That's what made the economy good in those years.

Interest rates you know. Rates worked their way uphill from the late 1940s to 1981, and have tended downhill since:

Graph #1: Interest Rates trended upward from the late 1940s to about 1981, and downward since

Here's a bit from my second look post:

... take a look at the rate of debt growth since the 1950s:

Graph #2: Percent Change in the Non-Federal Portion of TCMDO (blue)
If I did it right, the red line is a Hodrick-Prescott trend of the debt data.

The first thing that happened "after the early 1980s" was a slowdown in debt growth! A slowdown beginning in the mid-1980s. Immediately after the early 1980s there was a major downtrend in the growth of debt.

But by the late 1990s, the growth rate of debt was back to normal. Back to 10% annual, give or take. Back where it was before the neoliberals took over. Back where it was in the Keynesian years.

What's different is that in the Keynesian years, excessive debt growth led to inflation. In the neoliberal years, excessive debt growth led to unemployment. That's the main difference.

The problem is the excessive debt growth: the excessive reliance on credit, the excessive cost of circulating money... It's a cost-push problem.

Key concept: the excessive cost of circulating money.

Even though interest rates have been declining since 1981, the source of troubles in our economy is the excessive cost of circulating money.

The cost of interest? No. Not only the cost of interest, but also the level of debt. If you want to borrow a dollar, the cost depends on the rate of interest. But at any effective rate of interest, the cost of existing debt depends on how much debt exists. And we—
We have lots and lots of debt,
And that has made all the difference.


I want to look at "the cost of circulating money". Total cost of interest in the economy, divided by the number of dollars of spending-money:

Graph #3: Interest Paid per Dollar of M1 Money

See how it's low there at the start? Less than 0.5 it is. The 0.5 means $0.50. It means 50 cents of interest paid for every dollar of spending-money in the U.S.A.

The cost of circulating money in 1960 was just about 33 cents for every dollar in circulation. That was low.

It's been up in the neighborhood of $2 (on average) since 1980. Two dollars of interest paid, for every dollar we have. Just to be clear on that: "Every dollar we have" refers to the money we have that we expect to spend. Not the money we have in savings.

The money we have in savings is the recipient of that interest, of course. Oh, and since there is far more money in savings than what we have for spending, the interest paid is far less than $2 per dollar in savings.

You can look at this in terms of income inequality, if you like, to see who's paying what to whom.


There is a problem with Graph #3. It uses M1SL for the money measure. It doesn't count "sweeps". That's a favor policymakers did for banks, not counting the sweeps. But it makes M1SL an unrealistic number. The more realistic number is M1ADJ, which does count sweeps. M1ADJ is bigger than M1SL, so the ratio is lower, as Graph #4 shows:

Graph #4: Interest Paid per dollar of M1 Money (Adjusted for Sweeps)

Now there is a general downward trend from the early 1980s. Not sharply down, but down.

But here's what I want you to see: The latter 1990s. The best years since the 1960s. The "macroeconomic miracle" years.

On Graph #4, the sustained high in the mid-to late 1990s is lower than the sustained high of the 1980s and lower than the brief high of the 2000s. The cost of money -- not the rate of interest, but the cost of interest per dollar of spending money -- was lower during the boom years of the 1990s.

We were paying less to have money to spend, in the 1990s. So we could spend more on the things we wanted spending-money for. That's what made the economy good in those years. That's what made it a boom.