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Tailwinds often make jet planes fly faster than they would regularly fly. In this post, I talk about economic tailwinds that help the economy grow more quickly.

Strangely enough, the economy seems to move from tailwind to tailwind, as new resources are discovered, as population expands, and as central banks figure out new ways to fix the economy. In this post, I will describe some tailwinds affecting the economy. Many of these have recently lost their value or are likely to lose their value in the future. The long-term trend seems to be toward tailwinds becoming available to some parts of the world economy, but there may be major dips and shifts with respect to which segments of the world economy are favored.

[1] The tailwind of very low oil prices

Before 1972, the US economy had the tailwind of a good supply of oil available at very low prices. Goods could be made cheaply with oil products, and new devices, such as automobiles, could be operated very inexpensively. New technology could take hold quickly because resources, including energy resources, were easily available. For these reasons, the economy could grow very quickly, with little use of debt.

Figure 1. Average annual inflation-adjusted oil prices, based upon data of the 2023 Statistical Review of World Energy, published by the Energy Institute.

Data from the US Bureau of Economics shows that the US economy experienced an average annual growth rate of 4.8% between 1932 and 1972, which is very high by today’s standards. The same data shows that the US economy’s average annual growth rate was 2.7% for the period 1972 to 2022.

[2] The tailwind of falling interest rates and near zero interest rates

From 1981 to 2020, the world economy had a tailwind of generally falling interest rates.

Figure 2. Chart by the Federal Reserve of St. Louis, showing interest rates related to 3-month and 10-year US Treasuries, with US recessions noted in gray. Chart has been annotated by Gail Tverberg to point out time of generally falling long-term interest rates.

On Figure 2, the top line (in red) shows 10-year interest rates. The lower line (in blue) represents interest rates of 3-month Treasuries.

In the US, many mortgage rates have tended to follow 10-year interest rates. We all know that as mortgage rates fall, homes become more affordable to buyers. As more homes become affordable to buyers, the “demand” for homes goes up. More homes are built, stimulating the economy. Similarly, buying farmland becomes more affordable. Factories become more affordable. There are more people bidding for these goods, so the selling prices tend to rise.

Figure 2 shows that short term rates have also been falling, but in a more irregular way. The fact that these rates have generally been falling has also greatly aided economic growth, since many industrial and financial loans are very short term.

It appears to me that the temporary rise in short-term interest rates between 2004 and 2006 ultimately caused the Great Recession of 2007-2009. See my academic paper, Oil Supply Limits and the Continuing Financial Crisis. Note the delayed impact of the rate rise. It is far too early to assume that the recent rise in interest rates will have no serious detrimental effects on the economy.

To try to keep the economy operating after the Great Recession, short term interest rates were brought down to close to zero for most of the time between 2008 and early 2022. These low interest rates encouraged investors to pursue new ventures that were very “iffy”– they might produce a positive return, or they might lose money. In fact, government subsidies were added, inviting investors to pursue “opportunities” that were likely to be money losers.

With this long-term tailwind of falling interest rates, capital gains were very easy to obtain. Homes became worth increased amounts, as did farms, seemingly by magic. Shares of stock tended to rise. People began to believe that there was little risk in borrowing money for questionable ventures. New high technology businesses in Silicon Valley blossomed.

In some sense, interest rates that rose in the 1960 to 1981 period (to keep the economy from racing ahead too fast) had stored up momentum that could be used in the 1981 to 2020 period.

We are now past that period of falling interest rates. In fact, we are in a new period of rising interest rates because of depleting resources, and the upward pressure these depleting resources place on inflation rates. Furthermore, a 200-year history of US interest rates shows that the recent near-zero interest rates have been an anomaly. We cannot expect interest rates to go back to the recent low level for any extended period. An interest rate of 5% or more is normal. The economy has benefitted from the temporary gift of falling interest rates, and of near zero rates, but this period is likely past.

[3] The tailwind of rising debt, relative to GDP

The fact that debt is rising, relative to GDP, is closely related to Tailwind [1] and Tailwind [2].

Figure 3. Ratio of the increase in US debt to the increase in US GDP for 5-year periods, based on data of the US Bureau of Economic Analysis.

How much debt does it take to create one dollar of GDP? In theory, both the buyer of a product (such as a vehicle), and the various organizations involved with creating the product and shipping it to the end user, will need debt to move the process along. If the government is adding a subsidy to move the process along, this will add another layer of debt.

Figure 3 shows that prior to 1981, when oil prices were low (Figure 1), it took less than one dollar of debt to facilitate the process of creating one dollar of GDP. Oil companies were sufficiently profitable that they could use their profits to reinvest in new wells as old ones depleted. They did not need to add debt to make the process work. While products such as homes might need debt for the buyers to afford them, many other products did not. In this early period, government subsidies were much more limited than today.

After 1981, the ratio of debt to GDP steadily rose. The rise was particularly steep after 2001, when China was added to the World Trade Organization (Figure 1). As China ramped up its manufacturing, the price of oil tended to rise because more oil was needed for manufacturing and shipping the goods China made. More debt was required to import this higher-priced oil, causing at least part of the increase in the debt to GDP ratio. The dip in the debt to GDP ratio in the 2014-2019 period seems to correspond to the period of lower oil prices shown in Figure 1.

In some sense, it is strange that GDP does not consider the added debt that an economy requires in order to create the goods and services that it produces. Logically, it might make sense for GDP to measure the value of goods and services added, net of the additional debt required to make these goods and services. We can see from Figure 3 that this net approach would only work up until 1981. Since 1981, it has become necessary to add more debt than the amount of additional goods and services produced. If the interest rate is 0%, perhaps this is not a major issue, but if the interest rate rises to 5% or more, a huge amount of interest to be paid. Repaying debt with interest becomes a serious problem unless the borrower is able to find a truly profitable use for the funds.

[4] The tailwind of higher population

If population is growing, there is a need for many new things, including new schools, roads, stores, and homes. This puts pressure on GDP to grow. Figure 4 shows population growth, excluding the impact of migration.

Figure 4. Natural population increase (based on births minus deaths) as a percentage of population based on data from World Population Prospects 2022 published by the United Nations.

In the 1950s and 1960, part of the reason that GDP in the More Developed parts of the world was growing rapidly was because population was growing quickly (Figure 4). This tailwind had mostly disappeared by the mid-1990s. Now, if one of the More Developed parts of the world shows population growth, it tends to be the result of increasing immigrant population.

Figure 5. World population estimates as used in the 2023 Statistical Review of World Energy by the Energy Institute. OECD is a slightly different grouping of highly developed countries than UN’s grouping. Thus, non-OECD corresponds to the population of less developed countries.

Total world population (Figure 5) keeps rising, even though birth rates have been falling because people in less developed parts of the world have been living longer. This adds to migration pressure because there are not enough goods and services available for the increased population.

[5] The US tailwind from playing “King of the Mountain”

In March 2022, the US Federal Reserve started raising interest rates. These higher interest rates can be seen as a way to push the US$ higher relative to other currencies, especially relative to currencies of poorer countries, such as Argentina and Turkey. By pushing the dollar higher, oil and other commodities become relatively cheaper to the US, and relatively more expensive to those countries with currencies whose value is low relative to the US$. Also, the higher interest rates make the US a more attractive country for other countries to invest in.

The US move to raise interest rates higher can be viewed as a “King of the Mountain” move. High interest rates can perhaps be withstood by strong economies, but they cannot be withstood by weak economies. For example, many of the poorer countries of the world have loans from the International Monetary Fund. As the US dollar strengthens relative to local currencies, these loans become more difficult to be paid back. The fact that recent interest rates are higher also makes it harder for borrowers to repay debt with interest. Weak businesses and perhaps weak governments around the world will tend to be squeezed out.

One thing that may help the US in trying such a move is that fact that US debt has a kind of moneyness quality that the debt of other countries does not have. This occurs because the US$ is the reserve currency, which in turn is related to the US being the world’s hegemon. The question becomes: How long can the US maintain this lofty position? Other countries are likely to push back and find ways to work around the use of the US$, if it is to their disadvantage.

[6] The tailwind from the “Green Energy Will Save Us” narrative

Figure 6. Figure by Gail Tverberg illustrating an economy that is trying to turn to a different direction, while the standard narrative is that business as usual can continue forever, thanks to the miracles of Green Energy.

The standard narrative about green energy saving the world from its climate change gives great opportunities for governments to subsidize wind turbines and solar panels, battery manufacturing plants, and the building of electric vehicles. These subsidies create more debt, which helps push the economy along.

The educational system is also stimulated by the “Green Energy Will Save Us” story. Educators have new courses to teach and new subjects to write academic papers about. If students are interested in studying these subjects, the US government is willing to provide debt-based funding to the prospective students. This adds another source of debt to stimulate the economy.

Of course, there is the hurdle of paying this debt back, especially if interest rates are at a new higher level. This game would not seem to be able to go on very long unless some green approach actually works. Such an approach needs to work in current devices, be low-cost to manufacture, and be affordable to customers at a price that generates taxable revenue.

[7] Over the very long run, tailwinds do seem to help the Universe grow and become more complex and more energy intense.

Eric Chaisson, in the book Cosmic Evolution: The Rise of Complexity in Nature, writes about the Universe gradually becoming more complex and having greater energy intensity. He shows images such as this one.

Figure 7. Image similar to ones shown in Eric Chaisson’s 2001 book, Cosmic Evolution: The Rise of Complexity in Nature.

We don’t understand why this happens. Evolution seems to happen in every part of the Universe. Many parts of the Universe are short-lived. Each new part of the Universe varies in random ways from its predecessors. Evolution happens through the survival those that are the best adapted to their surroundings. This happens at least partly through the laws of physics. There may be some other force involved as well. Economists talk about the Invisible Hand being helpful. Those who are religious may think of the Hand of God being involved.

We know that the Earth has survived for a very long time, despite being hit by large meteors and despite major changes in climate. In fact, early humans lived through glacial periods. There are times when economies and populations fall back considerably, but somehow the world ecosystem recovers. It may even adapt in a way that allows more opportunity for growth.

Thus, even as the economy seems to be running out of today’s tailwinds, somehow there may be future tailwinds that will push the at least segments of the world economy along in a somewhat different direction. We simply don’t know for certain how things will turn out.

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