Sunday, July 10, 2011

Another day older and deeper in... Well, you know.

I wrote this post back in August of 2010. For some reason I never posted it. But I'm back on the same theme now, and I found it, so I'm posting it today. Hodges has since updated his numbers.

I've come across pages of The Grandfather Economic Report a few times lately. Found one on debt just now. I want to review it in this post.

Clicking the image at right will take you to Grandfather Hodges' summary of debt, the page I'm reviewing here.

Hodges sets the tone right away: "America has become more a debt 'junkie' - - than ever before with total debt of $57 Trillion." Big number. Hodges uses the "debt junkie" imagery more than once.

Hodges points out the size difference between federal debt and total debt:

"The Federal Government Debt Report covers just the federal government debt of $12.3 Trillion... This chapter covers all U.S. debt... Total Debt in America is now $57 Trillion"

Then he presents a graph comparing that $57 trillion debt to National Income:

"This is A SCARY CHART - showing trends of total debt in America (the red line) reaching $57 trillion in 2009 vs. growth of the economy as measured by national income (blue line). (adjusted for inflation)."

Hodges does a lot with large fonts and capitals, and red and blue text and such. I'm not trying to duplicate that when I quote him. (The capitals copied over, of course.) To distinguish his text from mine, I'm putting his words in quotes and italics.

"This chart shows, for the period 1957 to mid 1970s, total debt (red line on chart) was increasing close to the growth rate of national income (blue line on chart), despite war debt for WW II, Korea and Vietnam."

"But, in the last several decades total debt has zoomed up, up and away - - growing much faster than national income. As of beginning 2010 total debt was $57 Trillion ($42.3 trillion private household/business/financial sector debt PLUS $14.7 trillion federal, state and local government debt)."

Yeah, debt grew only a little faster than National Income in the early years of the graph. Then it started growing a lot faster. Hodges puts a date on the change: the mid 1970s. Minor point: I would put the change around 1981, at the time of the K-R Shift.

Hodges makes some interesting observations about the graph:

"Total debt (red line) increased about $3 trillion per year the past several years. BUT - last year, for first time EVER, total inflation-adjusted debt stopped growing at $57 trillion, as if it hit a brick wall - and national income (blue line) stagnated and declined."

Yeah, that was the Paulson crisis, and the recession.

"It took $9 of new debt to produce but $1 of added national income - a new record."

I prefer to think of it as $9 of credit-use that produced $1 of National Income. Debt is only the record of credit in use. It's another minor point. But sometimes the little things help to clarify the big things.

"Although total debt in America stopped growing last year, federal, state & local government debt zoomed upward FASTER than EVER - by more than $1.8 trillion, while private sector debt decreased by about same amount."

Another consequence of the Paulson crisis, of course.

"This chart shows < 2009 debt of $57 trillion was 505% of national income; the debt ratio in 1957 was 186%. If 2009 debt had been at the 1957 debt ratio then 2009's debt would have been $21 trillion, not $57 trillion - - indicating excess debt in America today of $36 trillion."

Oh, I like the arithmetic! If not for our increasing reliance on credit, we'd have had $36 trillion less debt in 2009. With that much less debt, we'd have avoided the Paulson crisis. And by the way, economic growth was better in the 1950s and '60s, when there was less debt. Hodges makes another excellent point:

"In this graphic, note how the debt ratio data plots are nearly flat during the first half of the years shown, indicating debt was growing at approximately the same rate as the economy - - not faster than the economy. This proves America's economy can grow without increasing debt at a faster pace (because it has in the past)."

One more little thing:

"Please note this is a ratio chart - - a plot of debt as a ratio to national income - - called the 'debt ratio.' If the economy performed with less debt each year per dollar of national income growth, meaning better debt productivity, then the chart trend line would be pointing downward. But, the line points up - - each year more and more rapidly upward it soars. This means the economy has been performing with less debt productivity each year..."


Clonal said...
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Clonal said...
This comment has been removed by the author.
Clonal said...

I am trying to resolve a conundrum, and to find the perpetrator of an ongoing "robbery" . I think it is related to the debt. But exactly how, and how the con played out is still not clear to me.

Let me first explain the robbery.

From 1979 to 2010, Labor productivity went up from 1 to 1.85 In other words, each hour of labor input produced 1.85 units of "real" CPI adjusted goods.

At the same time, "real" cpi adjusted GDP (minus population growth) also went up from 1 to 1.85

However, if we look at the average "real" cpi adjusted wages, we find them stagnant at around $16 per hour. See Chart

If for the sake of argument we assume that all GDP is a result of the civilian work force, we can divide the "real" GDP by the civilian workforce, and then again by 2000 (assuming 50 weeks at 40 hours), and plot the results. We see that this went from $27 to $43 till the GFC (2008) If, the wages had gone up in the same proportion, the wages in 2008 should have been around $27 per hour. If the wages had gone up in the same ratio as the productivity, the real wages in 2010 should have been around $38 per hr.

So, the obvious conclusion is that the civilian work did not get the benefits of the increased GDP and the increased productivity. This is the "robbery."

So where did the wealth go? How can we find out the path from the published data?

If I look at "real" cpi adj. household debt per civilian worker, I get an interesting chart.

This came about because of a discussion on the plight of the "99ers" at "Re: The People."

Sorry about the previous deleted posts - found some errors, and corrected them.

Clonal said...

Didn't get all the typos! Should read $30 per hour and not $38. Sorry about that

The Arthurian said...

Economists say output equals income. I accept that. Output is GDP. So, GDP equals income.

Rather than looking at GDP I will look at income.

Adam Smith identifies the wages of labor, the profits of stock, and the rent of land. (TWON, Book One, Chapter VI) These are the three categories of people who receive income.

Then he says: "In every society the price of every commodity finally resolves itself into some one or other, or all of those three parts..."

Smith also said, "The interest of money is always a derivative revenue." But in our day finance has become a major player, so I like to use interest as a fourth category of income.

Your graphs here and at Re: The People show that the increased income (arising from GDP growth) has not been absorbed by the wages of labor.

There are not too many other places to look for that lost income!

You have Adam Smith's support in this effort, I think.

The Arthurian said...

Clonal, I broke this down to a baby-ish level so I could figure it out:

Suppose the price level is 1 the first year, 2 the second year, and 3 the third year.

To get "inflation-adjusted" values, I must divide by 1 the first year, by 2 the second year, and by 3 the third year.

Now... I want to look at debt, "inflation-adjusted" debt.

Suppose I borrow $1 the first year at zero interest, and neither borrow more nor pay it off. Then in the third year I still owe $1. But to borrow the same purchasing power in the third year, I would have to borrow $3. So my debt is already adjusted for inflation.

The value of debt is *automatically* inflation-adjusted because it is always expressed in nominal terms.

So I think your chart of "'real' cpi adj. household debt per civilian worker" is twice-adjusted, and in error.

It *is* an interesting chart, however. I went back to look at it because the flat spot starts in the mid-1960s and lasts until Reagan. That's when I saw the thing above.

Do you think my critique is valid?

The Arthurian said...

"The value of debt is *automatically* inflation-adjusted because it is always expressed in nominal terms."

No, I don't know what the terms are, nominal or real. But the burden of debt declines when there is inflation. That much I know.

Clonal said...


If I was improperly adjusting for CPI in the debt, the picture would be even worse. Twice as bad. I believe that I am applying the CPI adjustment correctly. The household debt is in nominal $ so I have to apply the CPI adjustment to compare the impact on a wage earner over time.

I had an error in the graph, I had one extra zero in the multiplier. The corrected graph is here At the peak, the average worker was in debt for about 18 months of pre tax earnings or 24 months of after tax earnings (this includes payroll taxes)

I agree with you on the Adam Smith part. But I am trying to find the "rentier" income in the GDP accounting, and I am unable to do so directly.

We do know that income and wealth disparity increased from 1980 on. But I would not consider that to be the "smoking gun," but rather to be circumstantial evidence.

Clonal said...


You said,

the burden of debt declines when there is inflation

That is true only if I do not take on more debt with time, and my income keeps up with inflation

The Arthurian said...

I am the lender. You are the borrower. I lend you $100 at zero interest to be paid back in a lump sum at your convenience.

By the time you pay me back, prices have gone up tenfold.

You pay me $100.

For me (as a lender) to stay even, you would have to pay me ten times as much. (Multiplication.)
Since you do not pay me ten times as much, your debt has *already* been adjusted for inflation.

But you want to DIVIDE by ten because prices went up tenfold,
So then, you think you should pay me $10 and we are even?

I don't buy it.


I went through the motions in FRED. Your graph is interesting, with the flat spot in it. But flat spot seems to arise entirely from the CPI component.

Clonal said...


I think you misunderstand. In general, wages have tended to keep up with inflation. We have established that. Now we know that the household debt has increased with time. And that can be plotted. It was just that the CPI adjusted debt gave me a way to measure the impact of the debt on a wage earner.

I still owe the same $100, but it feels like the $10 of thirty years ago. So owing $10 thirty years ago is the same as owing $100 today. That is the purpose of the CPI adjustment. How does my debt of today compare with my debt of yesteryear.

However, I will show the data another way - "Total Household debt/Wage and Salary accruals"

The same picture holds true as before. Average debt in 1980 was about 10 months of wages. In 2008 it was 26 months of wages. And as we showed earlier, the real hourly wages were stagnant, but average endebtedness went up 2 1/2 times.

If I remember correctly (and 40 years is a while, and memory can play tricks) in the 60s and 70's, union contracts had inflation factored into the negotiated wages. We see some of that reflected in the CPI adjusted figures.