http://teodesian.net//posts/49a29f5d-2d07-11ec-8cc5-fd8f246d4839?format=xml teodesian.net : /posts/49a29f5d-2d07-11ec-8cc5-fd8f246d4839 en 2026-04-21T06:05:53 2026-04-21T06:05:53 /favicon.ico http://teodesian.net 32 32 teodesian.net favicon http://teodesian.net/posts/49a29f5d-2d07-11ec-8cc5-fd8f246d4839 The U.S. economy has clearly experienced an unprecedented set of supply side disruptions, which serve to shift the upward sloping aggregate supply curve inward. In a graph, with aggregate prices on the vertical axis and real GDP on the horizontal axis, this causes the aggregate supply and demand curves to intersect at a higher price level and lower level of real GDP. This drop in real GDP, often referred to as a supply side recession, increases what is known as the deflationary gap, which means that the level of real GDP falls further from the level of potential GDP. This deflationary gap in turn leads to demand destruction setting in motion a process that will eventually reverse the rise in inflation. In the 1970s, the economy was beset by a string of such supply curve shifts primarily because of falling oil production. Then the inflation rate did not fall but continued to march higher. However, before Paul Volcker was made Fed chair late in the decade, the Fed actions allowed money supply to accelerate steadily. During the 1970s, unlike currently, the velocity of money was stable (although not constant). As a result, the aggregate demand curve (C + I + G +X = M x V) also shifted steadily outward. This allowed the inflation from the supply side disruptions to become entrenched. Currently, however, the decline in money growth and velocity indicate that the inflation induced supply side shocks will eventually be reversed. In this environment, Treasury bond yields could temporarily be pushed higher in response to inflation. These sporadic moves will not be maintained. The trend in longer yields remains downward. ]]> doge http://teodesian.net/posts/49a29f5d-2d07-11ec-8cc5-fd8f246d4839 2021-10-14T15:56:26