Output Gap Trap escape doubtful as BEA revises GDP down, again

[EJ]

Re: Output Gap Trap escape doubtful as BEA revises GDP down, again

maybe a video with transcript below?
of course if this site gets any better than it already is, some of us might never get out of the house....

Thanks for the kind words. We hope our members find the new site worth the wait.

Quick update on the analysis in progress, hopefully near completion. We come to the inescapable conclusion that the U.S. needs and will get an output surplus of 10% per year for several years with inflation to match.

We start by asking whether maybe, as Larry Summers and friends say, we can borrow our way out of our Output Gap Trap the way we did in the 1940s?

Problem is, we are already where we were at the peak of WWII stimulus in terms of federal government spending, yet we have not yet even started to get out of our Output Gap Trap. Most of the spending is unproductive.

This time around U.S. economic policy makers have managed to engineer stagflation, as I predicted they would in my book. A persistent output gap has not kept inflation from rising toward a level unfriendly to FIRE Economy interests, north of 2% as the Fed furiously works at asset price inflation.

We have the deficit spending part of the post-credit bubble reflation program down, but are missing the essential ingredient: inflation.

The deficit/inflation economic policy combo pack is the ultimate output gap closer. Deficit spending without inflation will never close an output gap -- just ask the Japanese -- but it leaves the creditor class intact.

What our economic policy makers need is an external driver for policies that produce both an output surplus and politically justifiable inflation. We investigate several scenarios.

[globaleconomicollaps]

Re: Output Gap Trap escape doubtful as BEA revises GDP down, again

What our economic policy makers need is an external driver for policies that produce both an output surplus and politically justifiable inflation. We investigate several scenarios.

I vote for a really big war with ... [ spin the globe ] ... China! No make that Iran, Syria, Nigeria hell just make it the whole world! It has a nice ring to it. World War 3.

[EJ]

Re: Output Gap Trap escape doubtful as BEA revises GDP down, again

I vote for a really big war with ... [ spin the globe ] ... China! No make that Iran, Syria, Nigeria hell just make it the whole world! It has a nice ring to it. World War 3.

That would appear to be the obvious choice, except that government spending is already as high as it was at its highest point during WWII. When speaking with various economists at the Fed and other meetings I attended recently, they are happy to argue about the benefits of deficit spending to stimulate the economy, whether more is needed as Summers and Volcker say. They point to WWII as an example of how fiscal stimulus ends balance sheet recessions and closes output gaps. They aren't arguing for war, of course, but for government spending as a way out of an output gap trap.

But none of them wants to hear the other side of the WWII story, that it was the combination of a huge output surplus and high inflation that got us out of The Great Depression.

In the upcoming analysis is my chart How the Fed Sees the World.

It goes like this. The chart shows the output gap minus the 3-month Treasury bill rate, a value I refer to as the Fed Policy Rate. The Fed believes that it's doing its job when the Fed Policy Rate is between o% and 3% because the Fed believes that when it is, inflation will remain around the "ideal" level of 2%. During WWII, the Fed Policy Rate was kept incredibly low, minus 34% in one quarter in 1944. This produced enormous surges of inflation. Nominal incomes surged as well, and debt was inflated away. After the war there was a brief spike of inflation caused by commercial banks lending against reserves accumulated during the war; commercial banks financed about half the war, which built the relationships with government that eventually developed into the FIRE Economy in the 1980s. A series of events -- including the end of the Bretton Woods system and the ME oil crisis, and misguided Fed policy -- caused the Fed to lose control of the policy rate. It exceeded -10% in the early 1970s and again in the late 1970s and early 1980. Inflation spiked well into the and beyond the red "danger" zone. The Volcker Fed wrestled it back down to 0%. Not until the early 1990s was the Fed firmly back in control.

Then along came the miracle of the tech stock bubble that produced a -10% Fed Policy Rate but without inflation. Readers will remember this as the Greenspan/Clinton "Goldilocks" era. The Fed was worried to see the Fed Policy Rate in the red "danger zone" but ultimately left rates low because CPI inflation did indeed remain muted as asset price inflation roared. After the tech bubble popped the Greenspan Fed grew the housing bubble, another period of nirvana when the Fed Policy Rate was in the yellow "warning zone" but soon enough that bubble collapsed, too, and produced the grossly positive Fed Policy Rate we have today. The output gap remains stuck at 7% because at zero interest rates, there is nothing more the Fed can do; the Fed Policy Rate equals the output gap.

The question is, how can policy makers achieve the kind of growth the U.S. experienced starting in 1939 that produced a large negative Fed Policy Rate via a combination of an output surplus and inflation, but starting from a gross public debt position equal to where it was at the end of WWII?

The U.S. was a foreign creditor not a debtor then. The U.S. could act unilaterally with respect to its fiscal position. Today the U.S. has to worry about surpassing a domestic public debt threshold that triggers a loss in confidence by its foreign creditors.

[jk]

Re: Output Gap Trap escape doubtful as BEA revises GDP down, again

i struggled to understand how there could be a "policy rate" of -34% until i realized that during the war the output gap was negative, i.e. the economy was running above potential, which sounds impossible but can in fact occur for brief periods. so you need a growth spurt faster than normal potential growth. [i know i'm restating the obvious.]

[jiimbergin]

Re: Output Gap Trap escape doubtful as BEA revises GDP down, again

i struggled to understand how there could be a "policy rate" of -34% until i realized that during the war the output gap was negative, i.e. the economy was running above potential, which sounds impossible but can in fact occur for brief periods. so you need a growth spurt faster than normal potential growth. [i know i'm restating the obvious.]

it was not obvious to me! thanks, now it is.

[EJ]

Re: Output Gap Trap escape doubtful as BEA revises GDP down, again

i struggled to understand how there could be a "policy rate" of -34% until i realized that during the war the output gap was negative, i.e. the economy was running above potential, which sounds impossible but can in fact occur for brief periods. so you need a growth spurt faster than normal potential growth. [i know i'm restating the obvious.]

My concept of an Output Surplus is explained in the upcoming article. Economists use the term negative output gap but I don't think that term captures the significance.

Periods of output surplus are associated with high inflation. The unusual case was the Greenspan/Clinton technology bubble era when asset price inflation created a output surplus without CPI inflation.

The main reason we've developed the video process is to show some of these somewhat more complex concepts. Finding one's way around a chart like the one above isn't easy, and it's as simple as we can make it.

[charliebrown]

Re: Output Gap Trap escape doubtful as BEA revises GDP down, again

Quick update on the analysis in progress, hopefully near completion. We come to the inescapable conclusion that the U.S. needs and will get an output surplus of 10% per year for several years with inflation to match.

It's the will get phrase that throws me for a loop. How, Civilian Conservation Corps v 2.0? and how is inflation measured? In the inflation measure CPI-J6P, I figure it is growing at roughly 6%. food, clothing, energy, medicine, transportation, education all up sharply y-o-y. House prices are deflating weigning negatively on CPI, but that is only applicable to first time buyers, I don't think rents are trending down, but I am not in this market, or know many people who are.
The only thing I see trending down is electronic bling, that is purely discretionary.

As far as WWWIII, it is going to take a real or false flag attack on the home land, to get popular support. I think
Americans are becoming tired of endless, limited scale engagements in far away places with dubious reasons for our
involvement.

[charliebrown]

Re: Output Gap Trap escape doubtful as BEA revises GDP down, again

OK, some more thoughts, 1-2-3-4 lets start a trade war??

Through tariffs, legislation, regional war etc, Chinese and other cheap asian imports are shut out of the U.S. market.
Jobs are brought back to the U.S, that cheap waffle Iron, and athletic shoes jumps in price, but employment is brought down because they will be made here, therefore inflation up. Wages climb because the labor market is tightening. China blows up, because they lose a large share of their export market. U.S. has a problem financing our debt, maybe that is left up to the fed and its printing press.

J6P loves it because they hate chinese imports in theory, and want a job. Therefore the politicians love it, because they
get people to work and crap on China, and it's not their fault etc. etc.

[aaron]

Re: Output Gap Trap escape doubtful as BEA revises GDP down, again

The owners of our society would not like this. They still own the politicians. I do not see this happening without some serious uprisings. Perhaps civil unrest is inflationary? God knows police overtime costs a pretty penny. Pepper spray and rubber bullets will surely go up in price.

No, the sheeple will keep losing their jobs and pay higher prices for stuff. They will be led to believe it is the teachers' faults or the OWS or the "terrorists".

[charliebrown]

Re: Output Gap Trap escape doubtful as BEA revises GDP down, again

I did forget about the over-lord's not liking it. As EJ puts it; will at a certain time, the over-lords' agenda will have to be put on hold to feed the sheeple.

[Slimprofits]

Re: Output Gap Trap escape doubtful as BEA revises GDP down, again

re: revisions to GDP estimates

http://www.hussmanfunds.com/wmc/wmc111212.htm

here is Jon Hussman talking about Lakshman Achuthan of ECRI. Lakshman was on Bloomberg TV last week reiterating his U.S. recession call.

Achuthan also noted that "the other half of the GDP report," gross domestic income or GDI (which tends to be the more accurate measure of GDP) was up just 0.3% in the most recent quarter. The Federal Reserve has observed that when GDP and GDI differ, the GDP figure tends to be revised toward GDI, not the other way around.

[Slimprofits]

Re: Output Gap Trap escape doubtful as BEA revises GDP down, again

another shocking downward revision

http://www.bea.gov/newsreleases/nati...ewsrelease.htm


Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.8 percent in the third quarter of 2011 (that is, from the second quarter to the third quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent.

[Slimprofits]

Re: Output Gap Trap escape doubtful as BEA revises GDP down, again

Output gap trap update via NYT

http://www.nytimes.com/2014/06/12/bu...gers.html?_r=1

[don]

Re: Output Gap Trap escape doubtful as BEA revises GDP down, again

Stagnation is the norm, robust growth the exception, at this stage of the game. Global concentration brings with it falling profits and overproduction. FIRE is the current answer.

[Chris Coles]

Re: Output Gap Trap escape doubtful as BEA revises GDP down, again

What our economic policy makers need is an external driver for policies that produce both an output surplus and politically justifiable inflation.

So, why not try some new thinking; already set out in a detailed plan; in part, built upon the long term debate created here on iTuilip? I must add that I keep getting invited to seminars and people seem to both understand the principles and support what I have proposed. http://www.chriscoles.com/page5b.html a simple plan designed to create 30 million new jobs through the creation of ~ 6 million new very small enterprises that, applied to the US would inject $2.25T entirely through new job creation.

With frequent visits to seminars in London, it is only recently that I have started to catch up with my visit to the OECD Forum 2014 meeting where I did get to talk to a lot of people and where, in one of the largest sessions, Economic Outlook Debate, I got to my feet and made a short speech before asking my question. You will find it here
http://webcastcdn.viewontv.com/clien...2014_blue.html

If you move the slider to 1:08:00 you will be able to watch the start of the questions from the audience, and I come into view at about 1:11:00. I must add that as you can see, they had a camera full on to me rather than from behind. (Indeed, it was turned towards me for some time as I kept my hand in the air for a very long time to get myself noticed).

So; why not?