Come to think of it…
I’ve been saying since forever that excessive debt hinders growth.
Some time back I looked into the erosion of debt by inflation.
Lately, I’ve been noticing that real GDP growth was consistently better during the Great Inflation than at any other period in the data FRED provides.
Now I’m thinking it was the erosion of debt during the Great Inflation that enabled the superior economic growth.
What this would mean is that, already during the Great Inflation, debt was excessive.
What it means for you is that if we want good growth without inflation, policy has to help you get your debt down to a very low minimum.
Something you always wanted.
It´s a great piece of “screwed-up” logic!
These are the relevant charts. In what sort of world would you prefer to live? Also, in what sort of world would you expect debt ratios to be higher?
In the first charts we see the combination of real growth, inflation and unemployment during the “Great Inflation”. Between 1968 and 1981, real growth averaged 3.06% with a standard deviation of 2.6. Unemployment was on a rising trend as was inflation (gauged by the core PCE).
Now look at the same combination during the “Great Moderation”. Between 1987 and 2007, real growth averaged 3.02% with a standard deviation of just 1.35. Unemployment was on a downtrend and inflation persistently low. The charts are on the same scale to make comparison easy.
To him, debt is the driver of the process. Increase debt, generate inflation to erode the value of the debt and come out with “superior” growth!
He forgets that debt is endogenous. Why did the debt ratio rise during the “Great Moderation?” Maybe for the same reason that after being flat (in nominal terms) all through the “Great Inflation”), stock prices trended up for seventeen straight years between 1982 and 1999.
Would that be associated with a more “friendly” (less “risky”) macroeconomic environment (low macro volatility)?
When you look at household debt, you see that the lion´s share of the increase in the household debt ratio came from the increase in mortgage debt. Did the several incentives given to “homeownership” distort decisions? Quite likely, but that´s an altogether different question.
His “logic” closes with the recommendation to keep debt at a very “low minimum”. The lowest minimum is zero. Maybe the “best performing” economy would have “zero debt” (and assets)!