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High Unemployment = High Inflation

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A lot of posters here (usually the deflationist uber bears) talk of high unemployment leading to deflation.

This is a huge myth. On an empirical basis high unemployment goes hand in hand with higher inflation.

Zimbabwe had an 85% unemployment rate with hyperinflation.

The deflationists need to get back to reality and away from the Japanese example when their fundamentals are so polar from the UK's position today.

Inflation and unemployment go hand in hand.

http://www.financialsensearchive.com/fsu/editorials/delta/2009/0622.html

A High Unemployment Rate Correlates

to a High Rate of Inflation

by Michael Pento, Delta Global Advisors, Inc. | June 22, 2009

Print

It absolutely amazes me how sanguine the Fed, Treasury and Administration are about the prospects for subdued inflation. What they and many economists like to point to as the source of their optimism is the high rate of unemployment, which is currently 9.4%.

But the truth is that inflation actually causes higher rates of unemployment, while it is false to believe that inflation can be prevented by a labor slack in the economy.

To prove this point, I would like you to observe the following two charts.

I chose 1971 (the year Nixon broke the gold window) as the starting point, as that was the year we began a 100% fiat currency system. The correlation between Consumer Price Inflation and the Unemployment Rate is impossible to ignore. You can clearly see that unemployment rises when CPI increases, with a small lag. The point is this; if inflation causes rising rates of unemployment, is it reasonable to assume that high rates of unemployment must necessarily prevent inflation from occurring? Clearly that would be false.

A closer look at the data

The cyclical high 12.2% Y.O.Y. rise in CPI that occurred in November of 1974 led to the cyclical high of 9% unemployment during May of 1975. Likewise, in 1979 the Y.O.Y increase in CPI reached a high of 14.6% in March and April of 1980, which was followed by another cyclical high 10.8% unemployment print in November and December of 1982. Finally, CPI increased from 1.2% in December 1986 to 6.4% in October of 1990. That again corresponded with the rise in unemployment that occurred from the 5% level in March of ’89 to 7.8% in June of ’92.

There is substantial evidence from the above data to conclude that a rise in unemployment does not serve as a depressant to inflation but rather that inflation leads to an increase in job loss.

However, there is one noted exception. What’s going on today you may ask? We see a huge increase to 9.4% in the unemployment rate and yet CPI decreased 1% Y.O.Y in May—which belies the 38 years of historical data. I believe much of what the CPI is picking up today is the plummet in oil and commodity prices that occurred last year. The price of oil dropped 75% and that caused a onetime temporary distortion in the inflation data. Meanwhile, since then much of the decline in commodity prices has been reversed. Oil is up 70% and copper is up 60% this year while the US dollar is down 10% since March. The CRB Index gained 14% and gas prices are up 26% just in the month of May.

Those who are relying on a high rate of unemployment to keep inflation in check will be severely disappointed. There just isn’t any historical basis for that belief in this country or any other. In fact, there are some extreme examples today of countries that experience high rates of unemployment along with runaway inflation.

The reason for this is simple. More people working and producing more goods to consume has nothing to do with inflation. Inflation is a monetary phenomenon and is caused by too much money chasing too few goods. In fact, fewer people in the work force mean fewer goods and services available to soak up money supply. Higher rates of inflation cause the dissolution of the middle class, as new money created always goes to the rich first. What money the non-rich do possess is subject to the same destruction in purchasing power of the rich, only they have much less of it. One of the consequences of this is a loss of discretionary purchases, which directly leads to a rising rate of unemployment.

The facts are that today that the Fed Funds target rate is near zero, the monetary base has more than doubled and the country needs to sell trillions of dollars in record shattering debt. Those factors alone are a perfect recipe to send CPI inflation rocketing up to meet the level of unemployment. Given the very strong historical relationship between inflation and unemployment, coupled with the recent surge in commodities, along with renewed weakness in the dollar, and it is reasonable to expect the rate of inflation to increase significantly in the very near future. Meanwhile we can only hope that Messrs. Geithner and Bernanke stop believing low inflation must persist just because there are less people out there producing.

Edited by ringledman

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Bleeding obvious.

But go and tell that to our very own debtor class evangelist, scepticus. There are just too many indebted VIs desperate to see the currency debased to advance their own interest. It's hopeless.

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When deflation struck the US post 1929 and again in the late 1950's there were a lot of people out of work.

Unemployed people pay less for their sh*t and prices have to fall to accommodate the masses.

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unemployment arises from a lack of jobs...bleeding obvious.

both high inflation and deflation cause a lack of jobs....one because people cant pay the next months bills without either a loan or a cut in costs, and the other becuase they cant pay next months bills without more sales or a cut in costs.

One has an end though.

and its not hyperinflation.

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We've has a credit boom.

It has popped

What happens now depends on central bankers and governments

If they emit unbacked currency to pay (rising) public sector wages, we get hyperinflation and a withdrawal of money from our economy by private investors

If they do what they have been doing (QE, ZIRP) we kick the can down the road for a bit. This may be a bit deflationary until the bust, at which point they escalate and go hyperinflationary or accept a GD deflationary outcome

I still think we'll see deflation (of credit) coupled with commodity inflation. Mugabe's government was exceptional in surviving hyperinflation - most don't. British savers and pensioners render hyper inflationary policies politically impossible

Things might turn out different in the US - it wouldn't be that surprising to see klepto-sucking Bernanke bugger off in his helicopter after triggering hyperinflation to escape the (armed) fury of the mob

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unemployment arises from a lack of jobs...bleeding obvious.

both high inflation and deflation cause a lack of jobs....

Bleeding obvious. You mess with the currency and the real economy suffers.

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unemployment arises from a lack of jobs...bleeding obvious.

both high inflation and deflation cause a lack of jobs....one because people cant pay the next months bills without either a loan or a cut in costs, and the other becuase they cant pay next months bills without more sales or a cut in costs.

One has an end though.

and its not hyperinflation.

My previous post was over-simplistic and misleading.

It's the inflation that destroys the economy and jobs but at long as inflation continues that destruction can remain hidden through additional misallocations of capital.

The deflation only makes apparent the extent of the prior inflationary destruction.

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It's the inflation that destroys the economy and jobs

That Oxford economist woman who is interviewed in "How to beat tough times: Moneywatch" makes quite an interesting point: historically and in this country at least, high levels of inflation occur during the recovery and not the recession.

Thinking about it, this actually makes some sense as after all, if unemployment is rising how can you justify raising prices? Is it not better to take the hit now and raise prices during the recovery? And from the BoE's point of view, high levels of inflation can erode debt while at the same time be absorbed as the economy is now "recovering".

I suspect that just like in the late 70's we will experience high levels of inflation from a stagnant economy. The inflation aspect will reduce the impact of misallocated of funds and in effect free up new capital so that the wheels can turn once again. Of course this will need to be justified and so the medium-term outlook should probably be for deflation and more QE.

Edited by LandOfConfusion

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Guest Noodle

Of course, even after slipping to third place, in scale of economy Japan is still rich and comfortable some say the Switzerland of Asia.

Getting away from monetary aspects there are other fundamentals that differ quite dramatically from he society that created hybrid cars and the Walkman to that of the UK. Such as a 99 percent literacy rate and the world's longest life expectancy at 83 years. Tokyo is also the capital of fine dining, with more Michelin-starred restaurants than Paris

Yeah but does it have a Burger King?

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The deflation only makes apparent the extent of the prior inflationary destruction.

Does it?

So why aren't our press unanimous in condemning the evils of HPI debt prior to the bust? Perhaps it's only really apparent to those who were already alarmed by the inflation?

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I did point all this out months and months ago, of course I was derided because the uber bears want to plant their collective thinking heads in the sand and say 'lalalalalala can't hear you............cos it doesn't fit with my failing strategy.............'

Go back over my posts.

'Unemployment rose dramtically between 1975 and 1985...............wages doubled' go figure.

The prudent are getting trashed and will be trashed to save the indebted idiots. Sick but true. Don't keep shooting the messengers, wake up!!!!

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Guest Noodle

Yes I think it does.

Anyway didn't you see the red herring in the comparison ?

Nah, I don't like those fish burgers.

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That Oxford economist woman who is interviewed in "How to beat tough times: Moneywatch" makes quite an interesting point: historically and in this country at least, high levels of inflation occur during the recovery and not the recession.

Thinking about it, this actually makes some sense as after all, if unemployment is rising how can you justify raising prices? Is it not better to take the hit now and raise prices during the recovery? And from the BoE's point of view, high levels of inflation can erode debt while at the same time be absorbed as the economy is now "recovering".

I suspect that just like in the late 70's we will experience high levels of inflation from a stagnant economy. The inflation aspect will reduce the impact of misallocated of funds and in effect free up new capital so that the wheels can turn once again. Of course this will need to be justified and so the medium-term outlook should probably be for deflation and more QE.

this short presentation may add some light

http://khanexercises.appspot.com/video?v=LXrPdFn7Gn4

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'Unemployment rose dramtically between 1975 and 1985...............wages doubled' go figure.

That's because, during that period, from a Marxist point of view, the returns to labour were too great. The unions had too much power. So, a course of action was taken to reduce the returns to labour and increase the return to capital, which was apparently in balance around 1986. However, these measures continued, and lead to the mess we find ourselves in today.

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this short presentation may add some light

http://khanexercises.appspot.com/video?v=LXrPdFn7Gn4

That's quite interesting, thank you.

Getting back to the OP's point (high unemployment can lead to high inflation), this doesn't seem to be supported by that video. As employment falls, quantity and velocity of money also fall, as does some capacity. The main driving factors here though (money available and prices) therefore fall, with capacity falling later. This isn't inflation but it does end up in inflation as the economy recovers and demand starts to outstrip the now reduced capacity.

Of course things get more complicated when you introduce suppliers who use a different, unpegged currency and you buy most of your goods from them.

And when the central bank starts monetising government debt.

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That's quite interesting, thank you.

Getting back to the OP's point (high unemployment can lead to high inflation), this doesn't seem to be supported by that video. As employment falls, quantity and velocity of money also fall, as does some capacity. The main driving factors here though (money available and prices) therefore fall, with capacity falling later. This isn't inflation but it does end up in inflation as the economy recovers and demand starts to outstrip the now reduced capacity.

Of course things get more complicated when you introduce suppliers who use a different, unpegged currency and you buy most of your goods from them.

And when the central bank starts monetising government debt.

I think the video entirely endorses your position

lets suppose demand is 50,000 units.

lets suppose that 100 people make 100,000 units.

now, due to poor management or loan failure or soemthing causes 50 people to be redundant. we can now see that production is 50,000 units.

competition is removed and the unit makers can raise the price. 1 more redundant and their will be a supply shortage....and the price rises quicker.

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Mmm,... doesn't competition / imports just fill any demand gap.

It could be argued those 50 made redundant used to ern a wage (which represent a larger percentage of the work force / consumers in this simple model) and now can't afford to buy as many units, so demand falls, less money around and deflation (especially if debt servicing is sucking up more money).

History indicates that Thatcherism claimed to promote low inflation. In my view the large number of unemployed helped to keep inflation lower and allowed lower interest rates during that early 80s period. Depends on your initial viewing point, starting conditions and event timing I guess.

EDIT: I thought that one of the coalition's plans was to use high unemployment once again as a tool to hold IRs lower for longer if the balance against deflation and QE like schemes so required.

Edited by DarkHorseWaits

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Mmm,... doesn't competition / imports just fill any demand gap.

snip

in the simple example above, yes, imports may affect prices....course, defending the curency would prevent some of that, but letting the currency fall would reduce employment locally.

we have inflation, we also have production falling..

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  • 238 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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