Tverberg: "The World Economy Seems To Be Seriously Ill..."
Figure 5. U. S. Income Shares of Top 1% and Top 0.1%, Wikipedia exhibit by Piketty and Saez.
(2) Interest Rates. Interest rates are the lever that economists like to adjust upward or downward to try to stimulate the economy or push the economy downward. Short term interest rates, up until about the end of 2005, were at the level they were at during the Depression of the 1930s.
Figure 6. Monthly average 3-month term treasury bill rates in chart prepared by FRED. Amounts shown through October 2018. Grey bars indicate recessions.
Raising interest rates is like adding a little more dough to the already over-full bread bowl. With these higher interest rates, borrowers need to pay more for monthly payments, making the strain on their finances even worse than it was previously. Figure 6 shows that raising interest rates very often creates a recession. In fact, the Great Recession of 2008-2009 seems to be the result of an increase in short term interest rates. This time we are being told that the increase will be gentle, but if the bread bowl is already overly full (in the sense that affordability of the output of the economy is already way too low, for many workers), what difference does “gentle” make?
(3) Return on Capital Investment/Added Debt. Falling long-term interest rates between 1981 and 2016 seem to be an indirect reflection of falling long-term return on capital investment. If capital returns had been higher, there would be more demand for debt, forcing interest rates up to levels closer to where they had been when the economy was growing more quickly.
Figure 7. Monthly average 10-year US Treasury interest rates in chart prepared by FRED. Amounts shown through October 2018. Grey bars indicate recessions.
Another way we can look at how productive the addition of debt has been is by comparing the debt increase each year with the GDP increase (including inflation) each year. We use current year GDP as the denominator in both calculations. Figure 8 shows the indications for what the Bank for International Settlements calls “Core Debt” (that is, Total Non-Financial Debt, Including Government Debt).