Depressed Growth

According to this guy, the US has been in a depression since 2007, using an idiosyncratic definition of depression. Putting aside the semantics, I was skeptical of, yet intrigued by, the claim that there was a significant, persistent change in economic growth since the 2008-9 recession. Using data from FRED, I plotted real GDP per capita. The plot is on a semi-log scale, where a constant percentage growth appears as a straight line. The quarterly FRED GDP data are plotted in red. Exponential fits to the 1947-2007 and 2009-2019 are plotted in green and blue, respectively. The fits have been extended to highlight the difference between the two annual growth rates (2.15% & 1.56%). The difference between the green and blue fits in the current year is more than $10k per capita: nothing to sneeze at.

Previous recessions have been followed by higher growth rates to return the GDP to the trendline. Put another way, while a single trendline works for the period 1947-2007, no such fit is reasonable for the entire period 1947-present. This last decade is in a class by itself. Even the nasty, stagflation-ridden 1970s look good by comparison.

A couple of technical notes:

  1. I used per capita GDP instead of total GDP used in the linked video because it removes the confounding effect of population growth. Adding more people with the same per capita GDP does not make individuals wealthier even thought the country as a whole has grown.
  2. Real, rather than nominal GDP is used. The GDP is chained and seasonally adjusted, which leaves the door open to all sorts of statistical shenanigans.
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Author: drlorentz

photon whisperer & quantum mechanic

11 thoughts on “Depressed Growth”

  1. Ten K per capita? I still can’t afford to buy a new wallet. Mine if falling apart, not from what it is carrying, but from me turning it inside out every once in a while looking for misplaces cash…

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  2. James Rickards (“this guy” from the original post and video) is one of the more measured and level-headed commentators of the gold bug persuasion.  I have read and reviewed two of his books.

    He has since published three more books, which I have not read.

    I won’t have time to listen to the whole video until this evening, but from the first ten minutes and the analysis in the post, it does seem there is a significant change in the slope of the growth curve after 2008.  There are a lot of potential causes for this, but one thing that’s obvious is that since 2008 we’re in an unprecedented period of financial history: global financial repression, resulting in interest rates for over a decade remaining depressed below historical norms and the rate of real inflation, massive money printing (evidenced in the U.S. by the Fed’s balance sheet), and towering levels of debt: public, corporate, and consumer.  Given those and other more subtle and second-order causes (for example, student loan debt causes young people to defer family formation, purchase of a first house, and starting a retirement investment plan), it’s plausible this would be reflected in macroeconomic measures such as rate of growth in GDP per capita.

    I’ll have more to say after digesting the video and thinking about it further.

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  3. In 2008 we elected B.H. Obama, who ran on an anti-business campaign, pledging to ruin entire industries and use draconian regulations to put a choker leash on the planet-killing economy.

    Because nobody in Team Obama had any clue as to how business operates, they had blind faith that the Amerian economy would recover like it always previously had, because animal spirits.

    It is no surprise that we had no recovery.

    With Team Trump now killing regulations, I had hoped to see an improvement to underlying economic conditions.   And, things have improved.

    But the improvement is hampered by another phenomenon.  American Big Bidness is now hamstrung because they allowed Leftists to seize their own internal Human Relations departments.  The Bidness of America used to be Bidness.   Now the Bidness of America is Diversity, Sustainability, Egalité.

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  4. MJBubba:
    In 2008 we elected B.H. Obama, who ran on an anti-business campaign, pledging to ruin entire industries and use draconian regulations to put a choker leash on the planet-killing economy.

    Blaming Obama is simplistic. Sure, the Left has done its share of damage but we’ve had leftists in charge before. Somehow, the current situation is worse  that any time since WW II, including two oil-price shocks in the 1970s. I know, I know, Obama was a socialist totally unlike any of his Democrat predecessors: a socialist Übermensch. Early in the video, Jim Rickards discounts any attempts to blame this on a specific political administration. As he notes, there are other, bigger forces at work: fiscal and monetary forces that transcend any one political regime.

    While it may be comforting to blame political opponents, that stands in the way of discovering true causes and possible solutions. We’ve already endured a lost decade and there’s no sign of change in the trendline after three years of Trump. In any case, Rickards claims the phenomenon is worldwide. Obama’s power may be great but it’s not global and continuing past his tenure. Likewise, the rot in corporate HR departments has been creeping for decades, while the change in the slope of the graph is sudden. The data simply do not line up with the blame lefty narrative.

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  5. Toward the end of the video (starting at 33:30), Rickards notes that starting on 2016-10-01, when the Chinese yuan was added to the currency basket in which IMF special drawing rights (SDR) are priced, the price of gold, quoted in SDR per troy ounce, seems to have stabilised and thereafter was confined to a fairly narrow trading range.  Rickards suggests that this might mean the Chinese have pegged gold to the SDR, presumably by buying and selling when it reached the limits of the band defined by their peg.

    The chart he shows in the video goes through early July 2018.  Here is the chart of XAU/XDR updated to today.

    Gold (XAU), SDRs (XDR) per troy ounce

    As you can see, the apparent peg breaks down almost immediately after the time period shown in the video, declining well below the previous bottom of the band, then recovering, staying within the band again between November 2018 and mid-June 2019, when gold takes off like a rocket and rises to levels not seen since 2013.

    So, if there was some kind of peg of gold to the SDR, it doesn’t seem to be any longer in effect.

    I’m not sure why the Chinese would be motivated to attempt such a peg.  The yuan makes up only 10.92% of the SDR basket, so it would seem to put their central bank in an odd position to try to maintain the price of a commodity in terms of a “currency” of which the money it issues makes up only around ten percent.

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  6. John Walker:
    So, if there was some kind of peg of gold to the SDR, it doesn’t seem to be any longer in effect.

    I’m not sure why the Chinese would be motivated to attempt such a peg.  The yuan makes up only 10.92% of the SDR basket, so it would seem to put their central bank in an odd position to try to maintain the price of a commodity in terms of a “currency” of which the money it issues makes up only around ten percent.

    The peg claim also caught my eye. Maybe the Chinese tried but they couldn’t make it stick, given their small position in the SDR basket. It does appear that something funny was happening between late 2016 and late 2018. On the other hand, there was a similar period of stability 2014/2015 so maybe there’s too much reliance on chart voodoo.

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  7. After viewing the complete video and thinking it over, it seems to me that the transition to consistently slower growth is probably real (statistically significant, given the closeness of the fit and its having persisted for more than a decade), and that the most likely reason for it is the U.S. having adopted, in the aftermath of the 2008 financial crisis, policies which are very similar to those implemented in Japan following the collapse of the multiple bubbles around 1990 and issuing in the subsequent lost decade (which has now stretched to almost three decades).

    When the bubble collapsed and put the Japanese financial system at risk, they loaded up on debt, used the central bank to flood the system with liquidity and carry zombie loans at face value, bail-out and force mergers among tottering firms, and manipulate interest rates to artificially low levels to allow servicing this mountain of debt (which had the knock-on effect of making credit unavailable to those seeking to borrow for legitimate investments, since rates were artificially so low lenders had no incentive to take the risk).

    A number of observers, including that renowned economic seer Barack Obama, warned of a “U.S. lost decade” as a consequence of the policies rammed into place in 2008.  I don’t think that anybody would have expected them to remain in place for more than a decade.

    In any case, anemic growth, low investment, and a fall in real wages were among the consequences in Japan, and that’s what was seen in the U.S. (and the Eurozone, which adopted similar policies).

    Now, one must always be careful not to generalise from Japan to other economies.  It has a wildly outlier domestic savings rate which means it can fund high levels of debt without seeking capital abroad, which is not the case for the U.S. and Europe.  But at first glance, the lost decade model seems a reasonable explanation for the observation.

    Unfortunately, nobody seems to have come up with an exit strategy once a country gets itself into the lost decade scenario.  Japan, who pioneered it, is still pretty much stuck there after thirty years, and the U.S. and Europe after ten.  It seems like a pretty stable attractor state and, as Rickards pointed out, once you’ve lowered interest rates sufficiently, you’re in a trap where raising them invites a recession at levels from which you can’t get out because you’re already so close to zero.

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  8. John Walker:
    …it seems to me that the transition to consistently slower growth is probably real (statistically significant, given the closeness of the fit and its having persisted for more than a decade)

    The difference in growth rates is definitely statistically significant: (2.15±0.03)% vs. (1.56±0.01)%; that’s a lot of SDs. Whether or not this trend will continue past a decade is less clear. Unless there are fiscal and monetary changes (government and private debt, Fed balance sheet), there’s no reason to think that the slope will change. And maybe it is an attractor for this dynamical system for the reasons that Rickards mentions. In any case, his doomsday scenario suggests hard assets and crypto are worth a harder look.

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  9. We shut off the growth engine of small business for twenty years and focused on marginal non value adding financial transactions which became a parasite on the real economy.

    Shift from Wall Street to Main Street and from global companies with cartel like markets to national markets and smaller enterprises will cause high growth in one area and a disaster in those who invested the wrong way.

    The worlds supply chains are reversing and finding new routes. Companies without HR departments will rule.

    Schumpeter’s Creative Destruction is underway to much gnashing of teeth.

    That goddam Democracy, they just had to give the vote to just ANYONE.

    The winners will be those large corporations run by crazy folks with majority ownership who will shift to innovation and opening new markets.

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  10. drlorentz:
    Blaming Obama is simplistic. Sure, the Left has done its share of damage but we’ve had leftists in charge before.

    Yes, we did.   The housing bubble of 2008 got started in the first Clinton Administration.   By the time W came into office, big bankers were laughing at how all those blinky mortgages were going to bite us some day, but meantimes the profits were too good to pass up.   The bubble was triggered when there was one single failure that caused a crisis of confidence.  Both consumer confidence and business confidence went to the floor, driven there by fearmongering in mass media.   The fearmongering was fraught for the purpose of electing B.H. Obama.

    For the most part, Team Obama policy was the same as that of Clinton and W, but it was really damaging to stay the course and even increase regulations that caused a drag on productivity while the economy was weak.   Their lack of understanding of business kept business hamstrung.

    Team Trump lowered the taxes on business.   Almost as important, they are rolling back regulations.   And next in importance is the shift in priority from the National Chamber to the Small Business Council.

    I am hopeful that we are not stuck forever in economic doldrums.   But if we elect a Democrat we might be.

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