Thursday, January 26, 2012

Private Debt 2012 (4): When does private debt grow?

Some things cannot be said often enough. Excessive private debt is the problem.

Last week we looked at Federal debt. We used the Federal component of total debt, where total debt was measured as FRED's Total Credit Market Debt Owed, or TCMDO.

This week we will look at all the rest of TCMDO, everything but the Federal component. And I will call it "private" debt. The red line here:

Graph #1: Total debt (blue) and Private debt (red)

I want to eliminate the blue line and just look at the red line, private debt And I want to look at the growth of that debt. So I will show "percent change" values, as I did last time to show the growth of Federal debt.

Graph #2: Percent Change from Year Ago, Private debt

Last time I highlighted the significant uptrends in government debt, and we saw that those uptrends occurred during recessions. I won't highlight the graph this time, but you can see on Graph #2 that for private debt, the downtrends generally occur during recessions. Just the opposite of the Federal debt. And the uptrends in private debt typically occur between recessions, when the economy is growing. As you would expect.

So now, I want to take the red line (total private debt) from Graph #2 and show it together with the blue line (total Federal debt) from last week's Graph #2:

Graph #3: Percent Change from Year Ago, Federal and Private debt
Wiggly lines. But if you look at the red line, it seems to be almost centered on the 10% line, dropping off perhaps toward the end. The blue line, on the other hand, has three really sharp spikes. These are associated with the recessions of 1974, 1982, and 2008.

Between those recessions, the blue line seems to be all over the place. Actually it fell a lot from 1984 to 2001 and from that low point there is another huge spike that doesn't look like a spike because it starts out from such a low point.

But before those recessions, before the 1974 recession, the blue line is quite tame. At the start, it seems to be almost centered on the zero line, maybe one or two percent, until the near-recession of 1966-67. Then a couple hefty spikes seem to push the trend upward. Even so, the blue line does not break through the red line and rise above it, until the 1974 recession.

Those sharp blue spikes of 1974 and 1982, and the premonitions in 1967 and 1970, are increases in government debt. The spikes show that our economy was already in trouble at that time. Already in trouble, in the 1970s.

But if we were already in trouble in the 1970s, then we must look for the problem in the 1950s and 1960s.

In the 1950s and early '60s, Federal debt growth was relatively slow -- averaging perhaps 2% per year. Federal debt growth was slower than GDP growth. Meanwhile, private debt was growing at a rate of 8% to 12% per year. And private debt continued to grow at that rapid rate, until accumulating debt created financial costs that led to severe recessions in the 1970s, forcing those large counter-cyclical increases in the Federal debt.

The economic problems of the 1970s and since, have their origins in the private debt growth of the 1950s and '60s.

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