Thursday, June 17, 2010

The Long Decline

A graph from Bill Conerly's Businomics Blog:

(From his April 25, 2009 post.) Look at the downhill trend created by the peak points. Capacity utilization at its best has been getting worse. Evidently the Keynes/Reagan shift (see my previous post, below) did nothing to slow the Long Decline.

With this picture I start a collection of graphs showing the long decline. But this one has a special relevance. A while back I quoted Anna Schwartz on the cause of inflation:

An increase in the supply of money ... stimulat[es] spending. Business firms respond to increased sales... The spread of business activity increases... In a buoyant economy, stock market prices rise... If the money supply continues to expand, prices begin to rise, especially if output growth reaches capacity limits.

"Prices begin to rise, especially if output growth reaches capacity limits."

Looks like those limits are getting lower. My comments from that post:

If it is true (as has been stated repeatedly) that our money supply has increased, then where is "the spread of business activity"? Where is "the demand for labor"? Where is "the demand for capital goods"? Where is the approach to "capacity limits"? Where is the "buoyant economy"? And why do we have all this debt?

What Schwartz describes is the "demand-pull" version of inflation -- a version we've not seen since the rise of stagflation in the very early 1970s. Her famous book with Milton Friedman was published in 1963. At that time, the economy was buoyant. It is buoyant no more. Her explanation is defunct.

Live long and prosper.

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