Threepeat...

You cannot imagine what a relief it is for me to know that there is an actual economist who tells a story so similar to the story I tell.

It is also pretty weird to come home from work, have dinner, turn on my computer before dark on Wednesday, 14 March, and read a post by Steve Keen that was posted on Thursday, 15 March at 8:50 the next morning.

(As I write this it is still only 1:49 in the morning of the 15th. I woke up thinking about Keen's graph that I am about to show you.)

In Economics without a blind-spot on debt, Steve Keen writes

“Neoclassical” economists (who dominate both academic economics and policy advice to governments) have a blind-spot about the role of private debt in macroeconomics, yet despite the economy crashing once before because of it during the Great Depression, they continue to argue that it’s irrelevant now—during this latest crash.

Emphasis added. Keen continues:

Data on long-term private debt levels is difficult to find, but I’ve located it for both the USA from 1920 till today, and for Australia from 1880 (see Figure 1).

Wow. Glad to see I'm not the only one who uses the word "data" as if it were singular. Never sounded right to me to say "Data are..." I usually use "The numbers are..."

Anyway, Keen:

Figure 1

Clearly, there was a debt bubble before the Great Depression, and a plunge in debt levels during and after it (and Australian data also shows the same phenomenon during an earlier bubble and crash in the Depression of the 1890s; see Fisher and Kent 1999). The same process is clearly afoot again now.

What woke me up is not that the process is afoot again now, but that the Australian data numbers show "an earlier bubble and crash in the Depression of the 1890s".

The 1890s, the 1930s, and today. That's three debt crises.

And you know what? The 1840s, too. Back last November Nick Rowe wrote a post called Why has (private) debt increased? In a comment on that post, Min wrote

The U. S. also had a run-up of private debt before the depression of 1837 - 1843. That was fueled by land speculation, not consumerism.

So: 1837-1843, the 1890s, the 1930s, and today. Four debt crises. Unfortunately, the numbers get harder to find as you go back in time.

Actually, it's pretty hard to find numbers on private or total debt, even today, even on the Internet.

But anyway, Keen has documented three debt crises. And I woke up remembering that Shiller has documented three:

A graph of Shiller's interest rate data going back to 1871 shows three longwave peaks. Not two:

Graph #1

The graph also seems to show "secondary" peaks at the lows: one in the neighborhood of 1894, and another at the time of the Great Depression.

(From mine of 28 November 2011, based on data from Robert J. Shiller.)
Three peaks, as with Keen's graph. Plus secondary or minor peaks or hints of peaks that coincide with the debt crises that occur after the interest rate peaks.

Each time, the interest rate peak precedes the peak of debt. The years following the interest rate peak are -- I was going to say "years of increasing financialization" but that is not correct; almost all the years are years of increasing financialization.

The years between the interest rate peak and the debt peak are years of financial dominance and must therefore show a relative slowing of output growth (and more rapid growth of finance).

The years after the debt peak are years of decreasing financialization -- as we seem to be experiencing now. My Debt-per-Dollar graph shows one such peak during the FDR years, and the presumed beginning of another decrease in 2008.

My debt numbers don't go back far enough to show the third peak, the 1890s peak that Steve Keen points out. Interestingly, my graph does show a similar event (generated by policy) in the early 1990s. This strongly suggests that debt crises can be solved or even prevented by the appropriate use of policy. (One question remains: What is the appropriate policy.)

Here's an analysis of the 1990s event.

The graph below from mine of 2 December 2011 shows Debt-per-Dollar and part of the Shiller interest rate data. But this graph is short, and lacks the 19th-century peaks:

Graph #2

A Glitch in the Matrix

You're gonna want to actually do this.

Go to FRED, in the search box type TCMDO, and press ENTER. // Not case-sensitive.

Just below the graph, under the FRED logo, it says EDIT GRAPH. Click that.

See how the blue line, the line showing the TCMDO values, starts two or three years after 1950? But if you read the "Observation Date Range" two or three lines down, it says the numbers start in 1949.

Actually it says they start in October of 1949. So, that might look like 1950 on the graph rather than 1949. But it shouldn't look like 1952 or 1953.

Maybe in the early years the numbers are just so low that we don't see them?

On the "Observation Date Range" line, click once in the box that states the end-date for the graph. FRED gives you a calendar. Click the drop-down for the year, scroll up a bit, and click 1960. Click Close to close the calendar.

A few lines down, click Redraw Graph to redraw the graph. FRED gives you a new picture, and we are now zoomed-in on the early years. You can see that the numbers start in 1952 or late 1951, not in 1949 or 1950.

That's not a glitch. The numbers for TCMDO start with 1949, but those are annual numbers. The quarterly numbers start a bit later.

Now, down below the "Redraw Graph" button, find the gray bar that says Add Data Series and click that. By default, the option is selected to give you a "new line". That's good. Click in the blank input box on the next line down (between the words "Search" and "Browse"), type TCMDO and press ENTER. Now you get a new picture, like the first one you had, except the line is red this time.

Up a little bit, click on the gray bar for Line 1: Total Credit Market Debt Owed (TCMDO). On the "Observation Date Range" line, click Copy to All Lines to copy the dates we're using for the blue line, to the red line. Click Redraw Graph.

Now you get the zoomed-in view, but only one line is visible, in red, because the red and blue lines are identical and the red one is on top.

We can change that.

If you've been following along here, doing it at FRED, you're now looking at the "Line 1" information. A couple lines down from the "Observation Date Range", the "Frequency" line reports that the frequency is "Quarterly, End of Period". (Don't change that.)

At the bottom of the "Line 1" info is the "Redraw Graph" button, and just below that is the gray bar for Line 2: Total Credit Market Debt Owed (TCMDO). Click that.

Change the "Frequency" for Line 2 to Annual and click Redraw Graph.

Now you have two lines -- the blue one we couldn't see before, and a red one parallel to it, a bit higher and more to the left.

The red line is smoother because it shows annual rather than quarterly data. And the red line is more to the left because the annual numbers start in October, 1949.

On the "Frequency" line we're looking at, for Line 2, the frequency is given as "Annual" and to the right of that, the "Aggregation Method" is "Average".

Click the drop-down for "Aggregation Method", select Sum, and click Redraw Graph. The red line changes dramatically. It jumps way up as soon as the blue line starts, and rises faster than the blue line -- apparently because it adds each new value to the previous total. So that's "Sum".

Click once again the drop-down for "Aggregation Method" and this time select End of Period. Click Redraw Graph. The red line changes, and now looks like a smoother version of the blue line, again a bit higher and to the left.

But is it the same as the default, the aggregation method called "Average"?

Click on the gray bar for Add Data Series and on a new line put TCMDO once again. Click the gray bar for Line 1: Total Credit Market Debt Owed (TCMDO), on the "Observation Date Range" line click Copy to All Lines, and click Redraw Graph.

Now the new green line hides the original blue line, because both show quarterly data. We'll change the new line.

Click the gray bar for Line 3: Total Credit Market Debt Owed (TCMDO). Change the "Frequency" from "Quarterly, End of Period" to Annual.

To the right of that, the "Aggregation Method" appears, with the value "Average". That's fine, don't change it.

Click the Redraw Graph button.

Now you have three data lines, all pretty much parallel. The blue line is our original version of TCMDO, which shows quarterly data. The red line shows annual data using "End of Period" aggregation. And the green line shows annual data using the "Average" method.

Oh. In case you don't know: By default FRED uses blue for the first line you put on a graph, red for the second, and green for the third line. That's useful, because it helps you interpret the graph.

The next line we add will be orange, because it is line number four.

Now it gets interesting. Take another look at the graph before we continue: Three lines pretty much parallel, and a maximum value on the vertical axis of 800 -- 800 billion dollars.

Okay. Click the gray bar for Add Data Series and add one more new line, again TCMDO, same as before. When you hit ENTER, the graph is redrawn for you. But we have to fix the ending date again. Click the gray bar for Line 1 and (on the "Frequency" line) click Copy to All Lines. Click Redraw Graph.

Observe that Line 1 (the blue line which we can't see because the orange line covers it completely at the moment) has the frequency "Quarterly, End of Period". Change nothing.

Click the gray bar for Line 2 (the red line) and observe that it has "Annual" frequency and "End of Period" aggregation. Change nothing.

Click the gray bar for Line 3 (the green line) and observe that it has "Annual frequency" and "Average" aggregation. Change nothing.

Click the gray bar for Line 4 (the orange line). The frequency is quarterly, like the first line. (That's why the orange line hides the blue line.) I want to change the frequency and aggregation for the orange line.

Change the frequency to Annual.

The aggregation method, by default, is "Average". Leave it. Click Redraw Graph

I see four lines:

But I shouldn't see four lines. I should see three. The orange line shows "Annual" data and "Average" aggregation, exactly the same as the green line. The orange line should hide the green line. But it doesn't. This is a glitch, a FRED glitch. Wow.

Now, let's finish up. For Line 4 change the aggregation method to Sum and redraw the graph. I get spikes all over the place:

The green line has spikes. The orange line has spikes. And the red line has spikes. So, changing the aggregation method for Line 4 to "Sum" affected Line 4 and Line 3 and Line 2.

This is definitely a glitch.

Wow.

Don't get all Hyper!

#1

At work we got notified by one of our suppliers of an impending price hike. Our reaction is to put a big order together ASAP, and buy that stuff for all the jobs we have and most of the jobs we hope to get.

Inflation accelerates spending.

#2

People say printing money causes inflation. But that's informal. Really, it isn't the printing that causes inflation. It's the spending.

Spending causes inflation.

#3

Spending causes inflation, and inflation accelerates spending.

That's why sometimes inflation becomes hyperinflation. It wants to be a self-reinforcing feedback loop.

The Freeman on Rent-Seeking

Here.

I've been looking for a definition.

I thought it was interesting, in the first note after the article they distinguish between rent and rent-seeking.

Private Debt 2012 (11): The Economy Is Transaction

No matter what happens in the economy, it happens with money, or it happens for money, or both. So the cost of money is an absolutely crucial element of economic performance. If the cost of money is too high, it interferes with everything.

No, not just the interest rate. The interest rate is the cost of credit. The cost of money is the cost that arises from applying the interest rate once for every dollar of existing debt. In an economy with lots of debt, the cost of money must necessarily be high, no matter the rate of interest.

In an economy that cannot grow because "interest rates are at the zero bound" and cannot go lower, one can reduce the cost of money only by reducing the reliance on credit. By paying down debt. Or cancelling debt. Or somehow getting rid of debt.

When the crisis hit, the Federal debt (red) was 10% of Total (TCMDO) debt

Oh, and it's private debt that must be reduced.

"Repressionomics"

At BBC News Business, Repressionomics - can 'financial repression' solve debt crisis? by Paul Mason:

It was economists Carmen Reinhart and Belen Sbrancia who, in March 2011, issued a ground breaking study of what "financial repression" means.

If we hear today the National Association of Pension Funds complaining that quantitative easing has placed a £90bn hole in the pension system, we can judge how rapidly the concept of "repression" is moving from theory to practice.

So what is "financial repression"? Put simply it is a combination of inflation and capital controls designed to erode the value of debts - and therefore of savings. It is overtly designed to prevent market mechanisms responding to inflation, leaving the price of borrowing too low and the return on savings too low.

Reinhart and Sbrancia pointed to the success of Western economies in "repressing" a mountain of debt after World War II - in a way that avoided fiscal austerity, and allowed a growth spurt, combined with inflation, to cancel out unsustainable debts.

No link, Paul?


The "mountain of debt after World War II" is not the same as today's mountain. After World War II it was a government mountain. The mountain of private debt that had created the Great Depression was gone, "eroded" by repayment, default, inflation, and the rocketing government debt of the second World War.

The mountain after that war was public debt; the mountain today is private debt.

And the "success" of Western economies in "repressing" debt after the war can be attributed largely to the economic growth that was made possible by the relative absence of private debt. But economic growth since the war was accompanied (and financed) by the growth of private debt.

Private debt grew until it hindered economic growth. Then government debt started growing again, and policies were put in place to encourage private credit use. But those policies failed to boost growth, because private debt was already excessive.

Reinhart and Sbrancia don't seem to see it that way:

Hoping that substantial public and private debt overhangs are resolved by growth
may be uplifting but it is not particularly practical from a policy standpoint. The
evidence, at any rate, is not particularly encouraging, as high levels of public debt appear to be associated with lower growth.

"High levels of public debt appear to be associated with lower growth." This is not true for the United States during the "golden" years after World War Two. High levels of public debt were associated with higher growth because private debt was low and did not interfere with private sector growth!


Related posts:
1. Debt Relatives
2. Debt Relatives: Uncle Sam
3. Debt Relatives: The Cousins
4. Debt Relatives: The Rise and Fall of the Non-Federal Relative

The analysis is incomplete

JW Mason links to Seven unsustainable processes, again? (short PDF) which contains two quotes that caught my attention. First:

Godley (1999) pointed to seven unsustainable processes which could harm U.S. growth prospects. In our view, a longer, deeper crisis was averted in 2001, without addressing the underlying growth problems, so that the next (current!) crisis was more severe.

Sure, okay. And the rest of that thought, too:

It follows that if the remaining imbalances are not addressed by appropriate policy measures, resuming growth under the same demand patterns will imply further instability.

Yeah. Except for one thing. This pass-the-buck approach to dealing with the longer, deeper crisis does not go back only to 2001. It goes back at least to 1974.


Second:

Some commentators put the blame on monetary policy for keeping interest rates too low, and therefore allowing an ever increasing level of debt.

In our view, low interest rates helped defer the crisis.

Again, sure... Low interest rates DID help defer the crisis. And low interest rates did contribute to the expansion of debt, or at least, did nothing to slow it.

Low interest rates postponed the inevitable and made it worse -- exactly as the PDF posits in the first quote.

It seems to leave us between the rock and the hard place: Jack up interest rates and suffer the consequences now, or leave 'em low and suffer worse, later. But the analysis is incomplete.

I insist: The analysis is incomplete.

Our assumptions so thoroughly permeate our thinking that we fail to see what we're doing wrong. We think we need credit for growth. So we see nothing wrong with increasing our reliance on credit, and increasing it more. And then increasing it more.

And then increasing it more.

But we don't need credit for growth, not so much. Certainly we do not need a volume of credit equal to three and one-half times GDP. One-fifth of GDP is probably twice what we need for growth.

Thing is, we don't just use credit for growth. We use credit for everything. And we don't pay it off. We let it accumulate. We use credit like money and let debt accumulate. We make financial crisis inevitable.

But it's not like we had a choice. It's policy. We use credit for growth because policymakers think credit is good for growth. And they set that in stone.

Oh, and the other thing: They think printing money causes inflation. So the cheap money, interest-free money, there's almost none of it around. But there is plenty of expensive money in use, as evidenced by the size of private debt.

And when the expensive money contributes to inflation, policymakers further restrict the quantity of cheap money, and make the expensive money more expensive. What they ought to do is encourage more rapid repayment of existing debt, to fight inflation.

Mason Rowe

JW Mason:

One of the things you hope students learn in a course like this is that money consists of three things: demand deposits (checking accounts and the like), currency and bank reserves. The first is a liability of private banks, the latter two are liabilities of the central bank. That money is always someone's liability -- a debt -- is often a hard thing for students to get their heads around, so one can end up teaching it a bit catechistically.

Nick Rowe:

...if the central bank money is not redeemable in anything, it's not really a liability...

Point Rowe.

Prescience

There is no special reason to doubt that exceptional growth will continue...

From The Golden Age of Capitalism, by Stephen A. Marglin, page 39: