The “original” Great Moderation was characterized by:
- Low volatilities of real and nominal growth in output
- Low and stable inflation
What is forgotten is the Level path along which real and nominal output growth were stable.
With the final release of second quarter GDP, revised up from 4.2% to 4.6% we have to stomach comments such as these:
(WSJ): The U.S. economy grew in the spring at the fastest pace since late 2011, another sign the recovery is accelerating after five years of sluggishness.
(Bloomberg): “We definitely see momentum,” in the U.S. economy, said Brittany Baumann, an economist at Credit Agricole CIB in New York, which correctly forecast GDP.
Those are very misleading comments as the following charts attest. After the initial bounce back in the early stages of recovery, the economy has entered a period of almost unbelievable stability in nominal and real spending. Annualized rates are notoriously volatile and shouldn´t be the basis for comments such as those above.
Unfortunately the LEVEL path is too low!
But this accomplishment tells us something interesting: If the Fed was able in 1987-2007 to keep the economy piggy-backing along a level path and now it is keeping the economy piggy-backing along a much lower level path, it could, if it chose to, establish a higher level path along which the economy would ride.
If it is not even trying to do so, either it is woefully ignorant of its powers or it sees no alternative to keeping the economy in a depressed state, bowing to the “Great Stagnation” view!