Sunday, October 4, 2015

Levels and Growth Rates of Debt and Income

Yesterday we looked at the growth rates of household debt and disposable income:

Graph #1: Household Debt Growth less Disposable Income Growth

We looked also at the level of household debt relative to the level of disposable income:

Graph #2: Household Debt (in billions) relative to Disposable Income (in billions)

Both looks are important. But each graph leaves out half the important stuff. So I took the calculations for the two graphs and just multiplied them together:

Graph #3: (Debt Growth/Income Growth)*(Debt Level/Income Level)

The early years' activity on Graph #1 is reduced on Graph #3 because the level on Graph #2 is low. The late years' activity on #1 is exaggerated on #3 because the level on #2 is high.

Between 2000 and 2010 the graph now runs higher than the mid-1980s peak, not lower. That seems right. And in the years before 1966 the decline no longer starts immediately, but is delayed until perhaps 1963.

Saturday, October 3, 2015


The Way We Were:
"The Way We Were, and Should Be Again"
by Jude Wanniski
The Wall Street Journal, November 11, 1994

"Why do you think President Clinton isn't getting credit for the good economy?" a producer of CNBC's "Business Insiders" asked me as we prepared for the show.

I asked the young man how old he was, and when he replied "29," I told him bluntly that he was too young to know what a good economy looked like — that you have to have lived in the 1950s and 1960s to have experienced a good economy.

By a good economy I mean one that is not only expanding, but is also employing the nation's human and physical resources at a relatively high degree of efficiency. In my experience, in these terms the U.S. economy has been contracting since the late '60s, and is now nowhere near the levels reached earlier.

You have to have lived in the 1950s and 1960s to have experienced a good economy, Wanniski says. And In my experience, in these terms the U.S. economy has been contracting since the late '60s.

The good economy came to an end in the late 1960s, he says.


Steve Keen on the level of private debt:
On current trends it will take till 2027 to bring the level back to that which applied in the early 1970s, when America had already exited what Minsky described as the "robust financial society" that underpinned the Golden Age that ended in 1966.

According to Minsky, Keen says, the Golden Age ended in 1966.


Suppose we take FRED's numbers for Household Debt and for Disposable Personal Income, look at the growth rates of these two series, and subtract income growth from debt growth. Where the result is greater than zero, debt is growing faster than income. Where it is less than zero, income is growing faster than debt:

Graph #1: Household Debt Growth less Disposable Income Growth
The plot first goes below zero in 1966. Coincidence?

Probably not.

Look at the same two datasets another way. Consider household debt in billions, relative to disposable personal income in billions. Where the line is going up, debt is growing faster. Where the line is going down, income is growing faster:

Graph #2: Household Debt (in billions) relative to Disposable Income (in billions)
The ratio reaches a turning point in 1966. At the same moment Graph #1 shows the number moving from above zero to below zero, Graph #2 shows a change from uptrend to downtrend.

You should be comfortable with the thought that both graphs show the same change in 1966: Debt growth was faster than income growth before 1966, and slower than income growth for some years after 1966.

But perhaps Graph #2 brings something to mind that Graph #1 didn't: inflation. It was just around 1966 that inflation started pushing prices and incomes significantly higher. Income went up, prices went up, and new borrowing to pay for new purchases on credit went up, but existing debt was unaffected.

Inflation drove income up, but it did not drive existing debt up. Income grew faster than debt as a result, and both graphs show it.


Minsky pegs 1966 as the end of a golden age. Wanniski pegs the late 1960s.

How 'bout that.

Friday, October 2, 2015

Success changes the circumstances that led to success, leading to failure

Greenewable’s Weblog links to This Sociological Theory Explains Why Wall Street Is Rigged for Crisis at The Atlantic. It opens with a great story:
On October 25, 1962, a bear tried to climb the perimeter fence at the Duluth Sector Direction Center, a sensitive U.S. military installation in Minnesota, setting off an alarm during a DEFCON 3 alert. The alarm signal was connected to a mis-wired klaxon at Volk Field in Wisconsin, and the blaring klaxon led to an immediate order to launch aircraft. Pilots of nuclear equipped F-106A’s were taxiing down the runway to respond to the start of nuclear war when the error was discovered. A car flashing its lights raced from the command post to the tarmac and stopped the jets.

This near brush with nuclear catastrophe, brought on by a single foraging bear, is an example of what sociologist Charles Perrow calls a “normal accident.” These frightening incidents are “normal” not because they happen often, but because they are almost certain to occur in any tightly connected complex system....

Further back, in a harbinger of what was to come in the financial crisis of 2008, we can look to the 1998 failure of Long Term Capital Management. The hedge fund had made a bad bet on derivatives tied to the Russian market, and its collapse threatened to cause a chain reaction throughout the world financial system. The traders at Long Term Capital were no rookies. Among their advisors were Myron Scholes and Robert Merton, 1997 winners of the Nobel Prize in Economics for their path-breaking work on a "new method to determine the value of derivatives."

Normal accidents, like these, occur because two or more independent failures happen and interact in unpredictable ways.

I don't know. Maybe. Sure, why not. But I don't like it already by the second paragraph: "These frightening incidents ... are almost certain to occur in any tightly connected complex system".

So, we can stop looking at the economy and we can stop trying to figure out what went wrong? That's what it sounds like they are saying. But no, we didn't get the financial crisis of 2008 because the economy is a "tightly connected complex system" and we happened to have a coincidence of "independent failures". No, we didn't.

There is some good stuff in the article, though. That part about two things interacting to produce unpredictable results, I like that. Doesn't have to be two failures, though. It could be two successes. And they don't have to be independent. They could be related.

And the problem may end in failure not because the results were unpredictable, but because when we started seeing the results, we didn't stop to wonder if they might be related to our successes.

Thursday, October 1, 2015

How much of that was interest?

If we take "Household Debt Service Payments as a Percent of Disposable Personal Income" (TDSP) and multiply it by "Disposable Personal Income" (DPI) ((and divide it by 100)) we get Household Debt Service Payments in billions of dollars. Those debt service payments include both interest and principal.

What portion of those debt service payments is attributable to interest costs? And what portion to principal?

Take "Monetary interest paid: Households" (W292RC1A027NBEA) and divide it by Household Debt Service Payments in billions ((and multiply it by 100)) to get interest costs as a percent of debt service payments:

Graph #1: Interest as a Percent of Household Debt Service Payments
Eh, kinda boring.

Okay, let me add a line showing the other part, principal as a percent of household debt service payments:

Graph #2: Interest (blue) and Principal (red) as Shares of Household Debt Service
Now it is pretty easy to see a decline in interest and an increase in principal since the early 1980s. Many factors must have contributed to these trends.

Wednesday, September 30, 2015

The Emergence of the State

I thought this was fascinating.

Via Reddit, at Vox

Cereals, appropriability, and hierarchy

Joram Mayshar, Omer Moav, Zvika Neeman, Luigi Pascali 11 September 2015

Conventional theory suggests that hierarchy and state institutions emerged due to increased productivity following the Neolithic transition to farming. This column argues that these social developments were a result of an increase in the ability of both robbers and the emergent elite to appropriate crops. Hierarchy and state institutions developed, therefore, only in regions where appropriable cereal crops had sufficient productivity advantage over non-appropriable roots and tubers.

To understand why surplus is neither necessary nor sufficient for the emergence of hierarchy, consider a hypothetical community of farmers who cultivate cassava (a major source of calories in sub-Saharan Africa, and the main crop cultivated in Nigeria), and assume that the annual output is well above subsistence. Cassava is a perennial root that is highly perishable upon harvest. Since this crop rots shortly after harvest, it isn't stored and it is thus difficult to steal or confiscate. As a result, the assumed available surplus would not facilitate the emergence of a non-food producing elite, and may be expected to lead to a population increase.

Consider now another hypothetical farming community that grows a cereal grain – such as wheat, rice or maize – yet with an annual produce that just meets each family's subsistence needs, without any surplus. Since the grain has to be harvested within a short period and then stored until the next harvest, a visiting robber or tax collector could readily confiscate part of the stored produce. Such ongoing confiscation may be expected to lead to a downward adjustment in population density, but it will nevertheless facilitate the emergence of non-producing elite, even though there was no surplus.

This simple scenario shows that surplus isn't a precondition for taxation. It also illustrates our alternative theory that the transition to agriculture enabled hierarchy to emerge only where the cultivated crops were vulnerable to appropriation.

  •  In particular, we contend that the Neolithic emergence of fiscal capacity and hierarchy was conditioned on the cultivation of appropriable cereals as the staple crops, in contrast to less appropriable staples such as roots and tubers.

According to this theory, complex hierarchy did not emerge among hunter-gatherers because hunter-gatherers essentially live from hand-to-mouth, with little that can be expropriated from them to feed a would-be elite.

  •  Thus, rather than surplus facilitating the emergence of the elite, we argue that the elite only emerged when and where it was possible to expropriate crops.

Due to increasing returns to scale in the provision of protection from theft, early farmers had to aggregate and to cooperate to defend their stored grains. Food storage and the demand for protection thus led to population agglomeration in villages and to the creation of a non-food producing elite that oversaw the provision of protection. Once a group became larger than a few dozen immediate kin, it is unlikely that those who sought protection services were as forthcoming in financing the security they desired. This public-good nature of protection was resolved by the ability of those in charge of protecting the stored food to appropriate the necessary means.

  •  That is, we argue that it was this transformation of the appropriation technology, due to the transition to cereals, which created both the demand for protection and the means for its provision.

This is how we explain the emergence of complex and hereditary social hierarchy, and eventually the state.

Tuesday, September 29, 2015

Not setting the interest rate

From the FRED Blog:
The traditional policy tool of the Fed is to target the federal funds rate. Note the term target. Indeed, the Fed does not set this interest rate; rather, it sets the target and then conducts open market operations so that the overnight interest rate on funds deposited by banks at the Fed reaches that target.

The Fed does not set the interest rate. It sets the target and conducts open market operations so that the interest rate reaches this target.

Monday, September 28, 2015

The lower the number, the faster debt accumulates.

Not sure I have this graph right. I'm taking "Household Debt Service Payments as a Percent of Disposable Personal Income", dividing by 100 to eliminate "percent" and multiplying by "Disposable Personal Income" (FRED's DPI) to get Household Debt Service Payments in Billions. But the DPI numbers are quarterly at an annual rate and the debt service numbers are just "quarterly". My numbers might be mismatched.

Don't let that stop me.

After I get Household Debt Service Payments in Billions, I multiply by 100 to get percent and divide by Household Debt (FRED's CMDEBT) to see Household Debt Service Payments as a Percent of Household Debt:

Graph #1: Household Debt Service Payments as a Percent of Household Debt
I'm going ahead with this graph despite my doubts, because the results are reasonable. At max, debt service amounted to between 16 and 17 percent of debt. At present. debt service amounts to between nine and ten percent. Those numbers feel right. Were I to multiply (or divide) them by 4 to correct for a "quarterly" discrepancy, the revised numbers would be too high (or too low). So I'm happy with this graph.

Not happy with the downward trend. The lower the number, the faster debt accumulates.


FRED doesn't offer Household Debt Service Payments data for the years before 1980. So I don't know what the graph of those years would look like. But I expect it would be pretty much a mirror image, increasing irregularly from the 1950s to the 1985 peak.

Sunday, September 27, 2015

New Borrowing minus Payback = Change in Debt

We were looking, a few days back, at cost-of-debt graphs. Geerussell linked to How much income is used for debt payments? A new database for debt service ratios by Mathias Drehmann, Anamaria Illes, Mikael Juselius and Marjorie Santos.

I re-read that article this morning and made sense of it this time. Some things it says should be obvious:
Debt service ratios (DSRs) provide important information about the interactions between debt and the real economy, as they measure the amount of income used for interest payments and amortisations...

These debt-related flows are a direct result of previous borrowing decisions and often move slowly as they depend on the duration and other terms of credit contracts. They have a direct impact on borrowers' budget constraints and thus affect spending.

Since the DSR captures the link between debt-related payments and spending, it is a crucial variable for understanding the interactions between debt and the real economy.

(By "amortisations" they mean repayment of principal. So they are looking at more than just the cost of interest. Interest and principal, both. Debt service.)

Some of what they wrote was plain interesting:
... during financial booms, increases in asset prices boost the value of collateral, making borrowing easier. But more debt means higher debt service ratios, especially if interest rates rise. This constrains spending, which offsets the boost from new lending, and the boom runs out of steam at some point. After a financial bust, it takes time for debt service ratios, and thus spending, to normalise even if interest rates fall, as principal still needs to be paid down.

After a financial bust, it takes time for debt service ratios, and thus spending, to normalise even if interest rates fall, as principal still needs to be paid down.

But Jim has pointed out that "The amount of debt for households hasn't changed much in the last 8 years." He's right:

Graph #1: Household Debt. The circled point on the graph is Third Quarter 2007, eight years back
Principal still needs to be paid down.

The change in household debt was that it stopped going up so fast. That seems to agree with Dr. Econ's graph showing a sudden, screeching halt in Household Net Borrowing:

Graph #2: Household Net Borrowing is "the difference between borrowing and saving during a period"
When new borrowing drops to nothing, debt stops increasing.

But look at Household Debt in comparison to "Debt Service Payments as a Percent of Income":

Graph #3: Household Debt Continued to Grow Faster Than Debt Service Payments
You wouldn't know by Graph #3 that there had ever been a financial crisis. There's barely a wiggle on the graph. And debt continues to increase faster than we can manage to pay it off.


  •  Debt will always increase unless we pay it off faster than we take it on.
  •  If debt always increases, you must eventually have a crisis.
  •  The longer debt reduction is postponed, the bigger the crisis.

Saturday, September 26, 2015

"a handful of sand"

From Chapter 7, Zen and the Art of Motorcycle Maintenance by Robert M. Pirsig:
All the time we are aware of millions of things around us -- these changing shapes, these burning hills, the sound of the engine, the feel of the throttle, each rock and weed and fence post and piece of debris beside the road -- aware of these things but not really conscious of them unless there is something unusual or unless they reflect something we are predisposed to see. We could not possibly be conscious of these things and remember all of them because our mind would be so full of useless details we would be unable to think. From all this awareness we must select, and what we select and call consciousness is never the same as the awareness because the process of selection mutates it. We take a handful of sand from the endless landscape of awareness around us and call that handful of sand the world.