Saturday, July 9, 2011

Misery Index update



The top chart is an update of the Misery Index as of June (assuming the CPI will be reported as up by 3.7% in the 12 months ended June). At 12.9, the index is now higher than at any time since May 1983. The components of the Misery Index are included in the second chart for informational purposes.

Some observations worth noting: Every significant rise in inflation has preceded a rise in the unemployment rate. Why? Because the Fed starts fighting the rise in inflation by tightening monetary policy, and a scarcity of money (and high real interest rates that it entails) slows and eventually crushes the economy. Similarly, every significant decline in inflation has preceded and/or accompanied a decline in the unemployment rate. Since the unemployment rate moves inversely to the health and strength of the economy, we can say that, based on the experience of the U.S. economy over the past 50 years, high and rising inflation is bad for growth, and low and falling inflation is good for growth.

6 comments:

Benjamin said...

I sense inflation is dead, but unemployment is stubbornly high. We actually need some inflation to help us accelerate out of this patch.

The most important thing is to not do a Japan.

Fighting a recession through tight money is like trying to get into shape the Karen Carpenter way. Applying leeches to an anemic patient.

Japan has tried the "fighting inflation" approach for 20 years. The yen has appreciated mightily--and Japan is is caught in a perma-recession stupor amid chronic deflation.

Meanwhile, S Korea and China have not blushed when it comes to printing money. And they are blowing past Japan.

Monetarists have a lot of explaining to do, as to what works in the real world.

The Nipponistas are the biggest threat to American prosperity today.

William said...

What "garbage" as the French would say!

Look it up ;~)

Ali said...

Nicely reflecting the negative outlook for the US right now. Muddle-through economy at 1.5% to 2.5% GDP growth will never create the jobs that will result in the critical mass to dig out of such huge deficits.

Some problems require unpopular and painful treatments, this is one of them, and one that politicians are getting closer to proving yet again that they cant live up to.

John said...

The economy is not monolithic. Some aspects (corporate profits)are doing exceptionally well. Why would they want to change?

Dr William J McKibbin said...

The correlation between inflation and unemployment is spurious -- other phenomena are missing from the analysis (such as the occurence of wars preceeding the periods of inflation and including Vietnam; theArab-Israeli wars of 1967, 1973, and 1982; the Iraqi wars of 1991 and 2001) -- to imply that inflation causes unemployment is misleading as to the true causes of recessions macroeconomically.

Benjamin said...

William-

I would like your take on the the performance of the Japanese yen in the last 20 years--it has doubled in value, as measured by exchange rates--and that of the Nikkei Dow, which has lost about 80 percent of its value.