Causal or Irrelevant?

The more I looked at this graph from Marc Nunes, plotting “nominal spending and output growth from 1800 to 2011” the more questions I had. Mr. Nunes notes:

Note that since the 1980s, and increasingly, nominal and real growth have become more tightly knit.

I wish there were a little more detail. I’d particularly like to know how the figures were derived.

I interpret his comment to imply that the change in nominal GDP is effecting the change in real GDP. Can you determine that from the graph alone? Why isn’t it the other way around?

I think a perfectly reasonable interpretation of the graph is that over time the Federal Reserve has become increasingly skilled at doing what it perceives its job to be. The Federal Reserve was established in 1913, coincidentally just shortly prior to the largest discrepancy between NGCP and RGDP over the period. After a few oscillations (notably, the Great Depression and World War II) there’s the “Great Inflation” followed, starting about 30 years ago, by the “Great Moderation”.

Has the old order really failed? That may be the case but I don’t see how you can support that conclusion from that graph.

7 comments… add one
  • steve Link

    Just better at controlling inflation.

    Steve

  • Drew Link

    I don’t get it either. Just two data plots. Count me: irrelevant.

    By the way, your “derived” also intrigues. If headline inflation is really what John Q Public is experiencing I’ll eat my show.

    Separately, the Navarro comments and Morici link here: http://www.cnbc.com/id/47573095 are supportive of your traditional comments on the yuan.

  • Drew Link

    I guess I should say “experiencing today”

  • Yeah, China has the problem that all successful predators eventually have. Okay, you’ve hunted the prey to extinction. Now what do you do?

    For well over a decade I’ve been saying that the Chinese authorities need to let personal consumption expand. Instead they’ve elected to expand public consumption which, conveniently, maintains their hold on power. Public consumption has reached absurd heights in China. We all know the stories of empty cities, shopping centers with no customers, and passenger trains that no passengers can afford to ride on.

    In addition they’ve got the problems inherent in a pegged currency. If they float it, they get social upheaval. If they don’t float it, they’re in the same boat as other countries who aren’t monetary sovereigns.

  • Ben Wolf Link

    @Dave Schuler

    Not that my praise means anything but this . . .

    “In addition they’ve got the problems inherent in a pegged currency. If they float it, they get social upheaval. If they don’t float it, they’re in the same boat as other countries who aren’t monetary sovereigns.”

    . . . indicates a better understanding of monetary systems and the FX market than most have, so kudos to you for due dilligence. Having pegged its currency to the dollar China has in fact surrendered its monetary sovereignty in order to net save in the currency of the United States. It’s questionable that this any longer serves the interests of the Chinese people.

  • Thanks, Ben. I appreciate that.

    Recalling the history is helpful, I think. China started pegging its currency when the Chinese officials realized they were incapable of controlling inflation themselves and, consequently, decided to let us do it for them. How the same officials could later develop reputations for omniscience and omnipotence baffles me.

  • steve Link

    “How the same officials could later develop reputations for omniscience and omnipotence baffles me.”

    This has intrigued me also. Seems like the same people who consider China a bogeyman also want to make it have superpowers. I think they get some credit for using some market reforms, and pegging to solve a problem you couldnt isnt the dumbest idea in the world, but they have been engaged in catch up growth. I dont see their rapid growth as a real threat to us.

    Steve

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