of manipulation?

Antal Fekete: The manipulation theory was invented by those who are afraid to face the facts squarely. We should know better: no valorization scheme ever works for any significant length of time for any commodity. It is another matter that foreign policy makers in Washington may have stolen a ride on the back of spontaneously collapsing crude oil to punish Putin.

Mish: I am in perfect agreement on this point. Commodity price declines are about the slowing global economy, not oil price manipulation.

There is more to the interview, and inquiring minds may wish to read further. Let's stop here and look at a few charts of velocity.

M1 Velocity

M2 Velocity

As you can see, velocity depends on how one measures money, and even Austrians do not agree how to do that.

Mish Definition

My definition of inflation is expansion of money supply and credit with credit marked to market. My definition of deflation is contraction of money supply and credit, with credit marked to market.

Both Fekete and I have definitions that differ from the pure Austrian concept of expansion of money. And we have been in the same boat in one sense. Neither of us thought the expansion of money would lead to huge "price inflation" and it didn't.

From a practical standpoint, I believe my definition explains the real world better than other definitions.

In my model, and called for in advance, the US experienced deflation from late 2007 until March of 2009. At that point Bernanke managed to reignite demand for credit and the stock market took off.

I expect another round of deflation when various asset bubbles pop. Meanwhile, and as long as asset bubbles are expanding, I do not believe deflation is the best word to describe current events. That said, I would state the current setup is highly deflationary looking ahead.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

History Lesson for Hypocrites, Warmongers, and Fools

Posted: 06 Apr 2015 04:09 PM PDT

In response to Obama Doctrine; An Astonishingly Good Deal? "Only Rand Paul Could Do Worse" Says Senator Graham reader Michael says I am naive and we should "cut out the cancer" now.

In a subsequent email Michael called me "Neville" ...

Dear Neville,

I'm sure a compassionate, but determined U.S. President, could figure out a way to work with pro-western Iranians to overthrow the Iranian regime while minimizing collateral damage.

I guess I'm just more concerned about losing a million New Yorkers than you are. What the hell, they're mostly Jews anyways.

Sig Heil Mr. Chamberlain

Track Record

Dear Michael, let's take a look at the track record of US overthrows starting with the very place the madness started, an overthrow in Iran.

The 1953 Iranian coup d'état was the overthrow of the democratically elected Prime Minister of Iran Mohammad Mosaddegh on 19 August 1953, masterminded by the United States under the name TPAJAX Project and backed by the United Kingdom under the name 'Operation Boot'.

The US installed Shah of Iran ruled as a brutal, corrupt puppet of the US until a violent overthrow in the Iranian revolution of 1979.

In 2013, under freedom of information lawsuits, the Guardian reported CIA Admits Role in 1953 Iranian Coup.

So dear Michael, how well did that coup work out?

Netanyahu Lesson from 2002

Here's another history lesson: Who said "If You Take Out Saddam, I Guarantee It Will Have Enormous Positive Reverberations".

Here's the answer: Benjamin Netanyahu in 2002.

Iraq War: Predictions Made, and Results

Let's take a look at previous predictions, when they were made, and how accurate they were, starting with a Christian Science Monitor report Iraq War: Predictions Made, and Results.

Ahead of and shortly after the US invasion of Iraq in 2003, a number of officials, including former Defense Secretary Donald Rumsfeld and his deputy Paul Wolfowitz suggested the war could be done on the cheap and that it would largely pay for itself. In October 2003, Rumsfeld told a press conference about President Bush's request for $21 billion for Iraq and Afghan reconstruction that "the $20 billion the president requested is not intended to cover all of Iraq's needs. The bulk of the funds for Iraq's reconstruction will come from Iraqis -- from oil revenues, recovered assets, international trade, direct foreign investment, as well as some contributions we've already received and hope to receive from the international community."

In March 2003, Mr. Wolfowitz told Congress that "we're really dealing with a country that could finance its own reconstruction." In April 2003, the Pentagon said the war would cost about $2 billion a month, and in July of that year Rumsfeld increased that estimate to $4 billion.

I believe we all know how that turned out.

Lost Cause

On July 24, 2010 I wrote Afghanistan is a "Lost Cause"; Leaked Documents Show Futility of Afghanistan War

The questions on my mind are: How many trillions of dollars do we have to spend, how many lives need to be wasted, and how much longer are we going to be involved in the boondoggle known as Afghanistan?

The total amount of the waste and lives lost is unknown, but we now have an answer to my 2010 question: "how much longer are we going to be involved in the boondoggle known as Afghanistan?".

The unfortunate answer is "until 2024 at least".

How much will fighting ISIS really cost? No one can answer that now, but a safe starting point for discussion is somewhere between 10 and 100 times initial projections.

Accountability

In Iraq Splinters Into Pieces, Al Qaeda in Control of Several Cities, Kurds Take Oil City Kirkuk; Thank George Bush and the Neocons; Iraq Before and After I held the Bush Administration largely responsible for this mess.

Sure, president Obama made many mistakes but the initial, most damning mistake was the Iraq invasion and the overthrow of Saddam Hussein.

In a follow-up post, Assessing the Blame for Iraq: Bush, Obama, McCain, Others; Iraq Sunken Costs I asked for self-assessment.

Time for Self-Assessment

I can and do blame Obama for countless things. But Republicans would be very wise to self-assess on Iraq, on nation building, and on warmongering in general.

Instead of self-assessment, warmongers want more war.

Deficit-Hawk Hypocrites

As is always the case, John McCain leads the war rally cry in the Senate. In the House, Speaker John Boehner Says U.S. may have 'no choice' on combat troops.

Not once have these Republican deficit-hawk hypocrites said how they propose to pay for this. Not once has McCain ever placed the blame for ISIS where it belongs.

ISIS a U.S. Creation

ISIS is 100% a US creation. ISIS arose following inane US nation-building policies starting with the absurd belief the "Iraq war would pay for itself."

This self-made mess produced Strange Bedfellows: To Fight ISIS, US Now Supports Iranian Revolutionary Guard, Other Terror Groups.

I concluded "Strange Bedfellows" with a warning "Just remember ... To make matters worse, you have to begin somewhere."

In 1993 the Washington Post stated Iraq and Afghanistan Wars Costs Top $4 Trillion.

Oops. They forgot to factor in ISIS fighting.

Ukraine

How well is the US sponsored overthrow of a democratically elected president in Ukraine working out?

Compassionate Idiocy

Nonetheless reader Michael asserts "I'm sure a compassionate, but determined U.S. President, could figure out a way to work with pro-western Iranians to overthrow the Iranian regime while minimizing collateral damage."

To top it off Michael takes out the Hitler card as if Iran wants to conquer the world.

Finally, proving that he is also a hypocrite, somehow it is OK for Israel to take out Iran preemptively but not the other way around.

Why are We Working with Iran and Saudi Arabia?

Inquiring minds should take a look at a Glenn Greenwald appearance with Glenn Beck: Why are We Working with Iran and Saudi Arabia?

Matter of Life and Death

Arguably, it makes far more sense to work with Iran than Saudi Arabia. Not only was it Saudi nationals behind 911, it is now extreme Sunnis that form ISIS.

It is Saudi groups that fund and support ISIS.

Iran is predominately Shiite. Given that Sunnis and Shiites look alike, here's an interesting set of Questions Rebels Use to Tell Sunni From Shiite.

When ISIS captures a village, Shiites are killed on the spot.

Lesson in Trust

Reader Michael sides with war hawks and says we cannot trust Iran.

Good grief. We inspired a military coup in Iran, installed a brutal regime for the benefit of US oil interests, we back Israel no matter what it does, and let Israel have a nuclear program.

In the wake of 911, Iran offered assistance to track down Bin Laden and the US refused.

Now, people bitch we cannot trust Iran.

Hell, Iran is damn near crazy to trust us given that track record, especially when leading Republicans vow to overturn any agreement in 2016.

Accord Speaks for Itself

Iran will give up about 14,000 of its 20,000 centrifuges
Iran will give up all but its most rudimentary, outdated centrifuges: its first-generation IR-1s, knockoffs of 1970s European models, are all it gets to keep. It will not be allowed to build or develop newer models.
Iran will give up 97 percent of its enriched uranium; it will hold on to only 300 kilograms of its 10,000-kilogram stockpile in its current form.
Iran will destroy or export the core of its plutonium plant at Arak, and replace it with a new core that cannot produce weapons-grade plutonium. It will ship out all spent nuclear fuel.
Inspectors will have access to all parts of Iran's nuclear supply chain, including its uranium mines and the mills where it processes uranium ore. Inspectors will also not just monitor but be required to pre-approve all sales to Iran of nuclear-related equipment. This provision also applies to something called 'dual-use' materials, which means any equipment that could be used toward a nuclear program.

Even if Iran reneges down the road, as long as those points are verified before sanctions are removed, Iran's nuclear program would be set back years, if not longer.

But that is not enough for reader Michael or the war hawks. Both want to take out Iran (at minimum cost of course).

Then both have the gall to bitch about Iran logically wanting a weapon to defend themselves from just that.

Israel Demands Changes

This reports just in: Israel calls for changes to international nuclear deal with Iran.

Israel stepped up its lobbying campaign against the agreement on Iran's nuclear programme on Monday, listing the changes it regards as essential in the framework accord that Tehran reached last week with world powers.

Yuval Steinitz, the minister for intelligence and strategic affairs, said on Monday that Israel would try to persuade the powers — the US and five others — "not to sign this bad deal or at least to dramatically change or fix it".

Mr Steinitz said that Israeli military action remained an option, despite the framework accord. "It was on the table, it's still on the table, it's going to remain on the table," he said. "Israel should be able to defend itself, by itself against any threat."

It's no wonder Iran is paranoid.

Addendum

Please consider Conservatives say Obama is like Neville Chamberlain. They said the same about Reagan.

My comment: People, especially warmongers, pull the Hitler card at the slightest provocation. It's nearly always wildly off base. Please read the article for discussion.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Right on Cue: Fed's Dudley Delivers Dovish Speech

Posted: 06 Apr 2015 11:58 AM PDT

Futures were negative following Friday's dismal job showing but that lasted only as long as the the market open.

Right on cue came dovish pronouncement from Fed governor William Dudley in a speech to a New Jersey audience on the regional and national economy.

Reuters reports Rate Hike Timing Now Unclear.

The timing of the Federal Reserve's interest rate hike, which would be its first in nearly a decade, is unclear and for now policymakers must watch that the U.S. economy's surprising recent weakness does not signal a more substantial slowdown, a top Fed official said on Monday.

New York Fed President William Dudley's comments were the latest sign that a string of disappointing economic data, including a sharp drop in jobs growth last month, is derailing a Fed plan to tighten monetary policy around mid-year after more than six years of rock-bottom rates.

In relatively dovish remarks to a business audience in Newark, New Jersey, Dudley did not repeat his refrain that a rate hike could reasonably be expected to come by mid-2015.

A permanent voting member of the Fed's policy panel and a close ally of Fed Chair Janet Yellen, Dudley repeated that the rate hike would come once the labor market improves more and when policymakers are reasonably confident that low inflation will return to a 2 percent goal.

"The timing of normalization will be data dependent and remains uncertain because the future evolution of the economy cannot be fully anticipated," he said, adding he expects the path of rate hikes to be "relatively shallow."

Low oil prices and the drop in domestic drilling will exert a "meaningful drag" on U.S. economic activity, he said. The strong dollar will continue to hurt U.S. trade performance, and has already shaved an estimated 0.6 percentage point from overall 2015 growth, he added.

Longer term, he said the Fed's key policy rate will probably rise to only about 3.5 percent, lower than previously thought.

Dudley has been under political pressure for perceived regulatory missteps by his New York Fed, with lawmakers and even one former Fed official floating changes. But Dudley defended the status quo on Monday, saying his Fed bank should continue to play a key role in monetary policy during periods of stress.

Text of Dudley Speech

Reuters, as is typical from mainstream media, did not bother linking to the text of Dudley's speech.

Inquiring minds may wish to read Dudley's Speech on the Regional and National Economy at the New Jersey Performing Arts Center, Newark, New Jersey.

His speech was certainly on the dovish side. Yet, it did contain many positives.

Dudley Snips

Economic performance in this cycle has been disappointing compared to historical patterns. ... despite very accommodative financial conditions and record corporate profits, growth of business fixed investment has been tepid.

Looking forward, my outlook for 2015 is that economic growth will be close to the pace of the past two years, supported by continued solid fundamentals and accommodative financial conditions. If I am correct, then this would lead to a further reduction of labor market slack, with the unemployment rate approaching 5 percent by the second half of the year.

The pace of improvement in the labor market has slowed in recent months from the strong pace at the end of last year. Nonfarm payroll employment increased in the first quarter by about 200,000 per month, well below the pace of the fourth quarter. This slowdown was broad-based, with job growth slowing in both the goods-producing and the service-providing sectors.

The unemployment rate was 5.5 percent in March: analysis by my staff suggests that the unemployment rate is nearing the point where we may begin to see a pickup in the pace of real wage gains. If this proves correct and unemployment continues to decline as I expect, then these stronger wage gains could help support solid income growth even if the pace of employment growth slows. However, it will be important to monitor developments to determine whether the softness in the March labor market report evident on Friday foreshadows a more substantial slowing in the labor market than I currently anticipate.

The March labor market report is another indicator that the first quarter is likely to be quite weak. Our current projection is that the economy will grow at about a 1 percent annual rate in the first quarter of 2015. This softer performance is suggested by a wide range of recent indicators that have surprised to the downside over the past couple of months. Examples of such indicators include retail sales, the ISM manufacturing index, manufacturing production and orders, and single-family housing starts.

Overall, I view these downside surprises as reflecting temporary factors to a significant degree. For example, some of the recent softness is likely due to yet another harsh winter in the Northeast and the Midwest. My staff's analysis of a measure of both the amount of snow and the population affected indicates that January and February weather was 20 to 25 percent more severe than the five-year average. Such large deviations appear to have meaningful negative impacts on a number of economic indicators.

Even so, there are some downside risks to the growth outlook. In particular, the steep decline in crude oil prices is likely to lead to a further sharp drop in U.S. oil and gas investment. Additionally, the significant rise in the value of the dollar is likely to lead to weaker U.S. trade performance.

Turning to the negatives, the support to growth from rapidly rising U.S. oil production almost certainly will fade away. U.S. oil production has been rising rapidly for several years, due largely to new technology that has expanded the amount of oil that can be recovered from existing wells and that has facilitated shale oil production by fracking. Now, with prices dramatically lower, U.S. oil exploration and drilling activity is falling off very sharply. This will exert a meaningful drag on economic activity.

Another significant shock is the nearly 15 percent appreciation of the exchange value of the dollar since mid-2014. Such an appreciation makes U.S. exports more expensive and imports more competitive. My staff's analysis concludes that an appreciation of this magnitude would, all else equal, reduce real GDP growth by about 0.6 percentage point over this year.

Turning to inflation, the data continue to come in below the FOMC's objective of a 2 percent annualized rate for the personal consumption expenditures (PCE) deflator. The twelve-month change of the total PCE deflator was 0.3 percent in February, with the core PCE deflator at 1.4 percent. Despite this, my expectation is that inflation will begin to firm later this year. In particular, most of the impact from the decline in energy prices that has weighed down overall inflation is likely over.

Monetary Policy

As the FOMC has consistently communicated, the timing of lift-off will depend on how the economic outlook evolves. As I have discussed, the labor market has improved substantially and I expect to see inflation begin to firm later this year. If this labor market improvement continues and the FOMC is reasonably confident that inflation will move back to our 2 percent objective over the medium-term, then it would be appropriate to begin to normalize interest rates. At the March meeting, the FOMC removed language from the statement that indicated that we would be patient in beginning the process of normalizing monetary policy. But, as Chair Yellen remarked in her most recent press conference, removal of "patient" from the statement does not indicate that we will be "impatient" to begin to normalize monetary policy. Rather, the timing of normalization will be data dependent and remains uncertain because the future evolution of the economy cannot be fully anticipated.

Whenever the data support a decision to lift off, I think it is important to recognize what this would signify. It does not mean that monetary policy will be tight. We will simply be moving from an extremely accommodative monetary policy to one that is slightly less so. It also will be a positive signal about the progress we have made in restoring the economy to health. In my view, it would be a cause for celebration, because it would signal that the FOMC believes that slightly higher short-term interest rates are consistent with its objectives of maximum employment and price stability. Near-zero short-term interest rates and a larger Federal Reserve balance sheet were designed to be a temporary extraordinary treatment to help the economy regain its vitality, and not a permanent palliative.

How high will short-term rates ultimately need to go? I think this issue is very difficult to judge for a number of reasons. First, it depends on how financial market conditions evolve in response to our monetary policy adjustments. Second, it depends on other factors, such as real potential GDP growth, which, in turn, depends on the growth rates of the labor force and of productivity. My current thinking is that the long-run nominal federal funds rate consistent with 2 percent inflation is somewhat lower than in the past. My point estimate is 3½ percent, but I wouldn't bet the farm on this. I have considerable uncertainty about this estimate.

Key Sentence

"Whenever the data support a decision to lift off, I think it is important to recognize what this would signify. It does not mean that monetary policy will be tight. We will simply be moving from an extremely accommodative monetary policy to one that is slightly less so."

Outlook Brighter

Flashback December 2: New York Fed President William Dudley says "Dreary Days for U.S. Economy May Be Over".

Despite some headwinds, Dudley is optimistic that America could grow closer to 2.5% to 3% in the coming year instead of the ho-hum 2% growth that has been a hangover of the Great Recession.

"The U.S. economic outlook looks brighter, with growth likely to be somewhat above the trend of the past five years," Dudley said in a speech on Monday

In fact, Dudley thinks the economy could soon be healthy enough for the central bank to lift interest rates off the ground.

He's signaling the Fed will likely be able to raise interest rates in 2015.

"While raising interest rates is often portrayed as a difficult task for central bankers, in fact, given the events since the onset of the financial crisis, it would be a development to be truly excited about," Dudley said.

"When the [Fed] begins to raise its federal funds rate target, this would indicate that the U.S. economy is finally getting healthier," he explained.

In response, I commented Fed Governor Dudley "U.S. Economic Outlook Looks Brighter"; Ring! Ring! Goes the Bell: "Fed Governors tend to be among the best contrary indicators you can find, so much so that I have to wonder if a bell just rang. William Dudley is ready to sell. But I ain't buyin' it."

Dudley On the Economy

In spite of his brighter outlook about which he is now uncertain, Dudley only wants to go from an "extremely accommodative monetary policy to one that is slightly less so," precisely the cue the market was seeking.

One of these lovie-dovie speeches will be a major sell signal, but the Wall Street salivating dogs won't recognize it when it happens. Perhaps no one will.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Employment: What Age Group Gets the Jobs?

Posted: 06 Apr 2015 01:52 AM PDT

Inquiring minds are investigating job creation. Here is the question at hand: What age group or age groups get the bulk of the jobs?

ZeroHedge claims No Country For Young Workers: Only Americans 55 And Older Found Jobs In March.

We first showed back in October 2012 that in America, courtesy of the Fed's micro-mismanagement of everything, the labor force has been turned upside down, and the only jobs being created are those for aged workers, Americans 55 and over. The reason is two-fold: with savings rates at zero, Americans who were on the verge of retiring found that the fruit of their labor was worth nothing under ZIRP (and may well be punished under the upcoming NIRP) as their savings (and fixed income investments) generate zero interest income, while young Americans would rather stay in college by the millions funded generously by trillions in Uncle Sam student loans.

All of this was on full display in today's jobs number, which while disappointing wildly based on Establishment survey data, was even worse based on the Household survey where only 34,000 people found jobs in March. But it was the age breakdown that was the stunner, and it can be seen best in the chart below.

In short: America continues to be a country where there are only jobs for old men, those 55 and older, who saw a 329,000 increase in jobs in the past month. Every other age group saw job losses!

March Job Losses by Age Group

That was one of the charts ZeroHedge posted. Technically there is nothing wrong with the chart, assuming the numbers are accurate.

However, the chart does not show where gains and losses are in a realistic manner.

A couple charts of my own will explain why.

55 and Over Employment

Note the volatility in this series. Last month employment in the 55 and over category declined by 187,000. This month it rose by 329,000.

Is Age Group 55 and Older Gaining or Losing Employment?

Quick question: Judging from the above chart, is age group 55 losing or gaining employment?

The correct answer is "relative to population growth, it's impossible to tell!"

The only realistic way to prove or disprove ZeroHedge's claim is to factor in age demographics. The proper way to do this is compare the growth in population of an age group vs. growth of employment in the same age group.

Let's chart this for two age groups.

Civilian Population 55 and Over
Civilian Population 25-54

To chart relative employment gains or losses I take the population change from year ago and subtract employment levels from a year ago.

In periods where growth in population exceeds growth in employment the charts are in positive territory.
In periods where growth in employment exceeds growth in population the charts are in negative territory.

55 and Over Population Minus Employment Year-Over-Year

For age group 55 and over, the growth in population far exceeds growth in employment for every year-over-year comparison. This demographic is "not" adding employment.

25-54 Population Minus Employment Year-Over-Year

For age group 25-54, year-over-year gains in employment were greater than population gains every month since November 2011 except for September and October of 2013.

This is by no means a strong recovery. It simply means the ZeroHedge statement "We first showed back in October 2012 that in America, courtesy of the Fed's micro-mismanagement of everything, the labor force has been turned upside down, and the only jobs being created are those for aged workers, Americans 55 and over." is incorrect.

Let's do the exercise again month-over-month. For this exercise we need to use seasonally adjusted numbers for employment.

There are no seasonal adjustments for population numbers, you are either alive and counted or dead and not counted, except perhaps for voting purposes in certain places.

55 and Over Population Minus Employment Month-Over-Month

March is one of about 20 months in this series where employment in age group 55 rose relative to population. It is opposite to the long-term trend, yet common enough to be meaningless. One month proves nothing.

25-54 Population Minus Employment Month-Over-Month

Note the purple squares for each year. In years where employment rises faster than population, the bulk of the area will be below the zero line (i.e. negative numbers).

Let's do a sum of the months.

Age Group 25-54 Population Minus Employment 2008-2014

Year	Population Growth - Employment Growth	Monthly Average
2008	2,708,000	225,667
2009	3,476,000	289,667
2010	-404,000	-33,667
2011	-672,000	-56,000
2012	-731,000	-60,917
2013	-187,000	-15,583
2014	-1,107,000	-92,250

Age Group 25-54 Net Gains and Losses

In 2008 the average net monthly loss in employment was 225,667.
In 2009 the average net monthly loss in employment was 289,000.
In 2013 the average net monthly gain in employment was a mere 15,583.

The only strong year in the set is 2014 where net employment gains relative to population growth averaged 92,250 per month. Once again, negative numbers show employment growth relative to population growth.

In 2013, relative to population growth, there was only a tiny gain in employment. The unemployment rate fell dramatically thanks to people dropping out of the labor force.

That should put in context the much hyped monthly job gains over the last year.

Age Group 55+ Population Minus Employment 2008-2014

Year	Population - Employment	Average
2008	984,000	82,000
2009	2,117,000	176,417
2010	877,000	73,083
2011	1,049,000	87,417
2012	1,847,000	153,917
2013	1,735,000	144,583
2014	1,054,000	87,833

Relative to growth in population there has not been a single year that shows age group 55+ has gained employment. Indeed, the best year in the lot was 2010 where population-adjusted employment fell an average of 73,083 per month.

The following tables show the huge gains every year in retirement age groups 60-64 and 65+.

Age group 60-64 consists of people who may want to retire. Age group 65 and older consists of people who probably want to retire.

Population Growth 60-64 (numbers in thousands)

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec
2005	12719	12760	12890	12947	12988	13036	13036	12990	12986	12997	13076	13073
2006	13135	13128	13255	13299	13358	13327	13373	13409	13450	13629	13713	13736
2007	13841	13875	14138	14175	14262	14352	14260	14424	14521	14623	14756	14842
2008	14866	14806	14833	14844	14782	14943	14983	15126	15267	15299	15373	15437
2009	15423	15516	15609	15605	15607	15714	15760	15846	15958	16007	16143	16279
2010	16297	16337	16398	16328	16443	16455	16495	16599	16737	16809	16986	17139
2011	17134	17144	17124	17162	17161	17294	17368	17354	17465	17506	17582	17513
2012	17815	17745	17650	17705	17631	17632	17639	17774	17779	17841	17919	17790
2013	17847	17854	17830	17904	17967	18056	18118	18271	18151	18126	18241	18170
2014	18293	18376	18394	18441	18475	18449	18522	18472	18593	18664	18729	18873
2015	18848	18919	18973

Population Growth 65+ (numbers in thousands)

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec
2005	34888	34933	34955	34982	35014	35033	35084	35149	35168	35206	35201	35208
2006	35362	35395	35461	35509	35554	35607	35625	35671	35733	35797	35804	35841
2007	35946	35956	36013	36048	36133	36207	36234	36290	36351	36444	36511	36603
2008	36810	36866	36925	37002	37054	37110	37165	37247	37318	37437	37481	37522
2009	37677	37709	37782	37861	37905	37967	37979	38059	38143	38232	38297	38362
2010	38401	38444	38499	38573	38588	38668	38708	38791	38877	38906	38973	39045
2011	39383	39402	39450	39478	39488	39575	39635	39778	39937	40045	40208	40364
2012	41085	41231	41379	41481	41601	41751	41876	42082	42278	42413	42557	42695
2013	42724	42851	42986	43071	43192	43307	43453	43607	43710	43887	43998	44155
2014	44265	44402	44561	44638	44787	44875	45002	45116	45249	45398	45534	45685
2015	45780	45936	46091

Retirement Age Perspective

Since March 2008, the age 60-64 demographic rose by 4,140,000.
Since March 2008, the age 65+ demographic rose by 9,166,000.
Since March 2008, the 60+ demographic rose by 13,306,000.

It is reasonable to assume some of those in age group 60-64 retired. It is reasonable to assume most of those older than 65 did retire.

Yet, retirement alone does not account for the huge drop in the unemployment rate. I will prove that in a followup post with a discussion of "core unemployment".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

luni, 6 aprilie 2015