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Why The "Output Gap" Inflation Model May Be Fatally Flawed
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 very large and negative output gap for 2009’s second quarter: –6.7 percent. Because this (predicted) output gap is so large, several analysts have concluded that monetary policy can remain very accommodative without fear of inflationary repercussions. We argue instead that standard output gap measures may be severely biased by the bubble in real estate prices that, according to many, started around 2002 and burst in 2007.
Why is the output gap such a tricky concept?
One difficulty in estimating output gaps is that a key component—potential output—is defined as the GDP attainable when the economy is operating at a high rate of resource use. Because economies are subject to the effects of recurrent external forces, actual GDP is typically not at its full potential. This implies that we cannot really ever observe potential output and, hence, it must be approximated. The first method to do this consists of identifying potential output according to long-term trends in GDP. The second method—the production function approach—is based on a relation between available productive inputs (such as capital and labor), their current utilization rates, and aggregate production.
Here is the core of the issue, so obvious, that even first year investment banking analysts are taught to account for it, yet the Chairman of the Federal Reserve, due to the bubble of his own creation, is unable to grasp it.
Components of existing statistical methods to estimate potential output are typically subject to inertia. Hence, if the recent real estate bubble increased GDP and productive inputs to levels higher than what would be expected by economic fundamentals, then it is likely that potential output estimates will also be beyond what economic fundamentals would imply. Thus, these estimates would be biased. One way to better understand how bubbles affect key macroeconomic indicators is to consider that high growth in real estate prices may affect GDP not only through the increase in the value of residential services, but also through its indirect impact on higher than-usual growth in (i) the finance and insurance sector and (ii) consumption—the latter caused by perceived increases in personal wealth.
And the renormalization exercise:
Knowing the exact rate at which the economy would have grown without a bubble might be impossible. Nevertheless, we construct two estimates of potential output that we consider reasonable and “bubble-free.” These estimates are based on the long-run trends of GDP and capital stock up to 2002, before the bubble began. We call the difference between our artificial constructs and actual GDP our “bubble-free” output gaps. Our results are summarized in the chart.
Our output gap estimate based on GDP growth trends during the 50 years preceding the real estate bubble yields an output gap more negative than the CBO’s estimate. Why the difference? Growth during 2002-09 was relatively weak compared with the past 50 years. Notably, this estimate also has the undesirable characteristic of being sensitive to the period chosen to estimate GDP growth trends. In contrast, the output gap based on the production function approach, after adjusting the value of inputs for possible bubbles, results in an output gap less negative (and positive through 2008) than the CBO’s estimate. Hence, two reasonable methods yield opposite conclusions about the output gap. At the very least, we can say that the confidence intervals for the output gap seem to be wide.
And the sobering conclusion:
Our results add to a long list of practical problems in precisely measuring the output gap. We offer a word of caution to policymakers: Policies based on point estimates of the output gap may not rest on solid ground.
Keep in mind, this is not the conclusion of some liberal third party think tank: this is the Fed itself opining on the bubble of its own creation. And when the Fed says that Bernanke's $1.7 trillion policy of Quantitative Easing, almost guaranteed to be soon followed by a sequel (and another, and another), could have been based on a pro-cyclical reading of patterns, which in turn merely perpetuate the bubble, it is time for the lunatics in the Fed to finally take their feet of the printing machine accelerators and consider the collision course they have set the US economy on. It is also time for Ben to reconsider his assessment of whether or not his actions over the past year have thrown us into yet another bubble. It would appear that we never even emerged from the original one.
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"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved." - Ludwig Von Mises
Depression or hyperinflation. Your pick, Bernanke.
Depression and hyperinflation. With money printing, the real economy will still suck but the historical unit of measure will be fubar.
Gauge your ability to get a loan in 2006-2007 vs your ability to get a loan today.
Abandonment of credit by banks too big to lend? It won't get better until banks extend credit. Currently the only entity lending with relaxed requirements is the FHA(that's your money and mine).
WARNING: the following article could upset you.
http://www.nytimes.com/2009/11/20/business/20limits.html
backup source:
http://finance.yahoo.com/real-estate/article/108207/with-fha-help-easy-l...
"It won't get better until banks extend credit."
Where do banks get credit? Where does the government get credit for the FHA loans?
So far, Bernanke has avoided a depression by printing more money. The moment he stops printing, we will fall into a depression. If he does not stop printing, we will eventually have a currency crisis.
I wish we would just take our medicine today.
To complete the thought here, I have been questioning in my mind whether there could be some middle way between depression and hyperinflation. Some purgatory of Japan-style lost decade. Japan's current problems argue against a possibility of a sustainable middle way. And the article above, about the inadequacy of the GDP output-gap model, further argues against a possible middle way. There really are only two choices when a society falls this deeply into debt. I challenge anyone to find a historical example that would suggest otherwise. I would be thrilled to learn of one.
You are correct, there is a middle way between depression and hyperinflation, some purgatory of Japan-style lost decade as you well put it.
The problem is we just went through it the past 10 years. Rampant lending, asset price inflation, stagnant real wage growth, finally ending in high inflation by 2008 in gas prices, gold prices, agricultural prices, ammo prices etc.
Now we're redoing the entire past 10 year experiment on steroids. Even more attempts at more consumption, less savings, more spending etc. Even though the American consumer is tapped out the government is making up for them; and we should remember that all government spending is by definition consumption.
The real solution to this crisis is to take one on the chin, fire a lot of government workers, lower taxes, lower regulation in most areas, let the TBTF fail,etc. etc. etc.
But we're doing the exact opposite. That's why I'm starting to fall into the hyperinflation camp. They'll just keep printing money until we do have hyperinflation. By that time there won't be a solution anymore except a new currency... I hope I'm wrong, but I am starting to doubt it at this point...
Respectfully Doc
The moment he stops printing we will fall into a currency crisis. Credit will lock up and the dollar will take it's first trip toward Zero.
"If he does not stop printing" we will have hyperinflation. Interest will have to ratchet up much higher to attract investment.
It won't get better until banks extend credit.
Good thing interest doesn't grow exponentially. Oh wait.
I PASSED THE CALIFORNIA BAR EXAM! 1ST TIME PASSER! WOOOHOOOOOOOOOOOOOOOOOOOOOOO
props to you. now go sue someone while there's still some solvent people in cali.
hilarious....bon mots
Sorry to tell you, at some point in history that may have had meaning but with unemployment reaching almost 20% in California, Arnold told all agencies to "Relax Standards".
From the Cal State Bar:
The State Bar of California's Committee of Bar Examiners reported today that 56.4 percent of the applicants passed the July 2009 General Bar Examination (GBX). If the 4,888 people who passed the July 2009 exam satisfy other requirements for admission, they will become members of the State Bar.
Preliminary statistical analyses show that of the 8,667 applicants who took the GBX, 71.0 percent were first-time takers. The passing rate for 6,152 first-time applicants was 70.0 percent overall. The passing rate for the 2,515 applicants repeating the examination was 22.0 percent overall.
You can kiss my ass anonymous prick. This bar exam had the average pass rate for Cal in the past 10yrs. I know tons of people that failed and will join the "repeater" group and will have to pray to ever pass.
Sorry to tell you. Of the 8,667 test takers, 7924 were Realtors looking for a career change.
You are the company you keep. And NO, I do not want a refi, I'm not interested in your viatical settlement scheme, I do not need to go to a Pain Clinic, and I'm not sure how much the ad space costs for billboards on the 101.
Hahahahaha. Troll= not worth responding to anymore. Have a nice day.
Congratulations. Always good to hear some good news.
Congratulations!
"It is also time for Ben to reconsider his assessment of whether or not his actions over the past year have thrown us into yet another bubble."
correction: it is also time for the Senate to reconsider the re-appointment of helicopter Ben.
Peter Schiff had some comments on Benny and Timmay last night:
http://www.youtube.com/watch?v=wa7AT40sRHM
Hugh Hendry has made this a central tenet of his theiss as have many others. It's not rocket science: $5T of GDP "growth in a decade with no wage growth and no job creation? Deep down in those places Bernanke doesn't talk about, he acknowledges the lie as truth, but believes the supremecy of the money machines is always enough to lift the tide just enough to support asset prices but preserve the debt servitude. It is not a coincidence that Geithners script from the very start always made reference to not losing the political will to "stay the course."
The BLS and GAO are both ends motivated.
What should the numbers say? How to get there is where we got heuristics, birth/death model, and all the other shenanigans they created to bury inflation and declining GDP. A GDP of 3% is erased and then some by 4% inflation.
Simple
Who should I email, Olbermann or Beck?
Excellent article. I've been waiting months to see this kind of analysis posted. The losses in GDP are due to services that are not coming back; there is no "lost potential".
bernanke has an adgenda, and it has nothing to do with stabilizing the economy, or preventing inflation, or any other purpose than to facillitate the transfer of wealth and control of america to his zionist bosses.this juggling of numbers and political posturing is just smoke and mirrors. come on open your eyes and look at the big picture. a stealth coup has been taking place for years. this is war. we are under attack. a prisoner with extra food rations and yard priveleges, is still a prisoner. we have to throw these parasites off. they will feed on us to death, then feed on our children. they look like human beings, but they are something else. bernanke paulson geitner blankfein goldman frank pelosi lieberman and many more who are these people, and where do their loyalties lie. this is bigger than money. what percentage of the population is jewish? what percentage of political, judicial, and financial positions are held by these people, many with dual citizenship. if israel is our close ally, they have a strange way of showing it.
So the last bubble becomes the new normal by which current economic output is measured? I didn't read all 18 pages of professional Fed obfuscation, but is that the gist?
As Wiley Coyote would say, "Pure unadulterated genius!"
Now are Benny-boy and Timmy-boy really that stupid, or is this a criminal racket? My MacroEcon 101 credentials tell me something is really rotten here.
Those you mentioned are only the new generation of what has been happening through history. From the Egyptians chasing them into the Red Sea not to slay but to retreive what was stolen. The Spanish Inquisition was to drive them out not to rid themselves of heretics. Europe was to be the new Israel with their backing of the Nazi Party. And all this time they have been the self claimed martyrs of the human race. They lost and exploited it and continue to do so. You never see a memorial to the 20 million Russians that gave their lives in WWII, nor the 10 Million Germans, but we sure hear about the false number of jews killed. Wake us and smell the coffee, they are not our allies, they have infiltrated and are sucking the life blood out of our country, just as they have tried in every other country they have gained a foothold. But be careful for you will be labeled "anti"semitic". Go cry on someone else sympathetic ears, history will again repeat itself and they will be driven out once again.
Abso_kkkhenazi_fuken_lootly
A hiss and a byword, despised among men. Counterfeiters and exploiters of small discrepancy.
Small may they be, in the mirrors of thine own imaginings.
well adolph, thanks for sharing the vile hatred
of your soul....who else do you hate and is worthy
of extermination?....how do
you propose to destroy these people so that they
can no more suck life blood? the gas
chambers didn't work so well the last time...
pogroms, inquisitions, captivities, murders,
diasporas, the very hand of satan himself has
failed to vanquish the tribe from which the savior
comes...
your history of the exodus was obviously learned
from al-jazeera or the cairo times....
people like you give humans a bad name....
Debt has exceeded economy wide carrying capacity. Defaults in residential and commercial real estate are largest variables which will make overleveraged banks insolvent. The excess debt has been assumed by sovereign government that exchange impairments for much higher than market value with Treasuries. These bailouts and backstops are compounded by much higher federal expenditures for counter-depression responses. This add'l welfare, backstopping, interest payments, crashing tax revenue, exponentially increasing retirement and healthcare obligations surmount any potential to pay for them. The last several decades of unceasing growth has stopped. It is crashing and cannot be resumed, only dampened by monetary and fiscal responses.
Borrowing needs of the USA surpass any potential of all the world (at highest participation) to fund. Only monetization can fill the shortage gap. Monetization dilutes the currency for the world to see. Raising interest rates to subdue monetization must crash equity markets and sovereign debt markets worldwide, leading necessarily to further crashes in real estate and corporate markets.
Therefore the options which have the ultimate same outcome are: (a) Monetization to correct arrears due to deficit spending (b) Raise interest rates to increase demand for debt issuance which draws crowds to Treasuries and crashes everything else.
Strong currency, destroyed markets. Weak currency, feeble reinflation and market support.
BUT. China!
China may have lost confidence in the USA. Loss of faith in its leadership and ability to correct its financial position of peril. Loss of faith in the integrity of US lead metals market because of counterfeiting.
If that loss of confidence has fused with a belief of being double crossed, and China wishes its revenge and to secure as much recoverable value from their rapidly corroding relationship....
They will gather precious metals in earnest. They will dump their dollars which will join with the existing money supply to destroy the US currency. The gold management team which uses primary dealer commercial banks to hold short positions on Gold will be forced to cover at terrific losses driving the price astronomically.
Remember that these banks are so weakened at present that only fantasy accounting (allowed by rule changes) and having tacit backing of full faith and credit keep them from rolling over. They are well over 25:1 leveraged not including their disastrous forays into CDS derivatives.
Outcome? Potentially the collapse of US dollar and economy. The worst global depression on record. Complete meltdown of credit, banking, and currency relationships. End of globalism.
Very cogent narrative, self-evident logic, and depressing as hell
---until the last line. Is that the silver lining? Out of the ashes of the apocalypse rises a phoenix---a new culture of localism, new values, eco-sustainable ways of living, artfully connected to land bases.
that may be the best summary of where we stand that I have ever read, and I have read soooooo many. Thanks.
Im not an economist or anything close to that. let me point out one thing that bothers me the most. Many jobs have been outsourced to Asian countries, simply because the lower wages there, whereas the products they make there are shipped back to this country to sell to our people. the price of the products doesn't need to be higher for the corporation to make a big profit, simply because of the large difference of salaries between our people here and other countries. our people's salaries here don't really move much. Once the base is built in China or other countries, the kind of jobs lost in this country will never come back. This may have some significant downword pressure to the inflation measurement here. Someone may explain this better. This is probably the most dramatic change in this country in the last decade.
Rapidly declining real wages and general inflation are not mutually exclusive. All the necessary ingredients are already baked in.
Of course he is wrong. If your purchasing power drops, the stuff you import will get more expensive. What is not to understand there. US is heading for Weimar 2 and EU for Great Depression 2 so the rest of the world can catch up. Fair game for global balance of living standards. Now watch Americans pissed off by all the Obamagogy elect Bush 3 who will consider that three behind his name a sign ;)
Finally!! Yes, someone gets it. Obama is trying to cut us down to size so the US is not the lone super power anymore. This new US weakness will create a vacuum in stability around the world which will lead to some major wars.
although i agree that obama is trying intentionally
to sabotage the usa it is equally absurd that the
the decline of the usa will create a power
vacuum leading to war....
it is precisely the preponderous power of the
usa which spreads violence, murder, and wars
wherever its vile military and cia go....
there will be wars and rumors of war till
christ returns and the presence or absence of the
usa will have no bearing on that fact....
You guys don't get it.
We Americans need stuff.
And we will get what we want.
Debase the dollar, shrug off the debt and start all over again at zero.
In the mean time if you own dollars and not gold you lose it all.
This will happen in 2010.
As Marc Faber has astutely pointed out: "The output gap in Zimbabwe is 95%." Output gap when it is small should give comfort re: inflation...in theory though, once the output gap gets to a certain size, it is actually hinting at an underlying collapse of the economy, with collapse in tax receipts that should lead to big budget gaps, etc., other precursors of a collapse in a currency.
If the Fed wanted to do something useful, the Fed would study the point at which the output gap has historically gone from being something that keeps a lid on inflation to something that hints at coming hyperinflation...
But instead they prefer academic "play with your food" studies...
Very good point indeed.
Mark Faber on Gold:
http://www.youtube.com/watch?v=9HKN-A0EqyA&feature=player_embedded
gold physical bulls will :heart: it,
Anyone who has faith in 'potential' has never had kids!
Who contols the Bar association??
Who regulates the Bar association??
What branch of government has oversight??
Clue, look very closely to any personal check you may have and look at the line you sign your signature above,
Increases in commodity prices is inherently deflationary, not inflationary. Inflation will result only if the increases in those prices translates into workers successfully bargaining for higher wages, employers granting higher wages, or companies increasing borrowing as a result.
What is your definition of inflation? Whether it is (1) any increase in the supply of money, or (2) an increasing price level, I cannot make any sense of your statement. An increased money supply is an increased money supply. And increased prices are increased prices. Are they not?
increase in commodity prices translates to higher prices for all products (consumables.) inflation isn't expansion of credit, it is declining purchasing power
Guys, let's just embrace the reality that we don't understand what's what and it's all unprecedented.
Facts, and these are real facts:
1) Housing is about 30% of the CPI
Anyone really think housing is going up? Go ask some home sellers if they are pricing above 2007.
2) Gold is through the roof
Sure looks inflationary, doesn't it, except for #1 above and:
3) Short term T bills rates went negative this week
Anyone think that confirms inflation?
4) Global oil production is projected to be about 1.5 million bpd lower this year than in 2007. 2007's avg oil price was $67.
Anyone want to claim a higher price on lower consumption means there is plenty of oil?
Overall, the inflation folks have to sit themselves down and come up with a compelling answer to this question:
How do you raise the prices of things no one is buying?
> Overall, the inflation folks have to sit themselves down and come up with a compelling answer to this question: How do you raise the prices of things no one is buying?
Answer: the Fed bids them up via asset purchase signaling for non-traditiationally purchased CB securities (equities, bonds, etc). Read this:
http://ideas.repec.org/p/imf/imfwpa/03-64.html
The argument is deceptively strong: he who can issue fiat can can place as many bids as he likes. Always, on any asset class.
** correction **
Guys, let's just embrace the reality that we don't understand what's what and it's all unprecedented.
Facts, and these are real facts:
1) Housing is about 30% of the CPI
Anyone really think housing is going up? Go ask some home sellers if they are pricing above 2007.
2) Gold is through the roof
Sure looks inflationary, doesn't it, except for #1 above and:
3) Short term T bills rates went negative this week
Anyone think that confirms inflation?
4) Global oil consumption is projected to be about 1.5 million bpd lower this year than in 2007. 2007's avg oil price was $67.
Anyone want to claim a higher price on lower consumption means there is plenty of oil?
Overall, the inflation folks have to sit themselves down and come up with a compelling answer to this question:
How do you raise the prices of things no one is buying?
JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS - COMMENTARY NUMBER 259 - November 18, 2009 says, "Using the 1980's BLS measure (before gimmicks) inflation rose to about 7.1% (7.13% for those using the extra digit) in October, versus 6.1% in September."
Gold is going up because of the attack on the dollar. The price of oil is not related to reserves as much as speculation at the moment, but it is a key ingredient in making retail prices and utilities and everything else it touches cost more. It may be going back down to $67, as you say, but it hasn’t. Supposing I say it may go to $150. What does that mean?
Housing? We went through one of the largest housing bubbles in history, a bubble that has not yet declined to market levels. The price of housing still outstrips the ratios of rent and employment and wages. It’s still out of sight for most people.
And food? It’s not inflationary because the government switches the comparisons; or leaves it out of the inflation mix entirely. Yet, the price of food already is slated for another big inflation jump.
Behind that 32 percent tuition increase at the University of California 10-campus system that the UC Board of Regents just passed for undergraduates, bringing the yearly cost to above $10,000 and following a 10 percent hike earlier this year, is INFLATION—higher prices for heating fuel, food, books, desks, uniforms, water, insurance, paper, equipment, maintenance and repair, travel, supplies, electricity, you name it.
And to top that off, American workers’ wages have dropped at record rates, while productivity has increased at record rates. In fact, according to The Economic Populist:
Nonfarm business sector labor productivity increased at a 9.5 percent annual rate during the third quarter of 2009, the U.S. Bureau of Labor Statistics reported. This was the largest gain in productivity since the third quarter of 2003, when it rose 9.7 percent.
Unit labor costs in nonfarm businesses fell 5.2 percent in the third quarter of 2009; the increase in productivity outpaced the increase in hourly compensation. Unit labor costs declined 3.6 percent over the last four quarters— the largest decrease since the series began in 1948.
http://www.economicpopulist.org/content/productivity-costs-q3-2009
Since 1971, when US banks had created some 6 times the amount of paper money as they could redeem, when France and England had asked for their US dollars to be redeemed by the US treasury for the agreed upon $35 per ounce and were refused, and President Nixon announced that the dollar would "float,” i.e., the last time the world used a currency with any redeemable backing, American wages have either stagnated or decreased, after adjusting for inflation, particularly those at the middle and lower end of the pay scale.
"Much of what we now call growth or GDP is really just one of three things in disguise: fixing blunders from the past, borrowing resources from the future, or shifting functions from the traditional realm of household and community to the realm of the monetized economy. After rising somewhat between 1950 and the early 1970s, they said, the Genuine Progress Indicator (GPI) declined until in 1994 the GPI was 26% lower than it had been in 1973, and on a per capita basis it had fallen 42% since 1970!"
--Richard Stimson's "Playing with the Numbers"
citing the group "Redefining Progress,"
Clifford Cobb, Ted Halstead, and Jonathan Rowe
That's consistent with the idea that 'structural unemployment' has shot up now that the bubble burst.
Of course their whole idea of inflation is totally flawed.
As noted, currency devaluation will jack prices up w/o changing output. A spike in oil would do the same thing.
As long as there is money printing, inflation remains a major problem down the road. It must STOP now.
time123
http://invetrics.com
the output gap is a childish construct - it is built on synthetic numbers and is simply an abstraction which has no real counterpart and cannot be effectively measured or managed - nor should it be....more totalitarian gobbledygook...
Elsewhere, the government announced that New Orleans was not REALLY flooded by Hurricane Katrina because the POTENTIAL flood-avoidance capacity of the levees exceeded Katrina's floods.
Not sure if it was mentioned yet,
THE ST. LOUIS FED does not endorse this article or related research!
"Views expressed do not necessarily reflect official positions of the Federal Reserve System."
Everyone who reads this blog should know that.
This is all such a joke. Output gap may be smaller than we think: Watch out! Hyperinflation coming! Buy Gold! (And all you have to do is click through the ZH adverts to buy it!).
Go buy some condos and flip 'em while you're at it, suckers. ZH has gotta be run by a bunch GS traders long dollar, short gold. Laughing their asses off at you all the way.
Real US unemployment = 18-20%. There is excess manufacturing capacity in every corner of the globe except Antarctica and I hear the Chinese will soon buy that to start building widget factories. Where is that hyperinflation coming from? The only hyperinflation will be in high-end SoHo and London art markets and restaurant tabs, and, oh yeah, the price of gold. All thanks to both Bernanke's largess . . . and yours. It's called a bubble, folks.
Here's the reality for all the "imminent collapse" folks. The US can slap capital controls in place so fast it will make your head spin. It can raise trade barriers and retool factories to supply demand domestically and employ a lot of people doing it, including many of our troops soon to return home. It can confiscate your precious gold.
While I think the St Louis fed have picked up on a key point, gut instinct tells me their graph is wrong as well. Instinct tells me that the output gap went negative during 2009, but might be trending positive now. Think about it logically if the output gap was neutral at the moment why would we still be losing jobs.
Why use the last 50 years an why assume that the GDP figures are correct. We have had lots of bubbles in the last 30 years and the GDP figures are so tweaked nobody can really get any sort of grip on reality.
The problem is that the non-homogeneous capacity build up has taken place during the whole of the west's post WWII credit expansion. In simple terms, the problem is much MUCH larger than the analysis posted here presents, especially for the 4 accelerations we have had in the post war period.
1971- Gold window is closed
1981- start of the F.I.R.E. economy
1995- start of Clinton's "miracle" High growth w/ low inflation which was really only highly masked inflationary growth.
2001- start of the housing bubble.
You could go on and the vietnam war, the great society, the present wars, etc.
I'm simply trying to point out the major accelerations in the credit growth trend.
Based on an quick eyeball, tangible productive growth put's us back in the late 1970's early eighties.
If you compare interest rates then vs rates now, you have some idea of how large the mismatch is in terms of rates of interest.
If ever there was a time in history to "MAX OUT" your credit cards and buy durable goods (and I dare say, FOOD) this would be it.
Tellingly, only a the fear of a second great depression could lead us into hyper-inflation. We seem to be enjoying the historical quirk of "alternation", were outcomes play out in alternating forms of resolution. (e.g. the great depression was a deflationary depression, we are currently experiencing the early stages of a hyper-inflationary depression).
Good work ZH and TD, YOU Finally Seem to have GOTTEN "IT".
BTW, can you please stop wasting everyone's time with the generalized deflationary themed outcomes. Not only is that not a valid outcome this time, you are leading people to the slaughterhouse with recomendations that serve well in a deflationary outcome, but are LITERAL SUICIDE during hyper-inflation.
And, IMHO your focus should be on hyper-inflationary periods in various countries during post WWII time-frames. If you look at these examples, you will see that wildly overvalued stocks and realestate can have periods of decline during hyper-inflation, but that the long term trend follows almost exactly the magnitude of the hyper-inflation phenomenon itself.
That last point is the pertinent one for you and your readers when addressing the question of asset allocation.
Of course, there is a much simpler way of protecting your wealth during times like these.
I'm not usually a fan of vulgar language, but in this case I will acquiesce and leave you with a quote that is most apropos.
"Got Gold Bitches" - Chumbawumba
P.S. In keeping with the vernacular of ZH, "I Am NOT Chumbawumba"
P.P.S. You'd damn well better listen to Chumbawumba and Mr. Gordon Gekko if you would not like to have your ass handed to you in a hyper-inflationary sling.
V/R
Anon