Monday, August 29, 2016

Household borrowing hit a hard limit four years before the bottom fell out

Take household debt and look at the "change from year ago" values: That's household borrowing, in billions of dollars. That's the blue line.

Take household debt service payments "as a Percent of Disposable Personal Income" and convert it to household debt service payments in billions of dollars. That's the red line.

Look at what happened after the 2001 recession:

Graph #1: Household Borrowing in Billions of Dollars (blue) and
Household Debt Service Payments in Billions of Dollars (red)
Household borrowing (blue) rose sharply until it reached the ceiling set by debt service payments. Then it fell back. This happened in 2003. It happened again in 2004 and again in 2005 and again in 2006. It is as if lenders would lend no more than they could get paid back in a year... or borrowers would borrow no more than they could afford to pay in a year.

In 2007, after the fourth attempt, household borrowing went into free fall. You know what happened after that.

Sunday, August 28, 2016

Household Debt and Debt Service

After spending almost this whole month on debt service, I still don't know enough about the relation between debt service and debt owed. Here are the givens:

Graph #1: Household Debt (blue) and Household Debt Service Payments (red)
A small decline in debt since the crisis; a big decline in debt service. But the blue line uses the left scale and the red uses the right. So you can't look at the two lines and see relative sizes or anything useful like that. About all we can learn from this graph is that the Debt Service data doesn't start until 1980.


Here are the same two data sets, the one relative to the other:

Graph #2: Household Debt relative to Household Debt Service Payments
Well, debt is high, relative to debt service. High and rising. I don't like that too much. The only good thing I can say is that the increase seems to be slowing -- for what that's worth.

But this graph shows billions of dollars of debt, relative to debt service as a percent of income. The units are billions of dollars relative to percent. The units are screwy. I don't really know what the graph is telling me. Don't put too much stock in this one.

When I started on this little project this morning I didn't have my coffee yet. It was four in the morning, and even the dogs were still asleep. I took a sip of coffee and looked at what I was working with: debt in billions on the one hand, and debt repayment as a percent of income on the other. Apples and oranges.

I took the debt series (household debt) and made it "percent of income" like the debt service series:

Graph #3: Household Debt as a Percent of Disposable Personal Income
It's striking, that big decline since the crisis. Reminds me of the big decline in debt service. I wonder how the two compare -- household debt (relative to income) and household debt service (relative to income).

It's okay to compare 'em now, because both data sets are "relative to income". In fact, when I divide "debt-to-income" by "debt-service-to-income" income cancels income, and I'm left with "debt relative to debt-service", billions relative to billions. It shows how much debt we owe, for each dollar of debt service paid:

Graph #4: Dollars of Household Debt for every Dollar of Household Debt Service Paid
So, about six dollars of debt in 1985 for every debt service dollar paid... about eight dollars in the mid-1990s... about 10 dollars before the crisis and almost eleven after; but it has dropped a bit since 2013. Still very high, though. And with interest rates on the low side, this graph says households owe an awful lot of debt. An awful lot of debt, compared to what we're paying back.

Now it gets interesting.

Instead of looking at household debt as one big painful lump, let's look at how much it changes from year to year. And lets compare that to how much we pay as debt service in dollars each year, billions of dollars.

Graph #5: Change in Household Debt in Billions of Dollars (blue) and
Household Debt Service Payments in Billions of Dollars (red)
Let me talk thru how to read this graph. Take 1980 as an example, just when the red line starts.

In 1980 we paid just about 200 billion dollars in debt service -- interest and principal on the debt we owed that year. I don't know how much was interest and how much was principal. Let's say half and half. So we paid 100 billion interest that year, and we paid off 100 billion of debt. That's what the red line says.

That same year, 1980, the blue line shows that household debt increased by just under 200 billion dollars. See it on the graph? The blue line, just where the red line starts.

So in 1980 we paid off 100 billion of debt, and our debt increased by about 200 billion. What does this mean? It means we actually borrowed about 300 billion in 1980, but since we paid off 100 billion the net increase is 200 billion -- and the graph shows the net increase.

It makes sense to show the net increase, certainly, but it's also important to know that we actually borrowed more than that.

Second, take the 1990s as an example. The blue line is jiggy in the 1990s but if you imagine it smooth it is pretty much parallel to the red line during the period. So the net increase in household debt (blue) increased during the period, but so did debt service (red).

It looks like we were staying ahead of our debt in those years. But we were not staying ahead. Around the time of the 1991 recession, the net increase in debt was about half as much as debt service. But by the time of the 2001 recession, the net increase in debt was about two-thirds as much as debt service. The net increase in household debt gained on debt service during the decade.

Next, look at the years just before the crisis, where the blue line jumps up and runs neck-and-neck with the red -- and then suddenly falls, creating the crisis.

During those neck-and-neck years, the net increase in household debt was equal to our debt service payments. I'm not going to try to put into words how troubling this seems to me. I'm just going to say that this graph shows the problem that created the crisis.

Look at 2006 there, where the blue line rises above the red, then turns and starts to fall. In round numbers we paid about 1300 billion in debt service, and the net increase in household debt was about 1350 billion. The net increase in debt was more than we paid in debt service.

We were definitely not "staying ahead" that year. And the next thing you know, there was a crisis.

Saturday, August 27, 2016

Debt Service Projection thru 2020

One more time.

I grabbed all three Debt Service series from FRED, the three that I know about anyway. Looking only at the years since the crisis: since 2008 on the graph. Blue is the total of red and green:

Graph #1: Measures of Debt Service
Where will Debt Service go next?

There's a little "V" just at the end of 2012 in all three lines on Graph #1. After the "V", from Q1 2013 to Q4 2015, the lines show little disturbance to the trend. I took those years after the "V", 12 data points on each line, and used them as a basis for trend lines in Excel.

I went looking for the highest R-squared values for different kinds of trend lines, and the sixth order polynomials were highest every time. So I went with that, but when I extended the trends out into the future, the numbers got crazy.

I guess the sixth order line had too many turns in it, and the data after the last turn determined the path of the trend line. Projecting TDSP for nine quarters, the trend line went to more than 100% of disposable income. That's crazy. Things are bad, but not that bad. Look how flat the blue line is on Graph #1, after the "V". There's no way this line will climb to 100 percent in two years.

So I did it again, using the second order polynomial trend, which I've used before. This time each trend line predicts a smooth continuation of actual recent data:

Graph #2: Debt Service 2013 thru 2015 with Trends thru 2020
There is no guarantee that recent trends will continue, of course. But if recent trends do continue, the actual data will look like what this graph shows.

By this measure, MDSP (debt service payments on mortgages) bottoms out in fourth quarter 2016. So if you've recently heard that new home sales surged 12.4 percent and existing home sales had four consecutive months of impressive increases , well, I guess mortgage debt service payments should start going up soon. Graph #2 seems to offer a reasonable forecast.

But it is hard to see much on Graph #2 because it only starts in 2013. So I backed up the start-date to 1980. Now we can see the debt service forecast in the context of actual experience:

Graph #3: Debt Service 1980 thru 2015 with Trends thru 2020
Consider just the blue debt service line and its future projection. We see a large bowl shape that runs from about 2008 to 2020. Let me put this in terms you'll understand:

  •  Most of the downtrend of that large bowl was President Obama's first term.
  •  The bottom of the bowl was most of Obama's second term.
  •  The black uptrend part of the bowl is the first term of our next President.

What does this mean? Hold that thought.

Again, consider the blue line. There is a smaller bowl shape from 1991 to 1995 in the blue line.

  •  In 1991 and 1992 we have the downtrend of the small bowl.
  •  In 1993 and early 1994 we have the bottom.
  •  In latter 1994 and 1995 we have the uptrend of the small bowl.

The 1991-92 downtrend is related to the recession that helped George H.W. Bush lose the Presidency to Bill Clinton. The bottom of the bowl was a period of debt relief. The 1994-95 uptrend is evidence of the increased credit use that brought vigor to the U.S. economy for the rest of the 1990s.

There is no guarantee, of course, that the uptrend in debt service which is starting now will stick to a trend that brings vigor to the economy the way the 1994-95 uptrend did. But hey: Our bowl had its downtrend in Obama's first term. Our bowl had its bottom in the endless, listless economy of Obama's second term. And now our bowl has the start of its uptrend.

I can see the uptrend. Excel can see the uptrend. And I think you can see it, too.

Oh, and the uptrend means vigor. That's what it means.

Thursday, August 25, 2016

Bezemer and Hudson, Quotable & Relevant

From Finance is Not the Economy by Dirk Bezemer and Michael Hudson:
Mathias Drehman and Mikael Juselius (2015) report that debt-service ratios are an accurate early warning signal of impending systemic banking crises, and strongly related to the size of the subsequent output losses.

Wednesday, August 24, 2016


BBC News -- Federal Reserve 'close to meeting targets' for US economy:
The Federal Reserve is close to hitting its targets for US employment and 2% inflation, according to the central bank's vice chairman, Stanley Fischer.

In a speech in Colorado, the Fed's number two policymaker was upbeat about the economy's recovery and prospects.

"We are close to our targets," he said on Sunday, adding that jobs growth had been "remarkably resilient".

He did not mention interest rates, but the remarks are likely to fuel debate about when they may rise.

He did not mention interest rates, but I will: They needed interest rates low to get economic growth so they can raise interest rates and undermine the growth. This is their plan for the economy.

We have to stop thinking always in terms of interest rates. We have to find a better way to prevent inflation.

On second thought, no. We don't have to find a better way. We already have a better way to prevent inflation: Paying down debt destroys money. Paying down debt takes money out of circulation. Paying down debt is a way to prevent inflation.

Paying down debt takes money that is in the economy, and takes it out of the economy. It's money that's in the economy that causes prices to go up.

New borrowing is generally for growth: for a new car or a bigger home or for business expansion, stuff that gets counted in GDP. Growth.

But new borrowing also puts money into the economy. And after that first use, the money's in the economy and it circulates. It is "extra" money in the economy. It may be used to purchase more output, or it may be used to bid up prices. The latter is demand-pull inflation.

Most of the "extra" money eventually works its way out of circulation and into savings. Then it has no demand-pull effect. But the debt that was created when the money was created -- the debt remains in the economy. And the cost of servicing it continues to be imposed on the economy; this creates cost-push inflation. Financial cost push.

Anna Schwartz describes demand-pull inflation:
An increase in the supply of money works both through lowering interest rates, which spurs investment, and through putting more money in the hands of consumers, making them feel wealthier, and thus stimulating spending. Business firms respond to increased sales by ordering more raw materials and increasing production. The spread of business activity increases the demand for labor and raises the demand for capital goods. In a buoyant economy, stock market prices rise and firms issue equity and debt. If the money supply continues to expand, prices begin to rise, especially if output growth reaches capacity limits.

Do consumers feel wealthier since the start of quantitative easing? Has our spending been stimulated? Are businesses increasing production? Is the economy "buoyant"?


Is our inflation, what little inflation we have, is it demand-pull inflation?


Does printing money make prices go up, if nobody's spending the money?


If new borrowing leads to a buoyant economy and demand-pull inflation, is raising interest rates an appropriate policy response?

Yes. Perhaps not the best of policy responses, but it does address the problem of new borrowing. But if the economy is not buoyant and inflation is financial cost push, then raising interest rates is bad policy.

Graph #1

Paying down debt is a way to fight inflation.

Tuesday, August 23, 2016

BIS on the connection between Debt and Labor Productivity

At BIS, from When the financial becomes real:

Financial booms typically go hand in hand with significant resource misallocations. In particular, labour is diverted to booming sectors with relatively low future productivity growth...

The impact of these misallocations became even larger in subsequent years, once the boom turned to bust... Thus, the fallout from credit booms may well have exacerbated the trend decline in productivity growth in advanced economies. By the same token, lower productivity growth in recent years need not be permanent.

... need not be permanent. In other words, it ain't secular stagnation, it's crisis-related. And maybe, the bank is saying, maybe we shouldn't be surprised if we see an improvement in productivity in the next couple three years.

Where have you heard that before?

Also this, remarkable from a bank:

Credit expansions may still boost output growth through higher demand and investment, but not productivity growth. To gain a sense of the economic significance, consider the US experience. Between 2004 and 2007, labour productivity grew by 1.2% per year, but labour reallocations made a negative 0.3 percentage point contribution. Over the same period, private credit to GDP grew by 4.5% per year. Taking the estimates at face value, if credit to GDP had grown by only 1.5%, the drag on productivity growth would have been eliminated.

They're saying we used too much credit. BIS -- one bank to rule them all -- BIS says private credit use was excessive. BIS says private debt was excessive. BIS.

This is big.

Monday, August 22, 2016

Debt Service and Labor Productivity Projections

Here's the graph I couldn't get right for yesterday's post. (X-axis was messed up.)

The blue line shows household debt service, 1980 thru 2015. The black line is a debt service trend line showing the future debt service that I anticipate; same as yesterday.

The brown line shows labor productivity, 1980 thru Q2 2016. The bright red line shows my general expectation for future productivity, Q2 2016 thru Q4 2020. Also bright red, the productivity  data for Q4 1993 thru Q2 1998 -- the data I copied and showed again as future productivity.

Graph #1: Debt Service and Labor Productivity Projections
By the time we get to 2020, the economy will be great. The person we elect President in 2016 will be easily re-elected in 2020. And we'll all be happy again for a while -- until debt goes too high once again and we have another financial disaster.

Anything else?

// The Excel file

Sunday, August 21, 2016

Potential Productivity

"Since 2007, the rate of productivity growth has been disappointing", John Cassidy writes in The New Yorker. "Since 2010, it has been extremely disappointing."

Here's a close-up of productivity growth since the start of 2011:

Graph #1: Productivity Growth 2011 Q1 thru 2016 Q2
The linear trend line is very flat at 0.5 percent. Productivity is low and not improving. What's more, the last few readings show a downward trend. Extremely disappointing, as John Cassidy says.

But we do not know where the red line will go next. It was lower in mid-2013 than it is now, and it went low more quickly. Then it turned around and went up even faster. So you never know.

Here's a close-up of productivity growth in the quiet time before the Goldilocks years of the 1990s:

Graph #2: Productivity Growth 1993 Q1 thru 1995 Q1
The linear trend line is very flat at 0.5 percent. Productivity, low and not improving. The last few readings show a downward trend. Productivity growth was disappointing. Just like the first graph.

Here's a close-up that picks up where Graph #2 leaves off:

Graph #3: Productivity Growth 1995 Q1 thru 1997 Q1
The linear trend rises from 0.5 percent to nearly 3% in two years.

You never know.

To my way of thinking, Graph #1 (our time) is very much the same as Graph #2 (the early 1990s). But I think we are at the end of Graph #2 and ready to start Graph #3. That makes all the difference.

Oh come on, you are saying. Graph #2 shows only a couple years. Graph #1 shows almost six years. There's no comparison. The slump is endless this time.

It's not endless. That's the point. The quiet time before the vigor is longer this time -- about 2½ times as long, my guess. I'm telling you we are at the end of the quiet period. Soon we will see productivity start to climb, just as on Graph #3.

On Friday I showed productivity growth with bright red circles around the two quiet times -- the recent years, and the early 1990s. Our low productivity has lasted much longer than that of the 1990s:

Graph #4: Productivity and Debt Service
Yes, and it shows that the "bottom" in the dull red "debt service" curve has also lasted much longer this time. But you can see from the shape of that curve that it wants to go up.

And you can see from the early 1990s that when the debt service curve goes up it goes up quickly, and productivity goes up with it. And the economy becomes vigorous.

I expect that debt service will soon rise sharply. Productivity will improve, just as happened in the mid-1990s. And the economy will again be vigorous.

Graph #5: The Recent Years
If we want to understand the productivity problem, we have to look at it in context. What context? I suggest we use household debt service for context.

The recent years of debt service show a remarkable drop from the late-2007 peak. Debt service fell rapidly, to a sharp down-spike at the end of 2012.

After the bounce-back from that down-spike, the path of debt service was different. The rapid decline had ended. It had reached a bottom. It was running flat.

If you look, you can see that debt service since the beginning of 2013 shows a fairly smooth curve. The curve bottoms out just at the end of 2014, then starts to rise.

To my eye, debt service drifted downward less quickly in 2014 than 2013, then turned and started drifting upward in 2015. Started drifting upward last year.

Curse the luck, the debt service data ends with 2015. We don't have first- and second-quarter 2016 numbers that let us see what's really happening. But I think 2016 will drift upward a little more than 2015, continuing the pattern that began at the start of 2013.

And I think that after 2016 debt service will rise even faster. That's when we'll start to feel the vigor. That's when we'll see the improved productivity. Here: I mirrored the curve on this next graph to show the kind of future I expect:

Graph #6: Our Near Future?
Just to give you an idea.

I should say, though, that if debt service rises as far and as fast as this graph suggests, then the recession bar after 2025 will be even wider than what the graph shows, and the recession more severe than the last one.

But you take my point: If the debt service curve is going down, then going down more slowly, then going up instead of down, then going up more quickly, this is what the graph must look like. And if debt service goes up and up, productivity will improve and the economy will show vigor -- for a while at least.

I took the eight data values for 2014 and 2015 -- the slowly-down-and-slowly-up drift in the curve -- and used those eight values to create a trend line in Excel. The trend line runs into the past and future, to show where debt service will be (and where it would have been) if those eight values determined the path of debt service:

Graph #7: Household Debt Service and the 2014-2015 Trend
The original eight values are shown in red at the end of the blue line, just at the bottom of the U-shaped trend line. Going forward, the U-shaped trend provides an estimate of the future path of the blue line, the future path of household debt service.

Going backward, the U-shaped line is not an exact match to the blue line during its rapid 2007-2013 fall. But the lines are close enough to make you stop and think. And that means the right side of the U-curve, the side that imagines the future, is likely also a pretty good estimate.

Time will tell. In the meanwhile I have to look. I have to see if I understand what's going on. I have to see if I understand the economy.

I made a screen capture of household debt service in the 1990s so we can look at the "dip, bottom, and recovery" (DBR) of that time. It is shown here in place (in the 1990s) as a dotted green line in a black box, overlaid on the original blue line:

Graph #8: Capturing the "Dip, Bottom, and Recovery" of the 1990s
I took that image of the 1990s, with the green dots there, took that image and scaled it up by a factor of 2.5: that is, 2.5 times as tall and 2.5 times as wide. Then I moved it so that the "dip" of the 1990s lines up with the 2007-2013 dip on the blue line:

Graph #9: Looking at Current Conditions as 2½ times the size of the 1990s Conditions
The green dots -- the 1990s data, scaled up by a factor of 2.5 -- the green dots make a very good match to the 2007-2013 downtrend of the blue line. A very good match.

The green dots also suggest that the debt service "recovery" will happen sooner than Excel's U-curve says. This makes me stop and think. Excel's U-curve is based on the most recent two years of debt service data. Only two years of it, but the most recent two years.

Perhaps the debt service recovery will not come as quickly this time as it did in the 1990s. That seems a reasonable conjecture. Excel's U-curve seems to me a better bet than my scaled-up green dots from the 1990s. So I grabbed the image of the 1990s again and stretched it, still 2.5 times as tall but this time 3 times as wide. Three times the duration.

I fitted the green overlay to the blue line as before:

Graph #10: Looking at Current Conditions as 3 times the Duration of the 1990s Conditions
The scaled-up green dots from the 1990s align with the 2007-2013 fall of the blue line as before. And this time, the green dots of the 1990s recovery align quite nicely with Excel's U-curve.

What does it mean, really? Really, it means nothing: It's a prediction. Still, if the prediction turns out to have been correct, it means maybe I do have a pretty good handle on the economy. Time will tell.

It all comes down to prediction on my part.

You don't expect the economy to pick up. You don't expect vigor. You don't expect productivity to rise. I look at debt service in the '90s and say "That pattern is being repeated right now."

"No," you say. "The economy is different since the crisis." And you are right: Different it is. Maybe things won't pick up this time. Maybe the economy will stay as flat as my recent Blogger stats.

But everything I read tells me that people are tired of this washed-out recovery, which is less a recovery than a continuing depression. People are tired of it. People are ready for recovery. Nobody believes me when I say "vigor", but everybody's ready for it.

It will happen. It won't happen because of my charm and wit, but it will happen.

It will happen because people are ready for it. Nobody was ready yet, in 2010. Everybody wanted it, but everybody knew vigor was unrealistic. Today, people don't say vigor is realistic, but everybody wants it. We're not saying vigor is possible, but we're hungry for it.

You know what that is? That's expectations.

Expectations have turned. Can vigor be far behind?

Friday, August 19, 2016

Productivity and Debt Service

This graph shows productivity. I have circled the low productivity of the past few years, and also the low productivity of the 1990s in the years before "Goldilocks".

Graph #1: Productivity
When I take that graph and add household debt service to it, you can see that the circled years of low productivity are quite obviously related to the lows in debt service:

Graph #2: Productivity and Debt Service
Need I say more?