# Disinflation, Concave Negative

## 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 a Poole/Rasche love note on “Flation.” Abby Joseph Cohen reminded me of this recently on Surveillance Midday. Here is the classic Abba Lerner book.

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.

Discuss.

### Dallas

#### November 22, 2010 12:21 PM

Nice charts, but ... this disinflation/deflation meme is based on semi-myths from Japan, or rather a misanalysis of Japan in the last 20 years. Recommend Samuelson's recent piece on this: http://www.washingtonpost.com/wp-dyn/content/article.../2010/11/14/AR2010111403886.html.

(BTW, Samuelson's explanation makes it all the more clear, when the Fed talks about "deflation," it's code language for asset prices, not everyday prices.)

Essence: Japanese CPI/PPI deflation has been mild and a symptom, not a cause. Real problem: Japan was just the first Asian export powerhouse to fail to develop an efficient domestic economy and adequate domestic demand. QE and "stimulus" have been wasteful failures. Fix: get Confucian cultures to consume and import more, reform domestic economies. After all, why can't Chinese workers make cheap goods for Chinese consumers, not just for us?

Anyway, it's not at all applicable to the US, which is a powerhouse of overimporting, underexporting, and undersaving. The one thing in common is the bursting of bubbles built on cheap credit.

EconoChat captures Tom Keene's thoughts on economics, finance and investment. He is editor-at-large for Bloomberg News and hosts Bloomberg Surveillance and Bloomberg on the Economy on NYC1130, Sirius 129 and XM 130 and Surveillance Midday on Bloomberg Television. His complete interviews are at Tom Keene on Demand. Look for Tom on twitter @tomkeene