February 8, 2015


ALBERT EDWARDS: If the US measured inflation like Europe, then they'd be freaking out about deflation too (AKIN OYEDELE, FEB. 5, 2015, Business Insider)

The US Bureau of Labor Statistics excludes components with volatile price fluctuations like food and energy to get the "core" consumer price index reading. In the eurozone, core CPI also excludes shelter.

If the BLS removed shelter from core CPI, US inflation would look completely different:

"The next shoe to drop will be the realization that the US recovery is stalling and outright deflation is as big a threat there as it is in the eurozone," Edwards wrote. "Indeed my former esteemed colleagues Marchel Alexandrovich and David Owen pointed out to me that if US core CPI is measured in a similar way to the eurozone (i.e. ex shelter), then US core CPI is already pari pass with the eurozone - despite the former having enjoyed a much stronger economy! ... The biggest surprise will be when investors realize that, despite the US having recently been the single engine of global growth, the US deflation threat is every bit as immediate as that in the eurozone."

Deflation is a situation where prices are falling, demand is weak, and economists believe the economy is contracting, not expanding.

B and C do not, of course, necessarily follow A, which is why the late 19th century transition from farming to industry was, likewise, a deflationary epoch.

Consider a simple thought experiment : you have complete control over public/economic policy and you are confronted with an economy in which economic liberalization of foreign economies and the resulting offshoring of jobs; trade liberalization, and the resulting imports of cheaper goods made with that labor; deregulation at home; information technology; robotics; and all the rest of the innovations of the past 25 years combine to produce falling prices for everything we consume.  Now, would you be concerned that this ever greater wealth production and consumption represented a demand crisis?  Would you believe that it was a function of a contracting or expanding economy?  

Instead, as you look at it, isn't there really just one issue that raises concern: the falling demand is for human labor and, therefore, the traditional redistribution of wealth via paychecks is threatened.  Recognizing that, would your primary focus be on raising the costs of goods and services?  Mind, that would be easy enough to do simply by mandating hiring and higher wages. Sure, it would destroy the economy, but you'd still be accomplishing your redistribution via the traditional mechanism.  

Or, would you focus on finding different mechanisms for that redistribution that are, to the greatest degree possible, consistent with driving up production and profits and driving costs down even further?

N.B. To the extent there is an area of slack demand in the American economy it is in the housing market--as suggested above--and there's nothing easier than stimulating that demand, as we all know.  All it requires is more buyers.

Posted by at February 8, 2015 7:32 AM

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