People are most bullish when the valuation is at the highest, and most pessimistic when the valuation is at the lowest. However, in financial assets, the reverse is often true. People are usually happy when the price of goods falls, and they buy more, whereas the opposite is true when the price rises. This is especially true of investment assets. Sentiment drives the behaviour of investors, consumers, governments, Central Bank officials and financial analysts. The author did not address the role sentiment plays in this current situation, and I feel this is in fact the lynchpin of what will happen next. Many sources show the lower 90% have lost income share. William Lazonick has shown that over 90% of corporate profits have gone to stock buybacks or dividends. The surplus of the economy for many decades has gone to a wealthy minority, not to the working majority. How does a company have record profits in an inflationary period? When labor and material costs rise, the profits do not also rise, they drop. Josh Bivens at EPI says that 53.9% of inflation is caused by corporate price gouging, and no where does Roubini mention this finding. What the economy needs is a rebalancing of income distribution, and that will require a lot of government employment and government price control. Alpert with Robert Hockett and Nouriel Roubini wrote a paper, The Way Forward, in 2011 that called for a public jobs program and massive public investment. Daniel Alpert wrote a long paper on inflation in October 2021, that is closer to the mark. The owners are receiving more, this is causing an imbalance of demand. The workers are receiving a smaller portion of the overall national income. I you look at BEA.gov, the "disposable" income per capita in chained 2012 dollars, it has tripled since 1968. The BLS also shows that in 1968 the "average weekly earnings of production and nonsupervisory workers" were higher than in 2022 - HIGHER. Why? I just looked up "Median weekly earnings for production and nonsupervisory workers" at the BLS, it showed that since 1979 that the middle employee weekly income has grown by 3.6% - over 43 years and only a 3.5% gain. (Flow of Funds page 138, Table B.101) One might ask what caused such a huge jump? Since 2007 the S&P 500 has tripled, since 2016 the S&P 500 has doubled. In 2018 Q4 they stood at $15.564 trillion, in Q4 2021 they were valued at $32.011 trillion. "Corporate equities" doubled in 3 years reports the Fed's Flow of Funds. This matters because supply-driven inflation is stagflationary and thus raises the risk of a hard landing (increased unemployment and potentially a recession) when monetary policy is tightened. While both demand and supply factors were in the mix, it is now widely recognized that supply factors have played an increasingly decisive role. The second question is whether the increase in inflation was driven more by excessive aggregate demand (loose monetary, credit, and fiscal policies) or by stagflationary negative aggregate supply shocks (including the initial COVID-19 lockdowns, supply-chain bottlenecks, a reduced US labor supply, the impact of Russia’s war in Ukraine on commodity prices, and China’s “zero-COVID” policy). That depends on the answers to six questions.įirst, will the rise in inflation in most advanced economies be temporary or more persistent? This debate has raged for the past year, but now it is largely settled: “Team Persistent” won, and “Team Transitory” – which previously included most central banks and fiscal authorities – must admit to having been mistaken. NEW YORK – The global financial and economic outlook for the year ahead has soured rapidly in recent months, with policymakers, investors, and households now asking how much they should revise their expectations, and for how long.
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