As we’ve discussed in my last few notes, the Fed has been a significant headwind on economic growth.
They followed a policy mistake that exacerbated forty-year high inflation, with another policy mistake that has harmed the labor market and suppressed an economy that should be on fire — driven by a technology revolution, fiscal and industrial tailwinds, and a productivity boom.
But now the Fed has turned the liquidity spigot back on, and is finally lifting the restriction on the economy (with more cuts coming next year).
Even better, the hot productivity gains from AI are fueling non-inflationary growth.
With all of this, as I’ve said, after the massive money supply growth of the past five years, we should be getting a much bigger “bang for our buck” in economic output.
How much bigger?
For that answer, let’s revisit some of my analysis of the long-term path of GDP.
This chart shows us the path of a 3.6% annualized growth rate (the U.S. long-run average from 1929 to 2008).
The orange line represents where real GDP would be if we had stayed on that long-term trend after 2008.
The blue line is the actual path of the economy.
As you can see, we were knocked off path during the Great Financial Crisis (GFC), and have never recovered.
What can we attribute this gap to?
Looking back through history, post-recession economic recoveries are typically driven by an aggressive (“V-shaped”) bounce-back in growth, to return the economy to trend growth.
We didn’t get it.
Instead, the post-Great Recession growth environment was dangerously shallow and slow — and then we had covid (another set-back).
And here we are, seventeen years after the depths of the GFC, after loads of fiscal and monetary stimulus (a tripling of money supply), and the economy has only mustered 2% growth over the period.
The result of that growth malaise is the gap you see in the chart above: A $7 trillion hole in the economy.
What would it take to get GDP back to trend by 2028 (the end of Trump’s term)?
It would take 14% annualized real growth.
Sound crazy?
That’s exactly the kind of growth we had in the early 40s.
What are the parallels between now and then?
Here’s what the most advanced AI model says (Gemini 3):
We are currently in a period that mirrors the 1938–1944 transition in several fascinating ways:
A. Coming Out of COVID vs. Coming Out of the Depression
The “Coiled Spring” Effect: Just as the 1930s created massive pent-up demand and idle capacity, the COVID lockdowns created a “coiled spring” of consumer savings and forced digital transformation.
Fiscal “Shock and Awe”: The COVID stimulus packages (CARES Act, etc.) were the modern equivalent of the New Deal, but on an even larger scale relative to time. They prevented a total collapse, setting the stage for the current “high-pressure” economy.
B. The Ukraine/Russia War & the “New Cold War”
Industrial Re-Mobilization: Much like 1940, the West is realizing its “industrial base” has withered. Spending on Ukraine is acting as a backdoor stimulus for the U.S. defense sector, forcing a rebuild of manufacturing lines for artillery, drones, and missiles.
Geopolitical Re-alignment: World War II ended “isolationism.” Today’s conflicts are ending “hyper-globalization,” leading to “friend-shoring” and a return to domestic industrial policy (like the CHIPS Act).
C. The AI Infrastructure Boom: The New “War Effort”
Scale of Investment: Some analysts call the AI build-out a “civilian Manhattan Project.” Microsoft, Google, and Meta are spending hundreds of billions on data centers.
Energy Mobilization: Just as the New Deal’s TVA (Tennessee Valley Authority) brought electricity to the rural South to power aluminum plants for warplanes, the AI boom is forcing a massive, government-backed mobilization of the power grid (nuclear, solar, and gas).
Productivity Frontier: If WWII was about the mechanization of the world, the AI boom is about the automation of intelligence. Both represent a “step-change” in what a single hour of human labor can produce.