Wednesday, May 18, 2011


From the Wikipedia article on Indirection --
A famous aphorism of David Wheeler goes: All problems in computer science can be solved by another level of indirection.... Kevlin Henney's corollary to this is, "...except for the problem of too many layers of indirection."

-- which cracked me up. And which leads to this observation:

All problems in economics can be solved by using more credit... except for the problem of excessive reliance on credit.


Clonal said...

What would GDP look like, if you take out debt financed personal consumption on the lines of the article in the Globe and Mail - Why the U.S. GDP number may be as bogus as a three-dollar bill

I think he is incorrect about the Government spending part, but definitely there should be a reduction of GDP due to private sector debt.

Jazzbumpa said...

Art -

Check this out.

Food for thought here. I'll have to do a lot of digesting before I figure out if it's nourishment or junk.

JzB the only slightly overweight trombonist

LH said...

Junk or nourishment - depends on what you want to hear I suppose.

Jazzbumpa said...

LH -

Those of us in the reality based community crave nourishment. The problem is separating the wheat from the chaff.


The Arthurian said...

Hello again. I did look into the Edward Fulton Denison preface you linked before, but never got back to you on it. That one got away from me.

"What would GDP look like, if you take out debt financed personal consumption..."

That's a good question.

I went to FRED, searched 'DEBT", and selected "Household Sector: Liabilites: Household Credit Market Debt Outstanding (CMDEBT)"... I don't know if that's the best one to look at, but it is a place to start. Sounded like a big number.

It peaks at 14,000 billion dollars, about the same as GDP. But it turns out they're not as similar as they appear. Total household debt doubled as a share of GDP between 1980 and the recent crisis. But then, GDP is annual production and CMDEBT is an accumulation since year one or something. So I think I want to look at the change in CMDEBT, the annual increase, the change from previous year number, and compare that to GDP.

GDP peaks around 14,000 billion, according to the first graph.The third graph shows that the annual change in Total Household Debt peaks around 1,400 billion, or 10% of GDP. Just ballpark, we might subtract 10% of GDP if we eliminate household debt.

If we did, though, other things would be affected. With people buying less, inventories would build up. Probably there would be layoffs. That kind of stuff.

In the article you link, they use the word "fake" to describe the part of GDP that was bought on credit. I think "fake" is the wrong word. Obviously, we could produce the stuff. We just couldn't afford to buy it.

Maybe we should be looking at where GDP would be if personal income kept growing at a golden-age rate.

As for myself, I'd like to see money moving out of the financial sector and into the productive sector. Cut the size and cost of finance, boost the profits of the productive sector, and create something other than debt.

Good question, Clonal.

Clonal said...

On the personal debt based consumption, I would assume that people can save to buy (here I will assume that in order to buy I am a young kid. The only way I can save to buy the baseball bat I covet is to put some of my money into a piggy bank -- no interest earning on that) or they borrow to buy. If you borrow, you pay interest -- that is the cost of borrowing -- so I will take out the interest on the outstanding personal debt -- that includes motgage and automotive debt -- from the GDP figures.

The assumption that one has to make is that all borrowing is now only made for "true investment" purposes, which allow a business to be more productive. Go back to a world without credit cards, mortgage debt, education debt or automotive debt.

Clonal said...

On further thought, I would make it interest on personal debt using (interest I am charged) minus (interest I can earn.)

On the first pass, I would make it an average of credit card interest, mortgage interest, automotive interest weighted by the debt composition minus savings account interest and 90 day Treasury rate, weighted more heavily towards the savings interest. The logic being that most personal debt is held by people whose alternate savings medium are the mattress, savings account, or to a much smaller level the money market account.

The Arthurian said...

Couple years old, but some interesting debt graphs from ContraHour at Seeking Alpha.