Context (follow-up)

"Everyone looks at debt relative to GDP and says debt is high."

Graph #1

Graph #1 shows total debt relative to GDP. Versions of this graph are available all over the internet, including here, here, and here. You have to look, though, because many of the debt graphs show just the government debt, not total debt, relative to GDP.

The trend-lines on this graph are three different colors because the debt numbers come from three different sources, as noted in this series of recent posts. There is some mismatch among the sources, so (for example) the green and gray trend-lines do not form one continuous trend-line.

The tall green spike occurs at the time of the Great Depression. The purple line, which climbs up to the 3.5 level, shows the worrisome debt growth of the past three decades. The 3.5 level indicates that total debt is three and one-half times the size of GDP. The same value expressed as a percentage would be 350%. That sounds a lot bigger, but it is the same number.

That's probably how you've seen it: total debt is 350% of GDP. But I was thinking about this. It's 3½ times GDP. That's not so much. Oh, it's not good, not at all. But we could live with it. At least, we don't have to have the economy come crashing down because of it. It would be nice if the economy didn't come crashing down. That could help us get some of the debt paid off.

3½ times GDP. It's not so much. Suppose everybody with income had a mortgage of 3½ times his or her income. I know, I know, we don't want that. But a lot of people have mortgages like that already. So I'm not talking crazy here. Bear with me.

Suppose everybody had a mortgage like that, and nobody had any other debt. No credit card debt. No corporate debt. No financial-sector debt. And no government debt. Only the mortgages. That would be the same amount of debt that we have now.

It's not deadly. It's not like 345% was fine, but 350% is a killer.

The Debt-relative-to-GDP graphs were a big deal, a couple years back, because 350% of GDP was such a big number. I'm sayin' it's not so big. What it is, is, it's the highest spot on the graph. So, it is high compared to all the other amounts of debt we ever had. It's the highest spot on the chart. But that doesn't mean anything.

The highest spot on a turtle's back is not so high.

"I compare debt to M1 money. M1 is spending-money."

Graph #2

Graph #2 is my Debt-per-Dollar graph. This is a new version of it, actually. It uses the new debt numbers, instead of the old ones I've been gathering since the 1970s. And I created it in a Google Docs spreadsheet. Not with my own "ChArtie" program. The old computer recently crashed.

This graph suffers the same data mismatch as Graph #1 above. It has the same tricolor effect, the result of using three sources. And it has some interesting features. It rises to a peak, in 1933, of $8.46 of debt per dollar of money in circulation. It then declines  to a low of $3.72 in 1947. And then it increases almost without interruption, to a peak of $34.83 in 2007.

Graph #2 is a lot less jittery than Graph #1. To some extent that is because the "Debt per Dollar" peak is ten times higher than the "Debt relative to GDP" peak. In a sense we have to "zoom out" to see Graph #2, so the jitters just look smaller. (The data mismatch looks smaller on Graph #2 for the same reason.)

But to some extent also, the Debt-per-Dollar graph looks less jittery because it is less jittery. This graph uses M1 money in the ratio. M1 money is controlled by monetary policy and the Federal Reserve. The Fed uses "targets" (interest rate targets) to control the growth of the money supply. So, essentially, M1 is a controlled number.

By contrast, GDP is not a controlled number. GDP is simply the result we get. Other factors (like the quantity of money) are controlled, and GDP is the result. Because GDP is less "controlled" than M1 money, it is more jittery. Because GDP is jittery, Graph #1 has jitters that simply do not exist in Graph #2.

Other than that, how do these two graphs compare? The blue peak on this graph is much lower than the sharp green peak on Graph #1. It makes the green spike seem more significant. Certainly that green peak is an eye-catcher.

Also, on Graph #2, the blue peak of the Depression era is very much lower than the recent peak, the gold-color peak on the same graph. On Graph #1 by contrast, the green, Depression-era peak is nearly as high as the recent high point. The similarity of height makes it seem that current conditions are somehow similar to Depression-era conditions. That is a false reading, I think. A collapse of GDP comparable to the Great Depression would create a green-spike increase on top of the debt we have now.

Finally, Graph #2 has something of a big, sweeping arc that runs from 1947 to 2007, The sweep of this curve is obvious despite wiggles and mismatches. Graph #1 shows no such sweeping curve. It has more of a stair-step pattern, flat from 1956 to 1980, then rising, then flat from the late '80s to the late '90s, then rising again.

I would suggest that Graph #2 displays a sweeping curve because it uses M1 with its "controlled" growth. Graph #1 displays no such sweep because it uses GDP, whatever GDP turns out to be each year.

The level of M1 money is controlled by policy. The level of GDP is the result we get. Frankly, the whole notion of using results as the denominator of a ratio escapes me. One does not divide the quarterback's stats by the score of the game.

Graph #3 combines Graphs #1 and #2.

Graph #3

Graph #3 shows both the "Debt relative to GDP" (Graph #1) trend and the "Debt per Dollar" (Graph #2) trend, for purposes of comparison. The blue, red, and gold of the "Debt per Dollar" graph are a good deal higher than the green, gray, and purple of the "Debt relative to GDP" graph. The sharp, green eye-catcher of Graph #1 now looks more like a turtle's back.

It is important to note that this green-gray-purple is the same trend-line shown in Graph #1 above. In Graph #3, the most recent (rightmost) part of the purple line is between 0 and 5 on the number scale shown at the left. A little higher than halfway between 0 and 5, actually. Actually, that purple line ends at 3.5, exactly as it does on Graph #1.

And the green, Depression-era peak is nearly as high as the right end of the purple line. This is the same graph indeed. It has only been squeezed down to make room for the much higher numbers of the Debt-per-Dollar graph. Everybody looks at debt relative to GDP and says debt is high. But that oh-so-worrisome debt is insignificant compared to the "Debt per Dollar" numbers.

The sharp green spike of Graph #1 is a false alarm. It is not an "early warning" of an impending problem. It is simply the result of the collapse of GDP between 1929 and 1933. By contrast, Graph #2 shows an upward trend from the first available numbers, an upward trend that is undisturbed by World War I, the Roaring '20s, and the onset of the Great Depression.

On Graph #1 there is no connection between the sharp green spike and the increase of the purple line to the 350% level. There is some connection between the 1916-1928 rise of the green line, and the rise of the purple line. But that's not what people look at. It's not what I look at, when I look at that graph.

On graph #2 the increase from 1916 to 1929 and beyond is a premonition of the debt increase that begins in 1947. And the decline from 1933 to 1947 is a premonition of the solution to our present dilemma. But though this graph shows what must be done, it does not show any benefit to a leisurely application of the remedy.