In my chart, the blue line is the path of real GDP IF it had continued to grow at the long-term average rate of 3.8% (that’s the average growth rate from 1929).
So, if the economy had continued to grow “on trend” we would have a $26 trillion economy (the blue line).
Instead, we had the Great Recession. And instead of having the big bounce back in growth, that is typical following recessions, we had dangerously shallow and slow growth for the better part of a decade. And that growth was only due to the Fed propping the economy up through continued ultra-low rates and QE.
With that, the economy was knocked off (trend) path fifteen years ago, and the gap between trend and actual growth has only widened. We have an economy $6 trillion smaller than it would be had we stayed on trend.
This gap (between trend and actual GDP), and the (already) ballooned debt-load, explains why the Treasury (under Mnuchin) and the Fed (under Powell) didn’t hesitate to go big and bold to respond to the Covid shutdown. It was an excuse to do what had to be done — inflate.
Of course, the politicos are opportunists, and they’ve taken advantage of crisis, pushing what was “big and bold” into “wild excess” (to fund their agenda).
With the damage from wildly excessive spending, the Fed’s challenge has been to take the threat of hyper-inflation off the table, but leave the economy with stable, but hotter than average inflation. They may have done the job, but they will have to continue maneuvering/manipulating along the way.
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