For All You Inflation Fearmongers, Dr Lambert Has an Answer

This article was first published by me on Talkmarkets:

We can see by the latest reading on the FRED chart that the velocity of money continues to decline. Even with Trump's reflation, we had a sliver of an uptick in the third quarter of 2017 from 1.425 to 1.427. But the chart still looks dismal:

Dr Edward Lambert of Effective Demand Research has an answer for those crying inflation in a response to a question on his article comments:

... If money supply times velocity matches growth in employment, there would be no inflation. But it seems that M*V not only matches growth in employed but doubles it. The only answer I can think of is that M*V is measured upon number of employed, and capacity building. Labor wages are stagnant. Supply-side is optimized and maximized. Inflation is muted to the point that it equals increases in employed people.Before 1980's, there was surging demand from boomers and labor power. This was happening upon big increases in the number of employed. Labor had a lot of power back then. But now less people are building the employed numbers, they have less power.Demand is muted.The fact that less people are increasing the employed numbers may explain part of why velocity of money keeps falling, which keeps inflation in line with growth in employed.Edward

So, to summarize:

1. Wages are stagnant.
2. Supply side is optimized and maximized.
3. Inflation is muted.
4. Labor is not surging, but is weak.
5. Demand is muted.
6. Slow labor growth results in the decline of velocity, which is what is keeping inflation in line with growth in employment.

Perhaps those 15 million people permanently missing from the labor force from the writings of Jeffrey P. Snider has made it impossible for the Fed to create inflation. Labor growth must be much more robust for inflation to wake up from its deep sleep.

It is this truth about inflation that has so many people pining to create a real estate bubble. Anything to create jobs, and massive growth in jobs, is the driving logic behind people wanting to relax regulation in lending.

I wrote awhile back that movements in lending practices would help facilitate the housing bubble of the future. The Consumer Financial Protection Bureau has been limited, as I predicted, since that article was written. No longer will it be possible to sue banks for lending recklessly to people who cannot pay loans back. That is a huge step towards another housing bubble.

Now, I have noticed that in some cities, like Las Vegas, many houses are going unrented. The demand for those houses as rentals is extremely weak. The only way many real estate investors are going to gain a payoff in housing is through a bubble, through easy money pushing prices to the stratosphere. That will be the financialization of slow job growth into a short window of big job growth.

Banks may be weakened if those investors fall flat. So it may be that a housing bubble will get the banks off the hook. Nothing in finance happens unless it rescues banks first.

Also, people have short memories, so they forget the bubbles and crashes of the past and want bubbles for the future. Those who believe that financialization solves everything will get their boost in jobs and in demand. The question is how long will that boost last and what damage will it do when it comes crashing down?


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