Notes From Underground: A Review of Nehru Versus Nairu

Yesterday, Boston Fed President Eric Rosengren filled the airwaves with talk about the FED to be more aggressive in raising rates in order to prevent wage inflation from curtailing the current expansion. The continued concern from Wall Street about the POSSIBILITY of wage inflation because of FULL EMPLOYMENT reflects on the flaws in central bank’s models. Nairu (non-accelerating inflation rate of unemployment) is so 1970s, when globalization was just beginning and private sector unions had genuine bargaining power. The end of the Cold War unleashed hundreds of millions of workers to compete with workers in the highly developed and advanced economies. The fall of the Berlin Wall pressured even the strong German unions as the fear of jobs moving to Eastern Europe resulted in Social Democrat Gerhard Schroeder initiating the Hartz IV labor reforms which resulted in stagnant wages in return for some job security.

The continued concern about wage inflation because of full-employment is a mistake. If the FED wants to raise rates to deflate the vast amount of ASSET INFLATION then I am a big supporter for it is NEGATIVE REAL YIELDS that keeps the BID alive for equities and other asset classes. Chair Yellen is certainly aware that wages are STICKY DOWN because of the vast global capacity of workers and capital in China and other Asian nations. The free flow of capital allows global corporations to seek returns by building factories in cheap labor locales. The latest trend is investment into India where 1.3 billion people reside. Hence, NEHRU PREVAILS OVER NAIRU. It is perfectly correct to end the ridiculous policy of ZIRP and QE but don’t point at full employment as the reason. For Chair Yellen this is cognitive dissonance being as she would prefer for wages to rise as a percentage of profits. NAMASTE.

***Please take a listen to the recent PODCAST from the Financial Repression Authority.

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16 Responses to “Notes From Underground: A Review of Nehru Versus Nairu”

  1. Trader 1 Says:


    How much weight do you think the older members of the FED place on robots displacing workers for good and keeping a lid on wage inflation (added to the global capacity of human workers)? What I’m trying to ask is their view of economics somewhat distorted by the generation they grew up in?

    • Yra Says:

      Trader–that is a great question but I think the answer is found more in model dependency than gerontocracy

  2. frank c. Says:

    Rosengren wage inflation/unemployment is based on the Phillips Curve. As you reach full employment wages increase.

    The Phillips Curve has long since been disproven and is no longer an accepted economic theory.

    Globalization took over. The price and supply of labor is not bound by the US Labor force.

    That being said talk to any employer and it is hard to find skilled workers, let alone pass a urine test.

    Rosengren may be more worried about asset inflation. And is one of the few who has spoken out about the commercial real estate bubble.

    Assets look fully priced. As your friend Rick says, “yields are on the move”. With the French election behind us more global tightening looks likely.

    • Joe Stoutenburgh Says:

      Frank, you’ve his on something important – the increasing bifurcation of labor between unskilled (parking attendants, coffee baristas, burger flippers) and skilled (plumbers, engineers, electricians, steel workers, machinists). The former commodity is in large supply globally and the later is not only in short supply but increasingly available in Asian labor markets. There is nothing FED policy can do to alter this trend, and they should stop pushing on the string.

      Ironically the skilled workers are designing the very systems that will reduce the need for unskilled, driven by minimum wage increases. Order your pizza on-line and have it delivered by drone.

      At my local coffee shop all the servers are college grads in poly-sci, journalism and graphic arts. Some stayed in school long enough to get two useless degrees. They have a mountain of debt and are holding down 2 or 3 jobs. They are not the ones driving up housing prices.

      Sadly, the kids that come in each morning on their way to the local School for the Arts are just staring at their Snapchat Story feeds & Facebook pages. This year I’ve seen only toting math and science books. The outlook is an increasing supply of unskilled filling the decreasing demand.

  3. Bojo Says:

    But you don’t understand, Yra! Yellen and others have done so much good for humanity as if saving millions of baby seals. Cognitive dissonance indeed.
    Namaste to you! : )

  4. Arthur Says:

    Worth listening and reading. Thanks!

  5. Trader 1 Says:

    Marc Cuban was interviewed on CNBC Fast Money 5/11/17. If Cuabn is even 25% correct with his Aritificial Intelligence Thesis (he is investing $$$ behind his thesis) the FED is going to be praying for “Sticky Down” Wages — It’s going to be All Out Wage Deflation.

    Perhaps Rosengren and the rest of the FED should have a sit down with Cuban for a listening session (if they could put their Hubris aside for an hour). — That Cuban Interview is a must listen.

    • yra Says:

      Trader–the Fed will only view it as a stochastic disturbance because otherwise they would have to admit the MODELS are flawed—but your post i believe has great merit

  6. brianpellegrini Says:

    I must respectfully disagree on the wage inflation issue Yra. The U.S. is largely a closed economy. You can’t trade someone asking you if you’d like the steak special or the labor needed to build the next condo. Asset price inflation begets wage inflation.

    Whether that translates into price inflation for goods and services or a decline in profits is a separate question. In my opinion, we won’t get to find out the answer because a hawkish response to wage inflation will deflate asset prices before any feed-though effect can be observed.

    • Yra Says:

      Brian—but if you are Yellen with a leaning towards allowing workers to finally achieve a pay raise and receive a bite of the profits why be in a HURRY to raise rates???

      • brianpellegrini Says:

        Yellen, Dudley and the other governors definitely want to run the economy “a little hot” to encourage wage inflation. However, I think the problem they face is statements by the regional presidents and the market’s own interpretation of the situation steepening the curve.

        With dismal productivity numbers and rapidly rising wages the FOMC could be forced to forge ahead with policy rate increases at the short end to try to contain market-generated increases at the long end. I think the situation is made more difficult for them by uncertainty regarding how/when an unwinding of the Fed’s balance sheet will occur. In my opinion, the FOMC’s manipulation of the forward curve earlier in the recovery is now coming back to haunt them.

        I’m very interested to hear/read your thoughts on how bond market participants see the situation because my view is more theory-based.

  7. Arthur Says:

    FT “Italian populism unnerves investors in the Eurozone” and “German election: ‘A bit of a non-event’

  8. Arthur Says:

    Confronted with the possibility of the Netherlands quitting Europe’s monetary union by Eurosceptic MP Thierry Baudet, an angry Mr Draghi said: “The euro is irrevocable. This is the treaty. I will not speculate on something that has no basis.”

    • yra Says:

      Arthur—perhaps Mr.Draghi needs to understand that treaties have always found ways to be broken–I listened to that meeting and mr.Draghi didn’t not like the questioning he was undergoing–the Dutch MPs were peppernig him with real questions–maybe he nver heard of the treaty of versailles which was also dependent on German transfers

  9. Arthur Says:

    From a geopolitical-macro perspective, what three trends should macro investors watch? For example: 1. US-China relationship; 2. Euro; and 3. Inequality


    • Yra Says:

      Arthur–this will be a full blog in response —when i can get to it–so many prairie fires burning —the long dollar positions we have discussed were vulnerable .Interesting that the uber hawk,Jan Hatzius was out changing his stance again—-Goldman is like a promiscuous sailor—an opinion in every port of call

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