If it cost nothing, debt would be no problem

Below is a list of significant moments, based on simple dollar tallies. Everyone else on the planet, it seems, wants to attribute economic conditions to world events -- to some war, some technological innovation, some policy decision, some business mentality, some foreigners, or some defect in character.

Sure. Most of those event-issues are related. Many of them create disturbances in the force. Some of them may even be causal. But all those things together comprise a scatter-brained, patchwork tale. My story ties everything together with one common theme. An economic theme: dollar tallies.

Graph #1

1. By 1929, the level of debt was so high that it caused a depression.

2. By 1947, the level of debt was low enough to permit vigorous expansion. During the expansion, debt grew with gusto. And as long as accumulated debt remained yet small, economic growth was superb. That era is today considered a golden age.

3. By 1973, the level of debt again reached the high point that had previously led to depression. Debt was again high enough to hinder growth, and the golden age ended. But from the 1947-73 experience, policymakers understood that golden economic performance is associated with the rapid growth of debt. Policies designed to improve economic growth therefore ignored the possibility that debt had grown beyond its economies of scale, and that debt itself was hindering growth.

4. Nevertheless, in 1986 a slowdown of debt growth began. This slowdown continued until about 1992. Coincidentally, some time around 1986 the declining rate of saving changed direction, and began to increase. The increase continued also until around 1992. (Thanks to Liminal Hack for pointing out the saving-rate trend.)

Graph #2

Graph #3

I am not yet convinced these changes are related and significant. I am not yet sure whether I interpret the graphs correctly. The downtrend on Graph #2, or rather the trend change on that graph, may not begin at the peak of the third tall hump in 1986, but at the tail end of that hump, in 1989. Remains to be seen. In any event, there was a significant decline in debt growth during 1989-1992.

Graph #4

5. Coincidentally, after 1989, the rate of increase of M1 money accelerated, and continued to accelerate rapidly until about 1994. This increase, combined with the reduced debt growth noted above, was a prelude to the mini-golden age of 1995-2004.

A similar (if smaller) disturbance is visible on Graph #4, between the years 1985 and 1990. This may be related to the apparent rate inversions beginning around 1986, shown on Graphs #2 and #3 above.

6. By 1994, the economy had more "spending money" than it was used to. In addition, the level of debt had fallen enough to create financial "slack" in the economy. It was again possible for debt to increase rapidly for a few years before bumping up against the limits of financial innovation. And rapid debt increase is what happened next.

Graph #1 shows extremely rapid debt growth during the years 1995-2004, the time of the mini-golden age. As during the period 1947-73, it was the debt growth that in a sense "sponsored" the economic growth. The economy was good because rapid credit expansion was possible.

7. By 2004 the level of debt had again increased enough to interfere with economic growth. For the next few years the level of debt continued to rise rapidly. GDP did not.

On Graph #1 you can see a departure from trend between the labeled points 5 and 7. The downtrend was a necessary preparation for growth. The uptrend was the moment of improved growth. By point 7, debt growth had returned to trend, and growth of the economy was again impeded by excessive debt.

8. In 2008, just beyond the graph, the crisis hit. The rising trend of debt once again has started to decline -- just as it did after 1929, and just as it did after 1989.


Graph #1 shows three separate peak-events. It shows debt increase leading to crisis in 1929, followed by debt decline leading to a golden age for the economy.

It shows debt increase until 1990, followed by debt decline leading to ten years of significantly improved economic growth -- a golden decade.

And it shows debt increase leading to crisis in 2008, followed by debt decline. And the possibility of a golden future.

Four peak-events, if we count the 1985-1990 disturbance on Graph #4.

If we want our economy to recover -- if we want another period of "golden" growth -- then we must again reduce the level of debt, so that rapid debt expansion is possible.

Keynes preferred the "quasi-boom" to the "semi-slump". As do I. We have lived with a semi-slump since the mid-1970s, and it is time for something better. The quasi-boom arises when debt is low enough to permit a vigorous boom, and debt is capped off at that relatively low level.

// Related link: Credit Efficiency