Is this a correct explaination on unemplloyement and proof of no inflation?

[Lord Xar]

From a FB discussion I am reading.

Unemployment:

As for your question, first the unemployment rate is a bad measure of the strength (weakness) of the economy. When people stop searching for jobs for instance, the rate will fall. But that is not exactly a measure of economic strength, or a good signal to the fed to push rates up or down, is it? Look at the labor force participation rate instead. It gives you the proportion of employed people to the total labor force pool (i.e. excluding retired, disabled and people in school). It is more than 4 percentage points below its all time high (which was smack in the middle of the Clinton admin, btw).

So the Fed pretty much did all that it could do to raise inflation expectations (i.e. lowering short term rates and buying longer dated bonds) by the trillions. And yet the inflation rate hasn't budged, hardly at all (notice that most of the volatility of the CPI is in food and energy and you have to be kidding if you think the Fed can drive this...even then we haven't hit 4% in FOUR YEARS. Given that wages are by far the biggest cost input, I don't see how anyone would expect inflation until LFPR goes way up. So yes, there is a relationship, and right now it would take a huge change in employment (do the math on 4% of able bodied 18-65 yo's in the US today) to even start to push on inflation. In normal times, there is a definate relationship. Of course, that relationship can (and does) break down on the other side too. You can't just generate huge amounts of inflation to continually improve employment either.

So there is a relationship, but lets say that the relationship has multiple equilibria. We've had trillion dollar deficits and have been printing money by the trillions and yet there is almost no change in inflation, in four years man. This suggest that we are in a hugely depressed economy and as stated above, gold buggery would have likely plunged us into 20-30% unemployment (i.e. Great Depression II).

Says proof of little inflation:
http://research.stlouisfed.org/fredgraph.png?g=5U1

[Zippyjuan]

Price inflation. People look at things like the price of food rising or the price of gasoline going up and feel that inflation is high but the calculation for the rate of inflation attempts to include everything you spend your money on- housing, your car, insurance, food, clothing, energy- and they give each a weighting based on what percent of their income the average person spends on each category. Take food for example. The average family spends about eleven percent of their total budget on food. Let's use an index of $100 for total spending and see what happens. If our budget is $100 and we spend eleven percent that means that $11 is going to food. So let's crank up the price of food and double it. 100% inflation in terms of food. What happened to our budget? Instead of needing $100 to be able to purchase the same things we used to, we now need $111 (the $100 we were spending plus the $11 higher food now costs). Is the inflation rate for our entire budget 100%? No- that would mean we need to be spending $200 to buy what we were before. Instead we have experienced a net inflation of eleven percent because that is how much our total expenses went up- even though food now costs us twice as much. You may notice changes in the prices of things like food and gas but it depends on how much of your budget goes to those items how much your total rate of price inflation goes up.

How about unemployment? It is correct that people no longer looking for work are not counted as unemployed- To be included in the work force you either need to be working or actively looking for work. The unemployment rate can go down by simply having a large amount of those not working giving up looking for a job. Is the economy in better shape than when the rate was higher? Are these people better off? Not necessarily. We have not added a single new job but the unemployment rate went down.

But we can get a similar effect as the economy does pick up. The economy will eventually pick up and more jobs get created but the unemployment rate may actually rise. How is this possible? Remember those people who were out of work but quit looking for a job? Well, as things pick up and job prospects improve, they can decide to re-enter the job market and resume looking for work. Now they are again counted as part of the work force and if they re-enter at a faster rate than new jobs open up, the unemployment rate will rise even though more and more jobs are being created.

[onlyrp]

As for your question, first the unemployment rate is a bad measure of the strength (weakness) of the economy.

I agree. Employment is a measure of inefficiency, or under the broken window theory, unemployment is actually a good thing.

When people stop searching for jobs for instance, the rate will fall.

correct.

[Lord Xar]

so, is the persons summation correct, or not? Curious your feelings on it and if not, where is the err?

[Zippyjuan]

He is right that unemployment is not necessarily a good indicator of how the economy is doing (see my post above). I do think he is wrong about the Fed though. Their aim was not to increase inflation expectations (though that may end up being a side effect of their actions) but to first try to stop the economic hemoraging (which to some extent it did- their actions were reassuring to investors and banks). They also would like to encourge more employment by lowering interest rates and thus the costs of borrowing for business. This part did not work. It was't that they could not borrorw money to expand their businesses and hire more people- it was that businesses did not see sales strong enough to merit hiring more people. Corporations are sitting on trillions of dollars instead of investing them. They are not short of cash (smaller businesses always have some difficulties rasing cash at will). Nor did buying all those securities encourage the banks to lend more. As just mentioned, there wasn't that much demand for loans in the first place. The Fed tried to add $2 trillion to the economy via their purchases. Where did the money go? Ironically, back to the Fed itself. When banks have too much money (excess reserves) not being lent out or invested, they can do two things with it- keep it in their own vaults or let the Fed hold it for them. Well, the total excess reserves the banks currently have at the Fed is...yes, $2 trillion!

Price inflation is supply and demand. If you have a large amount of money out after a limited amount of goods, then the sellers of those goods and services can ask for and receive higher prices for them- price inflation. But money has to be out seeking to be exchanged for those goods and services and with consumers not spending and companies not borrowing and banks not lending, the money chasing goods is not rising- despite the efforts of the Fed to get that money moving. More money circulating means more demand for goods which hopefully means more hiring of workers to produce and sell those goods which should help lower the unemployment. But if things are rising too quickly it can also mean rising prices. The Fed wants more employment but not necessarily more inflation though their actions can cause both. (I think they should only focus on inflation and the proper level of employment will work itself out- the Fed can't force companies to hire people- much as they would like to).

So due to low demand for money, inflation is low right now. But if that money starts to flow (the $2 trillion at the banks plus the $1 trillion or so the companies have) it will be hard to control and inflation in the future could pick up quickly. That is potential inflation. Really the only tool the Fed has to try to deal with that would be to raise short term interest rates (they don't really effect longer term rates). That would slow down the economy as it heats up. But you don't want to hit the brakes too hard or you could slip it back into recession. They will have to tread a fine line why trying to adjust an economy via monetary policy is difficult and risky.