Overstating Non Farms Payroll & Understating CPI, How This Works
From Stephen Churchs commentary on Consumer Cash Flow at Prudent Bear our rantings follow:
"The scenario analysis left open a tantalizing opportunity to manage the transition to a stable economy with lower annual debt financing. The rate of growth of personal consumption expenditures would need to decline significantly while the rate of growth of personal income stayed near its current level.
The only way that we can envision this would be a managed deflation transferring corporate profits to households through price reductions on goods and services. Though this would lower profits appreciably, it would also enable the economy to cut household debt financing needs to reasonable levels."
Our comments follow: By raising rates in a small and measured method and inverting the yield curve, the housing price bubble slowly leaks out over 3-4 years along with the GDP growth that it supported and the economy slows down. Whether the resulting employment sector transition is orderly remains to be seen.
But, the fact that we are in a recession and inflation is not tame are "masked" through the whole process by understating the actual rate of inflation in the CPI and overstating the actual employment numbers through the creation of hypothetical McJobs in the non farms jobs reports.
By understating CPI, nominal GDP is overstated. The nominal GDP less the real CPI probably yields a GDP of 1.5 to 2%. The other effect of the mis-statements helps to adjust imbalances in current accounts globally through Forex (currency & bond) arbitrage by dropping our "real" GDP to a level closer to most of our trading partners whose economy's are weaker.
Meanwhile, as the bubble slowly fizzles, due to the slowdown in the economy, the rate of growth of personal consumption expenditures slowly declines and the necessity for household debt financing is slowly reduced.
As the slowdown continues, the price of goods may initially increase and profit margins temporarily decrease while the rate of growth of personal income stays the same, allowing household debt financing needs to be cut to even more reasonable levels.
Later in the cycle, as rates continue to rise, dollar appreciation causes profit margins to rise as the cost of the inputs such as commodities and oil fall, this offsets the decline in profit margins seen at the start of the slowdown as well as some of the dollar denominated asset price deflation.
When taken over the whole period, the price of goods stays in line or actually drops after the initial inflationary increase. Higher interest rates also keep the foreigners buying our bonds and financial instruments for the duration.
The necessary "deflation in corporate profits" and "transfer to households" mentioned by Church is the scenario currently being played out. The transfer being a temporary and illusory one.
In the last 3 years corporate EPS growth rates forward looking have fallen from over 20% to around 7%. Meanwhile, real estate assets or the average household has appreciated substantially.
This transfer will be balanced or recouped through equity, bond and real estate asset deflation via leveraged and timed speculation in the markets and the masked inflation or debauchery of the currency over the cycle via Forex arbitrage.
Its like slipping everyone the Mickey-Finn, they wake up feeling groggy with a much lighter wallet, but seem to remember a good time being had by all. Did you really think everyone (read John Q. Public) would get to dance without paying the piper in some way?
"The scenario analysis left open a tantalizing opportunity to manage the transition to a stable economy with lower annual debt financing. The rate of growth of personal consumption expenditures would need to decline significantly while the rate of growth of personal income stayed near its current level.
The only way that we can envision this would be a managed deflation transferring corporate profits to households through price reductions on goods and services. Though this would lower profits appreciably, it would also enable the economy to cut household debt financing needs to reasonable levels."
Our comments follow: By raising rates in a small and measured method and inverting the yield curve, the housing price bubble slowly leaks out over 3-4 years along with the GDP growth that it supported and the economy slows down. Whether the resulting employment sector transition is orderly remains to be seen.
But, the fact that we are in a recession and inflation is not tame are "masked" through the whole process by understating the actual rate of inflation in the CPI and overstating the actual employment numbers through the creation of hypothetical McJobs in the non farms jobs reports.
By understating CPI, nominal GDP is overstated. The nominal GDP less the real CPI probably yields a GDP of 1.5 to 2%. The other effect of the mis-statements helps to adjust imbalances in current accounts globally through Forex (currency & bond) arbitrage by dropping our "real" GDP to a level closer to most of our trading partners whose economy's are weaker.
Meanwhile, as the bubble slowly fizzles, due to the slowdown in the economy, the rate of growth of personal consumption expenditures slowly declines and the necessity for household debt financing is slowly reduced.
As the slowdown continues, the price of goods may initially increase and profit margins temporarily decrease while the rate of growth of personal income stays the same, allowing household debt financing needs to be cut to even more reasonable levels.
Later in the cycle, as rates continue to rise, dollar appreciation causes profit margins to rise as the cost of the inputs such as commodities and oil fall, this offsets the decline in profit margins seen at the start of the slowdown as well as some of the dollar denominated asset price deflation.
When taken over the whole period, the price of goods stays in line or actually drops after the initial inflationary increase. Higher interest rates also keep the foreigners buying our bonds and financial instruments for the duration.
The necessary "deflation in corporate profits" and "transfer to households" mentioned by Church is the scenario currently being played out. The transfer being a temporary and illusory one.
In the last 3 years corporate EPS growth rates forward looking have fallen from over 20% to around 7%. Meanwhile, real estate assets or the average household has appreciated substantially.
This transfer will be balanced or recouped through equity, bond and real estate asset deflation via leveraged and timed speculation in the markets and the masked inflation or debauchery of the currency over the cycle via Forex arbitrage.
Its like slipping everyone the Mickey-Finn, they wake up feeling groggy with a much lighter wallet, but seem to remember a good time being had by all. Did you really think everyone (read John Q. Public) would get to dance without paying the piper in some way?
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