Moderation in All Things

The Great Recession was comparatively less bad than the Great Depression. Between these two awful economic bookends, but more contiguous to the Great Recession timeline, was the Great Moderation. The Great Moderation is defined as that period of decreased macroeconomic volatility experienced in the United States since the 1980s, but ended abruptly at the outbreak of the worldwide Great Recession that started in 2007. See the colored periods in the chart below. According to the Federal Reserve, during this quiet period, fluctuations in real growth declined by half and inflation instability declined by two-thirds. The varied expert reasons for the so-called moderation range from (a) lower volatility in the demand for durable goods, (b) an absence of a decline in household consumption and individual earnings, (c) improved supply-chain management, (d) shifting from a production-based workforce to more service-based workforce, (e) technology advancement and information systems, (f) improved monetary policy and (g) just pure luck. These reasons are expanded upon by Davis and Kahn in “Interpreting the Great Moderation.” Read more.

Source: Federal Reserve Economic Data (FRED) database provided by Economic Research at the St. Louis Fed.

Let us add to the above list the real-world reason for the Great Moderation: (h), aggregate Household Debt, also being the primary reason for the Great Recession. Between the early 1980s to the early 2000s the debt-to-GDP ratio steadily grew slower at first but then accelerated to unsustainable levels.

It turns out that the Great Moderation was just the long and gradual run-up of the usage of debt to finance aggregate demand that eventually became so burdensome to service that the economy tipped over causing the Great Recession, which was debt deflation. The moderate usage of debt is stimulative at the outset of the long business cycle but becomes easily stifling in the end. Steve Keen was one of only twelve voluble professionals who predicted the Great Recession. In describing moderate tranquility to a acute breakdown, Keen said it best, “The Great Moderation and the Great Recession are merely different phases in the same process of debt-financed speculations (for stocks, real estate, etc.), which causes a period of initial volatility to give way to damped oscillations as rinsing debt transfers income from workers to bankers, and then total breakdown occurs when debt reaches a level at which capitalists become insolvent.” (Keen, 2011, “Debunking Economics;” p.374-5) Keen’s entire book addresses this topic in a multitude of citations and debunks most other misapplied and misunderstood topics running rife in mainstream economics. This book is most prescient and likely the most useful Post-Keynesian text for building the future foundations of real-world economic study. It is available at Amazon.