Saturday, September 27, 2014

CPI: Energy

The following chart shows the natural log of the Consumer Price Index for Energy. When using natural logs, constant exponential growth is seen as a straight line.

Click to enlarge.

The prosperity bulls are convinced that we are reliving the 1980s and 1990s. From an energy price standpoint, this chart would seem to confirm it.

The 1970s saw a huge increase, and then there was no increase for the next 20 years. The 2000s saw a huge increase, and there has been no increase since.

From a simplistic standpoint, this sure looks like a compelling prosperity theory to me. Maybe they've got a point. The 2010s seem a lot like the 1980s and 1990s so far. Call me stickler for details, but I do have a few concerns about the long-term theory though.

Interest rates fell dramatically in the 1980s and 1990s. The inflation rate did too. I therefore have a few rhetorical questions on my mind.

1. Can we expect interest rates to continue to fall for another 15+ years or so? You know, so we can accurately relive the prosperous 1980s and 1990s in all their grandeur? Can we assume it will come with massively increasing debt loads? Leverage up, baby!

2. Will we see the inflation rate fall similarly? This pesky 1.7% annual CPI inflation rate seems so high. Let's bring it down a thousand basis points or so like we did in the 1980s and 1990s (compared to the 1970s). Making Sure "It" Does Happen Here! Big time!!

3. At what point will the Fed speak to us in Japanese? I do not recall them speaking to us in Japanese in the 1980s and 1990s. However, maybe it is different this time. For what it is worth, I will personally be looking for "Tora! Tora! Tora!" in the FOMC minutes. I will also be scanning for "I fear all we have done is to awaken a sleeping giant and fill him with a terrible resolve." That would be written in Japanese of course, so as not to spook the masses.

September 3, 2014
OECD warns wage cuts create deflation risk

It called for governments to promote more productive and rewarding jobs.

Yes. Promote the @#$% out of productive and rewarding jobs! Why didn't anyone else think of that? Some sort of global ad campaign? "Up with more productive and rewarding jobs!" Or perhaps a plethora of automated government telemarketers could call us directly to inform us of the virtues of more productive and rewarding jobs? Yes, indeed. That's bound to work. Calling several times per hour would be greatly appreciated!

As a side note, government telemarketing work should only be done by automated systems since the tasks are clearly unproductive and unrewarding. These are the kinds of jobs that humans do not want to do. There's nothing worse than a human telemarketer trying to hard sell the productive and rewarding job theory to a guy in the National Do Not Call Registry many times per day. Trust me on this.

Source Data:
St. Louis Fed: Custom Chart


jeff said...

The increase in domestic oil production has improved the US trade deficit and has helped strengthen (partially) the dollar.

The USD also seems to be regulating the economy at this point. A strong dollar is a form of tightening that makes corporate exports more expensive (but does lower the cost of imports).

From the household and corporate perspective they see
- low energy cost (low CPI but with real wages)
- low interest rate (even with high debt)

This is an estimate of how much "free money' the average household has after tax, after debt expenses and after CPI increase. As the chart shows, in 2007 before the crisis the average household spent 15% of personal income on tax, interest and CPI increases. Currently, those expenses are at the all time low of near 10% of personal income.

Households and corporations have received a 5% boost in cash flow after tax with the low inflation and low rates. That increase in cash flow is in part sustaining the US economy.

The two bad thing is
- most of these "gains" in cash flow are going to rich (wealth inequality) and
- in a sense what we are doing is giving "welfare" to the weakest and highest levered consumers and companies who normally would default with low after tax interest/inflation

I expect though the private and corporate sector will lever up and use that "extra cash flow" and at some point when the business cycle turns down there will be more delinquencies and bankruptcies.

I'm surprised how well the US has done post crisis but I don't see a self sustaining way out of this yet. I guess we wait for the business cycle slowdown which will continue the original delevering process. At worst we become more and more like Japan with lower interest rates and low inflation. I think Japan has shown for the past 20 years that the hyperinflation or debt deflation disasters are unlikely outcomes. Rather a world of awful return on equity and gyrations in inflation/deflation.

jeff said...

I'm glad you are posting again.

So when do you see the business cycle rolling over?

Nathan said...

Doug Short maintains an interesting series of charts on gas prices and miles driven and gas sales per capita.

From either perspective it looks like gas at $3-4 / gallon kills off demand.

Stagflationary Mark said...


I'm surprised how well the US has done post crisis but I don't see a self sustaining way out of this yet.

Yeah, me too.

So when do you see the business cycle rolling over?

I predicted it would roll over on or before October of 2014 a few years ago. Seems unlikely now, but we'll see! Won't know for 6 months or more if I was right. (Few seem to notice a recession until we're well in it.)

Stagflationary Mark said...


I really don't think the global economy can tolerate $100+ oil. One wonders if the falling oil price recently doesn't reflect that.

jeff said...

After Japan's property bubble burst in 1990, their next recession was a the result of a external bubble (1997 asian crisis that popped when US started raising rates), then the 2000 dot com bubble and then again in 2007 with US property bubble (both which also popped with rising rates). The last recession occurred in 2011 after the earthquake and Tsunami.

Personally, I think the bubble is in the corporate junk bond sector. That said, without US rates rising to pop that bubble like, they popped the asian bubble, dot com bubble, housing bubble (or the black swan earthquake) then perhaps Japan would have avoided a recession. And simply grew at at a slow rate. Maybe the US can somehow keep muddling along here with low growth until some bubble pops or some big black swan disaster jolts confidence.

Stagflationary Mark said...


Personally, I think the bubble is in the corporate junk bond sector.

It would make sense. Just as many Americans fell into the subprime housing trap, so too many corporations have fallen into the subprime business trap. No amount of borrowing can likely make a bad business profitable. It simply extends the point at which it fails.

Some would argue that corporate subprime borrowers can't bring down the economy any more than subprime homeowners could bring down the economy. The people making these arguments have clearly been living in a cave for the past decade though, lol. Sigh.