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Not Enough Inflation

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Krugman points out that the U.S. Federal Reserve's forecasts in March 2012 show the U.S. will experience low inflation and high unemployment for many years. These forecasts are in sharp contrast to the expectations in the equity markets based on an uptick for a couple of months of unemployment numbers. The Fed's own statements suggest the improvement in hiring may be temporary and a response to the overreaction in hiring in 2009-2010 to the financial crisis, and not a lasting improvement. The Fed pointed out that the long term unemployed are at about 40% of the total unemployed and the share of the population that is working in March 2012 has barely budged from 58% in 2009.

Declining U.S. Labor Force Participation Rate for 2010-2016 and its implications for unemployment and economic growth

06/06/2009

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Job Growth Eases Fears About Effect of Closing

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Candid Criticism for Fed That Wasn’t on the Agenda

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Why high unemployment in the U.S. is expected for 2010-2014

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Structural problems like a mismatch of skills between maufacturing and construction sectors worst hit since 2008 and growing sectors like healthcare is one problem. Geographic factors and difficulty selling homes in states like Michigan is another. The tighter credit from a return of banking sector losses from bad home equity loans that is expected in late 2010 will keep the recovery from taking hold keeping unemployment high. The economic uncertainty following repeated budget battles between political parties also affects business investment.

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90 Million Americans Not Working

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Hiring Slowdown Blurs Growth View

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Confronting Old Problem May Require a New Deal

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Hiring Is Strong and Jobless Rate Declines to 6.1%

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Danger of increasing numbers of permanently unemployed workers in the U.S.

04/30/2009

The serious problem of the large proportion of long term unemployed in the total number of unemployed persons in the U.S., with the figure higher than 40% in 2012. More than any downturn in the postwar period the present situation presents the danger of increasing numers of permanently unemployed workers. Retraining become a big issue as some industries like autos are permanently downsized, and others like healthcare and renewable energy which are growing will require retraining.

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Jamie Dimon’s harried JPMorgan Chase pushes campaign for worker training - The Washington Post

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Elevated Level of Part-Time Employment: Post-Recession Norm?

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The problem of declining wages and rising inflation in the U.S. - 2011-2012

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OECD report cites rising income inequality - The Washington Post

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Job Growth Fails to Help Paychecks of Workers

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Hiring Booms, but Soft Wages Linger

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Sluggish Productivity Hampers Wage Gains

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U.A.W. Contract With Fiat Chrysler Would Give 2nd-Tier Workers Big Raise

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The probabilities of another round of quantitative easing or QE III in the U.S.

06/02/2011

Probabilities for a QE 3 in June 2011 are low, with inflation expected over the next 5 years at 2.8%, as suggested by TIPS. The Fed's thinking as reflected in comments by presidents of Fed regional banks is that there will be growth, even if it is "frustratingly slow at times." The Fed could act if a deflationary trend sets in. The extraordinary amount of liquidity- with about $2 trillion of bond purchases by the Fed since the 2008 crisis -acts as a counter weight to the housing slump, and to weak data for jobs and manufacturing.

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Fed Holds Steady as Economy Slows

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Bernanke’s Perry Problem

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Economy Deeply Divides Fed

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Divisions at Federal Reserve Led to Rate Compromise

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U.S. Consumer Price Index and the Fed

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Dollar Will Keep Jabbing at the Fed

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Housing Bubble Continues to Haunt Fed

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U.S. Treasury Inflation-Protected Securities (TIPS)

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TIP return for the last 12 months in August 2011 was 12%.

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Inflation Below Fed Target for 22nd Month in a Row

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The Bond Bubble and the Case for Stocks

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Better Ways to Fight Inflation

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Inflation Pressures Ease

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Inflation Hedge Is a Winner

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Allan Meltzer's program for the economy and advice to the Fed and policymakers in 2011-2012

08/11/2011

Allan Meltzer on the dangers of a loose monetary policy and the need for an early exit strategy.

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Once Again, the Fed Shies Away From the Exit Door

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Bhidé and Phelps: Central Banking Needs Rethinking

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The Folly of Economic Short-Termism

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This Time, Maybe the U.S. Is Japan

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Kansas City Fed President Defies Conventional Wisdom

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Tomorrow's Recession Recovery Is Today's History Lesson

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Fed's Yellen Defends Low Rates

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Recognizing Bubbles But Still Cautious About Deflating Them

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Janet Yellen Isn’t Going to Raise Interest Rates Until She’s Good and Ready

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Policy Makers Seek to Learn From 1937's Stalled Comeback

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Philadelphia Federal Reserve bank president Charles Plosser and other expert criticism of Fed chairman Bernanke's monetary policy.

01/04/2010

Plosser says the Fed cannot create jobs or retrain a workforce. In the short term the Fed can act against disinflation, says Plosser, but in the long term Fed policy such as the one being pursued by Bernanke can backfire and lead to more instability in the economy. The Dallas Fed President, Richard Fisher, expresses similiar views.

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Plosser's Monetary Rules

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Fed Hawks Wary of Bond Buying

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Fed Officials Try to Set the Market at Ease

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With 40% of the unemployed in the U.S. shown as long term unemployed, mismatch in skills and other structural problems with unemployment, the U.S. Federal Reserve policies of Fed chairman Bernanke are geared to addressing this problem.

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The Fed's policy according to Neil Irwin of the Washington Post, is to move in the direction of reducing the composition of its bond portfolio rather than printing new money for new bond purchases. That policy of printing money for bond purchases came under criticism from Republican presidential candidates and there were three dissenters at the last FOMC meeting. Mindful of this the Fed is now considering a policy called a "switch," of buying more long term bonds and reducing the short term bonds in its portfolio. This would reduce long term interest rates. The impact on the housing market of past and current moves is limited by the fact that the mortgage markets are not functioning properly, as a large proportion of homeowners are under water (owe more than their house is worth). The Fed's effort come under its mandate to keep unemployment in check in addition to inflation.

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For senior executives interviewed in this survey investing is all about capital preservation. One executive has moved all his funds to U.S. government bonds and cash, another executive has given up the 60% stock 40% bond allocation recommended by financial firm advisors and moved his savings to cash and high investment grade bonds. These executives witnessed the 2008 crash and are not taking any chances. Financial advisors of these firms continue to tell the public to stay in it for the long term. Who bears the greater risk if things go wrong? The middle aged investor risks losing the bulk of his 401 (K) as he nears retirement. Investor portfolios of the middle class in America risk further losses after losses in the 2008 crisis.

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With quantitative easing (QE), the Fed creating money to buy Treasury bonds at a fast pace, and with inflation "exceptionally low" in the Fed's words, there is considerable liquidity to support the surge in stocks. But this could change quickly. Investors would benefit from caution.

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The "Melt Up" U.S. stock market rally of late 2009 and its prospects.

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Farzad of BW says economic fundamentals don't justify the rally so it could fizzle out at any time in 2010 or 2011.

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