Debt and Inflation (2): Background

I want to look at the "productivity" of debt, and at eroding the real value of debt by inflation during the Great Inflation. But first I want to evaluate the notion of the real value of debt and the inflation-adjustment of debt.

I looked at inflation-adjusted debt a while back, in Iffy, Piffy:

Graph #1: Inflation-Adjusted Gross Federal Debt

At the time, I said this:

This graph shows that before about 1981 the growth of the Federal debt kept pace with inflation, and since that time the growth of the Federal debt has far exceeded inflation. The change is surprisingly distinct.

Okay. However, in that post I also expressed this conclusion:

If the Federal debt only keeps up with inflation, then the debt is not excessive. By this measure, until 1981 the Federal debt was certainly not excessive.

Today, I am not certain of that.


I went looking for other examples of inflation-adjusted debt graphs.

Mark Wieczorek looks at the national debt, adjusted for inflation, and writes:

In 1950's dollars, our debt is currently $887,445,036,515.72 or 887 billion dollars, which is 3.45 times the size of the debt in 1950. Here's just the inflation-adjusted debt from 1950 - 2003. This graph paints a very interesting picture about the past few administrations.

At Technorati, Steve Kosoris provided graphs of the U.S. National Debt, also adjusted for inflation. And at Bearwatch, Sackerson looked at US public debt since 1945 - inflation-adjusted. Sackerson writes:

For a long time, US public debt increased no faster than consumer price inflation, then under Reagan it appears to have started its steep rise. The causes are presumably complex...

And the Supporting Evidence site looks at the Federal debt, showing both current and inflation-adjusted values:

Source: Supporting Evidence

Oddly, all of the inflation-adjusted debt graphs I found were for the government debt. None showing total debt. Not even mine.

I still wonder what can and cannot fairly be said about these graphs and about the inflation-adjustment of debt. My first thought was: Wow, Reagan really increased government spending! But that's not right -- or, at least, it isn't what the graphs show.

If increased government spending was the cause of the change in trend, it would show up in current spending. It would show up in the deficits immediately. But it would appear in accumulated debt only after a lag. Cumulative numbers change slowly.

So if increased government spending caused that distinct change in the debt graph, we should look for the increase not in the years after 1981, but in the years before. And we should look not at the accumulated debt, but in the annual deficits, the additions to accumulated debt. Mark Wieczorek, quoted above, shows the additions to debt:

Additions to the National Debt, Adjusted for Inflation

The increase appears to begin in the mid-1960s, concurrent with the increase of inflation. Not concurrent with Reagan in the 1980s.

Note that the increase in deficits is not explained by inflation, for the graph shows inflation-adjusted deficits.