|Graph #1: Velocity and the Interest Rate|
Click Graph for FRED Source Page
On the way up the long wave, the business cycle pattern is much more evident in the red line than the blue. But on the way down the long wave, the business cycle pattern is strongly visible in both lines.
The most significant difference between the red and blue lines seems to occur between the years 1990 and 2000. Velocity fell much less than the FedFunds rate early in that decade, and stayed higher for the rest of the decade when economic performance was unusually good.
If there is a second most significant difference between the lines, it seems to be between the years 1960 and 1970 -- another decade of unusually good economic performance. Or perhaps I should say the early years of those ten were unusually good, until inflation flared up. But then, the separation between the two lines happens in the early years of that decade. The gap closes by 1967.
It's odd, though. During the good years on the way up the long wave, the red line runs high. During the good years on the way down, the red line runs low.
This is what we want to do. We want to "capture" those two good periods of economic performance and repeat them. We want to design a business cycle synchronized with a shortened and properly managed long wave.
The "up" side of the long wave will last as long as the concurrent business cycle. Interest rates will lead velocity on the way up. The "down" side will last as long as the following business cycle, and interest rates will lead the way down.
We attenuate the long wave, cutting off the highs and lows with a coordinated policy that works perhaps like a bandpass filter for the economy.