'..the true “Phillips Curve” .. is actually a scarcity relationship between unemployment and real wages, not general prices.'
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'..the true “Phillips Curve” .. is actually a scarcity relationship between unemployment and real wages, not general prices.'

Posted by ProjectC 
'The Fed is wed to the Phillips Curve.'

- David Rosenberg, (Source, August 25, 2017)


'..In any event, the notion of an “inflation-unemployment tradeoff” rests on a misunderstanding of Phillips’ work, and a disregard for historical evidence.'

'There’s an apocryphal story that in 1787, during the journey of Empress Catherine II to Crimea, Prince Grigory Potemkin, the governor of the region, erected fabricated villages along the Dnieper River, which would be disassembled after she passed by, and rebuilt again downstream overnight.

When one examines the collapses of the tech bubble and the housing bubble, it’s evident that one of the central elements of those collapses was the gradual recognition by investors that the overvalued pieces of paper they were holding were actually little Potemkin Villages; temporarily glorious and impressive on the surface, but backed by much less than investors had imagined was there. What sort of “catalyst” is needed for a Potemkin Village or a Ponzi scheme to disappoint? Only the gradual or sudden discovery of the reality behind it: the recognition that there is no “there” there.

..

A note on unemployment and inflation

From the standpoint of unemployment and general price inflation, it’s useful to emphasize once again that the so-called “tradeoff” between the two is a wholesale misinterpretation of both economic theory and historical data. There is no such tradeoff. Recall that the title of the famous 1958 paper by A.W. Phillips was “The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861-1957.” Recall also that during most of that period, the United Kingdom was on the gold standard, and the rate of general price inflation was very well-behaved. Finally, recall that Phillips explicitly excluded periods from his analysis that included what he described as large “cost of living adjustments” in the general price level.

Given those observations, I’ve regularly argued over the years that the true “Phillips Curve” that A.W. Phillips originally identified is actually a scarcity relationship between unemployment and real wages, not general prices. Put simply, when labor is scarce, the price of labor rises relative to the prices of other things, and when labor is plentiful, its price falls relative to the prices of other things.

..

You certainly won’t get much benefit from trying to predict inflation using the unemployment rate. Better leading indicators of inflation include year-over-year nominal GDP growth, and the year-over-year percentage change in gold prices, both which lead inflation by about 52 weeks. Short-term interest rates have a fairly coincident relationship with inflation, and once short-term yields are taken into account, long-term interest rates come in with a negative sign, since yield curve inversion also often precedes inflation. In any event, the notion of an “inflation-unemployment tradeoff” rests on a misunderstanding of Phillips’ work, and a disregard for historical evidence.'

- John P. Hussman, Ph.D., Behind the Potemkin Village, September 11, 2017


Context

Three Massive Bubbles in 17 Years: When Will This One Bust? A 60% Decline Coming? September 11, 2017

'..remember also that the global financial crisis was the result, not the origin, of the Fed's activism..'

'..central bankers are determined to prolong a radical experiment in monetary inflation..'