E Edward Lambert On Bond Demand, The Coming Recession, And New Normal

Edward Lambert is the blogger at Effective Demand Research. He is a noted economist, having shared his work at Angry Bear Blog, where he is an active contributor, and elsewhere. He has come up with an equation to measure effective demand and predict recessions. His calculations indicate we are on the path to recession already. I will address that aspect of his work down the page, but what has excited me most about his theories is that he agrees with me about monetary theory.

He is the only economist I know of who has come right out and said that monetary theory is dead, a point which I have been trying to share with economists to no avail until I ran across his comments.  Many economists simply refuse to speak about bond demand, like many Market Monetarists I have tried to engage.  Dr. Lambert explained it to me this way in an email:

I agree with you. Money theory, as it applies to bonds, is dead. Basically

because the models of economists cannot grasp the new normal. That is where my

effective demand is making sense of so many things. 

Krugman is waiting for the whites of inflation's eyes, but with after-tax

corporate profit rates at never before seen record highs, there is no price

pressure, too many firms are still able to undercut any price rise. So the

only thing that will bring on inflation is a substantial fall in after-tax

profit rates, which brings on a recession. So when Krugman gets his inflation,

a recession will already be happening. [Emphasis Mine]

Dr Lambert read some of my articles on Talkmarkets regarding these subjects, and the email he sent spoke to Effective Demand and to fiscal stimulus as an economic tool:

Economic theories have not grasped how the economy has changed. For me,

getting a working model for effective demand has made the difference. My

models are describing cycles that existing models cannot do...

About fiscal stimulus, I do not think it will work. Any money injected into

the circular flow of the economy will just flow into high corporate profit

rates and low labor share. Effective demand will stay weak. And with

unemployment low, and some marginal firms unable to pay the rising wages,

there will be internal decay in the business cycle leading to a contraction.

The contraction will want to clean out marginally unproductive firms. It is

long overdue with these low interest rates that we have had for years.


The pressure will build for wage increases. So the pressure on marginal firms

will build too. That cascades into a contraction.

More economists are expecting a recession in a few years, like Larry Summers.

But a recession is closer than they think because they still have one foot in

the camp that thinks there is still lots of slack. Yet as Keynes described it,

weak effective demand will keep the economy from reaching normal full

employment. The slack we see now will not be used due to weak effective

demand. So the recession will come on earlier than they think. [Emphasis mine]

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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Gary Anderson 2 years ago Author's comment

I think you are right. Many people, George, seem to be interested in the next big innovation that would pull us out of our malaise, but if anything, some of our innovations will doom labor. We need innovations that do not doom the labor force.