The chart below shows the relatively recent situation. What is remarkable is that the trend has begun to stall out in recent years, in spite of money supply growth ranging between 8-16% (currently approx. 8.5%). This is a strong hint that the succession of credit booms over recent decades has severely depleted the pool of real savings available to the economy (note that real savings, or the free capital actually available for longer term investment projects, are distinct from numbers piling up in bank accounts due to willy-nilly money printing).
The ratio of capital vs. consumer goods production shows that in periods of artificially suppressed interest rates spending on capital goods production rises sharply vs. spending on consumer goods production. Recently the trend has stalled, in spite of brisk money supply growth – click to enlarge.
For comparison, here is a chart of money supply and credit growth, with the same time period highlighted above shown in a blue rectangle:
Annual growth rates of the broad true money supply and total bank credit – this indicates that in order to reignite boom conditions, ever greater money supply growth is likely required – click to enlarge.
It is also worth considering the difference between “then” (the time prior to Nixon’s gold default) and “now”. As the long term chart below shows, the ratio actually moved in a well-defined channel before the dollar’s last tie to gold was cut:
Prior to the adoption of a full-fledged unanchored fiat money, the ratio between capital and consumer goods production moved within a well-defined channel. Recessions were more frequent, but also far less severe. It is to be expected that eventually, the entire move since 1971 will be “corrected” – click to enlarge.
In parallel to this, total credit market debt has exploded into the blue yonder. We would point out to this that the ratio between capital and consumer goods production would also rise if the pool of real savings were actually growing. In that case, an increase in economic growth should be expected to ensue, as the investment-consumption ratio would be in line with the actual wishes of consumers. The fact that economic growth has actually slowed quite noticeably relative to the pre-default era can be seen as empirical evidence that amassing all this debt and artificially distorting the structure of production has actually set us back quite a bit. One must always be careful with interpreting empirical economic data of course, as the ceteris are never paribus, but it is clear that we have very little to show for the explosive debt expansion chronicled below:
Total US credit market debt, which has gone “parabolic” after Nixon’s gold default. Unfortunately, this debt expansion has produced slower rather than faster economic growth compared to the immediately preceding time period (1945-1971) – click to enlarge.
How the vast money supply and credit expansion of recent decades has affected production is also shown by the following chart, which depicts the industrial production indexes of business equipment, durable, as well as non-durable consumer goods separately. Over time, the three data series have drifted ever farther apart.
Industrial production of business equipment (capital goods), durable and non-durable consumer goods. Note how the beginning of the secular downtrend in interest rates initiated by the Volcker Fed coincides with the growing gaps between these production indexes (note that under Volcker, the biggest year-on-year money supply expansion in a single year of the entire post WW2 era occurred in 1982. Today Volcker is widely hailed as an “inflation fighter”, one of the many great absurdities peppering the establishment-approved version of economic history. In reality he was a super-inflationist) – click to enlarge.
