Posted by: Tom Keene on November 21, 2010
Lower Toward Zero & There is No Bound
S = v(o)t + 1/2 gt ** 2 (pronounced, s equals vee oh tee plus one-half gee tee squared). This is the equation for acceleration. November is math month, Bloomberg Surveillance colleague Ken Prewitt growls at me while the Chairman & Co. squirm. Why does the Fed squirm? Because of acceleration. Because of immovable math, and immovable politics as they confront the descent of inflation and chronic unemployment.
Duration is a first-derivative change. Convexity (acceleration) is the first-derivative of the first-derivative or, the second-derivative. Newtonian fatigue? Try this: You’re tooling down the highway and you step on the gas. Or, you brake hard and decelerate. Right about now, inflation is decelerating, big-time.
CPI XYOY INDEX GPL semi-log: Here is core CPI. Note how the series curves down, and the 3- and 12-month moving averages curve down. The “curve” is even more profound as the series describes a curve against a logarithmic y-axis. (Slope matters). Only the green 6-month is even remotely constructive. Disinflation is accelerating…lower toward zero and there is no bound.
The Same as Above From 1958: This view does not take us back to the early 1950s bout of deflation. But semi-log suggests Bernanke’s convexity and there is no bound.
Shameless Book Plugs
A. Gary Shilling has been consistent in a dis/deflation call. When inflation whispers divisions of guessperts sting Shilling. The problem is, Gary has been more-or-less dead right for decades. Here is his new book and there is the classic.
Here is Robert Samuelson with a very trenchant look-back at how early-1960s politics (and bad economics) manufactured inflation and a difficult aftermath.
Not Prices, Wages; and the Japanese Trend is…Persistent
Big deal. The aggregate price level goes nowhere or even declines. It hurts some, benefits others and life goes on. The political-economic fear, no, strike economic…the political fear is always fewer jobs and flat-to-decreasing wages.
So, we are hard-wired for say, 5% wage increase minus 2% inflation equals a 3% real wage gain. Yeah.
Or now, its 1.7% y-o-y AHE wage increase minus 1.2% inflation equals a +0.5% wage gain. Not so Yeah.
Could it be, 0.5% wage gain minus 2% inflation equals a 1.5% real wage decline. Boo.
JNLSCONT INDEX GP Q ROLL: This is a killer chart of Chairman Bernanke’s worst nightmare. Well, at least one of them, vintage 2003. This is deflation-adjusted real wages for Japan. Granted, it is not perfect, particularly with the non-homogeneity with Tokyo versus the rest of the nation, but you get the picture. The real Japanese wage has tanked 6.5% or so in a decade-plus. And, the trend is…persistent.
John Makin is must-read, always. It’s a Chicago tilt with great respect for the underlying dynamics of a given problem. Here is Makin on QE2 and concave-negative CPI. Here is John Taylor with a devastating push-back against the Fed and QE2.
Who’s correct? I don’t know. And, I understand that a modest set of other things are inflating…now. What I do know is I will consider each and every nuanced view and be alert for exogenous shocks (click on this link for Irish heartbreak). I will consider if the ultimate price of not clearing troubled-asset markets is Disinflation, Concave Negative.