Sunday, March 9, 2014

Great Depression II

The US government targets a straight line NGDP rate of growth always heading up though massive debt spending and loose monetary policies since the 1980s at least:

Unfortunately, the rate of sustainable economic growth, this would the NGDP that would occur naturally without any short term dips or rises, has been flattening since the 1970s as the cost of energy sustains nominal rises primarily due to the rise in price of fossil fuels with no alternative being able to be as cheap as fossil fuels nominally were before the 1970s.

What this means is that there has been an increasing divergence between the two rates, and it is the reason why the Great Recession, which was basically an economic correction to bring the two rates closer together, was so large in amplitude. Because the government's reaction through its massive spending and continuing of loose monetary policies, we are basically put back where we were and set up for an even bigger economic correction in the future that will be bigger than the Great Recession and most likely will be bigger than the Great Depression in every way.

In order to prevent this Great Depression II, there are two basic paths. The first, and unfortunately not feasible, is to find an energy source that is at least as nominally cheap as fossil fuels were before the 1970s. All alternative and renewable sources of energy can only wait until fossil fuel prices rises to breakeven with them rather than being able to become cheaper. The second is for the government to target a flatter rate of NGDP growth by gradually pulling back on debt spending and tightening loose monetary policies so that the targeted NGDP rate growth is closer to the rate of sustainable economic growth. This is going to be unbelievably painful medicine because of how overleveraged we are. But it actually would be preferable to a Great Depression II.

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