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  • What Is Noah Thinking? [View article]
    Yes, you are quite right to point to signs of slowing growth, the eurozone's deflation, and the threat of recession. Going forward, the environment continues to look threatening for the middle class. (Kenneth Thomas)
    Jan 23, 2015. 09:08 AM | Likes Like |Link to Comment
  • New Variable For Effective Demand Limit... Part 2 [View article]
    Hello Peter,
    There is a lot of data crunching in those charts. The data has not been tampered with. It is all straight from FRED graphs.
    You might look at the latest post. But you will see more graphs and probably understand little from the post because you cannot see the data.

    My main goal at the moment is to just record the equations and the graphs in my blog. If others really want to know how to do the graphs, I would send them the spreadsheets.
    Jan 6, 2015. 02:22 AM | Likes Like |Link to Comment
  • The German Euro Is Overvalued [View article]
    jyard01, I think you have it backward. Germany is exporting deflation to the U.S. German policy is of course masochistic as you say.

    kberend, I was highlighting the extremes. By the estimate I cited, the euro is properly valued for France. In any event, it is also hurting itself with austerity, though we see rumblings from time to time that that may end.
    Dec 3, 2014. 06:08 PM | Likes Like |Link to Comment
  • Do Negative Real Rates Return To Their Natural Level? [View article]
    I need to tell the truth about this equation. I went into a deep concentration one night trying to understand the relationships that I was seeing in monetary policy and that TFUR. In a moment of concentration, the equation appeared from the back of my mind. I did not understand it at first. It took me days to see how it worked. Now I have been tweaking and making the equation better for over a year.
    The z equation did not appear at first. I had to figure that part out. When I finally saw that the natural real rate was part of the z equation, I was very intrigued. The model worked perfectly with that equation and still does.
    The good thing about this equation is that it does not rely upon a guesstimate for potential output or unemployment. It takes the labor share as the potential. We may find in years to come that there is a better way to use this equation with different variables. For the meantime, it is working though. But we'll see.
    Nov 11, 2014. 10:43 PM | 1 Like Like |Link to Comment
  • So Why Not Use Easy Money All The Time? [View article]
    D V Gendre,
    Aggressive monetary policy was necessary after the crisis. Jobs were saved and more. Yet that policy lost its effectiveness.
    Even the recent fall in unemployment should not be attributed to monetary policy. My view is that firms have vulnerable profit rates. and one way that they can support those profit rates is by increasing labor hours in relation to capital stock. They can keep hiring as long as real wages do not start working against profit rates too much, at which point, they will stop hiring.
    So, i agree with you that it is more of a coincidence that the improvements in the economy resulted alongside the easy money policy.
    Oct 29, 2014. 02:50 AM | Likes Like |Link to Comment
  • So Why Not Use Easy Money All The Time? [View article]
    yes, I see it this way.
    The solution is to re-calibrate monetary policy with the new normal. How is this done? You first realize that spare capacity will stay larger. Capacity utilization and employment have both been reduced to lower levels. In effect, we will not return to normal levels of capacity utilization and unemployment at full employment.
    So the Fed rate needs to rise to a normal level within this new lower normal. You can go to countries like Chile who have lower levels of capacity utilization and higher unemployment as the norm. But they were able to raise their central bank interest rate to over 5%. They have recently been able to lower this rate in response to economic weakness. The US did not raise the Fed rate, and does not have the option to lower rates. The Fed would really like to have that option. But the only way to have that option is to raise the Fed rate earlier on the recovery.
    Oct 29, 2014. 02:43 AM | Likes Like |Link to Comment
  • So Why Not Use Easy Money All The Time? [View article]
    Lots to respond to...
    I agree that the main response should have been fiscal, but aggressive monetary policy was needed too. My own research shows that the Fed rate should have gone negative after the crisis. But at about 2012, it should have started to rise gradually.

    The key factor is how much spare capacity one sees as "attainable" in the economy. There is lots of spare capacity out there, but much of it is lost due to a tightening of the effective demand limit.
    Even though Paul Krugman says that he does not believe that monetary policy can produce miracles, he is heavily in favor of keeping easy money out to 2016. In my view, the business cycle is already ending. There is no 2016 as far as the economy still increasing utilization of labor and capital. So in my view, monetary policy is in a trap and will not be able to raise the EFFR before the next recession. This will be dramatic.

    As far as the EFFR after the 2001 recession, I see that the Fed maintained an appropiate EFFR. There were quarters when it was too low, but eventually the EFFR came into balance with the market. Here is my graph of that... You will see my equation plotted close to the actual EFFR.

    In many ways, the velocity of money is falling due to banks now holding onto their excess reserves instead of lending them out. Banks need the reserves for many reasons... interest income, safety, protection against the unknowns in the derivative markets...
    And why is the US economy weak? It is because labor share has fallen. The leverage of the bulk of consumers is relatively weak. The transmission mechanisms from Fed policy to the pockets of people has broken down. The weak demand does not encourage great investment. I wrote a post about how falling labor share would kill the Fed rate last year... here is the link...

    The equation in that post has been much improved since then but the logic of why the Fed rate is dying still holds.
    Oct 29, 2014. 02:27 AM | Likes Like |Link to Comment
  • So Why Not Use Easy Money All The Time? [View article]
    Lawrence K,
    My work focuses on effective demand, which is the limit upon the utilization of labor and capital. As I see it, all business cycles have stopped at the effective demand limit, and we are there now too.
    My basic equation is...
    effective labor share >= capacity utilization * (1-unemployment rate)

    In the business cycle, the right side will not surpass the effective labor share, which is established as the center of the capacity utilization cycle. As labor share has fallen over time, we see capacity utilization falling at the same pace. Here is a link...

    There is much more in my research on effective demand that goes into monetary policy, productivity, potential GDP, inflation and more. here is a link to the policy rate rule based on the effective demand relationships...
    Oct 29, 2014. 01:55 AM | 1 Like Like |Link to Comment
  • So Why Not Use Easy Money All The Time? [View article]
    I agree with what you are saying.
    Oct 29, 2014. 01:41 AM | Likes Like |Link to Comment
  • So Why Not Use Easy Money All The Time? [View article]
    There really should be no doubt that QE has created jobs, but its main impact occurred early in the recovery. For the past two years, loose monetary policy has been distorting sound investment decisions.
    Oct 29, 2014. 01:41 AM | Likes Like |Link to Comment
  • Why Do Recessions Occur?... One Answer Points To Productivity [View article]
    Therein lies the increases in productivity.
    Firms with higher productivity respond faster after a recession because their break even point gets them moving faster. They will have an advantage to gain market share... or at least they should have an advantage. In this last recession, they lost the advantage when monetary policy and wage policies coddled any and all businesses. Productivity suffered.
    Oct 29, 2014. 01:36 AM | Likes Like |Link to Comment
  • Why Do Recessions Occur?... One Answer Points To Productivity [View article]
    Productivity growth does not go negative much after a recession. It stays positive even though it drops. This means that productivity keeps growing. When I say that productivity gains are not lost, you would see productivity growth goes as negative as it went positive, if this were not true.
    Since productivity stays positive, the productivity gains during a recession are incorporated into the economy. They are not lost.
    If you do not see anything positive in a recession, you are not fully understanding how the economy grows.
    Oct 29, 2014. 01:31 AM | Likes Like |Link to Comment
  • Why Do Recessions Occur?... One Answer Points To Productivity [View article]
    The key is that the productivity gains during the increased unemployment of the recession are not lost as unemployment comes down. Thus the growth spurt in productivity from fewer people producing more, is incorporated into the recovery.
    Reading your reasoning, one might think that as people were hired back on during the recovery, productivity would fall back to its starting level before the recession, but it never does. That is the key to understanding how productivity is released through a recession.
    Oct 27, 2014. 11:09 PM | Likes Like |Link to Comment
  • Why Do Recessions Occur?... One Answer Points To Productivity [View article]
    Productivity is not the only force involved in recessions. I focus on productivity because normally people do not associate roductivity increases with recession. But recessions are caused by a mixture primarily of productivity pressures, the effective demand limit, monetary policy, profit rates and labor market pressures. Even inflation can trigger monetary policy.
    Oct 27, 2014. 10:44 PM | Likes Like |Link to Comment
  • Is Tim Duy Seeing Fed Rate Behind Curve? [View article]
    Hello David,
    Yet minimum wage is relevant for monetary policy. You can raise the private costs of business toward the better social costs by raising the minimum wage and by raising the cost of funding.
    Someone once asked Bernanke at a dinner table something like this, "Why don't you just raise the Fed rate towards its natural level which is socially better?" His answer was that a higher rate would simply raise the cost to business. Yet he was focusing on private costs instead of social costs, which is the ultimate error of a bad economist. One should always look toward making sure the correct entities pay the social costs.
    Firms need to pay the social cost of a too low Fed rate, not people who are trying to build the real future of the US economy.
    Oct 22, 2014. 02:05 PM | Likes Like |Link to Comment