According to Lacy Hunt, chief economist at Hoisington Investment Management the “business cycle” is actually three different waves occurring in a specific order. They peak and trough in that sequence
- Financial cycle – lose and tight monetary policy influence the movement
- GDP cycle – monetary policy then impact inflation and risk-taking
- Price/labour cycle – this later makes wages and prices rise
Source: Hoisington Investment Management
Can the US Fed stimulate growth?
Although central banks can control the money supply, the velocity that it moves in an economy is very important to the business cycle – creating more money has little effect if people don’t use it. Velocity in the US is now lower than it was in the great depression. This is a serious problem for the US Federal Reserve’s attempts to stimulate growth.
There is also the problem of Marginal revenue product of debt – this is the amount of GDP growth generated by each additional dollar of debt. That has been falling for years and is set to fall even more as higher rates divert a bigger part of the revenue from debt-funded projects to interest payments instead of more productive uses.
Source: Mauldin Economics: Thoughts from the front line – 6th May 2023
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