We have heard about recovering from the ‘Great Recession’ since the summer of 2009. Politicians of the Left have been conducting a painful national celebration of how their Keynesian stimulation policies have saved and then recovered our economy. But what no one tells us is that recoveries come in various flavors, some of which, as we are experiencing, are very bitter to swallow. RR readers should understand some basics of what is a recovery, and this post will attempt to contribute to that understanding.
In the figure below we see a standard garden variety, or nominal, process (green line) that starts at 100 and grows at an average 4% rate per time period. Here we have shown time divided into 100 numbered periods – i.e. t = 1, 2, 3, …, 99, 100. Everything seems to be going along normally or nominally until t = 40 at which time the recorded amount has climbed to about 225 (blue dotted line). Then something goes wrong, the process falters and plunges about 40% (red line) over the next ten time periods such that at t = 50 it is at around the 130 level at which time a ‘recovery’ begins.