Thursday, November 18, 2010

A Look at the Debt Problem (3)

...not the changes of direction, but the direction of those changes...

Government debt increases during recessions, until the economy starts to grow. Private debt increases during periods of growth, until growth cannot continue.

When a recession slows the economy, private-sector debt growth slows. When the economy recovers, private-sector debt growth resumes.

With every recession, Public CFPY increases and Private CFPY decreases.

Dare I say it? The graphs seem to show it is private-sector failure that leads to public sector debt growth.


There are very few times that the above generalizations do not hold.

1. The debt trends appear to change in the middle of the 1991 recession. This would directly contradict my generalizations.

But the problem here is that the recession bar is inaccurate. According to the St. Louis Fed, the 1991 recession started in July of 1990 and ended in March of 1991. So the recession ended early in 1991. By these dates, the CFPY graphs show debt trends that fit my generalizations.

The recession bar for the 1991 recession makes it look like the recession lasted from January to December of 1991. This is the source of the discrepancy. (For more on this, see my Jealousy Bars post.)

2. A peak is visible around 1966-67 on the Public CFPY graph. But there is no corresponding recession.

Ah, but there is, almost. As Paul Kasriel put it:

The LEI contracted on a year-over-year basis from Q4:1966 through Q2:1967 although no recession was declared by the NBER. However, "unofficially," this period was referred to as the mini-recession of 1966-67. The Fed quickly began cutting the funds rate in December of 1966, thereby averting an official recession.

Recession was averted, but it was in the works.

The generalizations hold.

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