World-System (1980-2070) US Central Government Debt Bubble

 

The US Central Government (CG) Debt Bubble was created by the Great Recession. The Spike around 2020 was the result of the COVID-19 Pandemic and the botched response under the Trump Administration. The question now is whether the Debt Bubble will pop and whether we will return to the USL20 Attractor Path (dashed red line) or whether CG DEBT will continue increasing and get beyond 120% of GDP.

Here is how Google AI Analyzes the Debt Crisis:

When the Debt Bubble pops, there will be a lot of Hardship (the US Great Depression was caused by the Roaring Twenties Bubble being popped after the Wall Street Crash). In this historical instant, the Debt Bubble might well pop as the result of foolish policy actions by the Trump II Administration which does not seem to understand the Historical Polycrisis it is facing.

Boiler Plate

 

State Space Model Estimation

The Measurement Matrix for the state space models was constructed using Principal Components Analysis with standardized data from the World Development Indicators. The statistical analysis was conducted in an extension of the dse package. The package is currently supported by an online portal (here) and can be downloaded, with the R-programming language, for any personal computer here. Code for the state space Dynamic Component models (DCMs) is available on my Google drive (here) and referenced in each post.

Atlanta Fed Economy Now

My approach to forecasting is similar to the EconomyNow model used by the Atlanta Federal Reserve. Since the new Republican Administration is signaling that they would like to eliminate the Federal Reserve, the app might well not be available in the future.

While the app is still available, there have been some interesting developments. In earlier forecasts, the Atlanta Fed was showing GDP growth predictions outside the Blue Chip Consensus. Right now, after unorthodox economic policies from the Trump II Administration, the EconomyNow model is predicting a drastic drop in GDP (the Financial Forecast Center is only predicting a slight drop here).

Climate Change

Another comparison for what I have presented above are the IPCC Emission Scenarios. These scenarios are for the World System. Needless to say, (1) the new Right-Wing Republican administration plans on withdrawing the US from all attempts to study or ameliorate Climate Change and (2) the IPCC does not produce any RW modes for the World System (but seem my forecasts here).

World System

The longest running set of data we have for the World-System is the Maddison Project based on the work of Angus Maddison (more information is available here). Data on production (Q) and population (N) for most countries and regions runs from years 0-2000. More data becomes available as we near the year 2000. 

Available data were entered in a spreadsheet (see Population above, double click to enlarge). Missing data were interpolated with nonlinear spline smoothing using the R programming Language.

In cases where initial values were not available (see GDP above), the E-M Algorithm was used to estimate initial conditions.

From the graph of GDP above (W_Q) for the World System, it can be seen that economic growth from the year 0-1500 was basically flat. The period of British Capitalism (after 1500) had a small plateau of growth. Takeoff does not happen until the Nineteenth Century.

From a system's perspective, the only model that can be tested for the entire period is Kenneth Boulding's Malthusian Systems Model [Q,N] = f[Q,N].

When developed as a State Space model (measurement matrix above) there are two components: W1=Growth and W2=(Q-N), the Malthusian Controller. When more data is available, the Malthusian Controller can be generalized to other SocioEconomic theories.

What the Malthusian Controller shows (plotted as Q-N above) is that a long-developing Malthusian Crisis (Q<N) started in the Late Middle Ages and accelerated through the period of British Capitalism (Dark Satanic Mills) and was reversed spectacularly during the Nineteenth Century.  Takeoff in response to a deepening Malthusian Crisis would not be an unreasonable way to view Modern Economic Growth.

Error Correcting Controllers (ECC)

In another post (here), I presented Leibenstein's Malthusian Error Correcting Controller (ECC). It can be generalized to the dominant ECCs in most theoretical economic models (above). These controllers can be further generalized. For example, (X-U) and (L-U) can be generalized to (N-U), a more general Urbanization Controller which describes market expansion for economic growth. In countries and periods with limited data, (N-U) might subsume all these processes. ECCs describe important feedback processes in SocioTechnical System that are typically not recognized as such in academic literature.

Kaya Identity

The basic theoretical model underlying all the World-System models I crate is the Kaya Identity. There are a number of advantages to starting theoretical development with the Kaya Identity: (1) An "identity" is true by definition Adding other variables to the model ensure that theory construction is on a solid footing. (2) The Kaya Identity is also used as the foundation for the IPCC Emissions Scenarios allowing a linkage between World-Systems Theory and the work of the IPCC.

World Development Indicators (WDI)

After WWII, extensive data sets on all countries in the World-System became available from the World Bank (here). The indicators above where chose to construct the state space for each WDI-based model. Addition indicators can be added for specific forecasts and analyses.

World-System (1900-1950): Did the Smoot-Hawley Tariff Cause the Great Depression?

 

US President Donald Trump recently said (here) that low tariff's caused the Great Depression. But, the Smoot-Hawley Tariff Act of 1930 raised tariffs right after the Stock Market Crash of 1929 and GNP continued to collapse dramatically. Is Trump wrong about tariffs, as almost every economist claims?

Sorting causality out during the early Twentieth Century is difficult (so much was going on) and compounded by lack of agreement among economists and historians (see Fearon, 1987). When I was in Graduate School I was told not to wade into this area because it was way too controversial. Obviously, nothing has changed since the 1980s.

But, here's my attempt to explain the period in the US. The graphic above shows actual GNP (dark black line) and the World System attractor path for GNP (dashed red line) based on the USGD model (and WGD Model here). What you are looking at is the mother of all bubbles caused by WWI (a similar Bubble happened during WWII but GNP was below the attractor path at the start of the War) and the Roaring Twenties. The Bubble was popped by the Stock Market Crash of 1929 (not the Smoot-Hawley Tariff). Once the Bubble had been popped, GNP had no where to go but back to the attractor path (dashed red line) where it stayed until well into WWII. 

Part of the problem with my explanation is that Free-Market Economists will not admit that Economic Bubbles exist (the market is always perfect). From the perspective of World-Systems Theory, the assumption of market perfection makes it impossible to understand the Great Depression. Economic collapse should never happen; bubbles shouldn't happen. Keynesian Economics threw out market perfection, but Neoliberalism is the dominant ideology today and we are blinded by it.

World-System (1970-2020) The Bubbly Economy of Argentina

 

The Economy of Argentina has been through some things: Military Coups, Recessions, Inflation, Neoliberal Austerity measures, IMF interference, Protests, etc. etc. The graphic above shows actual GDP (dark line) compared to the attractor path (dashed red line) and the 98% prediction intervals. It's not a pretty picture. For most of the late 20th Century, the economy was underperforming. After 2000, there was an Economic Bubble that eventually popped and allowed the economy to return to the attractor path (you can read the details here).

Looking at the 2003-2008 Expansionary Monetary Policy Bubble more closely, the bubble began after 2005 and was popped by the 2008 Global Financial Crisis. By 2012, the economy had returned to the attractor path (dashed red line) with growth ranging from1-2%.

The period from 1975-1990 was not good for the Argentinian economy and is sometimes describe as a period of stagflation. From 1989 to 1990, Argentina endured a hyperinflation shock. Minister of the Economy Domingo Cavallo instituted Austerity measures (trade liberalization, deregulation, and privatization) in addition to pegging the Peso to the US Dollar. Inflation has been well below the attractor path (dashed red line above) since then.

The Austerity measures (AUST1 above, see Shefner et. al.) kicked in after the hyperinflation and extended well into the 21st Century.

And, poor economic performance leads to hardship (HARD2 above, see Shefner et. al.).