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Edward Lambert
Phoenix, Arizona
Independent researcher for a model of Effective Demand.
Recent Activity
I have not posted in a while. I am watching the craziness as Trump turns the economy against the general population. From what I see, inequality will grow... and importantly, negative externalities will grow and accumulate. Businesses will make more profit in the short-term, but in the medium-term, the negative... Continue reading
Posted Feb 13, 2017 at Effective Demand Research
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Here is a graph that shows the fall of core PCE inflation from its peak in 1981 to the present. (link to quarterly data) Inflation has fallen with stable swoop downwards. We are currently at about the 0.1 mark on the x-axis showing a core PCE of 1.6% on the... Continue reading
Posted Nov 26, 2016 at Effective Demand Research
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Last week the markets moved. Bonds yields went up. Stocks went up. Inflation expectations were awakened. What will the Fed funds rate do? How might the Fed respond? I will do an analysis to project a path for the Fed Funds rate based on my research into effective demand. (a... Continue reading
Posted Nov 12, 2016 at Effective Demand Research
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This graph shows yoy %change for the U-3 and U-6 rates for unemployment. (link) They are on a normal trend of a business cycle where they bottom out and then head upwards. When the trend starts to go positive, a recession is imminent. The trend is just now hitting 0%... Continue reading
Posted Nov 6, 2016 at Effective Demand Research
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Equation for potential real GDP Real GDP - $2.6T * (capacity utilization/(labor share index*0.76) - 1) Continue reading
Posted Oct 29, 2016 at Effective Demand Research
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Many think that effective demand is simply aggregate demand. But that is not true. They are different concepts. It is very important in the current economic sickness to understand the role of effective demand. So I will define effective demand in this post as Keynes saw it. 1. Effective Demand... Continue reading
Posted Oct 27, 2016 at Effective Demand Research
Janet Yellen gave a speech where she posed 4 questions to economists in general seeking answers... The first question she asked was this... "The Influence of Demand on Aggregate Supply The first question I would like to pose concerns the distinction between aggregate supply and aggregate demand: Are there circumstances... Continue reading
Posted Oct 18, 2016 at Effective Demand Research
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Many top economists use the IS-LM model to support low interest rates. The LM curve of the IS-LM model is built upon a model of financial markets. In the graph above, money supply has been pushed far to the right to keep interest rates low. The model implies that the... Continue reading
Posted Oct 18, 2016 at Effective Demand Research
Larry Summers wrote a post yesterday about the hollowing out of the middle class and how that has lowered consumption and led to secular stagnation. He says that this effect must be taken into account for policy. Well I sit here after 4 years of building models of Effective Demand... Continue reading
Posted Sep 30, 2016 at Effective Demand Research
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Stan Fischer: "I think we'd be better off if there was a price for using money, or for not investing, in terms of monetary returns" — Matthew B (@boes_) September 27, 2016 Data link... Red circle is 2nd quarter 2016. Continue reading
Posted Sep 27, 2016 at Effective Demand Research
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I have posted this model of core inflation before. Core inflation on y-axis. Corporate-after-tax profit rate minus nominal rates on x-axis. The model implies that inflation depends upon the difference between an aggregate corporate profit rate and nominal rates. The more nominal rates cut into corporate profit rates, the more... Continue reading
Posted Sep 17, 2016 at Effective Demand Research
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Here is a graph from FRED showing monthly percentage movements of core inflation. (link to data) There used to be ranges that core inflation moved within. The monthly change either hit the maximum of that range or the minimum with some breakout movements in between. Monthly movements made sense by... Continue reading
Posted Sep 14, 2016 at Effective Demand Research
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This graph plots labor share (left) against the unemployment rate (bottom) since 1948 to 2ndQ 2016. (data at FRED) The data points suggest a labor supply limit shown by the down-sloping red line. As labor share drops, unemployment tends to bottom out at higher levels. The last 3 quarters are... Continue reading
Posted Sep 9, 2016 at Effective Demand Research
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Which of these models would you trust to evaluate inflation? (quarterly data since 1957) Phillip's curve... core inflation plotted against unemployment. (link) My model plotting core inflation against corporate profit rates minus a mix of short & long-term nominal rates... (link) Who in their right mind would consider the Phillip's... Continue reading
Posted Aug 24, 2016 at Effective Demand Research
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The Phillip's curve is obsolete. Inflation does not reliably depend on employment. So what other model could we depend on? This one showing core inflation plotted against an aggregate corporate profit rate minus a mix of nominal rates. (FRED data link) Mixed nominal rate = 0.56*Fed rate + 0.44*10-year treasury... Continue reading
Posted Aug 24, 2016 at Effective Demand Research
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I have been presenting a new model to explain the forces around inflation. (link1, link2) Antonio Fatas poses a very good question. You can lower interest rates, but can you raise inflation? "But if monetary policy is being successful we expect inflation expectations and growth expectations to increase. Both of... Continue reading
Posted Aug 10, 2016 at Effective Demand Research
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I continue to explore the model that I posted this... Continue reading
Posted Aug 9, 2016 at Effective Demand Research
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I have been in the workshop building a model for inflation, capacity utilization and other things. It builds upon the model for forecasting the profit rate cycle. And also upon the model for the relationship between inflation and net profit rates. The model was provoked by a video from Khan... Continue reading
Posted Aug 8, 2016 at Effective Demand Research
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There have been calls for a 4% inflation target. But I have my doubts that it would work. Let me show you why. Look at this chart that plots net profit rate with core inflation... (quarterly data since 1958) Net profit rate = Corporate profit rate - nominal interest rate... Continue reading
Posted Jul 28, 2016 at Effective Demand Research
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The graph shows how inflation drops as net corporate profits rise. (quarterly data since 1958 to 1st quarter 2016) Net corporate profit rate = Corporate profits/GDP - nominal interest rate The trend line (bright red curving downward) implies an exponential decay of inflation. We have been at the decay extreme... Continue reading
Posted Jul 25, 2016 at Effective Demand Research
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Is there a relationship between Inflation and Corporate Profits? I think so. But I do not know of anyone talking about the relationship, so I will. The point I want to make is that corporations control prices. They set prices. They are not just price-takers. Corporations will change prices with... Continue reading
Posted Jul 24, 2016 at Effective Demand Research
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As a recovery gets underway after a recession, wouldn't it be nice to have an equation that would forecast the peak of the profit rate cycle? Well, below is one. Profits are a function of labor share. If labor share rises, the profit rate will decline. Profits are also a... Continue reading
Posted Jul 17, 2016 at Effective Demand Research
I defined net profit rate like this above... (aggregate corporate profit rate - Fed rate) It is a macroeconomic estimation that is not useful to apply to specific firms. The graph of net profit rate to inflation can be seen here (1958 to 2015)... http://effectivedemand.typepad.com/.a/6a017d42232dda970c01b7c874a72d970b-pi In all those years, only since 2009 has the net profit rate gone over 5% which according to the graph implies an inflation rate below 2%. So we are talking about unusual net profit rates. The graph is saying that higher net profit rates would associate with lower inflation rates. So keeping the Fed rate near zero has supported an aggregate net profit rate associated with inflation below 2%. Did the Fed do this on purpose? I do not think so... They are like you or used the IS-LM curve. They assumed that the low inflation rate required a lower Fed rate to spur investment and then raise inflation. But such high net profit rates have never been seen before, and I do not remember anyone pointing out this relationship between net profit rates and inflation since the crisis. This looks to be a story that has gone unnoticed, but can actually explain what happened. Then we can see why some were instinctively saying that raising the Fed rate would raise inflation... the Fisher effect. No good model ever appeared. But when I saw the linked graph, things became clear.
Toggle Commented Jul 12, 2016 on Catching Up at Tim Duy's Fed Watch
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Profits drive the economy... The Fed is not holding inflation at 1.5%. The very high historic net profit rates of corporations (profit rate - Fed rate) have held down inflation through the profit rate cycle. The Fed would have had to believe that raising the Fed rate into high net profits would actually raise inflation by putting pressure on corporations to raise prices... In effect, the Fisher effect... But the Fed could not go that route with the theory they use, so they had to keep the Fed rate low because inflation was low. But actually even a lower Fed rate would raise net profit rates even more and keep inflation even lower. A weird moment when net profit rates went too high, but nobody realized that such high net profit rates produced low inflation. and that an ever low Fed rate was keeping those net profit rates high. But now that net profit rates are coming down on their own, inflation is ticking up. Firms feel some pressure to raise prices to hold onto their profit rates. The Fed could have engineered that effect safely years ago by actually raising the Fed rate when net profit rates were rising and stable. Again, the Fed missed the boat years ago.
Toggle Commented Jul 12, 2016 on Catching Up at Tim Duy's Fed Watch
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The Fed rate really can only rise during the upswing of the corporate profit rate cycle to gain economic balance. And profit rates peaked very high in 2014. It would not be wise to raise the Fed rate into falling profit rates now... They missed the boat years ago. Thanks for your good work Tim Duy.
Toggle Commented Jul 12, 2016 on Catching Up at Tim Duy's Fed Watch
1 reply