America's economy (via the economist)

The Economist takes on the productivity "miracle" (highly improbable one should say) and disects its effect on the economy. I think the Ben line is interesting, especially in light of the fact that Ben is one of the guys that has helped keep all of the overcapacity in the system (we are running at about 74% currently, that is if the capacity utilization numbers can be trusted, but that is a disortation for another day).


If demand continues to lag behind productivity, inflation as well as employment might fall again. In a prescient speech last month, Ben Bernanke, a governor at the Federal Reserve, warned that a growing economy might still be vulnerable to disinflation, or even deflation, if the recovery is not strong enough to take up any slack capacity. A predicament of this kind—the mirror image of stagflation—would not be unprecedented. The late 19th century saw over two decades of mild deflation, during which time many economies grew respectably. China routinely combines growth rates of 6% or 7% with near zero inflation.

While the academics debate the size of the output gap, both the Fed and the bond markets have to act on it. The latest productivity figures suggest the recovery has some way to go before it brings the economy back to its full potential, stirring inflationary pressures and inviting higher interest rates from the Fed.