TSP Indicator Update: Criss-Cross, Flip-Flop And Remembering 1966

In November, we argued that the business cycle rests heavily on a certain type of incremental spending—namely, spending that doesn’t require prior savings. We used the term thin-air spending power (TSP) to describe spending that’s financed by external “injections” instead of prior savings.

As part of our argument, we shared the chart below, which compares TSP-derived spending on the left (financed by fresh bank credit) to spending that merely recycles savings, such as the prior domestic savings category on the right.

(Click on image to enlarge)

econ indicator 5

We also shared a diagram that puts the argument in pictures, illustrating how bank credit boosts economy-wide spending.

(Click on image to enlarge)

econ indicator 1

As shown, bank credit stands apart because it doesn’t require savings from prior income. Rather, it creates fresh TSP, which again represents spending power that materializes from “thin air.” (See articles here and here for further explanation.)

Measuring TSP

But banks aren’t the only source of TSP. Investment gains and losses can also boost or dampen spending in ways that leak into the circular flow depicted above. Recognizing the similarities between these TSP sources, we can build a highly predictive indicator from only two components:

  • Real new bank credit. Inflation-adjusted new bank credit aggregated over four-quarter periods and expressed as a percent of final domestic demand in the prior period.
  • Real holding gains. Inflation-adjusted holding gains (household and nonprofit gains from equities, mutual funds, real estate, and pensions) aggregated over four-quarter periods and expressed as a percent of final domestic demand in the prior period

The chart below shows the indicator’s average path during the last nine business-cycle expansions. Note that we’re mapping a path through two dimensions—one for each of the two primary TSP sources—by connecting data sequentially.

1 2 3 4
View single page >> |

For the full TSP chartbook, click here. For a deeper dive into the underlying philosophy, see  more

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


Leave a comment to automatically be entered into our contest to win a free Echo Show.