| Graph #1: Dollars of Private Debt per Dollar of Public Debt, 1918-1970 |
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| Graph #2: Dollars of Private Debt per Dollar of Public Debt, 1952-2012 |
When the line goes up, times are good:
• 1920-1929, The Roaring Twenties
• 1947-1973, The Golden Age
• 1994-2000, The Macroeconomic Miracle
When the line is high, times are tough:
• 1929, start of the Great Depression
• 1974-1993, Small ups and downs here, suggesting only brief "good" periods.
When the line peaks there are problems:
• 1929
• 1974
• 2007
When the line falls dramatically there is Depression.
When the line goes up, times are good. But when the line is high, times are tough. This is the stuff cycles are made of.
The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.
My idea is to use policy to keep the line flat, like 1974-1994, but to keep the flat at a much lower level, a level where the economy constantly wants to grow vigorously. We may not get Golden Age growth that way, but growth will be better that way than any other way. Sustainable growth.
7 comments:
"My idea is to use policy to keep the line flat, like 1974-1994, but to keep the flat at a much lower level, a level where the economy constantly wants to grow vigorously. We may not get Golden Age growth that way, but growth will be better that way than any other way. Sustainable growth."
Although I agree it would be best to keep that ratio more stable , that alone wouldn't be sufficient to guarantee sustainability , since the private/public ratio could remain constant while the overall debt/gdp grows again to crash levels.
It's interesting , though , to speculate on what the optimal private/public ratio should be. In "normal" times , the public share of GDP is ~20% and the private share ~80% , so you might say that the ratio should be about 4 to 1. However , given that we are going to have some overall debt/gdp limit to keep us out of trouble , some would argue that the private sector should get a larger than proportionate share , since they'd be more efficient at converting the debt into productive capacity.
I'm not sure that's true , but even if it were , there's a counter-argument in favor of the public side. Public debt is almost invariably financed at lower rates than private debts , meaning lower flows of capital to the parasitic financial sector , which increases the efficiency of public debt relative to private.
It's depressing to me how far away we are from having these sorts of debates at the policy-making level. All we hear is "public debt = BAD ! " , from both sides , with very little appreciation that it's the private sector debt burdens that are killing us.
When the line goes up, times are good
Is that the real relationship? Look at the levels and slopes. Modest slope and low(-ish) level pre-1972.
High levels and slopes the last two decades. Doesn't this play right into the efficiency of debt idea? Hypothesis: When private debt is high, it needs to grow faster to sustain economic growth.
Now, why did a 4.5 ratio bring down the economy in '29, when it took double that in '08? And why was there no melt down in 74? Just a couple decades of MEH!
Technical note - why did you subtract FGTCMDODNS from TCMDO. I'm pretty sure TCMDO is private debt only, so you don't need to do that.
JzB
TCMDO is very closely approximated by the 5 debt categories totaled here.
http://research.stlouisfed.org/fredgraph.png?g=65b
As you can see, there is no room in for FGTCMDODNS to be a component of TCMDO.
I'm baffled by the red-blue divergence in recent years.
Cheers!
JzB
JZ Tech, see my
http://newarthurianeconomics.blogspot.com/2011/07/shopping-list.html
for TCMD-related categories, organized (by me, admittedly) in a way that seems right (to me, granted), and
http://newarthurianeconomics.blogspot.com/2011/07/bagging-groceries.html
for component summing. In particular the first two graphs there. My conclusion is as follows
TCMDO DNS is part of TCMDO
FG TCMDO DNS is part of TCMDO DNS
so FG TCMDO DNS is part of TCMDO.
Also, TCMDO is total CREDIT MARKET debt owed, so the part of the Federal debt that the government owes to ITSELF is not included in it. See Gene Hayward's remarks on this, here and here. See also the table at
http://newarthurianeconomics.blogspot.com/2012/02/fcm-factor-cost-of-money-further-review.html
The "debt clock" debt, $14T+, is given by FYGFD at FRED. The publically held portion of it, $10T+, is counted as part of TCMDO. The difference is owed to the Social Security Admin and similar governmentals.
Dunno how DODNS fits in to this. That is a separate collection of datasets I think.
Jazz,
me: "When the line goes up, times are good"
you: Is that the real relationship? Look at the levels and slopes. Modest slope and low(-ish) level pre-1972.
High levels and slopes the last two decades. Doesn't this play right into the efficiency of debt idea? Hypothesis: When private debt is high, it needs to grow faster to sustain economic growth.
Yes, exactly. When private debt is high, it needs to grow faster to offset the cost of existing debt and still provide a boost. Ultimately self-defeating.
(I still do not like the phase "efficiency of debt". I much prefer "efficiency of credit use" because the use of credit is what creates the boost. Debt is just the evidence of credit use, and a measure of the resulting burden.)
Now, why did a 4.5 ratio bring down the economy in '29, when it took double that in '08? And why was there no melt down in 74? Just a couple decades of MEH!
Probably because, after the Great Depression, counter-cyclical policies were put in place. These policies did not solve the problem: They did not prevent the excessive accumulation of debt and did not prevent other policies that encourage and support the accumulation.
But those counter-cyclical policies did allow the accumulation to get much bigger, this time around.
Nonny: It's interesting , though , to speculate on what the optimal private/public ratio should be. In "normal" times , the public share of GDP is ~20% and the private share ~80% , so you might say that the ratio should be about 4 to 1.
I criticize studies that consider economic conditions "since 1980" or "since the 1970s" because these studies consider only an economy that is already in trouble. It is important to see how that economy differs from the economy of the 1950s and 1960s.
People who say the "normal" ratio is about 4-to-1 are basing their thinking on an economy in trouble. Such analyses are not worth the paper they are printed on.
However , given that we are going to have some overall debt/gdp limit to keep us out of trouble , some would argue that the private sector should get a larger than proportionate share...
Okay. And good point, my graphs leave debt/GDP out of the picture. But why do we need credit and debt to sustain the existing level of economic activity? There ought to be enough non-credit money in the economy to sustain existing levels. And then, credit-use would be for growth and special circumstances.
The reason we fail to do this, I think, is that policymakers fail to see how easy it would be to set things right.
To Jazz
You have counted household debt twice in your summation of total debt.
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