Posts Tagged ‘Output gap’

Why The “Output Gap” Inflation Model May Be Fatally Flawed

Why The "Output Gap" Inflation Model May Be Fatally Flawed

Courtesy of Tyler Durden at Zero Hedge

Could it be that the fundamental economic indicator that is gospel not only to Goldman Sachs, but to Ben Bernanke in estimating and determining monetary policy, the output gap, provides a flawed reading of the economy? As a reminder, Ben Bernanke has repeatedly expressed little regard for either commodity inflation or US dollar exchange as having an impact on overall US inflation. As Askari and Hochain state: "according to [Bernanke's] theory, inflation was related only to the output gap. As long as the output gap was negative, that is, if actual gross domestic product was below potential GDP, the economy was at no risk of inflation. Hence, he argued that the central bank had to adopt an aggressive money policy until the output gap closed. Such is the policy prescription from what is called the Taylor Rule or the Phillips Curve. Because potential GDP is not a measured macroeconomic variable, it can be estimated in millions of ways. There are, therefore, millions of ways for estimating an output gap, making the concept difficult to use as a policy tool." The problem with these millions of estimations, is that especially courtesy of the Greenspan created bubble over the past 20 years, the American economy is, ironically, not a true representation of itself. And thus, the output gap estimates need to be normalized for a "bubble free" GDP environment. It is precisely this issue that none other than the St. Louis Fed addresses in its latest paper: "Has the Recent Real Estate Bubble Biased the Output Gap?" The conclusion is startling: based on a production function output gap normalization (an approach "based on a relation between available productive inputs (such as capital and labor), their current utilization rates, and aggregate production"), Bernanke could be fatally wrong about the economy’s "capacity for inflation" courtesy of the CBO’s overestimated output gap, and that his loose monetary policy could end up being a disastrous precursor to rampant (and not distant) hyperinflation, due to his blatant avoidance of simple logic when interpreting the economic output gap.

Some preliminary observations from St Louis:

The output gap is the difference between actual gross domestic product (GDP) and the economy’s potential output at a given moment in time. The Congressional Budget Office (CBO) estimates a


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Some Common Fallacies About Inflation and Deflation: the Weimar Nightmare in Review

Here’s an article by Jesse’s Café Américain on inflation and deflation. 

Some Common Fallacies About Inflation and Deflation: the Weimar Nightmare in Review

Le Café AméricainThere are several fallacies making the rounds of the economic community, often put forward by pundits on the infomercials for corporate America, and also on the internet among well-meaning but badly informed bloggers.

The first of these monetary fallacies is that ‘the output gap will prevent inflation.’ The second is that a lack of net bank lending or other ‘debt destruction’ will require a deflationary outcome. Let’s deal with the output gap theory first.

Output gap is the economic measure of the difference between the actual output of an economy and the output it could achieve when it is most efficient, or at full capacity.

The theory is that when GDP underperforms its potential, with unemployment remaining high, there can be no inflation because demand is weak and median wages will be presumably stagnant. This idea comes from neoliberal monetarist economics, and a misunderstanding of the inflationary experience of the 1970s.

The thought is that sustained inflation is due to a ‘wage-price’ spiral. Higher wages amongst workers cause prices to rise, prompting workers to demand higher wages, thereby fueling inflation. If workers do not have the ability to demand higher wages there can be no inflation.

While this is in part true, it tends to confuse cause and effect.

The cause of a monetary inflation, which is a broadly based inflation across most products and services relatively independent of demand, is often based in a monetary expansion of the currency resulting in a debasement and devaluation.

A monetary expansion is relatively difficult to achieve under an external standard since it must be overt and often deliberative. A gradual inflation is an almost natural outcome under a fiat currency regime because policy-makers can almost never resist the temptation of cheap growth and the personal enrichment that comes with it.

There can be short term non-monetary inflation-deflation cycles that tend to be more product specific in a market that is not under government price controls. But this is not the same as a broad monetary inflation or deflation.

The key difference is the value of the dollar which has little or nothing to do with a business cycle or product demand/supply induced inflation/deflation.

In the modern era the Federal Reserve can increase the money supply


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Phil's Favorites

Brexit: the last time MPs were given indicative votes to break a deadlock, they failed

 

Brexit: the last time MPs were given indicative votes to break a deadlock, they failed

Deadlocked. Pajor Pawel/Shutterstock

Courtesy of Martin Farr, Newcastle University

One of the many ironies thrown up in the course of Brexit has been just how controversial attempts by parliament – the UK’s supreme constitutional authority – to take back control have been.

First, MPs insisted on holding a “meaningful vote” on the government’s draft Brexit deal. Then they insisted that the prime minister must return to parliament within three days with a new plan after they ...



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Zero Hedge

IBM Jumps On Guidance Boost Despite Revenue Slide, Massive Addbacks, Bizarre Tax Rate

Courtesy of ZeroHedge. View original post here.

IBM is back to its revenue declining, non-GAAP-EPS-beating-through-low-tax-gimmick ways.

With Wall Street expecting IBM to report (non-GAAP) EPS of $4.82 in Q4, the company "beat" by the tiniest of margins, reporting non-GAAP, adjusted EPS of $4.87, a 5% drop from last year.

So far so good, but as usual, there was a gaping difference between GAAP and non-GAAP, and in this case it was more than double, with the company reporting a paltry $2.15 in GAAP EPS, more than 50% below the Non-GAAP number. ...



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Kimble Charting Solutions

S&P and Crude both testing key breakout levels!

Courtesy of Chris Kimble.

The correlation between Crude Oil and the S&P 500 has been rather high over the last 100-days, as each looks to have peaked at the same time around the 1st of October at (1).

After peaking together in October, Crude fell over 40% and the S&P nearly declined 20%, with both bottoming on Christmas Eve at each (2).

Both have experienced counter-trend rallies since the lows, as Crude is up 23% and the S&P 13%.

These rallies have both testing dual resist...



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Insider Scoop

Cowen Suits Up With Nike, Looks To Outperform

Courtesy of Benzinga.

Related NKE Consumer Discretionary Q4 Earnings: U.S. Consumer Appears Strong Amid Heightened Global Uncertainty Golf Equipmen...

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Chart School

Weekly Market Recap Jan 20, 2019

Courtesy of Blain.

After entering the week quite overbought, indexes took a small retreat Monday before hurling back upwards.  This is typical of the “V” shaped moves up after any significant selloff, we’ve seen most of the past decade and watching them unfurl is quite amazing actually.  Thought maybe this time would be “different” but not so much.  So two week’s ago we asked “Has the Fed solved all the market’s problem in 1 speech?” – and thus far the market has answered resoundingly yes.  The word of the year thus far in 2019 is “patience” as that simple insert into a speech change the whole complexion of everything.

China has also been busy stimulating; on Tuesday:

An announcement from the People’s Bank of China that ...



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ValueWalk

Everyone Else Is Selling Stocks, So Is It Time To Buy?

By Michelle Jones. Originally published at ValueWalk.

After a difficult few trading days in the beginning of the year, U.S. stocks are bouncing back with meaningful gains on Monday following Friday’s strong rally. The S&P 500, Dow Jones Industrial Average and Nasdaq 100 were all up by more than half a percent by midday. It looks like investors could be taking advantage of the end-of-the-year declines, but is this a wise time to be buying?

Trying to time the bottom of the market will almost always be a fool’s errand, but one firm suggests equities could have much farther to fall before they hit bottom in 2019.

...



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Digital Currencies

Transparency and privacy: Empowering people through blockchain

 

Transparency and privacy: Empowering people through blockchain

Blockchain technologies can empower people by allowing them more control over their user data. Shutterstock

Courtesy of Ajay Kumar Shrestha, University of Saskatchewan

Blockchain has already proven its huge influence on the financial world with its first application in the form of cryptocurrencies such as Bitcoin. It might not be long before its impact is felt everywhere.

Blockchain is a secure chain of digital records that exist on multiple computers simultaneously so no record can be erased or falsified. The...



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Members' Corner

Why Trump Can't Learn

 

Bill Eddy (lawyer, therapist, author) predicted Trump's chaotic presidency based on his high-conflict personality, which was evident years ago. This post, written in 2017, references a prescient article Bill wrote before Trump even became president, 5 Reasons Trump Can’t Learn. ~ Ilene 

Why Trump Can’t Learn

Donald Trump by Gage Skidmore (...



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Biotech

Opening Pandora's Box: Gene editing and its consequences

Reminder: We are available to chat with Members, comments are found below each post.

 

Opening Pandora's Box: Gene editing and its consequences

Bacteriophage viruses infecting bacterial cells , Bacterial viruses. from www.shutterstock.com

Courtesy of John Bergeron, McGill University

Today, the scientific community is aghast at the prospect of gene editing to create “designer” humans. Gene editing may be of greater consequence than climate change, or even the consequences of unleashing the energy of the atom.

...

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Mapping The Market

Trump: "I Won't Be Here" When It Blows Up

By Jean-Luc

Maybe we should simply try him for treason right now:

Trump on Coming Debt Crisis: ‘I Won’t Be Here’ When It Blows Up

The president thinks the balancing of the nation’s books is going to, ultimately, be a future president’s problem.

By Asawin Suebsaeng and Lachlan Markay, Daily Beast

The friction came to a head in early 2017 when senior officials offered Trump charts and graphics laying out the numbers and showing a “hockey stick” spike in the nationa...



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OpTrader

Swing trading portfolio - week of September 11th, 2017

Reminder: OpTrader is available to chat with Members, comments are found below each post.

 

This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...



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Promotions

Free eBook - "My Top Strategies for 2017"

 

 

Here's a free ebook for you to check out! 

Phil has a chapter in a newly-released eBook that we think you’ll enjoy.

In My Top Strategies for 2017, Phil's chapter is Secret Santa’s Inflation Hedges for 2017.

This chapter isn’t about risk or leverage. Phil present a few smart, practical ideas you can use as a hedge against inflation as well as hedging strategies designed to assist you in staying ahead of the markets.

Some other great content in this free eBook includes:

 

·       How 2017 Will Affect Oil, the US Dollar and the European Union

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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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