Monday, March 5, 2012

I got this one by accident

After you make a FRED graph, you have to check the formula in the left side border.

I put TCMDO on a new graph and changed the units to "Change, Billions of Dollars". Then I added GDP to the graph to use as a denominator. FRED automatically set the units to the same as I had selected for the previous series. Makes sense FRED might do that, maybe. But it wasn't what I had in mind.

Graph #1: LOG of (Change in Debt per Change in GDP)
To my eye, the trend is flat at 5 from start-of-data to maybe the mid-1970s. Thereafter, it slopes up. Reading from right to left, perhaps the upslope starts earlier.

By accident, this graph turned into another look at "debt productivity", which Jim looked at a while back:
This graph shows how debt and GDP have have grown relative to each other

[increase in GDP]/[increase in debt]
Prior to the meltdown there seem to be a steady trend of declining productivity increase per dollar borrowed.
Downsloping from 1966 to the crisis. (Divide GDP by debt (like Jim), and the line goes down. Divide debt by GDP (like me) and the line goes up.)

Ron Robins also looked at debt productivity a while back:
For decades, each dollar of new debt has created increasingly less and less national income and economic activity...

Getting less and less economic benefit from each dollar of new debt is becoming an enormous and onerous problem for the US...

According to Dr. Kurt Richebacher, writing for The Daily Reckoning, US credit expansion in 2005 was $3,335.9 billion and matched by nominal GDP growth of $752.8 billion, equalling $4.43 in new debt for each dollar of GDP growth. In 2006 total credit market debt increased $3.9 trillion while nominal GDP (seasonally adjusted) grew by $686.8 billion showing that it took $5.68 of new debt for each dollar increase in GDP.

Grandfather Hodges also considered debt productivity:
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...

Even The Economist looked at debt productivity:

Like alcohol, a debt boom tends to induce euphoria. Traders and investors saw the asset-price rises it brought with it as proof of their brilliance; central banks and governments thought that rising markets and higher tax revenues attested to the soundness of their policies.

According to Leigh Skene of Lombard Street Research, each additional dollar of debt was associated with less and less growth.

And just as I was looking for a way to wrap up this post, a new comment linked to an interview with David Stockman and provided this teaser:
Q: Why are you so down on the U.S. economy?

A: ( Stockman ) It's become super-saturated with debt. Typically the private and public sectors would borrow $1.50 or $1.60 each year for every $1 of GDP growth. That was the golden constant. It had been at that ratio for 100 years save for some minor squiggles during the bottom of the Depression. By the time we got to the mid-'90s, we were borrowing $3 for every $1 of GDP growth. And by the time we got to the peak in 2006 or 2007, we were actually taking on $6 of new debt to grind out $1 of new GDP.
// Related posts

Credit Efficiency

1 comment:

Jazzbumpa said...

Pretty interesting set of graphs.

What this suggests to me is that too much debt, per se, in not the problem. Debt inefficiency is the problem.

This takes me right back to the fraction of total debt and the fraction of total corporate profits in the finance sector.

I'm sure there must be more to the story, but the finance sector is a bloated leach, bleeding the economy white.