‘Animal spirits’ update: contraflation?

The adaptation level theoretic measure of confidence that I track continues to be positive, slightly, based on the relationship of the unemployment rate to an exponential moving average of recent rates.  When you’re coming down from over ten percent, 8.1 percent seems great (and nobody really pays close attention to the high U measures of unemployment, in this view).  The configuration of my confidence metric and the Michigan sentiment measure most closely resembles that in 1973, when Michigan confidence was low, but the A metric was positive.

The period after the election to the inauguration is what someone has called the mother of all lame ducks if Romney wins.  Any tax relief the Congress might enact—whether a “temporary” payroll tax cut or further postponement of the Bush-Obama tax cuts’ expiration—will be political suicide.  It might well be even if Obama wins.

That implies that fiscal drag equivalent to 3-4 percent of GDP could kick in January 1, 2013.  The underlying unemployment rate forecast is as follows:

Notice that confidence turns up even as the unemployment rate continues to rise!  This is one of the interesting nonlinearities of the A metric.  In terms of my confidence metric, the next recession may not be that bad, ending in about the middle of 2014, probably as the Fed pumps even more credit into the economy, and as inflation probably infects the wage price spiral, gunned on by war in the Middle East, if Charles Nenner’s forecast is true.

In the final supernova end game of the global credit bubble there is a tremendous first-mover advantage to she who inflates first.  And historically, war is a quick way to get a “hot” inflation going—even as some sectors (like housing and some commodities) continue to deflate!

We need a new term for this phenomenon of inflation and deflation occurring simultaneously. 

Contraflation?