Tuesday, May 15, 2012

Real and Nominal Debt: Your Turn

In the May 9th post I introduced two different calculations for inflation adjustment of number series that are stocks rather than flows. I worked out the ART2 calc with an example on the 14th. But I had some problem with the ART1 calc.

The ART2 uses a "base year" just as the usual inflation adjustment does. I used the final year as the base year, but I could have picked any year.

The ART1 is different. It has a floating or "flying" base. Each year's number is properly adjusted for that year: The current addition to debt remains in current dollars, but the prior years' debt is adjusted and expressed in those same current dollars.

I don't mean to beat a dead horse. But the difference between the two calculations is significant. To create the inflation-adjusted numbers behind Graph #4 in yesterday's post, I used the ART2 adjustment on the numerator and the Surreal adjustment on the denominator.

I think I could create the same numbers using the ART1 adjustment on the numerator, and *NO* inflation adjustment on the denominator. I have not done it, and I could be wrong. But I'm pretty sure that's how it works. If anybody wants to give it a try...

See also -- DIY Econ: Debtors and Inflation, by Ohm at Bread and Butter. Ohm looks at the "big misconception out there that the problems of debt overhang can be solved by creating inflation" and "the myth that "inflation is always good for a debtor".

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