Tuesday, October 16, 2012

Blueberries on a String

From Jerry's recent comment:

One thing that jumps out at me is - i think you guys're looking at rates-of-change (is the "YoY" year-on-year change?). So, really, you are seeing correlation between deficit and growth. Not debt and growth. But you could also look at debt (normalized somehow - tcmdo/gdp?) versus gdp growth (or something), right?

I liked that idea -- GDP growth versus the change in debt-relative-to-GDP. I set that up with real GDP on the vertical scale, and a ratio of nominals on the horizontal.

Graph #1: Change in Real GDP (left) vs Change in the Debt/GDP Ratio (bottom)
Click graph for FRED source page, Graph #bLT
I didn't put any trend line on it. And you may see errors in my thinking. But it seems pretty clear to me that the trend line would go from upper-left to lower-right. Same general direction shown by most of the connecting lines between the blueberries on the graph.

Upper left is a big increase in real output, and a small increase (or an actual decrease) in the ratio of total debt to GDP. Lower right is a small increase (or a decrease) in real output, and a big increase in the debt/GDP ratio.

The imaginary trend line suggests that large increases in debt (relative to GDP) hinder growth, and that small increases in debt (relative to GDP) are good for growth.

Jazzbumpa considers the possibility that "YoY TCMDO is a function of GDP, rather than the other way around". I would have a hard time getting to that view. But I can take the causality out of the previous paragraph, and say:

The imaginary trend line suggests that large increases in debt/GDP are associated with small increases in GDP, and that small increases in debt/GDP are associated with large increases in GDP.

Please be aware that the "debt" under discussion is Total Credit Market Debt. Not only public debt.

Related Posts:

8 Oct 2012: Three Decades (and an Update). Also: Three Decades (2)

11 Oct 2012: JzB's Debt and Growth, at Retirement Blues and Angry Bear.

12 Oct 2012: JzB, meet bJZ, named in part for a FRED graph.


Jazzbumpa said...

I like this methodology. Takes some thought to suss it.

Since TCMDO includes both public and private debt, it makes me want to unravel them.

Is it as simple as subtracting GFDEBTN from TCMDO, or is there more to it than that.


Clonal said...

Art and Jazz,

See my comment in the "Things Left Out" post. I believe that rising private debt, and in particular consumer debt may be to blame for the negative correlation. My guess is that both business debt and public debt will be positively correlated with GDP.

See if subtracting consumer debt (along with real estate debt and auto loans) from TCMDO takes away the negative correlation.

Jazzbumpa said...

Real estate debt is a FRED series, and I think consumer debt is also. Not sure about auto loans.

I'll have a look.


Clonal said...

We should also look at productive industry (manufacturing/retail etc.) debt vs financial sector debt. Financial sector debt could also turn out to be "non-productive" and possibly negatively correlated with real GDP

Jazzbumpa said...

Can consumer debt really be 5x mortgage debt, or am I missing something?


Auto loan debt is insignificant.


The Arthurian said...

Jazz: "Is it as simple as subtracting GFDEBTN from TCMDO, or is there more to it than that."

Here's my understanding, possibly flawed:
TCMDO is credit market debt. It includes only part of the Federal debt. It includes the part "held by the public" but not the part held by the Federal government itself, like social security money that the government borrows.

To take Federal debt out of TCMDO, subtract FGTCMDODNS. After that you could add the gross federal debt by adding FYGFD or GFDEBTN.

See the first couple sentences of Gene Hayward's remarks on this.

I've looked at TCMDO pretty thoroughly, but never looked at DODNS.

Clonal: "My guess is that both business debt and public debt will be positively correlated with GDP."

Well said. The sentence cries out to be turned into graphs!

jerry said...

i'd originally been thinking of this graph


but i can't really see any trend there, i guess. Maybe it's all bSh.

The Arthurian said...

Jerr, I looked at that one, too.


Quarterly data; yours looks to be annual. I get more dots.

I get a heavy cluster at about 1.5 on the horizontal axis. Took me a moment to realize that this (1.5 zone) is the "flat spot" -- the Great Inflation years, when inflation eroded debt enough to keep the TCMDO/GDP ratio fairly stable for 15 or 20 years.

Jazzbumpa said...

Jerry's graph clearly has a downward slope with either annual or quarterly data.

I want to understand this better and am in a FRED frame of mind, so I'm going to be all over it.

Have some other fish to fry first, but will have a very graph-heavy post up in the next day or so.


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Jazzbumpa said...
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