Price indices don’t really say what policymakers think they say. Central bankers often act as though price index statistics are the same as the “generalized price level” of theory — and the level is caused primarily by monetary policy. Yet, hard data and daily life – especially during COVID – show that assumption is false. That means a 2% target of any flavor isn’t what they think it is. The target needs to be replaced in a specific way. And investors need to embrace the data. While “Monetarism” is widely debated, oddly, the monetarist assumption of “inflation” is widely accepted.…
Author: Brian Barnier
Brian Barnier talks with Rob Johnson, President of the Institute for New Economic Thinking about how the pandemic could change the mission of central banks. Listen or read the transcript at INET https://www.ineteconomics.org/perspectives/podcast/brian-barnier
Central Bank interest rate actions have little control over price changes due to digital shopping, demographics, better management, technology, or government policy (tax, spending and regulation). So, they can stop trying to raise interest rates out of fear of, say, apartment rents in San Francisco. With a big day in football coming up, consider special teams – experts at kicks, punts, and returns. They are vital when called on the field and can make magic moments. But, for most of a game, they’re only watching. While watching, they avoid stressing about the rest of the game, so they can focus…
Politics aside, there’s a simple reason why the Federal Open Market Committee (FOMC) shouldn’t have raised rates so high – it’s not nice to fight mother nature. The FOMC describes how their decisions are made based on several guide-posts. To know whether the Federal Funds (FF) rate is too high or low, it can be compared to the “natural” or “neutral” interest rate. The natural interest rate is the interest rate that would be naturally in the market in absence of short-term disruptions, such as liquidity crunches or rising commodity pricesThis is also viewed as a neutral rate that balances…
For accelerating on an expressway or powering through off-road terrain, a driver must shift gears. To get to higher growth, it’s time for the Bank of Japan (BOJ) to shift gears. The BOJ has been in “low gear” to “get traction” with “quantitative easing” (QE) The BOJ has achieved its objectives: massive liquidity, growth in household consumption and compensation of employees, and price stability Success means it is time to shift from low gear QE to a higher gear to cruise down the expressway toward healthier households and exports In consumption and compensation… In the data picture below and in…
Growth in Japan’s compensation of employees hit a 20+ year high. Spending on durable goods and services also hit new highs. Yet, more focus is needed on three threats to Japan’s export engine and household health. Growth in compensation and consumption continue Japan’s success story Growth in Compensation of Employees (COE) is the highest in over two decades – since before the “Asian Flu” hit Japan in 1Q1997. We’ve known that since about 3Q2015 companies have been increasing payouts, although COE includes benefit contributions beyond immediately spendable cash. And, wage growth is shifting toward younger workers as seniority increases…
Despite the most recent inflation report, headlines hide the real story. Price increases aren’t widespread or mostly from monetary-causes. In May, the Personal Consumption Expenditures (PCE) deflator finally popped above the 2% target of the Federal Open Market Committee (FOMC) — both the annualized increase from April and compared to May 2017. Popularly called “inflation,” it conjures images that prices generally rose 2% or that the increase was due to monetary causes (primarily Federal Funds rate and Fed’s balance sheet) controlled by the FOMC. Is that true? Not really. The PCE deflator is a weighted average of product price…
Weaker labor productivity isn’t widespread or always bad. The more central bankers are guided by productivity, the more investors need to understand what’s really happening. “Why is productivity growth so poor?” is widely asked. Here’s the catch… the question assumes a problem. In the data, neither labor productivity nor multifactor productivity is widely weak. So where did this squishy assumption come from? From the aggregate average measures that make news headlines. An example is “Nonfarm business sector productivity.” Yet, the “nonfarm” in the name is the first clue to a problem. A long time ago in a farm field…
As Japan’s expansion continues, compensation and especially savings are improving. The BOJ can now shift policy to avoid conflict with the structural reforms needed to grow exports. True or false? “Japan’s Longest Stretch of Economic Growth in 28 Years Ends.” It depends. If measured as real (adjusted for price level change), seasonally adjusted, quarter-over-quarter and annualized Gross Domestic Product (GDP), then true. If measured as real, percent change from a year ago, then false. Viewed four-quarters, 1Q2018 was the thirteenth quarter of expansion, although fifth weakest. The year view better reflects decision cycles of businesses and investors and avoids…
Financial services and insurance have been the big drivers of “inflation” beyond energy. The Fed strongly influences financial product prices. If the Fed fears overheating, rather than hiking the Federal Funds rate, it could reconsider its own influence. Is the Personal Consumption Expenditures (PCE) Implicit Price Deflator the best measure of “inflation?” The PCE deflator is a broad weighted-average of consumer price changes. The Federal Open Market Committee (FOMC) relies heavily on the PCE deflator for determining Federal Funds rate increases. But, given the institutional infatuation with the broad average of the PCE deflator, care is needed in interpretation.…
Recent price increases are concentrated in products over which central banks have little control. When product price change causes are beyond a central bank’s control, monetary policy gets frustrated fast. “Inflation is back” has been a big headline. Is that true? Yes, if “inflation” means the weighted-average price change of products No, if “inflation” means price increases caused by monetary factors or widespread price increases Prices continue on their recent trends For services, an uptrend since 2009 For nondurables, an uptrend since 1Q2016 For durables, a downtrend since 2009 The dramatic change came in the mid-1990s when the average…
Weaker labor productivity isn’t widespread or always bad. The more policy-makers are guided by productivity, the more investors need to understand what’s really happening. Reveals are famously done by drawing back a curtain. Curtains are made in the textile industry that includes apparel. Apparel labor productivity categories for the period 2009 to 2016 varied widely – from one falling 15% to another rising 25%. In “Labor productivity gets trumped by ROI,” we described how business investment decisions are guided by financial returns more than how economists measure labor productivity. This means flat or falling labor productivity due to increased…
Businesses make investment decisions mostly to maximize returns. Labor productivity is not central to investment math, yet too many monetary economists assume it is. This misunderstanding can lead to disconnects between central bankers and businesses on interest rates. Setting the stage “Work smarter, not harder” is a practical way to think about labor productivity. Yet, just as there is a precise definition of an NFL football, labor productivity has several specific meanings: Labor productivity is units produced divided by labor hours worked. This is taught in business schools and used in companies. It is also used by the U.S.…
Improving technology and management technique means that our economic growth isn’t as limited by labor as it once was. Policy-makers need to shift their focus from labor productivity to measures that matter more to business investment decisions. “Labor force and labor productivity growth are the only way to get economic growth” is a frequent refrain in economic policy circles. But, that’s not as true as it once was. The theory came together way back when automobiles looked like this — 1928 Ford Model A. Photo credit: Ford Motor Company and The Henry Ford In 1928, automobile manufacturing was like…
Debt becomes most destructive – when, like a drug, more debt is needed to support sales and production. It’s worse when debt also bubbles financial asset prices. After 1979, sales and production fell relative to debt From about 1958-79, roughly constant was the ratio of Gross Domestic Product (GDP) to Nonfinancial Sector Total Liabilities at about 0.6. In those decades, when people, businesses, and governments borrowed to invest in houses, productive capacity, or infrastructure, GDP increased proportionally. Debt is helpful when incurred by people with comfortable debt to income ratios and with little threat to that income. Then the…
“Wow” factor charts have helped readers see a reality in a fresh way. Some Fed Dashboard & Fundamentals comments dug deeper into data, some painted a more complete picture of data points, and some framed the analysis in a more insight way. For more insightful framing, these are top picks: DATA ANIMATION: No fear of deflation is cause is PIPE Factors (July 2015) Tech and Trade Transformation It’s not secular stagnation; it’s the tech and trade transformation (October 2016) Tech & trade – “must discuss” topics for Jackson Hole (August 2016) Complications of P/E, EPS and related ratios: To find better measures…