Tuesday, September 20, 2011


In mine of the 10th I showed Federal Deficits relative to Base Money. Here is that relation again, omitting this time other data-lines:

Graph #1: The Federal Deficit relative to Base Money

Deficits relative to base money seems to me a meaningful ratio. It is a comparison of two ways money comes into our economy.

It looks disorderly at first. So I eyeballed in some trend lines to show the trends I see. Hover the mouse over the graph to see the trend lines.

To my eye, the trends are these:
1. Flat, until the early 1960s.
2. Rising sharply then, through the 1980s.
3. Falling sharply through the 1990s.
4. Rising even more sharply since 2000.

We could quibble about turning points, especially the transition at the end of the 1980s. Perhaps the change came immediately after the 1982 recession, where the blue line shows a high point.

Or perhaps the change came about halfway between the 1982 and 1991 recessions, where the decline suddenly becomes more rapid.

Or perhaps, as I show, the change came just after the 1991 recession. Or perhaps it came two or three years after that with the obvious wiggle one-third of the way down my "Falling sharply through the 1990s" trend.

We could quibble. But obviously there's a turning point in there somewhere.

The sharp drop of the 1990s, or since the early 1980s, says that Federal deficits fell relative to Base Money. Deficits fell. Now, that's not surprising for the Clinton years when the budget came briefly into balance. But it's not what we typically think of, when we think of the Reagan years!

This sharp downtrend, wherever it starts, whatever its cause, I am calling an "anomaly". I think the anomaly is related to the widening of the gap visible on Graph #2, expanding all through the 1990s:

Graph #2: The Federal Debt, and the Gross Federal Debt

Graph #2 is a log graph. The blue line is the Federal Government debt that is part of TCMDO debt, credit market debt. The red line is the Gross Federal Debt. The space between them is internally-held Federal debt.
// If that's not right, please let me know!
The space between them widens from almost nothing after the 1982 recession, to a pretty good gap by the 2000 recession.

While the Federal budget was by all accounts coming into balance, more and more of the Federal debt was moving to internal government accounts.

A Pebble in the Shoe

Back on 1 June 2011 I showed this graph:

Graph #3
And I wrote:

[Graph #3] shows each year's change in the Gross Federal Debt. Basically, this is like showing federal deficits, except it never goes below zero. You can see the anomalous decline from 1992-2001 on Graph #2, while the federal budget was approaching balance and briefly achieved a surplus. But when the budget is in surplus, you'd expect to see the annual increase in debt go negative. In this graph it doesn't. It approaches zero but never falls below that magic number.

I tried not to make a big deal of it at the time, but it bothered me. Why didn't the additions to debt go negative when the budget was balanced? At the time, the best I could say was "I don't really know." I'm not saying that, now.

Graph #4
Graph #4 is a close-up of Graph #3. The blue line on Graph #3 is repeated on Graph #4 and you can see that it comes close, but never reaches zero. The year-to-year change in the Gross Federal Debt did not reach zero. The Federal budget was never balanced.

The blue line is the one people speak of now as $14 trillion-plus, and what we see on debt clocks. The red line is the Federal part of TCMDO debt, credit market debt. The gap between the two lines is internally-held Federal debt -- what the Treasury owes to the Social Security Administration and stuff like that.

In 1993 the gap was about $100 billion. At the low point (end of September 2000) the gap was something over $300 billion. That's a $200 billion increase of internally-held Federal debt, which helped to make the Federal budget look vigorously balanced:

If the gap that represents internally-held debt stayed the size it was in 1993, it would have pushed $200 billion of the Federal debt onto the credit markets. The Federal budget would still have been "balanced" but only just barely. "Balanced" in quotes.

But if *all* of the internally-held debt was pushed onto the credit markets (where it seems to count for balancing) the Federal budget would not been balanced at all.

Or, I don't know, maybe I have the whole thing wrong.


LiminalHack said...

About printing up money and paying down debt. That is a (unfunded) debt jubilee, if you are talking about private debt.

When all that debt is paid down, the asset side of bank balance sheets will have shrunk. They will receive less interest income. However the liability side - mine and your savings - will be what it always was.

The savings, are no longer backed by debt. Surely you are not saying we can all save magic numbers in a computer that will somehow magically transport wealth into the future without a debt to carry them?

You will get hyperinflation since the buying power of borrowers released from debt has risen, without a corresponding fall in buying power of savers.

So you will have one pie, and twice as many people as there are slices.

Its a bad idea.

The Arthurian said...

This is exactly what I want, evaluation. Thanks Liminal.

Yes, private debt. It is funded.

I don't have in mind to have everybody's debt paid off all at once. I have in mind maintenance payments, monthly payments, so that debts whither away on their pre-established schedule. It will relieve debtors nonetheless and (I think) allow the economy to grow again.

Meanwhile, the savings are as backed by debt as they ever were.

"the buying power of borrowers released from debt has risen, without a corresponding fall in buying power of savers."

Good point. I had not thought of this. But the money is savings is in savings and the savers are already not spending it. I assumed that this behavior would continue.

Anyway, nobody's eating the pie now.

Liminal Hack said...

"Good point. I had not thought of this. But the money is savings is in savings and the savers are already not spending it. I assumed that this behavior would continue."

Well it might short term but not in the long run. In a world without money (a hypothetical hunter gatherer economy) there can be no deferred consumption/saving without debt can there?

You can't have claims on future income, aka deferred consumption, without a corresponding promise to defer consumption in future, without inflation.

You can't write off some portion of the promises and keep all the claims and not expect to get inflation. That is what I mean by 'unfunded'.

What you need to do is write down debt and claims at the same time.

The Arthurian said...

Hi, Liminal. Okay, I get your definition of "funded". It sort of means that money always comes from somewhere. Before it goes into this pocket, it has to come out of that pocket. Balance sheet stuff.

But back in the day, a miner would find gold and have it minted and have money as a result. Doesn't that defy the logic of the balance sheet? But okay, I suppose it might also have caused inflation. Got ya.

"What you need to do is write down debt and claims at the same time."
I think the people who hold the claims do not want to write them down.
Maybe half and half? Write down 50%, print and pay off 50%. Reduce the "unfunded" part. Certainly, we have to do more than we are doing now, and do it more quickly.

I'm having trouble with this: "In a world without money ... there can be no deferred consumption ... without debt can there?"

Why not? Me and the candy bowl is a world without money. If I don't eat them now, that is deferred consumption. The candy bars are equity. Where is the debt? (The example sounds frivolous. The question is not.)