Monday, December 17, 2012

At the Peak of Private Debt

A comparison of private debt in recent years and at the time of the Great Depression:

Graph #1: Debt at the Peak
Blue = Great Depression years; peak year 1929.
Red = Recent years; peak year 2008.

Debt is shown relative to the size of the peak year debt, for three years before and after the peak.

In the years just before the peak, the red line goes up faster than the blue. We were accumulating debt faster in recent years, than they were in the late 1920s.

In the years just after the peak, the blue line goes down faster than the red. They were getting rid of debt faster in the early 1930s, faster than we are today.

If excessive private debt is the cause of our economic troubles, then we are not doing a good job solving the problem; they did better after the Great Depression.

The last years shown on the graph are 1932 (blue) and 2011 (red). During the Great Depression, private debt continued to decline for three years after the last year shown. After the current crisis, the decline of private debt appears to have stopped already.

If excessive private debt is the problem, we are not dealing with the problem.

Depression-era numbers: "Private" debt (Series X398) and "Total" debt (Series X393) from Historical Statistics of the United States: Colonial Times to 1970.

Current-era numbers: Total debt (TCMDO) and Non-Federal debt (TCMDO less FGTCMDODNS) from FRED.

This Google Drive spreadsheet contains graph and data.


jim said...

Art wrote:

"If excessive private debt is the cause of our economic troubles, then we are not doing a good job solving the problem; they did better after the Great Depression."

Careful what you wish for.

From 1929-1932 GDP fell
faster than private debt fell. That is an extremely painful way to shrink private debt.

Shrinking debt means shrinking the power to spend and purchase goods and service. If you're willing to shrink the production of goods and services it will make that goal easy to accomplish, but don't expect it to be popular. An extremely unhappy constituency may produce all kinds of nasty unintended consequences.

The Arthurian said...

If there was ever a time to "think outside the box" Jim, this is it.

The post above does not address the question whether excessive private debt is the problem. But if that is the problem, then we must find a way to deal with it.

I agree, collapsing the banking system is not the best approach. Nevertheless, if excessive private debt is the problem, then we must find a way to deal with it.

I think we can avoid "shrinking the power to spend" by replacing a lot of debt with money. (QE fails to do this because it leaves the liabilities in the private sector. Bankers think debt is something you OWN, when really it is something you OWE.)

The trouble with replacing debt with money is that it tempts fate to visit us in the form of inflation. That problem can be avoided easily if we do a thing that needs to be done anyway: embed into policy the desire to rely less on credit. That is what people want; only existing policy makes it impossible.

We must change the composition of money. We must make it more green and less red: more like money and less like debt.

jim said...

Hi Art,

I don't know that there are any easy or fast solutions.

Credit expanded for 60 years at a pace faster than GDP grew. Now GDP
is growing faster than total debt.

It is pretty clear that the current path will resolve the problem eventually. I haven't seen any other path that looks like it will.

Luke Smith said...

Good stuff, Art. I got a kick out of comparing the farm to nonfarm mortgage amounts from 1916 to 1970(where did you find that data?). It would appear that the current situation is not completely unprecedented; short-term interest rates are nearly as low now as they were during the Great Depression.

The Arthurian said...

Luke, that page comes from the Bicentennial Edition: Historical Statistics of the United States, Colonial Times to 1970, downloadable (free) from this site:

I printed out one page of that massive PDF as a PDF using a free utility called DoPDF. It installs a virtual printer that writes PDF files.

"Not completely unprecedented", indeed. Both on the scale of the human lifespan and on the scale of civilization lifespan. Oh, and on the scale of the business cycle, too, the obvious one.