Click to enlarge.
Both data sets clearly show that in order to get positive real GDP growth we must expand the number of workers and/or have each worker take on more and more debt (in inflation adjusted terms).
The latter method of boosting real GDP is not sustainable over the long-term. We are currently finding that out the hard way.
I expect the "You Are Here" point to eventually return to the trend line. There will be more pain if/when it does.
Note that it took more debt growth from 1980 on to get the same level of GDP growth that we saw before 1980 (as is seen in the difference in slopes between the two trend lines). In other words, we're getting progressively less bang for our debt buck.
I am more bearish now than I was when I first turned bearish in 2004. Just once I'd like to find a chart that offers a bit of "real" long-term hope.
Update:
Click to enlarge.
Picosec pointed out that the correlation was rather low. I increased the time frame to 5 years to remove some of the random noise. It still looks a bit noisy, but keep in mind that this chart is not on the same scale as the last one. I was able to zoom in a bit to show more detail.
The r-squared for the blue line is now a respectable 0.73 (up from 0.58 in the first chart) and for the red line it is now 0.56 (up from 0.29 in the first chart).
See Also:
Real Total Debt vs Real GDP
Source Data:
St. Louis Fed: Total Credit Market Debt Owed
St. Louis Fed: GDP
St. Louis Fed: CPI
St. Louis Fed: Civilian Employment
I find it very interesting that both trend lines cross the 0% origin.
ReplyDeleteIf you believe what this chart has to say, then real GDP growth simply comes down to fairly simple math.
Hire more people and/or enslave them in debt.
Mark,
ReplyDeleteAt first glance, this chart looks very much like one I studied on long wave cycles comparing real GDP to inflation. Can you throw that one together for comparison?
In the GDP/inflation chart, the lower left quadrant occurred during depressions, the upper left quadrant was a stagflation crisis. The Fed may have just vaulted us out of a depression and straight into a stagflation crisis. Or we might fall right back into the depression quadrant.
Whatever happens, Jeremy Siegel will have some stock picks for us! Stocks for the long emergency.
Part of the the debt thing is a self-created mess.
ReplyDeleteI consider much of it simply failing to tax the "job creators" enough -- returns to capital compound while returns to labor do not.
http://research.stlouisfed.org/fred2/graph/?g=2iP shows things were on track 1995-2001, then the system got taken over by revisionists and something weird happened.
http://research.stlouisfed.org/fred2/graph/?g=2iQ shows CMDEBT over total wages.
http://research.stlouisfed.org/fred2/graph/?g=2iR adds mortgage debt (red line), showing that the growth of debt was mortgage debt.
http://research.stlouisfed.org/fred2/graph/?g=2iS shows mortgage debt / wages (red) and the 30 year interest rate (blue).
That graph shows Greenspan was trying to throttle the economy in 1999-1H00, and when rates were lowered mortgage leverage began to take off.
30 year rates were raised 2005-2006, but by then the market had found IO and negative-am to keep the leverage going.
So that's how we got here, fully six years of mortgage credit expansion, 2001-2006.
I don't know where we're going.
Because there's not a great deal of correlation in these data, I'm not sure if there's a message other than "We be in uncharted waters."
ReplyDeleteBut that's scary enough on its own.
Mr Slippery,
ReplyDeleteAt first glance, this chart looks very much like one I studied on long wave cycles comparing real GDP to inflation. Can you throw that one together for comparison?
I'm not quite sure what you are requesting. You want to see an inflation adjusted GDP vs inflation chart?
I don't think there's much to see, mainly because I don't see this as an inflation/deflation issue. I see it as a lack of real growth issue (inflation adjusted growth). It's a stagnation issue.
The Fed may have just vaulted us out of a depression and straight into a stagflation crisis.
If I was willing to lean a bit deflationary at $100 oil, then I'm still okay leaning that way with $90 oil. That said, I think our problems will still exist even if the Fed could permanently fix the CPI's growth at 2.5% per year.
Other than some volatility in the CPI, that's pretty much what the Fed has done. The CPI's average annual growth over the last decade has been 2.5%.
Picosec,
ReplyDelete"We be in uncharted waters."
To back your point, the correlation was higher in the older blue data than in the newer red data.
It is what you might expect to see as you head into uncharted waters.
But that's scary enough on its own.
Indeed!
Troy,
ReplyDeleteI don't know where we're going.
Uncharted waters! ;)
Mr Slippery,
ReplyDeleteI meant to offer this volatility link that shows YOY CPI changes.
Picosec,
ReplyDeleteI would also add that data can be highly correlated even when it doesn't look that way. It could just be short-term random noise added to a cleaner long-term signal.
I can significantly boost the correlation by simply increasing the time frame from 2 years to 5 years.
I'll post an update that shows it.
New chart posted.
ReplyDeleteMr Slippery,
ReplyDeleteMy "real" concern is that inflation continues to average 2.5% for a very long time even as savings accounts pay 0.0%.
Those waiting for better opportunities may never get the chance. Losing 2.5% per year waiting can compound and compound and compound. Sigh.
Once again, that's the #1 reason I locked in rates on long-term TIPS.
(0.975^30) = 0.468
Now that's some scary long-term math. Risk abounds, no matter what we do. Pick your poison.
While five-year averaging improves the correlation, the huge change in the "Your Are Here" location between the two charts indicates to me that something big is happening on a two year scale that is masked by smoothing over the last 5 years.
ReplyDeleteYour first chart (2-year smoothing) shows us in territory never before experienced, while 5-year smoothing makes it look like things are, in some sense, normal.
tings, dey ain't normal.
Picosec,
ReplyDeleteYour first chart (2-year smoothing) shows us in territory never before experienced, while 5-year smoothing makes it look like things are, in some sense, normal.
tings, dey ain't normal.
Agreed. The last 5 years have been anything but normal.
The 5 year chart is the eqivalent of placing one foot in an ice bucket, the other foot in boiling water, then declaring your two feet are comfortably warm on average, lol. Sigh.
You can see the problem directly on the 2 year chart. Notice the velocity of the "You Are Here" point (as seen by tracking it back to its connected points). It is NOT stable. Who knows where it heads next. (I'm guessing straight down, but it is just a guess.)
Here's why I would guess straight down (lower real GDP growth per civilian employed).
ReplyDelete1. Austerity and/or tax hike talk.
2. It's above the trend line on the 2 year chart (mean reversion).
3. It's above the trend line on the 5 year chart (mean reversion).
4. Recent stock market weakness.
5. Recent consumer confidence bad.
6. Most recent real GDP data was "unexpectedly" bad.
Down seems like path of least resistance.
It's starting to look like the word of the day might just be Rubicon.
ReplyDeleteSince under historically low tax rates the alleged job creators have created negative several million jobs over the past decade, taxing them can do no harm whatsoever. A huge tax increase on the rich, with explicit redistribution to the working poor and those unemployed would do wonders for the economy.
ReplyDeleteIn the 50's and 60'd we drastically reduced debt/gdp with high tax rates, robust regulations, strong unions and a vibrant middle class.
Look where households went into debt: The Reagan and Bush II administrations. (Troy's 2nd graph over a longer time frame.) There is the root of the whole problem. The current third term of Bush II, aka B. Hoover Obama is just giving us more of the same.
WASF,
JzB
Jazzbumpa,
ReplyDeleteSeptember 18, 2011
Obama's millionaire tax is class war, say Republicans
Seeing as how there is 9.1% unemployment and tens of millions on food stamps, I am now playing the world's tiniest violin in tribute. I cannot even get myself to read the article.
Instead, I opted to reread the following one.
November 26, 2006
In Class Warfare, Guess Which Class Is Winning
“There’s class warfare, all right,” Mr. Buffett said, “but it’s my class, the rich class, that’s making war, and we’re winning.”
Note to Republicans:You can't have class war, without "class."
ReplyDeletenanute,
ReplyDeleteI think I figured it out.
The millionaire tax is class-size war.
March 1, 2011
Teacher layoffs raise class-size tensions
Research suggests bigger classes are impediment to learning, but some aren't persuaded
If the research is correct, it would seem reasonable that the country only needs one teacher. We could do this if every child had a computer and an Internet connection. Just think of the learning efficiency!
Sarcasm!
I have trouble reading these types of charts, but I like them.
ReplyDeleteGYSC,
ReplyDeletePerhaps I can help you get into the right frame of mind. ;)
Line chart -> Clint Eastwood
Scatter chart -> Chuck Norris
Ah! now its clear!
ReplyDelete