Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Coronavirus China Infection Statistics Analysis, Probability Forecasts 1/2 Million Infected - 21st Feb 20
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20
China Under Reporting Coronavirus COVID-19 Infections, Africa and South America Hidden Outbreaks - 12th Feb 20
Will USD X Decline About to Trigger Precious Metals Rally - 12th Feb 20
Copper Market is a Coiled Spring - 12th Feb 20
Dow Theory Stock Market Warning from the Utilities Index - 12th Feb 20
How to Get Virgin Media Engineers to FIX Hub 3.0 Problems and NOT BS Customers - 12th Feb 20
China Under Reporting Coronavirus COVID-19 Infections by 66% Due to Capacity Constraints - 12th Feb 20
Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? - 12th Feb 20
Stock Market 2020 – A Close Look At What To Expect - 12th Feb 20
IBM AI Mega-trend Tech Stocks Investing 2020 - 11th Feb 20
The US Dollar’s Subtle Message for Gold - 11th Feb 20
What All To Do Before Opening A Bank Account For Your Business - 11th Feb 20
How and When to Enter Day Trades & Swing Trade For Maximum Gains - 11th Feb 20
The Great Stock Market Dichotomy - 11th Feb 20
Stock Market Sector Rotation Should Peak Within 60+ Days – Part II - 11th Feb 20
CoronaVirus Pandemic Stocks Bear Market Risk 2020? - Video - 11th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Yellen Looking For Inflation In All The Wrong Places

Economics / Inflation Feb 09, 2015 - 03:02 PM GMT

By: Michael_Pento

Economics

In 1958, economist W.H. Phillips wrote a paper that argued an inverse relationship existed between wage inflation and unemployment.  The crux of his theory was when unemployment is high wage growth is absent; but when the unemployment rate is low wages rise rapidly.  Philips established his theory under the framework of a curve and it was aptly referred to as “The Phillips Curve”. However, many economists wrongly adopted the Phillips Curve by relating it to general price inflation, rather than to just wage inflation.  Sadly for Phillips Curve enthusiasts, the high inflation and high employment rates of the 1970’s turned this metric on its head. 


Stagflation in the U.S. throughout the 1970’s proved high inflation and high unemployment can—and often do--exist concurrently, thus rendering the Phillips Curve obsolete. This same phenomenon where rising inflation coincides with a rising unemployment rate has also been witnessed throughout the globe. Fittingly, the notion that more people working was the cause of inflation should have found its place in the Wall of Shame of economic theories, sandwiched in between other items falling out of vogue at the time, such as toe socks and the pet rock. 

However, the Keynesian economists who held this curve in such high esteem in the 1960’s, were somehow unable to let it go. Therefore, a new metric was created rooted in the Phillips Curve, but conveniently much more ambiguous. They called this metric the Nonaccelerating Inflation Rate of Unemployment (NAIRU).  The idea behind NAIRU is inflation and unemployment really only become correlated once unemployment falls below a certain calculated rate. But you have to understand that the Fed’s number for NAIRU is more elastic and flexible than Gumby. And when it does fall below that predetermined rate, as it did from 1996-2000, and inflation (as the Fed measures it) is still absent, the Fed must come up with an excuse for its inaction.
    
Just to be clear, there is no relationship between unemployment and the overall rate of inflation. As Milton Friedman taught us, inflation is solely a monetary event. It is my view that inflation is caused by a persistent fall in the purchasing power of a currency. The market becomes convinced that substantial currency dilution will occur and the value of paper money falls.  Even if everyone able to work became gainfully employed it would not cause inflation. It may lead to rising nominal wages but the increase in products and services provided by these newly employed persons would absorb the wage growth without causing prices to rise. A growing labor force and increasing productivity are the very keys to economic prosperity.

But, the reason it is important to understand the Phillips Curve and more importantly NAIRU, is because this metric is perhaps the most important data point Janet Yellen looks at when making decisions on Fed Policy.  When unemployment is higher than NAIRU, as it is now, Yellen sounds like a dove. But when unemployment falls below, as it did in 1996 to 2000, Yellen has shown she's more ready to tighten policy than other central bankers.

Ms. Yellen has an unfounded fear that too many workers will hyper inflate our deflating worldwide economy. Just to understand how unfounded these beliefs are in reality, take a look at these two charts.                   

U.S. inflation as indicated by the CPI since 2011. 


 
 U.S. unemployment rate during the same timeframe.


As you can see, inflation and unemployment are both declining in tandem. I defy any Keynesian adherent to the Phillips Curve or NAIRU to glean the correlation between a falling unemployment rate and the rate of inflation.

It was the Fed’s initial belief back in 2010, when the unemployment was just south of 10 percent, that a change in monetary policy would be necessary once the unemployment rate reached 6.5%. However, since inflation and the economy have not picked up, they have since moved the new target to around 5.4%.  With unemployment currently at 5.7%, we are getting dangerously close to Ms. Yellen’s line in the NAIRU sand. 

The problem is, while Janet Yellen is busy tinkering with the Phillips Curve--in a pernicious attempt to determine how many Americans she will allow to find work--she is missing the crumbling economic fundamentals all around her. The flattening yield curve, plummeting commodity prices, and weakening U.S. and international economic data; all show that the asset bubbles created by central banks are popping. Once again, the Fed is applying faulty models to the wrong economic fundamentals.   

However, if unemployment continues to fall Ms. Yellen will be forced by her own passionately held doctrines to raise interest rates into a deflationary cycle. I welcome this move; along with the overdue and inevitable consequences that it brings. But I also understand the Fed will unwittingly be doing the equivalent of parking a car on the train tracks.  Ms. Yellen will even have to ignore the fact that the falling unemployment rate is happening for the wrong reason, as it coincides with a falling labor force participation rate.

Yet again the Fed will be missing what is right in front of them.  As usual, it is fighting yesterday’s war with the wrong weapons.  This pervasive and protracted incompetence is not just confined to the U.S. central bank. The central banks of Europe, Japan and China also now join the Fed in owning the markets for real estate, equities, bonds and (as a direct consequence) their entire economies. This is why the immense power to determine the money supply and level of interest rates should never have been given to a group of unelected bureaucrats. And is why faith in the money printers to solve our economic problems is soon coming to an end.

Michael Pento is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

Respectfully,

Michael Pento
President
Pento Portfolio Strategies
www.pentoport.com
mpento@pentoport.com

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.
               
Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 
       
Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.
       

© 2015 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules