Debt Relatives

Do you capitalize the word "Federal"?

Used to be common to capitalize the word. A sign of respect, I think, Now it is common not to capitalize it: A sign of disrespect, I think. I don't capitalize it, not out of disrespect, but simply because that is the common usage. But now I think maybe I'll start capitalizing it again.


Everybody looks at the Federal debt. I like to look at Total debt.

Graph #1: Debt, and Debt

Red line: Federal debt. Blue line: Total debt. There are only three observations to be made about this graph:
1. Everything goes up.
2. The Federal debt is a small fraction of the total.
3. Everything changes with the recent Depression.


One can divide the Federal debt number by the Total debt number to see Federal debt as a percent of Total.

One can subtract Federal debt from Total to get something I will call the Non-Federal debt. And one can divide the Non-Federal debt number by the Total debt number to see Non-Federal debt as a percent of Total.

Graph #2: Shares of Total Debt

The blue line shows the Federal share of Total debt. The red line shows the Non-Federal share of Total debt. The two lines cross at 0.50, or 50%, in the mid-1950s. Since then, the Federal debt has been relatively low, and Non-Federal has been relatively high.

I woke up this morning thinking about this graph. The denominator is Total debt, 100% of debt. The denominator is in that sense "fixed". Total debt grew, of course; there's no denying that. But Graph #2 shows the Federal and Non-Federal shares of 100% of debt, from start to finish. That's boring.

By contrast, one can look at the Federal debt relative to Non-Federal, and Non-Federal debt relative to the Federal debt. Now this graph is more alive, more active, and more interesting:

Graph #3: Debt Relatives

The blue line shows the size of the Federal debt relative to the size of Non-Federal. The red line shows the size of Non-Federal debt relative to the Federal debt. Non-Federal debt is so much larger than Federal that the blue line is forced down to the bottom of the graph and most of its variations are lost.

The two lines cross around 1954 at the value 1, where there was $1 of Non-Federal debt for every dollar of Federal debt. The red trend line rises with determination, peaking at almost $4 during the 1974 recession -- the recession that ended our post-WWII golden age.

That determined increase in Non-Federal debt, by the way, is part and parcel of the golden-age growth. We use credit for growth. So when the red line is rising, Non-Federal economic activity is rising and the economy is generally growing. Then again, when the red line is falling, Non-Federal economic activity is falling and/or Federal economic activity is rising. Those things happen during recessions, when the economy is not growing.

One may observe, again on the red line, that the only sustained increase ended in 1974, and there has been no sustained increase since. One can translate that observation into English, saying that the only sustained period of vigorous economic growth ended in 1974, and there has been no sustained vigorous growth since.

Except for the growth of debt, of course.

Graph #3 is useful because it shows the changes in Federal and Non-Federal debt relative to each other. If the Federal debt rises relative to Total debt, the Non-Federal debt falls at the same time. Taking the Federal debt relative to Non-Federal puts the changes in perspective.

For example, consider only the rightmost portion of the three graphs, near the vertical gray bar of the recent Depression.

On Graph #1, Total debt (the blue line) suddenly goes flat, while Federal debt accelerates uphill.

On Graph #2, the red line turns and heads downhill. At the same moment, the blue line turns and heads uphill. At the same moment, and by the same amount. The red downturn and the blue upturn are of equal length, equal shares of the total.

On Graph #3 also, the red line turns down and the blue line turns up. But because Non-Federal debt is so much bigger, the fall of the red line is much bigger than the increase in the blue line. This provides an important perspective on the debt problem.


This method, comparing the one component of debt to the other, rather than to the total, I am calling the method of debt relatives.

I have two remarks on the method. First, each trend-line reflects both Federal and Non-Federal debt. As I said above,

The blue line shows the size of the Federal debt relative to the size of Non-Federal. The red line shows the size of Non-Federal debt relative to the Federal debt.

Because each line reflects both, it is not productive to compare the one trend-line to the other in a mathematical relation -- by making a ratio of them, for example. Such a ratio compares comparisons of debt, when the informative thing is to compare accumulations of debt.

On the other hand, it is true that Non-Federal debt since 1970 has generally been between three and four times the level of the Federal debt, as the red line on Graph #3 shows. And it is true that the Federal debt has generally ranged between a third and a quarter of Non-Federal debt for the same period. Showing the two lines on the same graph emphasizes these real differences in the accumulations of debt.

My second remark has more to do with my worldview than with economics. The thing we think of as "the business cycle" is only one of many economic cycles of various duration. One could say for example that the current depression is a low point on a long wave, with previous lows occurring in the 1870s and the 1930s. This is a much longer cycle than the ordinary business cycle.

The longest cycle I can envision is the cycle of civilization, more or less as described by Arnold Toynbee but driven by economic forces. I see this cycle as the social and cultural consequence of the concentration and distribution of wealth and income. I see it at the root of everything. This is why I put economics above politics. But that's beside the point.

I think there is a contest between public and private debt. Everybody focuses on the Federal debt and if they compare it to anything, they compare it to GDP. I compare the Federal debt to everybody else's debt, because these two accumulations of debt represent a contest or struggle. I cannot yet clearly define this struggle, but the consequence of the struggle is the cycle of civilization.

There. And now perhaps, I've said more than I should.