Wednesday, January 16, 2013

The Monetary Cause of the "Macroeconomic Miracle"

They call it "potential output". The default graph is a bit plain. I think the "percent change from year ago" view is interesting. It shows a strong downhill trend:

Graph #1Percent Change from Year Ago, Real Potential GDP
Click Graph for FRED Source Page

I see a straight, downhill decline from about 4.5 (in 1950) to about 2.0 in 2015... with big downers in the mid-1950s, around 1980, and from 2008 to some time in the future.

I see just one big peak, rising from 1992 to 2000, then dropping to about 2005. This peak is associated with the time that has been called a macroeconomic miracle.

There is another peak, in the 1960s. But the straight, downhill trend was quite high then. And relative to that imaginary trend line, the 1960s peak is not so very big. I'd say the 1960s peak was a little better than the "very good" of the trend. The 1990s peak was a lot better than the "not very good" of the trend.

Here's my debt-per-dollar graph, as much of it as one can see using FRED data:

Graph #2: Total Debt relative to Money in Circulation
Click Graph for FRED Source Page
One long, sweeping uptrend to the crisis of 2008, then it breaks and falls rapidly.

Oh -- there is something else! Just after the 1991 recession, the red line goes down for about three years. There was a unique and unusual decrease in total debt, relative to circulating money.

Graph #3 combines the two previous graphs in one picture:

Graph #3: Cause and Effect
Click Graph for FRED Source Page

The large peak in Potential GDP (blue) begins almost immediately after the start of the unique and unusual 1991-'94 drop in debt-per-dollar (red).

My view is that the drop in DPD was the cause of the tall peak in Potential GDP.

Note that the whole rest of the time, from the 1950s to the crisis, the red line was going up and the blue line was trending down.

By the way: There was a similar (longer) drop in the red line during the FDR administration (1933-1946). That's why the blue line started out so high.

Conclusion: Getting the red line down is good for growth. A good policy will bring debt-per-dollar down and stabilize it at a low level.

No comments: