The "nubs" of finance

This one didn't go where I thought it would.

See for yourself the persistent growth of finance:

Graph #1: The Persistence of  Memory  Finance

The growth of finance doesn't plot out as straight as the trend line, but the plot is not far off. Based on the graph we can say that Financial Corporate Business has been growing by two percent of GDP every 25 years. But don't forget: GDP was growing over all that time. Finance was gaining on that gain. Finance was growing faster than the economy. 

As if we didn't have enough finance already.

Maybe you are thinking 2% in 25 years isn't much. But, well, the change in GDP growth was half as much -- It was only 1%, period-to-period. For the first 25-year period, the average of quarterly Real GDP growth rates was 4.1 percent. For the second 25-year period, the average was 3.1 percent. For the third 25-year period, the average growth rate was 2.3%. Economic growth was great in the first period, not so good in the second, terrible in the third. And finance was gaining twice as fast as economic growth was declining.

Economists predict even slower growth in the future. McKinsey says global economic growth will fall by half in the next fifty years. That would put us in the neighborhood of 1% growth -- probably in half the time McKinsey says, and right on schedule. And finance will be 10% of GDP by then.

While we're waiting, take a look at the history shown on the graph:

• In the first 25-year period, 1947 thru 1972, when RGDP growth was great, the growth of finance was running on the high side of its trend line. But around 1963 something changed: the blue line shows the growth of finance running below the trend line until the early 1980s. What happened between those low-side dates? The Great Inflation happened. Inflation is related to the Quantity of Money; the Q of M is related to the borrowing we do; an increase in borrowing is related to an increase in the size of finance. There is a connection between inflation and the size of finance.
  
  
• In the second 25-year period (1972-1997), after 1975 or so the blue line shows finance creeping back up to trend. The line runs above-trend from the early 1980s to around 1987, the Reagan years. But then the line goes low again, indicating a slowdown in the growth of finance from 1987 to around 1997. This slowdown was a consequence of the Savings and Loan crisis. Wikipedia puts that crisis between 1986 and 1995. And the graph does show the blue line creeping back up to trend again after 1995.
  
  
• In the third 25-year period (1997-2022) the growth of finance runs high from around 1998 thru 2006. The growth of finance this time is greater than in the previous above-trend episodes; the gap between red and blue lines is greater. But then suddenly we had a "financial crisis". You can identify it by the sharp low between 2007 and 2011 on the graph. Coming out of the crisis, finance grew below-trend for five or six years, and then things got back to normal -- for finance. For the rest of us, not so much.

Here's an interesting bit: Just at the end of the 1998-2006 high in the growth of finance, there is a little nub. I don't know what else to call it (nub: "a small lump or protruberance" according to Oxford Languages). Immediately after the little nub, finance fell into crisis.

That's not the interesting part. The interesting part is the second nub, the one we see in the last two years on the graph. It is similar in shape to the first nub, and similarly higher than the five or six years leading up to it. But this second nub is bigger and more ominous. Plus, the Federal Reserve is busy right now raising rates and creating the next recession, just like they did before the 2008 crisis. Does this mean that after the new nub we get a new financial crisis?

Oh, I don't know. I'm no good at predicting things. I'm always wrong. 

So that's good, right? It means we don't get another financial crisis in 2023, right?

Oh, I don't know. I'm no good at predicting things...

Happy holidays, anyway.