Friday, April 30, 2010

How Far Had We Fallen? A LOT...

I "borrowed" the concept of the chart below from Calculated Risk, which showed the GDP declines from the prior peak for post WWII recessions in REAL terms (this downturn doesn't actually look too different).

The real level is of course more relevant than nominal level in most cases. HOWEVER, nominal matters a lot to country that is very indebted as debt is nominal (i.e. you get to pay it back in nominal, not real terms, which is why the thought of "inflating" debt away is so attractive to some).

As can be seen above, the decline in nominal was really unparalleled over the past 50 years and only now are we back to previous peaks (yet I still calculate us ~$1 trillion below trend). Yet another reason why, on the margin, we are at risk of suffocating under our indebtedness.

Source: BEA

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