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Flying into an Economic Coffin Corner
When a U-2 spy plane flies very high, the air gets very thin. This causes the the amount of air going over the wing to fall, so the wing thinks it is flying slower and therefore will stall (lose all lift) and fall out of the sky at much higher real speeds. The U-2 has another limit, its critical Mach number. This is the highest speed before the airplane will begin to tuck under and lose control due to transonic effects on the wing and tail.
Normally, there is a huge gap between the stall speed of the airplane and its critical Mach number. But as you climb higher, these numbers begin to converge. At the U-2’s highest operational altitude, the difference between the stall speed and the critical Mach number can be as little as five knots. This is known to U-2 pilots as the “coffin corner.” In the coffin corner, if you fly any faster, you lose control. Fly any slower … and you lose control. It’s extremely dangerous, and normally the plane would only be flown on autopilot in this region.
The coffin corner is a great metaphor for the region our politicians and economists have taken us over the past decade in their ongoing attempt to manipulate fiscal and monetary policy to avoid the natural consequences of the 2008 meltdown.
Think about the tools governments have to affect economic change: They can borrow money, they can raise or lower taxes, they can inject or restrict money flowing into the economy with fiscal stimulus or quantitative easing, or they can manipulate interest rates.
When inflation picks up, the government can put the brakes on it by raising interest rates. If deflation is a worry, the government can lower interest rates. Some believe a moribund economy can be propped up by borrowing and spending money as an economic stimulus, or by injecting more cash directly into the economy.
But here’s the problem: Each time you do one of these things, you set the stage for having to do more, unless it does exactly what you expect it to. If not, you begin to fly the economy into a coffin corner. You might be able to maneuver around a bit on the way there, but at some point, you’ll fly into the zone where everything you do just makes the situation worse, and you lose control of the economy entirely.
Today, interest rates are near zero. If another recession comes, there will be very little room to lower rates to boost the economy. On the other hand, if at some point the economy heats up and inflation rears its head, the enormous amount of debt governments have taken on since 2008 will severely constrain their ability to raise interest rates without the debt-carrying costs of government completely destroying the budget.
The current US debt is about 18 trillion dollars. If that debt were all in short-term instruments, then raising the interest rate by 1 percent would cost the government an additional 180 billion dollars per year in interest payments. If the government had to raise interest rates to 10 percent to fight inflation, interest on the debt would be 1.8 trillion dollars per year — completely unaffordable. Most of the new US debt has a maturity period of between one and five years, as the government has chosen to keep debt service costs low at the expense of taking on more risk.
Overall, governments of the world (and citizens) have been rapidly piling up debt to avoid the worst of the pain of the last fiscal crisis. In the past seven years, global debt has increased by 57 trillion dollars! China’s debt has quadrupled over that time owing to its government’s effort to maintain its growth rate. Japan has spent trillions on stimulus that doesn’t appear to have stimulated anything but massive overbuilding of infrastructure they don’t need and can’t afford.
As the old saying goes, if something can’t go on forever, it won’t. Given the anaemic global growth we’ve seen since 2008, imagine what it will be like when instead of borrowing trillions to prop it up, we have to start paying it back. Imagine what will happen if we wind up in another round of 70s-style stagflation, but without the ability to raise interest rates to fix it.
The global fiscal situation looks even worse today than it did before the collapse in 2008. Only this time, thanks to our elites who claim to know how to manipulate complex economies, we’re going to be flying in the coffin corner when we hit the next crisis. And there aren’t enough parachutes to go around.
Published in Domestic Policy, Economics, General
Stein’s Law, from Herb Stein, Chairman of Nixon and Ford’s Council of Economic Advisers and Ben’s dad.
Complete agreement. I have been predicting hyperinflation for several years… It is just a matter of time. We either hyperinflate, or the nation defaults.
I looked up a graph to help understand the analogy. Here it is in case it’s helpful to anyone else:
https://commons.m.wikimedia.org/wiki/File:CoffinCorner.png
Love it! Thanks. (+ The metaphor can be expanded to include the source of the U2–“the Skunk Works”)
Nice analogy. Thanks for posting this.
Excellent post, Dan, and a compelling example. The ability to come up with the right metaphor is, to paraphrase Twain, the difference between lightning and a lightning bug.
Yup. I’ve always said its like backing up a trail, but I like your analogy better.
Thanks.
Mach tuck. Only on Ricochet would I run into that again.
I agree on the aptness of the analogy, but when economists use something like this they are accused of “physics envy.”
Real economic growth helps prevent this as it provides more income and therefore more tax to cover the debt. Also, at least some of the fed’s increased balance sheet assets will mature and pay dividends, providing the fed with funds that can be paid to the government. I’m not hugely confident that funds from either source won’t be raided for increased spending, for example, see fed funds appropriated for the new highway bill.
This information will come as shockingly bad news to Democrats. You mean we can’t just spend infinitely, with no negative side effects?
Who knew?
Did the SR-71 have the same problem, or did the wing design prevent it?
The SR-71 was designed to fly supersonic, so it does not have the Mach tuck issue that the U-2 has.
I used to think so, but now I’m not sure. We’ve pumped an awful lot of borrowed and printed money into the economy already, and right now the biggest risk is deflation. I would not have predicted that.
The thing is, as a complex economic system, we really don’t know what the economy will do in response to changes in inputs. What it did last time may not be what it does this time. Economies learn from the past and adapt. For example, we learned last time that if you’re really big and screw up, the government will bail you out. That changes the behavior of people in response to risk, which means they won’t respond the same way the next time there’s a crisis. In this case, that’s a moral hazard. But the same can be true of any past shock to the system. Shocks change the system they affect, which adapts to the knowledge and changes its behavior.
Good analogy, it would be more accurate if engineers were perched on the wings trying to adjust designs in real time to match what they think the pilot will do, but with no knowledge of the pilot or where he’s going and no altimeter. The Fed, the Treasury are always flying blind. There is no science to tell them what to do, even if they knew where they were going, which is impossible to know. We say there’s a risk of deflation with no notion of what that means in this economy and if they did know wouldn’t know what to do, and if they did know what to do, it would be distorted by political interests. There is only one rule that generally makes more sense than other rules, “make simple transparent laws, then get out of the way”don’t burden the economy with fruitless attempts to guide it, fix it, smooth it, propel it because you can’t.
Couldn’t have said it better myself. Really. Damn it!
Tremendous analogy. I don’t think ‘if a recession comes’. I believe it is here. We cannot exist as a primary service sector consumer society forever.
The U2 analogy brings back memories of leaving Iraq at 50k, supersonic with 190KCAS and the jet handling like a dishrag.
How does the velocity of money tie into this (if at all)? According to the St. Louis Fed, M2 velocity is at its lowest since 1960. What happens when velocity returns to more normal levels?
Going from Tenacious D’s link to the flight envelope graph, I’ve “learned” a new German word: Fluggeschwindegkeit.
Although I gather it means “airspeed,” I think I’m going to use it more broadly. As in…
I enjoy inventing words that sound like Yiddish, but aren’t.
My favorite?
farFetched (emphasis on the second F.)
You won’t get much argument that our situation continues to worsen. But conservatives have been preaching the end is near since Reagan ran in 1980. Thirty-six years later we may be at the end of rope or it may go on for another thirty-six years.
It seems like giving up, but I have stopped making the prediction that our debt levels are unsustainable. I think they are eventually, but it is the when that is hard. I would have guessed the problems would have sprung up before now and I have not been right yet.
I tagged a few pilot friends of mine on Facebook and posted a version of my joke: ‘If we exceed our altitude limit, we’re totally fluggeschwindegkeit.‘
One replies, “That’s exactly how I use the word ‘Fluggeschwindegkeit’!”
And I don’t think he was kidding. So I reckon I’m not the first to come up with this. ;)
[P.S: Turns out he was kidding.]
If hyperinflation is coming, what is the better personal response: minimize household debt in pursuit of financial independence, or get deep in debt (ie, house-poor) and pay off loans with cheap inflated dollars? My principles on this waver in direct proportion to the cost of the houses I like on Zillow…
Deep in debt with fixed-rate instruments.
BrentB67….190KCAS? Translation please, for an earth-bound type.
Knots Corrected Air Speed, KIAS is Knots Indicated Air Speed, and TAS True Air Speed. The KIAS is what the meter on the panel shows however with variations in air density due to barometric pressure and temperature in needs to be “adjusted” for what you are really doing thru the air and of course since you are moving in a “fluid” that is also moving it need to be adjusted continually for ground speed. All have different purposes in the control and navigation of an airplane. Hope this help without being TMI…. (Which as an engineer I am always accused of doing)
GLD111
Thanks. Actually the physical concept is very clear as you explain it.