Illusion, Reality, and the Growth of Debt

Via Random Eyes, FRED graph #4JM:

Graph #1: FRED Graph #4JM
Click graph for the FRED Source Page

The green line is flat in this picture, and the red is nearly flat. It's the blue line that shows an interesting change. It too is essentially flat, at twice the level of Personal Income, but only until 1980. Then it climbs to over four times Personal Income.

The blue line on 4JM shows a ratio of nominal values. It shows that, at any point before 1980 or so, the burden of debt was essentially not increasing.

But it does not show that debt was not increasing. It shows only that debt was not increasing relative to personal income in a time known as the Great Inflation.

It also shows that after 1980, the burden of debt was increasing. The graph shows a change that people often attribute to the policies of President Reagan, or to policy since Reagan. But I think this is not accurate.

Reagan changed many things, but he did not significantly increase the growth of total debt. Surprisingly, a drop in the rate of debt growth started under Reagan, a drop nearly as big as the one that followed the financial crisis of 2008:

Graph #2: Percent Change from Year Ago, Total Credit Market Debt Owed

There was a massive slowdown in the growth rate of TCMDO debt from the mid-1980s to the early 1990s -- a slowdown that eventually opened a door to the increasing debt growth that supported the "miracle" economy of the latter 1990s, the balancing of the Federal budget, and all that came after.

The first graph shows a change that did not happen, and fails to show a change that did happen.


Costs and prices and, presumably, incomes increase with inflation. When prices go up, probably the amount of new borrowing goes up as well. If you're buying a car and it costs more than before, you borrow more to pay for it.

New borrowing increases with inflation. But old debt does not. When incomes go up and new borrowing goes up apace, old debt does not change. The net effect is to make it look as if debt is not increasing. This is true, even though new borrowing continues to increase. That is what Graph #1 shows.

We can take inflation out of the numbers and get a different picture of the TCMDO/PI ratio. The following graph uses "incremental" inflation adjustment of debt (which is a "stock"), and "aggregate" inflation adjustment of Personal Income (which is a "flow"):

Graph #3: Inflation-Adjusted (blue) and Nominal (red) Ratios

The red line here on Graph #3 is the same as the blue line on Graph #1. The blue line here shows the ratio of values with inflation stripped away. We see once again that the remarkable (and often observed) "stability" of debt in the years before 1980 is nothing but an illusion created by a great inflation.