Tuesday, January 17, 2017

A remarkably consistent increase in debt trend growth

Here. Take another look at yesterday's graph:

Graph #1: Exponential Growth of Real Debt Across Four Periods, 1948-1993
A lot of people seem to think debt exploded in the 1980s. It didn't. As I said yesterday, real debt did not run flat until the 1980s and then suddenly explode. It was always increasing. Today we look at the increase.

The black lines on #1 are exponential trend lines drawn by Excel for four different time periods. I used simple rules for selecting dates to figure the trend lines: Each period should be ten years or more in length, and aim for the maximum R-squared value.

After the thing posted on Monday morning I watched the graph for a while and started wondering what the growth rates are, the growth rates of the four exponential trend lines.

So in the Excel file I formatted the trendline label to make the numbers show 12 decimal places. Then I copied the exponents from the four different trendlines and pasted them together on a new sheet, along with the start- and end-dates Excel used to figure the trendlines.

Then I did my usual thing: I made a graph. I made a graph of the trend line growth rates.

The graph showed a straight line. I thought I messed something up. So I made it show a dot for each of the four data points. The dots all showed up on the straight line. So I know I didn't mess up.

It's a straight line. The increase in real debt growth is a straight-line increase, regular and consistent.

I recreated the graph as a vertical bar graph. It seemed right, as there are only four data points. And then I put the same data on the graph again as a line, like I had it the first time. With dots and all. I made the line black so it looks like a trend line. But it's not a trend line. It's a plot of growth rate data. And it's a straight line increase, regular and consistent:

Graph #2: Exponential Growth Rates of Real Federal Debt
I am amazed by this outcome.

// The Excel file

Monday, January 16, 2017

The evolution of Real Debt growth, 1948-1993

Real Debt did not run flat until the 1980s and then suddenly explode. It was always rising.
The graph shows Federal debt because I had that graph handy. But the acceleration of debt growth is similar for private debt and for total (public plus private) debt.

The animated GIF was easy to create from individual GIF images at gifcreator.me.

Sunday, January 15, 2017

Current expenditures? What's that?

This one was dated 29 June 2914 on my Test & Development blog. Apparently I didn't post it here, then.

Answer available at BEA. Here's a bit of it:
BEA's national accounts measure government spending in three ways:

Government consumption expenditures and gross investment:  This is a measure of government spending on goods and services that are included in GDP...
Government current expenditures: Total spending by government is much larger than the spending included in GDP.  Current expenditures measures all spending by government on current-period activities...
Total government expenditures:  In addition to the transactions that are included in current expenditures, this measure includes gross investment (as defined earlier), and other capital-type expenditures...

For more detailed information on government expenditures, please see "A Primer on BEA's Government Accounts."

- See more at: http://www.bea.gov/faq/index.cfm?faq_id=552#sthash.zpykIqWy.dpuf

U.S. Bureau of Economic Analysis, FAQ: “BEA seems to have several different measures of government spending. What are they for and what do they measure?” (May-28-2010), http://www.bea.gov/faq/index.cfm?faq_id=552.

Saturday, January 14, 2017

Philip George on involuntary unemployment

Why is there involuntary unemployment?

I think the article is brilliant. Recommended reading!

Friday, January 13, 2017

Agreeing to agree

Rummaging the internet for something I could use in my recent Adjusting Debt for Inflation series, I found an old (2011) post by John T. Harvey: What Actually Causes Inflation (and who gains from it) at Forbes.

I was so impressed by his opening:

I made a post two weeks ago in which I explained that the popular view of inflation (wherein it is caused by money growth) depends critically on assumptions that do not hold in the real world. Money comes into existence when someone adds it to her portfolio of assets. This occurs either when she borrows money (which creates new cash from reserves) or sells securities to the Federal Reserve (which injects new cash into the system). Neither of these scenarios allows the central bank to increase the supply of money beyond demand, the story told by those in the money growth ==> inflation camp.

I don't know what a "portfolio" is, and I don't want to know. But I know that money comes into existence when someone borrows money or sells securities to the Federal Reserve, as Professor Harvey says.

What I never thought of, on my own, was that "Neither of these scenarios allows the central bank to increase the supply of money beyond demand, the story told by those in the money growth ==> inflation camp." It's nothing, really. It's "supply and demand" as opposed to just "supply". But it is how the economy works -- I don't even have to stop and think about that. And it's important because, as Harvey says, "money growth ==> inflation" is a story without demand.

At least, in the dumbed-down "printing money causes inflation" version, it is a story without demand. And I never noticed.

So, first impression, I was pretty well impressed by John T. Harvey.

That opening paragraph continues:

... Neither of these scenarios allows the central bank to increase the supply of money beyond demand, the story told by those in the money growth ==> inflation camp. Instead, inflation happens first. This then means that agents need more cash for transactions, leading them to borrow more or sell government securities to the Fed. Thus, the money growth accompanies inflation, but does not cause it.

I'm a little uncomfortable with "inflation happens first". But I'm okay with "there is a need for more money". Either way, the key is "accommodation". If the Fed doesn't accommodate the increased demand for money, then there isn't enough money to let prices increase. At least, that was Paul Volcker's plan. (Hey, I'm big on cost-push. If costs are driving prices up, then the failure to accommodate means there isn't enough money to let the economy function normally, and all sorts of problems arise. I don't think Volcker's plan was a good one. However, I do still think the lack of money pretty well prevents prices from rising.)

I'm okay with "the money growth accompanies inflation, but does not cause it." I think it often works that way. One thing I particularly like about John Harvey's wording is that it leaves the cause of inflation unspecified. It leaves open the door to inflation being cost-push. I need that door open.

But I don't think it always works as John Harvey describes. Note that his analysis omits fiscal actions. Money comes into existence, he says, because "she" borrows it. She is the private sector, as I read his paragraph. When the Great Depression enveloped us, it was Federal spending that went high. And Federal borrowing. Nobody was depending on private-sector demand to lift prices while the Fed sat there pushing on string.

And again, during World War Two, it was Federal spending and Federal borrowing that went high. It's not the same as private borrowing and spending. The aftermaths differ. Professor Harvey omits this different era from his analysis.

Graph #1: Real GDP Growth (blue) and the Rate of Inflation (red), 1930-1955
Demand -- largely government spending -- along with manipulation of gold and other FDR policy created Depression-era highs (centered on 1935) in economic growth and inflation. Then wartime spending (see 1940-1945 on the graph) created a higher high in economic growth. The increased demand created a higher high in inflation as well.

After the war (1945) economic growth fell and inflation went low. After a low point in 1946, economic growth and demand came back, weakly. The blue line couldn't reach the 5% level. Inflation, however, spiked to 20%. And again after the 1949 recession growth and demand returned, stronger this time, but again inflation climbed higher than economic growth.

These peaks, in the late 1940s and early 1950s, these peaks show demand coming back enough to permit inflation to occur. But they do not show demand coming back enough to cause the inflation. Five percent growth doesn't cause 20% inflation. What was the cause of the inflation when price controls ended? Too much money chasing too few goods.

Federal spending and economic policy during the Great Depression and the Second World War raised the quantity of money to a high level relative to GDP and whatever. After the war, when the economy was getting back to normal, even a relatively low level of demand was enough to create a high rate of inflation because the quantity of money was extraordinarily high. This was demand-pull inflation.

Sometimes the "popular view of inflation" does happen in the real world.

I happen to think that John Harvey's description of the cause of inflation is mostly right most of the time. I also happen to think that Milton Friedman was born at just the right moment to see what was happening with money and demand and prices during the Great Depression and the second great war. And I think Friedman's description is exactly right for those periods of our economic history.

There is plenty more I'd like to say about Mr. Harvey's article. Another time, perhaps. Just now I have to say there is a lot of disagreement between different schools of economic thought. But a lot of it doesn't need to be disagreement. A lot of those different views need to be put on a timeline, that's all.

It's not that the other guy's assumptions "do not hold in the real world". It's that they don't hold at the present time. Or they only hold in special circumstances. From a timeline we might discover interesting stuff, like the "zero bound" problem occurs only rarely, and if "printing money" is applied as a solution then we should expect that the inflation which follows, when it comes, will be "too much money chasing too few goods" inflation.

The timeline would help us see that it's not always a matter of right and wrong. It is sometimes a matter of right now or right at some other point in time. Fleshing out the timeline might help economists get along better. And it would help them, and all of us, understand the bigger picture.

Thursday, January 12, 2017


This graph shows the Gross Federal debt, nominal and real:

Adjusting the Federal Debt for Inflation
Graph #1: Federal Debt (blue) and Its Inflation Adjustments, Right (red) and Wrong (green)
Nominal (blue) is useful for figuring the payback of debt. Real (red) is useful for figuring the boost that credit use gives the economy. The third calculation (green) is wrong and should not be used. These rules apply not only to government debt, but to all debt.

Wednesday, January 11, 2017

Would it matter?

Some people use an incorrect inflation adjustment of debt and produce a line like the green one on this graph:

Graph #1: Federal Debt (blue) and Its Inflation Adjustments, Right (red) and Wrong (green)
See how nice and flat the green line is, from the 1940s to the early 1980s? People see that and say those times were good because the debt stayed low. Then debt "exploded" in the 1980s, they say.

It's the wrong calculation. The green line is wrong. The red line correctly shows inflation-adjusted debt. Debt started going up in the 1950s, not the 1980s.

Look, I don't want to argue the point. I just want you to think about it. If you were making decisions and setting economic policy, would it matter if you thought debt started going up in the 1980s but it really started going up in the 1950s?

Would it matter? Answer that question first. If you think maybe it would matter, then maybe you should look into whether the green line really is wrong, as I say.

Tuesday, January 10, 2017

As a graph-maker ...

After I wrote yesterday's post and showed the "national debt (adjusted for inflation) since George Washington" graph, bluemexico's graph, I went and made my own graph right away.

Adjusting the Federal Debt for Inflation
Graph #1: Federal Debt (blue) and Its Inflation Adjustments, Right (red) and Wrong (green)
I didn't work out the numbers for each President, and I only went back to 1940. So my graph is only roughly comparable to bluemexico's, and only to the last part of it. This part:

Graph #2: The Last Part of Yesterday's Graph
The graphs differ some. Mine shows the data once for each year. Bluemexico's shows the data once for each President. The graphs show the same general path but are not identical.

But the two are close enough I can tell that bluemexico adjusted the debt for inflation using a calculation like the one that is used to adjust GDP for inflation. His graph shows the same pattern as my green line: It shows a peak in 1945. Then it falls a bit. Then it runs flat for the rest of the '50s, the '60s, and into the '70s. On mine, into the '80s.

Compare the green line to the red in the years before the mid-1980s, or the green to the blue, and it is easy to see that the green is the flattest of the three. That flatness is the result of the way inflation is taken out of the debt numbers.

What's wrong with the green line? Debt accumulates over many years. The effect of inflation on debt depends on what year the money was borrowed. But the calculation for the green line pretends that the whole accumulation was borrowed in a single year: in 1970 for all the debt accumulated up to 1970, in 1980 for all the debt accumulated up to 1980, and like that.

I know, I know. I hope I don't still have debt left over from 1970 or 1980. Still, the graph does show the debt of those years. And if the graph shows it wrong, people get wrong ideas about debt and the economy. That leads to flawed analysis and bad policy.

Here is a post on how to adjust debt for inflation.

Monday, January 9, 2017

You don't even know the size of inflation-adjusted debt until you get the calculation right

I keep going back to this graph:

Graph #1: Federal Debt by President, from Washington to Obama
You can click the graph to see it bigger and more readable. You probably don't need to, as the plotted line is easy enough to see. Also you may not want to, if your closed mind has already dismissed my topic as meaningless and unimportant. Me, I'm still trying to figure out what my topic is.

I keep going back to that graph because it shows debt adjusted for inflation. I wonder why they bother. They're not looking at debt relative to anything but the price level. All they are showing is that debt went up more than prices went up. It's an odd focus, don't you think?

Oh, I forgot to say: The graph is from Reddit, from the The_Donald subreddit, from a page titled A look at our national debt (adjusted for inflation) since George Washington became President in 1789. Obama will have added almost $9 trillion to our national debt by the time Trump takes office. It has 4082 thumbs up and 442 comments.

I searched that page for the phrase adjusted for inflation and found two occurrences: one in the post title, and one in a critical comment by imfineny:

I think it would be more informative to plot it against GDP adjusted for inflation

Mm. I wonder what sort of information the guy expects to find in the graph he imagines. (I briefly wonder why he doesn't just create the graph that he wants to see. I guess he doesn't want it that much.)

If the adjustment of debt for inflation is done using the same calculation used to adjust GDP for inflation -- as it almost always is -- then the debt-to-GDP ratio comes out the same whether the values are adjusted for inflation or not. It is incorrect to use the same calculation for debt as for GDP, of course. But I doubt those guys at Reddit are aware of that problem.

If they were, I expect they would focus more on getting the calculation right than on the size of the debt. Because you don't even know the size of the debt until you get the calculation right.

And now we have discovered my topic.