Sunday, August 26, 2012

Heilbroner and Bernstein (3): In Pictures

Following up.

Figure 1
Figure 1:

The little rectangle with a little "d" in it is a "deficit". You know, we get them every year. After a few years, they begin to pile up.

Figure 2
Figure 2:

You can think of the accumulated deficits as "debt". That's what the big "D" means.

Yeah, the one on the left shoulda had a small "d" in it.

Figure 3
Figure 3:

But remember, debt is just an accumulation of annual deficits.

Figure 4
Figure 4:

Sometimes we get inflation, and the value of the dollar becomes less. The value of the debt we owe becomes less, too.

Figure 5
Figure 5:

But the new deficit from this year doesn't get any smaller, because the dollars themselves are already smaller.

Figure 6
Figure 6:

This year's deficit cannot shrink until we get more inflation, like next year maybe. It is the old deficits, the old debt that is shrinking because of inflation.

Figure 7
Figure 7:

According to Thayer Watkins, the way Heilbroner and Bernstein adjust the deficit for inflation is to take the new total debt, with the latest deficit added in, and adjust that number for one year's inflation, and then subtract out everything except the current year's deficit. But when you do that, you make the deficit look smaller than it is.

Intuitively, I just don't think that's right.

I will come back to this topic, after I ruminate a while.

Inflation-adjusted debt is sometimes a useful concept, as when you want to evaluate the erosion of debt by inflation. But it is always important to get the arithmetic right.


Jazzbumpa said...

But it is always important to get the arithmetic right.


But it seems the errors aren't so much in the math as they are in setting things up correctly. This post illustrates that very well.

Bad set up comes either from errant [or sloppy] thinking, or from trying to have the math suit an agenda.


The Arthurian said...

"This post illustrates that"

Punny man :)