[quote=Rich Toscano]As far as slack and all that goes, I agree with John Hussman’s view:
“The Phillips Curve is simply a standard economic argument about relative scarcity. It says that when the labor markets are tight, nominal wages rise faster than the rate of general inflation (i.e. real wages rise), and when unemployment is high, nominal wages rise slower than the rate of general inflation (i.e. real wages fall). As we observed in the 1970’s, high unemployment can exist in concert with high rates of inflation. All that happens, in that case, is that wages tend to rise slower than prices. Assuming labor productivity is growing as well, real wages don’t keep pace with productivity growth. In any event, unemployment emphatically does not prevent the inflationary consequences of reckless creation of government liabilities.”[/quote]
This is true… but we didn’t see the kind of asset deflation in the ’70s that we’ve seen over the last few years either. We’ve got too many homes, offices and pretty much everything else at this point, which wasn’t the case in the ’70s. All of which is deflationary. Also, capacity utilization is around 74% and, if memory serves, 81% is the mean historically, and 82%+ is where inflation tends to get triggered. (Capacity utilization was higher-than-normal during the ’70s, but not for the whole decade. Then Volcker came along and started unwinding things in 1981.) Anyhow, lots of moving parts. I agree that getting fixated on one number – like unemployment – is not a good idea. But taking into account unempolyment + capacity utilization + asset deflation + a low savings rate (which will increase and cut into consumption) + a massive amount of debt that needs to get paid down… probably leads to low inflation for a while. What “a while” is is hard to know…
