A response to John Quiggan's "Zombie Economics"

John Quiggan, an economist, political commentator and fellow Australian, wrote an article recently for foreignpolicy.com entitled "Five Zombie Economic Ideas That Refuse To Die". His article fits into the same tone that Richard Werner wrote in "New Paradigm in Macroeconomics" in 2005, namely that neo-classical economic ideology (called neo-liberalism here in Australia) has failed to deliver what was promised.

Before I begin my critique of Quiggan's article, I need to first point out that I regularly enjoy reading Quiggan's blog. I find his point of view interesting and his arguments compelling. Like Quiggan I have a lot of sympathy towards Social Democracy and its tenets, as well as some of the wars he has engaged in (namely an informed disdain for News Limited and defending the science of global warming). I also need to point out that much of my critique of Quiggan's article is not based upon a defence of neo-classical economics but upon policy that I believe is simply the best choice.

Let me start with Quiggan's first point, that of "The Great Moderation". Quiggan says:

More importantly, central banks and policymakers are planning a return to business as usual as soon as the crisis is past. Here, "business as usual" means the policy package of central bank independence, inflation targeting, and reliance on interest rate adjustments that have failed so spectacularly in the crisis.

Quiggan then goes on to quote Jean Claude Trichet's comments about inflation, namely the importance of maintaining price stability in good times and bad. Quiggan points out that this attitude is "startlingly complacent".

My argument is that Central Bank independence should be maintained and that monetary policy should be geared towards keeping inflation down. Unlike many who argue that an "inflation target" should be set, it is my point of view that absolute price stability be the goal of monetary policy, whereby money neither increases nor decreases in value over the long term. Now while neo-classical and neo-liberal economic ideology argues for strict price stability, my reasons for holding this position do not come from either of these movements but from a much older idelogy - Ordoliberalism. This economic school was developed in Germany in the post war years and was responsible for Germany not just recovering from the devastation of World War Two, but becoming the economic powerhouse of Western Europe.

Let me just do a quick history lesson here. Please be patient.

After the hyperinflation of the Weimar Republic years and the disaster of the Hitler years, West Germany suffered under some very vengeful and short-sighted policy by occupying US forces. Joint Chiefs of Staff Directive 1067, signed by President Truman in 1945, attempted to de-industrialise Germany. Even though Germany did gain some relief from the Marshall Plan, the amount of money they were forced to pay in war reparations was greater than anything they received from the US. In short, West Germany, wrecked from the war, faced the prospect of paying the allies (net) war reparations while being forced to de-industrialise and turn into an agrarian economy. The result was disaster for Germany: poverty went hand in hand with growing inflation. In the years following the end of World War II, poverty in Germany grew worse and worse.

JCS 1067 was eventually overturned and the West Germans were granted the responsibility to look after their own economy. The philosophy that guided them was Ordoliberalism - the idea that the state should regulate the free market in order to allocate resources effectively. It was neither the Democratic Socialism that was embraced by the UK and France in the 1950s nor the Laissez-faire model of the US. One of the tenets of this philosophy was low inflation: Price Stability. The Deutschmark replaced the Reichsmark under this change, and stable prices formed the basis of Germany's growth during the years now known as the Wirtschaftswunder.

What we have learned from economic history is that any major swing towards inflation or deflation leads inevitably to hardship. Deflation beset the world during the Great Depression; Inflation beset the world during the 1970s and hyperinflation has led to ruin in numerous nations, including Ancient Rome, Weimar Germany and Zimbabwe today.

So what level of inflation does Quiggan want? Is 5% inflation too high? is 7%? Is 50%?

Ah, Quiggan might respond, what about the US over the last ten years? They had low inflation and that didn't stop the financial crash did it? To which I would respond by pointing out two things: Firstly that interest rate policy alone will not prevent a crisis from occurring, but is one important part of a whole host of things that should prevent a crisis. If a driver gets injured because another car rammed into him, it would be disingenuous of him to blame it on his tyres.

Secondly, that while inflation was historically low in the US for the past ten years, real interest rates were negative between 2002 and 2005. Many economists have pointed out that the US Federal Reserve kept interest rates too low during this period which, in turn, created the property bubble which burst and helped create the current financial crisis. The Washington Consensus, a neo-classical and neo-liberal text that has guided IMF policy for many years, specifically highlights the need for real interest rates to be positive. Had the US actually kept in lockstep with neo-classical ideas, this period of negative interest rates would never have been allowed. The crisis thus did not stem from a complete adherence to neo-classical ideology but from a deliberate rejection of what I consider to be good policy. If we go back to the car analogy, a driver who has injured himself by driving irresponsibly shouldn't blame the laws that he neglected to follow.

It also needs to be pointed out that the Federal Reserve Bank, unlike the ECB and Australia's Reserve Bank, did not have an inflation target to aim for, but kept markets guessing. The Fed certainly had a goal for price stability, but it was amorphous and opaque. This of course shifts the issue to whether a Central Bank should be independent. The original reason for making a Central Bank independent was to insulate it from political pressure in order to enact monetary policy that would be governed by price stability and not political interference. While I still believe in this, I am also willing to admit that Central Banks are not necessarily immune from market influence. The Federal Reserve, for example, has an unusual amount of employees working for it who once worked for Goldman Sachs. The fact that the market has been able to influence central bank policy does not therefore mean that they should come back under government influence, but that steps be taken to insulate it from all forms of undue influence. In other words, I am advocating a Central Bank that is not just independent, but also transparent and accountable.

To summarise my position on central banks and the current economic crisis: Central Banks should focus upon price stability as their main goal and set realistic low inflation targets (and again let me advocate absolute price stability instead of low inflation targets). Central Banks should be independent of government and market influence, while remaining transparent and accountable for their actions. Jean Claude Trichet, head of the ECB, was quoted by Quiggan as saying this, which I heartily affirm (and which Quiggan criticises):

Keeping inflation expectations anchored remains of paramount importance, under exceptional circumstances even more than in normal times.

There is nothing "neo-classical" or ignorant about this policy. In fact one could argue that had this policy been abandoned during the current crisis, we would be suffering even more.

One last thing before I move on: shouldn't central banks have a wider focus of reducing unemployment and fostering economic growth and not just price stability? To me that question is moot. Worrying about economic growth and the unemployed should be the focus of the government, not the central bank. "Pump priming" the economy through Keynesian stimuli should not be ignored as a policy, and nor should increasing the size of government to bring about a better economy over the long term. These I advocate, which plainly shows just how different I am from the neo-classical mould of "keep government small and let the market do everything", though I would point out that the government needs to control the level of debt throughout this process.

Quiggan's points on modern day monetary policy and the so called "Great Moderation" were my main problem. Now let me move on to Quiggan's other points.

The second point Quiggan critiques is the "Efficient markets Hypothesis". While Quiggan and I agree that letting the market do everything is a silly and dangerous policy, so to would be the idea that the government do everything. Quiggan is not a communist who advocates a planned economy, but his article is light on what he thinks should replace the current crazy "markets are always wonderful" idea. My argument has been that there are sectors of the economy that the government is better suited to controlling and sectors which the market is better at controlling, and that there are even areas where a combination of government and market result in the best outcome. Health Care, for example, has been shown to work best when a government run universal health care system operates alongside a smaller market system aimed at those who wish to pay more for their health. It is this combination of majority government and minority market which works so well in Western European Social Democracies and in countries like Canada, Australia and New Zealand. The US system, in which government healthcare is limited and which the market is dominated by health care companies, has been shown to be less efficient and less effective than the one employed by social democracies.

So while I agree with Quiggan that the "efficient markets hypothesis" is bunk, I would also argue that some markets are efficient while others are not - and those that are not should have some level of government intervention, which ranges from a stricter regulative environment at one end to complete government control at the other end. This again shows my belief in Ordoliberalism.

Thirdly Quiggan points out the stupidity behind Dynamic Stochastic General Equilibrium. I'm certainly in complete agreement with him on this one, as with his fourth point, that of the complete failure of "trickle down economics" to trickle anything down to lower income earners. Median wages in the US have certainly stagnated in the last ten years, and were affected most by Reaganomics, which cut taxes for the rich. While I admit that income and wealth disparity will (and should) always exist, there is a point at which it becomes ridiculous. Aiming for a GINI coefficient of under 30 should be a policy goal for any nation who wishes to intelligently reduce poverty levels.

Quiggan's final point concerns privatization: the selling off of government assets and economic sectors and their replacement by private companies. Again this is one area that I am in partial agreement. There are some government entities that definitely needed to be privatised. In the case of Australia, Qantas, the Commonwealth Bank and Telstra were progressively privatised over many years and I have no problem with these changes. Why should the government compete in the airline industry if private industries can do it better? Nevertheless the privatization debate is grounded on the efficient markets hypothesis, which I have written briefly about above. Privatization might lead to better economic and social outcomes, but then again so might nationalization of some industries. The guiding principle here should be pragmatism and social and economic harmony.

Like many post-crash commentators, Quiggan's points are a mix of good and bad. There is no doubt that the previous policy regime needs to be challenged but there is a point at which the proverbial baby is thrown out with the bath water. Marxism and Communism made the mistake of treating capitalism as an enemy that should be destroyed, while modern-day market advocates treat government as a similar enemy. Different ideologies, same blindness. Neo-classical / neo-liberal economics has certainly failed, but in developing alternatives we cannot ignore some of the truths hidden within its failure: Not all markets are efficient, but some are; Not all government programs are efficient, but some are; Price stability won't solve everything, but it does solve some things.

US CPI September 2010

Download here.

The Index increased from 218.150 to 218.372. This implies a month on month inflation rate of 0.1% which, when annualized, is 1.22%.

The Index in September 2009 was 215.911, which means that annual inflation is 1.14%.

Note that the current index is still lower than September 2008, which was 218.846. The effects of deflation in 2008 and 2009 have not yet been exceeded by the current recovery.

Real Interest Rates have remained stable at 1.51%:

From here.

GDP predictions for Q3 2010

Based upon my study of Real Interest Rates over the past three months (government bond rates minus inflation), I am making a judicious prediction of a number of countries.

Note: GDP measured here is change from the previous quarter in annualised form

Economies that were growing in Q2 and will grow faster in Q3

• Australia: > + 4.9%
• Canada: > +2.0%
• China: Growth (quarterly GDP figures not readily available)
• Euro Zone: > +3.9%
• France: > +2.8%
• Germany: > +9.0%
• Japan: > +1.5%
• South Korea: > +5.2%

Economies that are growing in Q3 at around the same rate as they were in Q2

• Argentina: +12.3% steady
• Britain: +4.7% steady
• Italy: +1.8% steady
• Mexico: +13.5% steady
• New Zealand: 1.5% steady
• Russia: Steady (quarterly GDP figures not readily available)
• Spain: +0.7% steady
• Sweden: +8.0% steady

Economies that were growing in Q2 but will begin to slow down in Q3

• Brazil: < 5.1%
• India: Less growth (quarterly GDP figures not readily available)Poland: Less Growth (quarterly GDP figures not readily available)
• Switzerland: < +3.5%
• Turkey: Less Growth (quarterly GDP figures not readily available)
• USA: < +1.7%

Economies that were contracting in Q2 but will perform better in Q3

• Ireland: > -4.8%

Economies that were contracting in Q2 and will be even worse in Q3

• Greece: < -6.8%
• Iceland: < -11.8%

If these predictions are correct then what we will experience in Q3 will be a broad and strong international recovery, especially in the Euro Zone, while the US grows only slowly.

Lady Elliot island

The reason for the silence? Holiday. To Lady Elliot Island on the Great Barrier Reef. Snorkelling with Manta Rays, Sharks and Turtles. Too windy though, but that was due to a High Pressure system off the NSW coast. Now that we have come back the island has likely returned to the tropical paradise it usually is. Staff was great and food was yummy. Our cabin was about 10 metres from the shoreline and we had a Red-tailed Tropicbird nesting about a metre from our front balcony. There was a huge amount of birds on the island that were all wild but humanized enough to walk past closely without them worrying. In fact for the first day or two the situation with the birds reminded me of Hitchcock's The Birds since there were huge clumps of waiting and watching birds on rooftops and in trees and on the ground, all making the eerie bird noise that Hitchcock used in the film.

Whilst there I read Truman Capote's In Cold Blood and the first two novels of Jim Butcher's Dresden Files. I attempted to read Richard Werner's New Paradigm in Macroeconomics: Solving the Riddle of Japanese Macroeconomic Performance but I got too enamoured with thinking about the implications of what I was reading more than aiming to finish the text.

The suites on the island have no televisions and the guest television only received satellite TV from an Intelsat and kids tended to hog the Cartoon Network. I purchased some internet time after about 4 days to find out what was happening in the world and discovered that the Australian Dollar was nearing parity with the US.

The official website for the island is here.

Another graph proving Peak Oil

Take a look at this graph from The Oil Drum:

Those in the past who deny Peak Oil have tended to do one of two things. The first is to attack the actual science behind it, trying to disprove Hubbert's Curve. The second is to argue that there is plenty of slack within oil productive countries to meet demand. What the graph shows is that neither of these are true.

One of the basic tenets of economics - in fact the basic tenet - is that of supply and demand. If demand increases, so should price; if supply increases, prices should drop. What we see in this graph is that from about 2003 onwards, demand for oil was not met by supply. Despite the myriad sources of oil supply all over the world, not enough oil was produced to keep prices down. Between 2003 and 2008, prices essentially tripled. Yet over the same period, supply hardly moved.

So if Hubbert's Curve was wrong, and oil reservoirs can just keep pumping out as much oil as is needed, then why didn't oil producers simply increase production between 2003 and 2008? Moreover, why hasn't production increased since 2005?

And if there is plenty of slack for oil producers and so many new oil projects up and running to take advantage of the high price of oil (which is still historically high despite the worst recession since the 1930s), then why isn't production increasing?

This graph seems to clearly indicate that not only was the theory of Peak Oil correct, but that the peak has already occurred - in 2005.

OSO's pontifications at Reddit

I've realised that some of these are worthy of posting here:

In response to the GOP's "Pledge" about controlling the US budget:

I'm actually a person who has looked at the stats. I know how much the US budget deficit is. I know how much US public debt is. I know the proportions of spending by various government agencies.

So let me summarise from here what the biggest things in the budget are, in order of amount:

1. Department of Health and Human services. (Medicare and Medicaid).
2. Social Security.
3. Department of Defense.
4. Interest paid on money owed

So there are only these four places for the Federal Government to cut into. Everything else represents a very small proportion of government spending. Even if you completely cut funding to NASA, Homeland Security, the FBI, or Department of Education, the result will be negligible.

So what Americans need to ask the GOP is "What are you going to cut spending on to bring the budget back into balance?".

1. Is the GOP going to gut Health and Human services? This means less money for Medicare and Medicaid. Old people especially will be hit by this.
2. Is the GOP going to gut Social Security? Less money for retirees.
3. Is the GOP going to gut Defense? Yeah right I see that happening.
4. Is the GOP going to stop paying debt off? That would mean defaulting on treasuries.

In the end the only real solution is to increase tax revenue, which means increasing taxes. The GOP won't do that. In fact they'll probably cut taxes for the rich again, convinced that maybe this time it might work.

Which means that the GOP will simply put the Federal government further and further into debt. That's what they've been doing since 1981, so we can assume that they'll go with tradition on that one.

In response to predictions of the "end of the world" and the fact that so many have failed:

The thing is that history is replete with instances of societal collapse and population downturns. War, famine and disease have taken away huge proportions of human population.

The "end" is never the "end", unless you're talking about Jesus returning or a massive impact event. The Roman empire ended - slowly and painfully. But people still lived in Rome. Other empires came along and replaced them.

We have around 6 billion people living in the world at the moment. If global warming takes a turn for the worse and agricultural production drops by 95%, it will probably mean the deaths of billions. But it won't be the end. People will still survive. Countries will disappear, governments collapse, borders moved, but there will still be stable governments and healthy people for a minority of the people on earth. And it will be that minority that will eventually flourish to replace the collapse.

So it's not the end of the world, but an end of a chapter.

In response to a Conservative Redditor who is very concerned about radicals taking over the Republican Party:

As a Liberal/Progressive, I like you.

We disagree over spending: I'm happy to increase spending and increase taxes; you're happy to decrease spending and decrease taxes. Both of us, however, oppose the stupidity of continually running deficits.

Even though I'm a lefty I have, like most people, a foot in both camps. I may believe in increasing welfare but I also believe in personal responsibility; I may believe in wealth distribution but I also believe that the talented and the hard working should be rewarded; I may oppose corporate corruption and tyranny but I also oppose government corruption and tyranny.

What saddens me is that conservatives in the US have degenerated into anti-intellectualism, blind ideological adherence and an inability to think critically. Popular conservative commentators reflect this belief.

Conservatism as a set of political beliefs has a lot to offer - seriously it does. But conservatives in the US pose a net threat to America's safety and prosperity.

If the GOP and the Tea Party do not do as well as they hope during the 2010 mid terms (ie control one or both houses of congress) I can see violence resulting.

A further comment on the same thread:

I don't even know who the "extreme radical left" are in the United States. There are certainly a few unreconstructed Marxists out there who still preach class warfare and the need for a people's revolution but they have, as far as I know, almost no influence upon the Democratic Party. Even Bernie Sanders is too right wing for these old Marxists.

There's a few anarcho-primitivists in the environmental movement, but they are too small.

I visit Daily Kos often - it's probably a good place to start in finding out the thoughts and beliefs of the young mainstream left in the United States. Although they support an expansion in government spending to fund universal health care, better public schools and better environmental policies, they are hardly trying to create a communist America. The policies of the Kossacks and those like them in the Democratic party is to move the US into more of a Western European social democracy. They may find the free market problematic and in need of change, but they are not preaching a complete government takeover of private businesses, wealth and property. By all means of measurement, the left in the US is moderate compared to historical progressive policy.

By contrast, the right wing in the US has no real precedent in history. The US right want the government to be turned into Minarchism while maintaining a series of very conservative social laws (eg against homosexuality & abortion, more censorship, etc). The America that the US right wing want is one in which the federal government runs the armed forces, state governments run law enforcement and the legal system is covered by both. Apart from that, the government should do nothing. Education will be run either as a private business or home schooling. The poor will receive no welfare except from the charitable giving of the wealthy. Health care will be provided entirely by private business and insurance agencies, with those who cannot afford it left uninsured or begging for charitable handouts. Social security should be eliminated and people should provide for their own retirement. These policies are a complete repudiation of all that has been learned in the last 150-200 years of Western Civilization. Thus the right wing in the US is historically very radical in its views and not moderate by any way of measuring political and economic beliefs.

And the more radical a belief is, the more likely that violence is to erupt. It erupted on the "left" when communism swept into Russia and China. It is likely to erupt on the "right" in the US due to the Tea Party.

And I finish by promoting Absolute Price Stability on a thread discussing the gold standard:

Fiat currencies are as inherently failure-prone as a car is - it depends upon the driver.

Car drivers can be stupid, they can be smart. If a car crashes it is oftentimes the fault of the driver.

When it comes to fiat currencies, it is up to central banks to control supply to ensure that it matches demand. When the demand for money increases so should its supply. When the demand for money decreases, so should its supply.

Money demand is called Money Velocity.

Basically it goes like this: Money velocity is sped up or slowed down according to the actions of the market and the government; Money supply is increased or decreased by the actions of the market and government when they respond to interest rates set by the central bank.

It is quite possible for a fiat currency to exist without any form of long term inflation. Japan since the early 1990s has had enough bouts of deflation and inflation to ensure that the Yen has neither gained nor fallen in value.

Of course Japan's economy during that period has not been the best, but what it does show is that an economy can function, GDP and GDP per capita can be raised and prices can remain stable even when a fiat currency is being used.

The key here is absolute price stability: ensuring that money neither rises nor falls in value over the long term.

Of course, by this argument, even low inflation targets are too high. The ECB, for example, tries to keep inflation under 2%. They should be keeping it just above or just below zero so that the average over the long term is zero.

As for gold... the problem with a gold standard is that for it to act as a currency it would need to not just retain its value but neither increase nor decrease in value, otherwise inflation or deflation would result. To increase gold supply would require more gold to be extracted from the ground (which would make mining companies de facto central banks) and, once it has been extracted, it cannot be "unextracted". By contrast a fiat currency can be created or "decreated" instantly by the actions of a central bank.

Listen to The Black Angels

When I returned to listening to new music a few years ago I was hooked by The Black Angels. With their name based upon the song name by The Velvet Underground and featuring the image of Nico on the drum kit, the Black Angels were one of the first bands that I was impressed by when listening to Last.fm's "sounds like" stream. Basically it goes like this:

1. I was a fan of Ride.
2. In the early 2000s, I discovered that Black Rebel Motorcycle Club were fans of Ride, so I became a fan of BRMC.
   
3. After subscribing to Last.fm, I played the streaming channel for bands that "sound like" Black Rebel Motorcycle Club.
4. I then became a fan of the following bands: The Black Angels, The Warlocks, The Brian Jonestown Massacre and Dead Meadow.
   

Of course as I searched backwards I discovered that Anton Newcombe founded the Brian Jonestown Massacre (BJM) partly upon the influence of British Shoegazing music, of which Ride was a major contributor. One member of BJM was Peter Hayes who left the band and formed BRMC. Another member of BJM was Bobby Hecksher who ended up forming the Warlocks. The Black Angels were influenced by BRMC and Dead Meadow were influenced by BJM. To top it all off, Mark Gardener, one of the members of Ride, wrote and performed on one of BJM's recent albums.

So essentially it goes back to Ride and The Brian Jonestown Massacre - although both bands owe their existence to The Velvet Underground as well.

Anyway, The Black Angels' star has been rising recently and they have appeared on David Letterman. Here is a song from their latest album. Please listen to it and buy the album.

The USDX and US Real GDP: Has the US been in recession since December 2002?

I'm a big fan of tying down absolute values. For me, it is no reason to cheer GDP growth in the US if the US Dollar has dropped by enough to wipe out relative gain internationally. This is because I see currency value as an international way of valuing. Let me give you an example.

Let's pretend that Country A has a GDP of 100 while country B has a GDP of 100, and that both countries have parity in currency value. If the currency remains locked together, then any increase in GDP in either country can be compared to one another. So country A, for example, may increase their GDP to 102, while country B increases to 101. Thus country A has the better GDP.

But what happens if you take currency changes into account? Let's say the while Country A's GDP has increased as per above, what would happen if their currency had dropped during that same period? In order to make an accurate comparison between country A & B, this change of currency must be taken into account. So the equation would look like this:

(Change in Real GDP) x (Change in Currency Value) = (Actual GDP Change)

And here's a table that explains how the difference might work in practice:

So while Middle Earth's GDP has increased faster than Narnia, the devaluation of Middle Earth's currency ensures that, in comparison with Narnia, it has actually experienced economic decline while Narnia has grown.

This sort of activity is naturally the case when GDP is compared internationally. Of course this has been augmented by the use of "Purchasing Power Parity" to ensure that differences in GDP comparison are more realistic.

Anyway, a while back I began to add the uncertainty of currency value into the analysis of US GDP. The USDX is the index best used for comparing the US Dollar's value compared to other currencies. So into the spreadsheet I went, multiplying real GDP by the 12 month USDX average from 1981 Q4 until now. This is the graph that results:

Historically you can see the effects of the Plaza Accord in the mid 1980s, followed by the mid 90s expansion and the tail-off since the early 2000s. According to this graph, US GDP peaked in 1986 Q1 (170.89), bottomed out in 1991 Q1 (134.67), peaked again in 2003 Q3 (239.54), and bottomed out again in 2009 Q3 (189.34). Since then it has risen only slightly (currently 191.91).

Of course, population issues need to be added into the equation, which is where GDP per capita comes into play. Here is Real GDP per capita adjusted by the USDX in the same way:

This obviously follows the same trend as the graph before, but you can see that the effects of a higher population have led to even less of a growth in GDP per capita from 1981 until today. According to these figures, Real GDP per capita, adjusted by the USDX, is currently 143.03, which implies only a 43.03% gain since 1981. In fact the current situation is lower even than the mid 1980s peak that was brought down by the Plaza Accord. This graph shows that a peak was reached in 1986 Q1 (164.52), which bottomed out in 1993 Q1 (121.81), peaked again in 2002 Q4 (190.29), and bottomed out again in 2009 Q3 (142.02).

What is notable from these last two graphs is that the last peak goes back eight years. In other words, the recent downturn, extreme in nature, has been cushioned by a rise in the dollar. Conversely, the "mild" recession of the early 2000s has been made worse by a long term decline in the value of the US dollar. These two assertions fit into the USDX history.

It would be fair to say that if Real GDP and Real GDP per capita (both adjusted by the USDX for international - absolute - comparison) did advance and decline in the years shown on that graph, then surely that would've been felt at a national level. Without really giving any links, consider this:

• US GDP per capita adjusted by the USDX grew in the early 80s. This implies that between 1981 and 1986, there was a period which could be described as "a good economy". That certainly fits.
• US GDP per capita adjusted by the USDX declined between 1986 and 1993. This implies that the period that could be described as "a bad economy". That fits too.
• US GDP per capita adjusted by the USDX then grew between 1993 and 2002. This implies that the period could be described as "a good economy". Despite a few issues (notably the 2001 recession), that fits as well.
• US GDP per capita adjusted by the USDX has then declined between 2002 and 2009. This implies "a bad economy" which fits too, though the property bubble helped smooth out the 2005-2007 period. Certainly this period had below-average GDP growth.
  

Though this issue has been on my mind for some months now, I am not fully convinced that my logic or argument is correct, which is why I am writing a disclaimer here. Part of my thinking is that a 1% growth in the value of a currency is the same as a 1% growth in the value of GDP, which may be in error. Certainly there is clear evidence that a GDP decline results in higher unemployment while a drop in currency value may not result in such an event. It is also affected by my opinion that common currencies like the Euro should be a logical economic goal, or at least have fixed currency rates governed by a currency board and operating by international standards.

Anyway, tell me where I'm wrong on this... if I am wrong.

Recession over; recovery still in progress.

The NBER has officially called the end of the recession: June 2009.

Of course the recession is measured from peak to trough, and crawling up the other side takes time. So just how bad is it currently, now that the Germans have stopped bombing and London has begun to be rebuilt?

The above graph shows that real GDP per capita peaked in 2007 Q4 at $44,062.22, plunged to $41,698.40 in 2009 Q2, and is currently $42,576.71. The peak and trough of real GDP per capita here matches the beginning and end of the NBER-defined recession. The current level of GDP per capita is the same as it was in 2005 Q3, so nearly five years of GDP have been wiped.

How the US performs from now on will be the real determiner of the recession's effect. While the recession was underway, many commentators (including Paul Krugman) wondered whether this would be an "L" shaped recession - a crash followed by a long period of low growth. The graph above shows the "L" beginning to form, though it may also be the beginnings of a "U" or "V".

My opinion is naturally quite negative. Total credit market debt for 2010 Q2 was 357.15% of GDP ($52.0545 Trillion), down from the peak of 374.15% ($52.5097 Trillion) in 2009 Q2 but still massively high in comparison with the rest of America's financial history. This means that much of the 30 year debt bubble accrued by US financial companies has a long way to go before it returns to normal. I can foresee very slow growth in GDP over the next few years for the US with the continual possibility of capital flight.