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Here is a short-term chart of the natural log of real GDP. When using logarithms, constant exponential growth is seen as a straight line.
Note that, thanks to the virus, we failed to stay in the green channel. We're currently throwing everything at real GDP, including the kitchen sink, just in an attempt to get back to where we were. Also note that real GDP growth was weakening before the virus even hit. The Fed raised rates in 2017 and 2018. In 2019, the Fed was forced to backtrack on that plan. In hindsight, a rate of 2.4% was too draconian. The Fed ended the year at only 1.6%. And then, the virus hit.
So, in the short-term, we're definitely attempting to claw our way back to that green trend channel. But what about long-term?
The red channel is where we once were. That ship has sailed. No hope of ever getting back to it, especially now that we have a Covid baby bust. That exponential trend failed spectacularly, leaving us with a new green channel. The green channel then failed too. Cascading exponential trend failures. That's where we are now.
Here's the good news. We're all in this perma-ZIRP handbasket together and some of us strongly suspect where we are headed. Brush up on your Japanese and enjoy the ride! We might not like the ultimate destination all that much, but the path to get there is filled with easy money. And when I say easy money, I'm not expecting retired savers patiently waiting for interest rates to "normalize" to someday make out like bandits. This isn't a Hollywood movie. If anything, it's more like Gilligan's Island. Being stuck at zero is normal. Interest rates have been exponentially decaying for 40 years. It's just more of the same.
4 comments:
You can curse the results of demographic change all you like, but you cannot stem the tide.
But cheer up: our boomers had children. We are going Japanese much more slowly than any developed countries except the French and Kiwis.
Speaking of curses and tides:
That time Americans demanded the Coast Guard rescue the cast of Gilligan’s Island
One day in 1964, TV producer Sherwood Schwartz received a strange message – from the U.S. Coast Guard. And that wasn’t the only message. Schwartz received a series of telegram forwards from the Coast Guard. He had just launched a new show on CBS about seven castaways stranded on a desert island…and Americans were demanding that the Coast Guard mount a rescue.
When the Fed announces a continuation of ZIRP to rescue the economy, I would prefer a theme song and laugh track.
So this is the tale of our castaways,
they're here for a long, long time.
They'll have to make the best of things,
it's an uphill climb.
Great Gilligan cover song.
Longer term, real GDP seems to be completing an arc with a maximum around 2050. Followed most likely by a gentle decline, though a shrinking real economy is never pleasant. The nominal numbers can keep going up, but you'll only get 14 sheets in your Costco paper towel roll (same great price!).
Worst case scenario is the flip side of human population growth vs oil. Alternative energy sources should dampen that blow.
What makes you say 2050? According to EROEI theory, were it not for efficiency improvements in the US, decline began once oil production peaked. But now that global oil production has peaked, all countries' economies are now going downhill.
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