Thursday, January 31, 2013

Totally off Topic: The Bricklayer's Song

Got your speakers on?

The Demand for Money

Demand? What is demand, anyway? If I'm hungry and I want to eat, that's demand.

Does the hamburger I had yesterday count as demand? Well, okay, unless today is New Year's Day, yesterday's hamburger counts in this year's measure of aggregate demand. But how about the hamburger I had in 1968? How about the new car I bought in 1974?

Stupid question? You'd think. Demand then was demand then. Demand now is demand now. The new car I bought then does not count as demand now, even if I still have that car. It's obvious.

But it's not obvious when we're talking about money. What is the demand for money?

For me, it's the reason I work: to satisfy my demand for money. And then I spend it, and then I have to work again the next week, because my demand for money is insatiable.

But what if I didn't buy that car in 1974. What if I put the money into savings instead. Then, instead of still having that car I would still have that money. And economists would figure that money in, when they figure the demand for money.

But they wouldn't figure my old car in.

But they would figure my old saving in.

Somehow, that's not right.

Wednesday, January 30, 2013

Back on track

I dunno. I got off topic yesterday. I was saying I have trouble making sense of the data on savING and savingS. I was pointing out that "saving" is the flow of money into the pool of funds called "savings" -- and that savings is a stock, an accumulation.

When I first heard guys talking about "stock" and "flow" I thought it was irrelevant to anything. Really, the two words are very helpful because they let us make important distinctions. If you take a "snapshot" of the economy, there are no flows. Only stocks. If you start the film rolling and watch what happens, you see flows adding to and subtracting from stocks or pools or accumulations. I find myself using those concepts often. So they must be important to my thinking. But I'm drifting again.

In a recent post, Paul Krugman said

We all know that personal saving dropped as inequality rose; but maybe the rich were in effect having corporations save on their behalf. So look at overall private saving as a share of GDP...

He distinguishes between "personal saving" and "overall private saving". For the latter, he uses FRED's GPSAVE. So I compared GPSAVE (blue) to Personal saving (red):

Graph #1: Gross Private Saving (blue) and Personal Saving (red)
The difference, Krugman suggests, is the saving of the rich through their corporations.
Click Graph for FRED Source Page

By the way, these are two measures of "flow" (if my Discrepancy Analysis is working). They are annual additions to total accumulated multi-year savings-with-an-ess. Thus, FRED's "Gross Private Saving" -- Krugman's "overall private saving" -- shows the annual addition to savings, and "Personal Saving" shows the part of it saved by individuals -- as distinct from corporations, as Krugman points out.

Graph #2 shows a ratio of the one to the other, expressed as a percent:

Graph #2: Personal saving as a Percent of Overall Private Saving
Click Graph for FRED Source Page
In the early years, personal saving ran about 30 to 35 percent of the total, drifting perchance upward. Since 1982 or before, personal saving was falling as a share of the total, reaching below 15% of total just before the crisis.

The difference has been made up, to use Krugman's alternative, by the saving of the rich through their corporations. So now we can see some of the effect that Krugman couldn't find, some of the effect of inequality on saving since the 1980s.

Tuesday, January 29, 2013

A high "drift factor"

I have trouble with data on saving and savings. I've looked at some of the datasets, looked at relations (using my old discrepancy analysis method) and not found results that I could make sense of.

The words were clarified for me by STF some time back. "Saving" happens during one year. Each year's "saving" adds to total "savings" which is an accumulation over many years. The words are very clear. But the numbers, not so much.

Krugman writes:

We all know that personal saving dropped as inequality rose; but maybe the rich were in effect having corporations save on their behalf. So look at overall private saving as a share of GDP:

Krugman's Graph

The trend before the crisis was down, not up — and that surge with the crisis clearly wasn’t driven by a surge in inequality.

The downtrend, from say 1982 to about 2008 and onset of crisis: Not only personal saving, but gross private saving "dropped as inequality rose". Saez shows inequality:

Graph #2: The Top Decile Income Share in the United States, 1917-2007
From Striking it Richer (PDF, 2009) by Emmanuel Saez
From 1978, give or take, inequality was increasing (Graph #2) while overall private saving dropped (Graph #1).

Graph #2 ends in 2007, so we can't say what happened to inequality since the crisis. However, from 1980 to the crisis, saving and inequality moved in opposite directions. And from 1980 back into the 1940s, saving increased while inequality was really quite stable. So I'm not sure that there's any correspondence at all between inequality and saving -- except that both of them show trends that changed around 1980.

But we can say that while inequality was fairly constant (1950-1978) and income was growing, saving was increasing and the MPC held good. In the more recent years when inequality was rising, Krugman's graph contradicts the MPC. So, where is the problem? what is the source of this contradiction?

I got to wondering what (if not inequality) might have caused the pattern visible in Krugman's graph. That sharp spike after about 2008, that's probably the response to the crisis -- the great concern that used to be called "panic". But set aside the crisis years. It's more instructive to look at trends of a "normal" economy.

From the late 1940s to around 1982 saving increased (relative to GDP). From 1982 to the crisis, saving fell. What explains this? My first thought was maybe "money growth" or "the growth of debt" might account for it. I know there was a slowdown in total debt growth around 1986. The last high point in the middle of Krugman's graph comes after 1982...

Then it struck me that the "up to 1982, down since 1982" pattern is similar to inflation.

Graph #3: Krugman's GPSAVE per GDP (blue) and the Rate of Inflation (red)
Yeah, I don't know. Both are quite disturbed before the early 1950s. Both rise to a mid-graph peak (but not with any great similarity that I can see). And both trend downward to the disruption of the crisis. But they just don't seem very similar.

Of course, interest rates followed a similar pattern:

Graph #4: Krugman's GPSAVE per GDP (blue) and the FEDFUNDS Interest Rate (red)
Actually, this strikes me as a better match for some reason. And I think economists would say that rising interest rates draw money to savings. That may be so -- if you have money to save. If you don't, the interest rate isn't much of an inducement. In my experience, it isn't much of an inducement. I'd rather consider Graph #3.

Could rising prices induce me to save? Probably not. But a rising income might. Even if my wages in the 1970s were not keeping up with rising prices -- and I had no way of knowing whether they were keeping up, at the time -- a growing paycheck might induce me to save. So, that would tend to produce an uptrend in "GPSAVE/GDP" when the rate of inflation was on the rise.

(It also fits exactly with the MPC. As my income grows, my spending grows (but not so fast) and my saving grows faster. Doesn't matter that my income is growing because of inflation.)

Could a slowdown in the rate of inflation cause me to save less? Again, I would think so. If my wages are not going up so fast, I might feel that I have less "extra" money, and might therefore save less. And if wages are failing to keep up with prices, well, then I can surely find things to do with my money other than save it.

What I think, in general, the thing that strikes you as the reason you do things, is probably one of the real reasons for the economic decisions people make. What we think motivates others, not so much. But what we think motivates ourselves can only be a real driving force.

So are there a lot of explanations for why Krugman's graph goes up and down?

There must be.

Monday, January 28, 2013

Krugman points out

Krugman's Graph: Overall Private Saving as a Share of GDP

Krugman points out this graph that shows "The trend before the crisis was down, not up". Krugman points out that overall "saving dropped as inequality rose". Krugman points out that the graph contradicts our belief that "the rich spend too little of their income." So it seems.

Confronted with this evidence, what are our options? We can accept the graph, and abandon what we think we know about the spending of the rich.

Or we can raise an eyebrow at the graph, and fail to jump to conclusion: Look for more evidence, and meanwhile try to figure out what Krugman's graph is showing us.

The latter is my lot.

I do not come naked to this fight. I have the MPC -- the Marginal Propensity to Consume. The MPC says that as income goes up, saving goes up faster. So in an economy confronted by growing inequality, people at the high end will be saving more. This is standard fare. But Krugman's graph seems not to show it. I wonder why.

Sunday, January 27, 2013

Krugman's Inequality and Recovery (1): First Things First

Greg's been writing lately. A good thing.

Greg's new post has some great insights into who is and who isn't underconsuming. In the post Greg also considers "the toxicity of debt" and presents a medical analogy. Let me summarize his analogy:

  • A human body is the economy.
  • A cell in the body is an economic unit: a person or a family, say.
  • Blood flow to the cell is income.
  • Blood flow from the cell is spending & bill paying.
  • Cellular acid is debt.

Greg follows through, comparing cellular and economic processes: Like cellular acids, "debts must be cleared or they will reach toxic levels".

You know I had to love the post.

Along the way, Greg links to Paul Krugman's Inequality and Recovery. Krugman has a way about him: he writes, and you just have to respond to him. So, like Greg, I want to look at Krugman's post now for a bit.

Tomorrow, maybe I'll tear him a new asshole. Today, I write in praise of Krugman. His post opens with these words:

Joe Stiglitz has an Opinionator piece arguing that inequality is a big factor in our slow recovery. Joe is an insanely great economist, so everything he says should be taken seriously. And given my political views and general concerns about inequality, I’d like to agree.
But — you knew there was a “but” coming — I’ve thought about these issues a lot, and haven’t been able to persuade myself that this particular morality tale is right.

"Given my political views and general concerns about inequality, I’d like to agree."

Krugman likes where Stiglitz is coming from, but the economics does not compute. So it doesn't matter to Krugman that Stiglitz's heart is in the right place. It doesn't matter to him that what Stiglitz says is something that Krugman wishes he could also say. If Krugman cannot work through the economics of it, Krugman cannot accept it.

That's the right way to do economics. It's the only way to do economics. Bravo.


So am I saying that you can have full employment based on purchases of yachts, luxury cars, and the services of personal trainers and celebrity chefs? Well, yes. You don’t have to like it, but economics is not a morality play, and I’ve yet to see a macroeconomic argument about why it isn’t possible.

"You don’t have to like it, but economics is not a morality play".

Right again. If you want to fix the economy, you have to understand that you must first understand the economy. You don't get there by saying I'm concerned first and foremost about unemployment, or first and foremost about inflation, or first and foremost about inequality. You don't get there any other way than by being concerned first and foremost about understanding the economy. And only after you get close do you begin to apply your knowledge to the problems.

Krugman gets it.

Enough!! Now I'll go off-topic, and do some economics of my own.

Krugman says "yes" you can have full employment based on the aggregate demand of the one percent alone. I can't wait till tomorrow. The tearing begins now.

Sure, you can have full employment based on the spending of the 1%. But to do it you must first redefine "full employment" to higher and higher levels of unemployment -- something we have been working on since the 1960s. And then you have to abandon capitalism for some form of aristocratic feudalism.

No: You can't get full employment by depending on hoarders to spend. It doesn't work. We tried it, actually, for 500 years and more. That experiment was winding down in the first hundred years shown on this graph of UK GDP:

Graph #2, data from Measuringworth

By Okun's law, there is a parallel between employment and output. Rely on the 1% to drive aggregate demand, and you drive employment and output to zero.

Saturday, January 26, 2013

Could be some.

Take a fairly stable rate of interest. Multiply it by the number of dollars on which interest must be paid. Compare that to the history of prices. Look for similarity.

Friday, January 25, 2013

Fitting some pieces together

Come to think of it...

I've been saying since forever that excessive debt hinders growth.

Some time back I looked into the erosion of debt by inflation.

Lately, I've been noticing that real GDP growth was consistently better during the Great Inflation than at any other period in the data FRED provides.

Now I'm thinking it was the erosion of debt during the Great Inflation that enabled the superior economic growth.

What this would mean is that, already during the Great Inflation, debt was excessive.

What it means for you is that if we want good growth without inflation, policy has to help you get your debt down to a very low minimum.

Something you always wanted.

Thursday, January 24, 2013


Marcus: "The point is that in the 1987-2007 period average real growth was around 3.2%, which had been in place since the early 1960s."

RGDP (% change from year ago) 1960-01-01 thru 2007-12-31
Click Graph for FRED Source Page

I downloaded the quarterly data from FRED for the above graph.

Marcus refers to "average real growth" so I am looking at the "Percent Change from Year Ago" numbers from FRED, and just averaging them for various periods. Not trying to figure compound growth rates or anything like that.

First data point: 1960-01-01. Last data point: 2007-10-01.

Full period average of growth rate values: 3.34%

Average for the period 1960-01-01 thru 1986-10-01: 3.59%

Average for the period 1987-01-01 thru 2007-10-01: 3.02%

For each data point, I figured the average real growth rate for the period since 1960-01-01. These values start above 5% -- a fluke, as the first value happens to be above 5% -- fall below 1.8% in 1961, then rise above 3% in 1962.

The average rises above 4% in 1964 and remains continuously above 4.0% until 1974, except for two quarters, when the average fell as low as 3.99540%.

After 1974 the average real growth number never again rises above 4%.

Taking a similar average using Marcus's 1987 start-date, the highest average growth achieved was 3.58430%

If Marcus wants to say that the high growth in the early years is inflation-related, that's fine*. But he can't say growth was just as good since 1987 as before.

I counted the number of quarters when the "average to date" value was greater than the highest average growth number (3.58430%) for Marcus's 1987 start-date.

Figuring the average from 1960, 85 of the 108 values (from 1960-01-01 thru 1986-10-01) or 78.7% were above the 1987-2007 maximum.

Again figuring the average from 1960, 8 of the 84 values (from 1987-01-01 thru 2007-10-01) or 9.52% were above the 1987-2007 maximum.

Figuring the average from 1987, of course, none of the 84 values were above the 1987-2007 maximum.

I just don't see how Marcus can repeatedly insist that it's all the same. I don't see how he can claim economic growth was just as good after 1987 as before. (And I'm not looking at years since the financial crisis, when growth got even worse.)

I think Marcus makes the argument he needs to make in order to justify the story he wants to tell. And I think it's bogus. Sorry, Marcus.

Link: Download the Excel spreadsheet where I did my work. Check my numbers. Or browse the Google Docs version.

* Related post: Lacker (2): Bullard. Marcus's own graph shows exceptionally good economic growth during the inflationary time. And the graph shows real growth -- growth with inflation stripped away.

Proofreading the post at two in the morning... Doublechecking the quote from Marcus Nunes... Turns out Marcus does have a story to tell! Good luck with the book, sir. But fix that growth thing, would ya?

Wednesday, January 23, 2013

In inflationary times, everything is inflationary

Joshua Wojnilower quotes Scott Sumner:

higher interest rates are inflationary

and Woj replies:

lower interest rates are inflationary.

Well, sure. We live in inflationary times.

Tuesday, January 22, 2013

Maybe that's why there was a crisis

In total, we have some 50 trillion dollars of debt in this country. That's a lot.

I don't know what the average interest rate is on all that debt, but say it's 2 percent. That's pretty low.

Two percent of fifty trillion is a trillion dollars. That's a lowball estimate of how much we pay in interest each year on all our debt. A trillion bucks.

Forget about the debt. Just look at the interest. We make the payments out of our income. Income is circulating money. If you save a bit, the bit you save stops circulating. As you spend the rest, it remains in circulation.

The money we use to pay that trillion dollars of interest comes out of the money in circulation.

How much money is there, in circulation?

Today there is about 2.4 trillion dollars circulating. So over the course of a year, we take almost half of that out of circulation just to pay interest.

Before the crisis there was about 1.4 trillion dollars circulating. It took almost all of that money just to pay interest on the debt we owe.

Maybe that's why there was a crisis.

Oh, I know. I've simplified things.

You want to tell me about all the poor old folks who live on interest, that can't afford to eat now because interest rates are low. And you might remind me that for people living on their interest income, the money most certainly does come out of savings and does go back into circulation.

Sure. But poor folks don't have a lot of money, in savings or anywhere. So I don't expect that the part of interest payments that goes back into circulation is a very large part of the total. I expect it is a very small part.

Rich people, on the other hand, might have a lot of money. But their Marginal Propensity to Consume is less, and they can afford to save. So for the people that have money, most of what they receive in interest is not coming back into circulation.

Anybody got the stats?

Monday, January 21, 2013

Kervick's Simplified

At Mike Norman's, Dan Kervick responds to Tom Hickey's Ellen Brown post.

Kervick simplifies an example, writing:

Suppose for the sake of argument that we had no commercial banks at all, just a single government-run central bank. There would still be two ways in which the government could inject money into the system: the Treasurer could spend it, or the central bank could loan it.

The Treasurer could still spend money into the economy, and the Fed could still lend it into the economy. To me, this is a useful simplification.

Even in Kervick's simplified system, there would still be "money" -- spent by the Treasurer -- and "creditmoney" which looks like money and acts like money but which eventually has to be paid back, and costs interest in the meantime.

Kervick writes:

Even if the loans were interest-free or subsidized so as to carry negative interest, the process would not be debt-free so long as the recipient was required to re-pay all or most of the principle.

I think that's right.

Consider two extreme cases. In the first case money comes into the economy in equal amounts from the Treasurer and the Central Bank. Assume a reasonable interest rate on bank loans -- say 6%.

Now the money circulating in the economy is half interest-free and half at 6% interest. So the average interest cost per dollar in the economy is 3%. That's not unbearable. To get the economy to grow at peak, we might need a little inflation just to offset the cost of interest. But I guess we're used to that!

In the second case, money comes into the economy in unequal amounts, with the Central Bank lending several times what the Treasurer spends each year. How much? Dunno, give me a minute.

Graph #1: Additions to Circulating Money
The blue line is FRED's Federal Surplus or Deficit, divided by 1000 to convert "millions" to "billions", and multiplied by minus one to turn the negative numbers into positive additions to money that circulates.

The red line is the yearly addition to everybody else's debt except the Federal debt, in billions.

For Kervicks' simplified example, the blue line represents money that the Treasurer spends into circulation. The red line represents money loaned into circulation by the Central Bank.

This is a graph of the ratio of the two, the money lent into circulation relative to the money spent into circulation, and Graph #2 shows a useful chunk of it, useful because it is stable enough that we can zoom in and see something:

Graph #2: Money Lent in to Circulation relative to Money Spent into Circulation, 1975-1995

Wow. That's the 20 years from 1975 to 1995, which looks low and stable in the linked graph, the one I didn't show. Oh, well.

Okay, consider it stable. Call it, what, an average value of 50? Let's go with 50.

That means, in real life, in those years, there was fifty times as much money lent into the economy as there was deficit spending. For our Kervick's Simplified example, it means for every dollar (beyond revenue) spent by the Treasurer, $50 was borrowed and spent by the private sector and other non-Federal borrowers.

Fifty to one.

So now: In the second case, money comes into the economy in unequal amounts, with the Central Bank lending several times what the Treasurer spends each year. How much? Fifty dollars lent, for every dollar spent.

Let's get into the weeds.

In the first case, the amount spent by the Treasurer and the amount lent by the Central Bank are equal. Let's say, $102 each.

There is a total of $204 introduced into the economy.

The $102 introduced by the Bank comes in at 6% interest, or $6.12 total.

In the second case, the amount introduced by the Bank is fifty times the amount introduced by the Treasurer. Suppose the Treasurer introduces $4, and the Bank introduces $200 into the economy.

There is a total of $204 introduced into the economy.

The $200 introduced by the Bank comes in at 6% interest, or $12.00 total.

There is approximately twice as much interest cost in the second case as in the first.

If in the first case, the drag created by financial cost can be offset by 3% inflation, then in the second case we will need 6% inflation to offset the drag and get decent economic growth.

In general, the greater the role of finance in the economy, the greater the financial cost. The greater the financial cost, the greater the inflation required to offset that cost. Or in the alternative: The greater the financial cost, the worse the economic performance will be.

Sunday, January 20, 2013

Lacker (2): Bullard

In a PDF from a year back, Federal Reserve Bank President James Bullard wrote:

During the 1970s, U.S. inflation eventually rose to double-digit levels, and this was accompanied by especially poor macroeconomic performance on the real side of the economy.

Yeah, that's what I thought too. But take another look at Marcus's graph:

Graph #1, source: Marcus Nunes

The years of high inflation show the best "real side" growth, well above trend.

Related post: Lacker


At the Fed Bank of Richmond, Federal Reserve Bank President Jeffrey M. Lacker presents his Economic Outlook, January 2013:

My economic outlook presumes that the FOMC will not allow monetary instability to disrupt economic growth, as arguably took place in the 1970s. But beyond avoiding the economic damage associated with high and variable inflation, I believe it is unlikely that the Federal Reserve can push real growth rates materially higher...

Out of context, for sure. But Fed Bank President Lacker is saying that high and variable inflation disrupted economic growth in the 1970s, and I don't think that's right.

First of all, it wasn't the inflation that disrupted economic growth. It was the Fed's response to inflation that disrupted growth. Trying to halt inflation, the Fed created the recession of 1970, the recession of 1974, and the recessions of 1980 and 1982.

Graph #1: The interest rate (blue) rises repeatedly, each time driving the red line (GDP) down.
Notice: At the Gray bars, the blue line is above the red, and the red is going down.

Again and again the Fed pushed interest rates (blue) up until GDP (red) fell and a recession (gray bar) was created. It was the Fed that disrupted growth!

However, despite the Fed's persistent choking-off of growth, inflation-adjusted GDP grew better during the inflationary years than at any other time:

Graph #2, source: Marcus Nunes

On Marcus's graph, the blue line shows inflation-adjusted GDP. The red line is the straight-line trend path for the blue line. For the years 1965 to 1980 there is a gray background, and these years are labeled "G.I." for the Great Inflation.

Notice that the blue line, real (inflation-adjusted) GDP is well above the trend line for the whole of the Great Inflation period. Oh -- the 1970 and 1974 recessions pull the blue line briefly down to trend, and the 1980 and '82 recessions ended the inflationary period. Sure.

But nowhere else on the graph do we see the blue line so significantly above trend for such an extended period, as during the Great Inflation.

The inflationary years were years of very good economic growth, by Marcus's graph. And remember, the blue line has the inflation stripped out of the numbers. That's real growth we're looking at.

Despite the Fed's creation of three recessions during that decade, real GDP growth was at its best in the inflationary 1970s.

Marcus's graph uses a log scale, so his trend line comes out like a straight line. I looked at the same data, without the log scale. So my graph shows upward-curving lines. Real (inflation-adjusted) GDP, shown in red on Graph #3, closely follows the exponential trend line shown in black:

Graph #3: Real GDP (Quarterly) 1947-2007 and Exponential Trend
Graph #3 doesn't look like Graph #2. But both graphs show inflation-adjusted GDP significantly above trend for the full period of the Great Inflation.

Conclusion: Inflation is good for real growth.

Now, what was it Jeffrey Lacker said? Inflation disrupts economic growth.

That's not right.

Saturday, January 19, 2013

Some evidence, and a vision

I am by no means an economist. Sometimes, that comes back to bite me. Because what I need is economists who are willing to take what I say, translate it into economist language, evaluate it, and then translate their evaluation back into Art-speak. But it's difficult to find economists willing to do that. (And who can blame them, really?)

But I am on to something, and I have been on to it since the late 1970s when I drew my first debt-per-dollar graph. Based on data from the Historical Statistics, Bicentennial Edition, it showed the debt-per-dollar ratio for the years 1916 to 1970. (It was still the 1970s when I first looked at it, remember.) Covering a period of more than fifty years, the graph shows only three trends:

Graph #1: Total Debt relative to Circulating Money, 1916-1970

Highly significant are the locations of the turning points: one comes at the worst point of the Great Depression, and the other at the beginning of a golden age of US economic performance. I don't know much economics now, and I knew less then. But I never had a doubt about the significance of this graph.

Today, you might dismiss that graph as ancient and therefore meaningless. I would remind you of the importance of older work in economics. Besides, the same kind of peak you see in 1933 on Graph #1, you can see repeated on Graph #2 in 2009:

Graph #2: Total Debt relative to Circulating Money, 1967-2012

Plus, there's a little one there, a little peak in 1990. So, that's three peaks. There's a lot of evidence here to work with:

1. The 1933 peak, followed by a long downtrend, set the stage for the long period of exceptionally good growth that began after World War Two.

2. The 1990 peak, followed by a brief downtrend, set the stage for several years of exceptionally good growth that began in the mid-1990s.

3. The 2009 peak, followed by


It's up to us.

We need to get that line down to a low level: maybe down around $10 of debt per dollar of circulating money. Just a guess. That is still very high; after the 1933 peak, the debt-per-dollar ratio went below $4!

But in the 1990s, debt per dollar fell only to just below $15 before we got a period of really good growth.

Still, the '90s growth did not last long, because debt soon climbed to too high a level. So I say, the lower the number goes, the better our chances of sustaining good growth.

We need to get that line down, and keep it down. This is a goal for policy.

Why is it important? Cost. The debt-per-dollar graph shows one of the two factors that make up the total cost of the money that circulates in our economy. The interest rate is the other factor, and I suggest that the debt-per-dollar ratio is just as important as the interest rate.

The two factors together -- the cost of borrowing a dollar, and the number of dollars we pay interest on -- determine the total cost of money or the "factor cost" of money.

If out of a typical paycheck you end up paying $2 in interest on your debts, or $200, it will make a big difference for you. If your interest costs are high, they interfere with your other spending plans.

And if we're all in that boat, then the things you buy cost a lot more because of the interest cost embedded in them. And the things you sell don't sell as well, because your customers' interest costs are interfering with their spending plans, too.

Finance is great. We need it. We just don't need so much of it.

When the debt-per-dollar line is going down, financial costs are being reduced. That frees up money for non-financial activity. It frees up money for productive activity. That's the reason growth is good after debt-per-dollar goes down for a while.

When the economy grows, the debt-per-dollar line goes up. That's because we use a lot of credit and we don't pay it off very fast. If we paid it off fast enough, we could use a lot of credit, and the resulting debt might never accumulate. That would be good.

But it would be better to not use a lot of credit, in order to keep financial costs to a minimum. The optimum level, we'll have to work out. For now, we just need to be heading in the right direction: the direction of less credit use.

When the line goes down, financial costs go down. When the line goes up, the economy grows. We want both of those things, so eventually we want the line to go flat.

When the line goes flat at a high level, growth is not good because financial costs interfere. But when the line goes flat at a low level, growth can be very good for a long time, as long as we keep the line flat.

What I'd like to see is, I'd like to see the debt-per-dollar line trend down and flatten out asymptotically, gradually. When we get the line low, financial costs are low, so economic growth can be very good.

When we keep the line low and flat, debt is contained, financial costs are contained, financial costs do not hinder economic growth, and the door is open at last for very good economic growth. For a very long time.

Friday, January 18, 2013

Assimilate This

At NBER, Robert J. Gordon considers "the sources of the U. S. macroeconomic miracle of 1995-2000".

At FT, Kaminska's missing variable post considers causes of that miracle of economic performance. I can't get to that post now because of the password requirement at FT, but a while back I reviewed the article. I summarized Kaminska's summary:

Information technology... Our supply-side culture... The uber-low rates... and then globalization. Notice how debt is right in there, so close, yet somehow never makes the list?

I was pointing out that debt was excluded from the list of relevant factors.

I'm saying the same, today. But my main point today is to make you aware of the real fascination economists and reporters have for the economy of the late 1990s. Economic performance was really good in the late '90s. Assimilate this: Really good.

From Economic Policy Institute in Learning Lessons From the 1990s: Long-Term Growth Prospects for the U.S. by Christian E. Weller:

Sluggish economic, employment and wage growth marked the period from 1991 to 1995. In comparison, accelerated employment, productivity and wage growth, as well as faster investment and consumption growth were characteristic in the later 1990s through to the end of 2000.

One of the big stories of the 1990s was the acceleration of productivity growth in the latter part of the decade.

At Economic Policies for the 21st Century, in The Story of the 1990s Economy Joel Harris writes:

After a slight dip in 1995, GDP growth took off – averaging 4.3% a year in real terms from 1996-2000. Multi-factor productivity rose...

FactCheck.Org considers the question "Were Clinton’s policies responsible for the 1990s’ economic growth?" and decides that "He deserves part of the credit, but many factors were at work."

What factors?

...the 1993 budget bill... reappointing Alan Greenspan... Personal computers and the Internet came of age... Manufacturing companies [became] more efficient... A massive reduction in military spending... No major war... [and] Good luck also played a role. Oil prices declined...

What's *NOT* on the list? Debt.

The annual change in non-Federal debt, as a percent of GDP:

Graph #1: Change from year ago, "Debt Other Than Federal Debt" as a Percent of GDP
Click Graph for FRED Source Page

The graph shows a gentle uphill trend until the crisis of 2008. Forget the crisis. Focus on the uphill trend.

The uphill trend shows a repetitive up-and-down wiggle. Notice that the wiggle-downs almost always cross the recession bars, and that after recessions there are always wiggle-ups. That's fine.

Notice also that (crisis aside) one of the wiggles is bigger than all the rest.

The wiggle-down that begins in the mid-1980s is twice the size of any previous down. And the wiggle-up that begins in the early 1990s lasts to the end of the 1990s.

Focus on the big wiggle.

The big wiggle-up begins just before the good economic performance of the late 1990s.

The big wiggle-down created the conditions necessary for that good performance.

The large drop in debt other than Federal debt was the necessary precondition for good growth.

Assimilate that.

Thursday, January 17, 2013

An Alternative to Death by Credit

I think we need economic growth. I'm even willing to say we need credit for growth.

But I am unwilling to say that we need credit for everything, which is what policy says. Policy! How else do you suppose we ended up with debt that is three and a half times the size of our entire GDP?

A Definition of Credit and Debt

When you borrow a dollar, you take a dollar of available credit and put it to use. Spend it, and the dollar is gone -- but the credit is still in use. How do you know you have a dollar of credit in use? Because you still have a dollar of debt.

Every dollar you have borrowed and not yet paid back is a dollar of credit in use. Debt is the measure of credit in use.

A debt that is "three and a half times GDP" means that we have, in active use, credit in the amount of 3½ times our entire GDP. Yes, we need credit for growth. But we don't need to use that much credit. We don't need to be paying interest on that much credit.

The Need for Credit

How much credit do we need to use? Enough to get the growth we need, but no more.

If you have a stable economy -- I mean, not growing -- there should be enough money to support all the ordinary economic activity taking place in that economy. If credit is for growth, it's for growth. This concept suggests a policy path to debt reduction, and a way to minimize the cost of finance.

Sure, situations will always come up, where people need to use credit for emergencies or for large expenses, the house, the car, the water heater springs a leak. Of course. But when we depend more on money and less on borrowed money, we keep interest costs down. We keep the cost of living down. And we keep debt to a minimum. (This goal cannot be achieved in an economy where economic policy continues to encourage the concentration of wealth and income.)

Let's say we get 5% real economic growth every year -- an unrealistically high number, to be sure. What I'm saying is, we need credit enough to support that 5% growth. So... How much credit do we need to support 5% growth?

Graph #1: Change in Total Debt per dollar of Change in GDP
Click Graph for FRED Source Page
Graph #1 shows "change from year ago" of total debt, in billions, divided by "change from year ago" of GDP in billions. Starts in 1962 because there were some tall spikes before that, that made it difficult to see what we can see here.

1962-1982: It took about $2 of new debt to generate $1 of additional GDP.
1982-2002: It took $3 or $4 of new debt to generate $1 of additional GDP.
2002-2009: It tool $5 or more of new debt to generate $1 of additional GDP.

Just off the top of my head, Minsky (I think) and others...

No. Here. I don't know Minsky stuff. But at Into the Future, in the comments, Yegor Perelygin recently observed:

Minsky and his FIH ... split all borrowers into three categories. With the 1st category being the healthiest (can pay the servicing of the debt and the principle), and with the 2nd category being speculative, and 3rd being ponzi-oriented.

Just off the top of my head, maybe Graph #1 shows Minsky's three categories. Note the increasing instability: more after 1982 than before, and again more after 2002 than before.

The Arthurian argument (as distinct from the Minskyian) would be that as debt accumulates in the economy (debt relative to GDP, but more especially debt relative to circulating money) financial costs increase, so increasingly larger additions to debt are required to achieve a given amount of additional GDP.

Why does it show up in stages on this graph? Dunno. Policy changes maybe.

But anyway, let's take the worst case and say it takes $5 of new debt to generate one extra dollar of GDP. Should be half that, but say $5.

If we're thinking 5% growth, that's N dollars, so we should need at most 5N dollars of new debt to permit the 5% growth. We should need at most a new credit use equal to 25% of GDP.

Not 350%.


Yes, you are right: 25% of GDP one year, and 25% of GDP the next year and the next and the next, and in four years we're already in the neighborhood of 100% of GDP. Right you are. But we have not yet thought about paying it off.

If one year's debt amounts to 5% of GDP, that's a lot of money. A lot to pay off.

Suppose it takes 12 years to get each year's debt paid off. 12 times 25 is 300, so debt will stabilize at 300% of GDP. However, we're making payments every month, and balances due are going down. Our oldest balances approach zero. Split the difference between 300% and zero: Say debt accumulates to 150% of GDP and stabilizes there.

Less, really. Because after 12 years of 5% growth, GDP is well on its way to being twice as big. Call it a stable accumulated debt equal to 100% of GDP. That's a heck of a lot better than 350%.

But it all depends on debt being paid off. Pay off debt faster, and debt accumulation stabilizes at a lower level. Pay off debt too slowly, and the accumulation grows faster than GDP, forever. Or, anyway, until the crisis.

Debt repayment is the key.

The Good Fight

You are way ahead of me again, aren't you. When we pay down debt, the money comes out of circulation, hindering growth.

True. But you know what else? When the money comes out of circulation it hinders inflation, too. In my view, this is the right way to fight inflation: Reduce the quantity of money that is actually causing inflation -- the money that is already in circulation, that was put into circulation by the spending of borrowed money.

Don't think of paying down debt as something that hinders growth. Think of it as the right way to fight inflation. What we do now is not good policy: We raise interest rates until new borrowing is reduced. But new borrowing is the source of growth. The standard, universally accepted method of fighting inflation is to hinder economic growth and do nothing about the credit already in use that created the money and caused the inflation in the first place!

Existing policy does not discourage existing debt. It discourages the new borrowing that leads to growth. Meanwhile, the existing debt is left to accumulate.

The proper way to fight inflation, when the expansion of credit use causes inflation, is to slow the expansion of credit use by accelerating the repayment of debt. Not by raising interest rates on new borrowing.

It should be obvious.

An Arthurian Solution

I didn't address the objection: When we pay down debt, the money comes out of circulation, hindering growth.

Yes it does. But you know, we should be able to replace the money coming out of circulation, without adding to inflation. Of course, if credit use is at a level that is causing inflation, replacing all of that credit with money would keep the inflation going, yes, which we do not want.

But with less credit use, if the level of credit use is *not* causing inflation, then as the existing debt is paid down, we can print money and put it into circulation, enough to keep the quantity of money from falling. This would still not be inflationary.

That's my idea: Use credit for growth. Achieve growth. Make sure the debt created by that credit use is paid down. Print money to counterbalance the paydown of debt. Keep the quantity of money in a stable ratio with output, and keep making sure that private debt gets paid off fast enough to prevent inflation.


We need a certain level of money to support all the normal economic activity in a given economy. And we need credit for growth. But credit is temporary money that must eventually be paid back.

Suppose we have just the right amount of money for the economy. Then we use some credit for growth, and the economy grows. Then the debt is repaid. Now, even if there is exactly as much money as there was before, now there is no longer enough money to support the economy, because the economy is bigger.

Existing policy solves this problem by discouraging the repayment of debt. That keeps the credit circulating; and this creates a permanent financial cost, ultimately creating imbalances that lead to financial crisis.

Arthurian policy solves the problem by encouraging the repayment of debt, and by "printing" enough new money to keep "just the right amount" of money in the economy.

We can change policy without making any "systemic" or "institutional" changes. All that must change is the mindset that says we need credit for everything.

The new policy can be instituted by having the Fed engage in "monetization of debt" or purchasing Federal government debt, enough to keep circulating money growing in proportion to output.

In addition, policymakers -- Congress, mostly -- must begin to dismantle the complex system of policies they developed to encourage the expansion of finance.

Wednesday, January 16, 2013

The Monetary Cause of the "Macroeconomic Miracle"

They call it "potential output". The default graph is a bit plain. I think the "percent change from year ago" view is interesting. It shows a strong downhill trend:

Graph #1Percent Change from Year Ago, Real Potential GDP
Click Graph for FRED Source Page

I see a straight, downhill decline from about 4.5 (in 1950) to about 2.0 in 2015... with big downers in the mid-1950s, around 1980, and from 2008 to some time in the future.

I see just one big peak, rising from 1992 to 2000, then dropping to about 2005. This peak is associated with the time that has been called a macroeconomic miracle.

There is another peak, in the 1960s. But the straight, downhill trend was quite high then. And relative to that imaginary trend line, the 1960s peak is not so very big. I'd say the 1960s peak was a little better than the "very good" of the trend. The 1990s peak was a lot better than the "not very good" of the trend.

Here's my debt-per-dollar graph, as much of it as one can see using FRED data:

Graph #2: Total Debt relative to Money in Circulation
Click Graph for FRED Source Page
One long, sweeping uptrend to the crisis of 2008, then it breaks and falls rapidly.

Oh -- there is something else! Just after the 1991 recession, the red line goes down for about three years. There was a unique and unusual decrease in total debt, relative to circulating money.

Graph #3 combines the two previous graphs in one picture:

Graph #3: Cause and Effect
Click Graph for FRED Source Page

The large peak in Potential GDP (blue) begins almost immediately after the start of the unique and unusual 1991-'94 drop in debt-per-dollar (red).

My view is that the drop in DPD was the cause of the tall peak in Potential GDP.

Note that the whole rest of the time, from the 1950s to the crisis, the red line was going up and the blue line was trending down.

By the way: There was a similar (longer) drop in the red line during the FDR administration (1933-1946). That's why the blue line started out so high.

Conclusion: Getting the red line down is good for growth. A good policy will bring debt-per-dollar down and stabilize it at a low level.

Tuesday, January 15, 2013

Felix Salmon: "we fervently hope" for more lending

Felix Salmon at Reuters:

...the latest relaxation of Basel rules was emphatically done with monetary policy in mind, rather than regulatory prudence. Under the new rules, it might take banks longer to get to a truly safe place, but at least those banks will (we fervently hope) lend more in the meantime...

Let me give that to you again: least those banks will (we fervently hope) lend more in the meantime, giving a much-needed boost to global growth.

Felix Salmon wants economic growth. He equates growth with bank lending. So he calls for more bank lending.

Here's the thing. It used to work like that. It did, and that's why people say things like Felix Salmon says. It's why they call for still more lending and still more use of credit and still more accumulation of debt today, when clearly that is a policy whose time has come -- and gone.

Remember "toxic assets"? Toxic assets are bad debts, or debts going bad if you catch them early. Why do debts go bad? Because people are bums? I don't buy that story.

Debts go bad because people can't afford to keep up the payments.

Why? Because sometimes, there gets to be too much credit in use. Too much debt.

Why too much debt? Because policymakers think the same way Felix Salmon thinks.

Monday, January 14, 2013

Paul Davidson savages the mainstream

Below Peter Radford's critique of economic models (the topic of yesterday's four o'clock) one finds a comment from Paul Davidson:

Keynes drew an accurate portrait of an entrepreneurial economy that uses money contracts (not real contracts) to organize all market production and exchange transactions.(Does this not sound like the world of experience?)

Unfortunately Samuelson, Hicks and others mistook Keynes’s analysis for nothing more than another neoclassical model with sticky wages and prices even though one of the chapters in Keynes’s GENERAL THEORY is entitled “Changes in Money wages”. This chapter shows that even with perfectly flexible wages, there is no automatic mechanism to restore full employment if the economy should suddenly experience a recession.

I finally convinced Sir John Hicks that his ISLM system was not Keynes — and published an article by Hicks entitled “ISLM: An Explanation” in the Journal of Post Keynesian Economics . In this article Hicks admitted that ISLM was not Keynes!! and Hicks ultimately signed on to my argument that the Keynes analysis was based on the assumption that uncertainty meant a nonergodic system.

I have written a textbook entitled POST KEYNESIAN MACROECONOMIC THEORY which places Keynes’s money contract, nonergodic portrait of the real world of experience against the mainstream fictional world of Samuelson, Friedman, Rational expectations, New Keynesianism, etc...

Echoing Radford's terminology, Davidson contrasts the portrait Keynes created to the caricatures created by others. Exactly so.

"...even with perfectly flexible wages, there is no automatic mechanism to restore full employment..."

That's the line that got me. Paul Davidson knows his Keynes.

I've heard before, of Hicks rejecting his own ISLM thing, which I understand is kind of a big deal (even though I don't understand the ISLM).

Now it turns out that Davidson convinced Hicks to reject the ISLM, and that Davidson published Hick's rejection article in his (Davidson's) magazine journal.

Wow. I never heard of Paul Davidson before, but I've heard of him now.

I got stuck on "nonergodic". Wikipedia didn't help:

In mathematics, the term ergodic is used to describe a dynamical system which, broadly speaking, has the same behavior averaged over time as averaged over the space of all the system's states (phase space).

Time and space? I Googled Paul Davidson and found an article at Naked Capitalism that was useful. Before Davidson's article is an introduction by Philip Pilkington (someone I have heard of). Pilkington writes:

In a recent interview I asked the US’s leading post-Keynesian economist and founder of the Journal of Post-Keynesian Economics, Paul Davidson to discuss what is known as the ‘ergodic axiom’ in economics. This is a particularly important axiom as it allows mainstream economists (including left-wing Keynesians like Paul Krugman and Joseph Stiglitz) to claim that they can essentially know the future in a very tangible way. It does this by assuming that the future can be known by examining the past.

Without this axiom the whole edifice of mainstream theory rests on very shaky grounds. Yet, it should be clear to anyone that given that the theory is supposed to explain human behaviour it is unlikely that the future will correlate with the past because people and institutions tend to change and evolve over a given period of time.

Okay. An "ergodic" economy is predictable, because the future is similar to the past. So a nonergodic system is unpredictable.

This must be similar to the "unit root" thing. A system either has or does not have a unit root. In the one case, there is every reason to expect GDP to return to trend after a major setback. In the other case, there is no reason to expect it.

The economy is either ergodic or it is not. In the one case, there is every reason to assume tomorrow will be similar to today. In the other case, there is no reason to assume such a thing.

Pilkington continues:

Yes, often past behaviour will help us understand future behaviour – apply this in a simple psychological way to anyone you know and you will find it to be true – however, it should be quite clear that all future behaviour cannot be wholly explained by past behaviour. Clearly it should be quite obvious that the same should apply when we consider large aggregates of individuals and yet mainstream economics steadfastly refuses to accept this.

Now, broadening the topic, I think of the world in terms of business cycles, large and small. Overlapping cycles, such as Schumpeter described.

Lots of economists have described lots of cycles. I don't remember most of them, but I accept the idea of cycles generally. I think in terms of four or five:

1. The business cycle, where we get a recession every nine or ten years on average, give or take. It doesn't matter exactly how long the cycle is. It doesn't matter that it varies in length. People have recognized this cycle since the time of Alexis de Tocqueville, if not before. So, since 1935-1840 or before.

2. The Kondratieff wave, or the "long wave". I use the words "wave" and "cycle" interchangeably. The long wave, I think that's the same one Greenspan spoke of when he said you get one of these major financial crises every 80 to 100 years. (Maybe not. Maybe these are two separate cycles. That would make five, then.)

3. The Price waves described by David Hackett Fischer in his book The Great Wave: Price Revolutions and the Rhythm of History. Fischer describes

four very long waves of rising prices, punctuated by long periods of comparative price equilibrium. This is not a cyclical pattern. Price revolutions have no fixed and regular periodicity. Some were as short as eighty years; others as long as 180 years. They differed in duration, velocity, magnitude, and momentum.

(Excerpt from a very large PDF, a powerpoint type presentation that highlights key points from Fischer's book.)

4. The Cycle of Civilization, pretty much as described by Arnold Toynbee -- but driven by economic forces. Specifically: driven by the human desire to accumulate wealth. Call it the "economic security" motive. Call it "self interest".

Assume a system at equilibrium. Posit a disturbance to the system. Feedback arises from the disturbance. There are two kinds of feedback. One kind helps the disturbance dissipate, so the system returns to equilibrium. The other kind makes the disturbance bigger, so the system moves away from equilibrium.

Both disturbances may come into play in the same system. If they alternate, the effect may be to create a cyclical pattern. Wikipedia provides an example of stock prices, which I summarize:

1. A disturbance: Stock prices begin to rise.
2. People react by trying to get in early.
3. People getting into the market makes the disturbance bigger. Prices rise more.
4. But there is "the knowledge that there must be a peak". People get out early.
5. People getting out slows the increase of stock prices and creates a peak.
6. Now the disturbance is different: Stock prices begin to fall.

The process continues, driving prices to a bottom. Then the disturbance toggles again, and prices begin to rise.

The pattern thus created is a cyclical pattern, a repeating rise and fall of (in this case) stock prices. The cyclical pattern is generated by the plans and preferences of the people taking part in the process.

Cycles arise naturally from economic activity.

Davidson's article (it would be a 3 or 4-page printout) is a bit long for me, but very readable. He writes, for example:

Logically, to make statistically reliable probabilistic forecasts about future economic events, today’s decision-makers should obtain and analyze sample data from the future.

It's funny because it's true.

Davidson writes:

In simple language, the ergodic presumption assures that economic outcomes on any specific future date can be reliably predicted by a statistical probability analysis of existing market data.

Okay. I'm not ergodic, I guess. I don't make predictions. (Or maybe I'm a monkey wrench that brings the whole ergodic system down: If somebody can't foretell the future, the ergodic system fails!)

Wow, the whole "in simple language..." paragraph is great. Here's the rest of it:

By assumption, New Classical economic theory imposes the condition that economic relationships are timeless or ahistoric ‘natural’ laws. The historical dates when observations are collected do not affect the estimates of the statistical time and space averages. Accordingly, the mainstream presumption (utilized by both New Classical economists and New Keynesian economists) that decision-makers possess rational expectations imply that people in one’s model process information embedded in past and present market data to form statistical averages (or decision weights) that reliably forecast the future. Or as 2011 Nobel Prize winner Thomas Sargent [1993, p. 3], one of the leaders of the rational expectations school, states “rational expectations models impute much more knowledge to the agents within the model (who use the equilibrium probability distributions)… than is possessed by an econometrician, who faces estimation and inference problems that the agents in the model have somehow solved”.

If capitalism is the high point of the cycle of civilization -- the 150-year "limiting point" Keynes described as "the greatest age of the inducement to invest" -- and if Toynbee's picture of history is generally correct, then yes: It is unsafe to assume that tomorrow will be like today. I'm reminded of something Robert Heilbroner wrote. Heilbroner did not expect business civilization to survive another 500 years.

Today, it seems, nobody does.

Paul Davidson:

Keynes’s uncertainty concept implies that the future is transmutable or creative in the sense that future economic outcomes may be permanently changed in nature and substance by today’s actions of individuals, groups (e.g., unions, cartels) and/or governments, often in ways not even perceived by the creators of change.

In other words, as Sarah Connor put it in the picnic table: no fate. The cycle of civilization is not set in stone. It is a pattern that tends to emerge from the aggregate behavior of individuals. I would add that Toynbee was right: the dynamic is "challenge and response", and civilizations die by suicide.

The economy is challenging us, and if we fail to find the right response, it's over.

So if you want to preserve capitalism, you might want to start by reconsidering your assumptions. And even if you don't.

Okay. "Ergodic" means the outcome is known, or that you can calculate all the probabilities for all the possible outcomes. Uncertainty means you can't.

Look! -- Look! -- Look at this:

In the classical (ergodic) theory, where all outcomes are conceptually calculable, there is never a need to keep options open. People will therefore spend all they earn on the products of industry (Say’s Law) and there can never be a lack of effective demand to prevent the system from reaching full employment.

See where Davidson's going now?

You know, I know Paul Davidson is right, that he has his Keynes right, because Davidson boils his argument down to Say's law. And Keynes said

The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required today in economics.

And, writing of Say's law, Keynes said

It is, then, the assumption of equality between the demand price of output as a whole and its supply price which is to be regarded as the classical theory’s ‘axiom of parallels’.

Paul Davidson is saying that, too.

Sunday, January 13, 2013

Peter Radford: "I call these models caricatures"

From the Real-World Economics Review Blog, Cartoon Economics by Peter Radford:

Economists nowadays love to talk about their models. They produce models to explain and elucidate. They devise more complex models to mimic the entire economy. They cobble together small models to illustrate a particular problem. Not to model is not to be an economist.

I call these models caricatures. That’s what they are. Caricatures.

They are gross simplifications with certain features of the real world suppressed or eliminated entirely in order to draw attention to others. If the model is supposed to throw light on one thing, then other stuff is thought of as extraneous and eliminated.

Apparently economists like caricatures because they cannot draw good portraits. Economics is mostly a cartoon. We need it to be more.

Good article!

The economy is the model. Anything else is caricature.

A satisfying history of The Coin

At Wired.

Saturday, January 12, 2013

The Stand-Alone Version

h/t Nathan Becker

Friday, January 11, 2013


In yesterday's post I showed a graph and asked, "When is the blue line below zero?"

Answering that question, I said several things that you cannot see on yesterday's graph. That's why I'm showing a different graph today.

The blue line on yesterday's graph shows "percent change from a year ago" for Federal debt relative to GDP. The blue line on today's graph is Federal debt relative to GDP, again, but just the plain ratio. No "percent change".

Today's graph shows whether there is "much" or "not much" debt. The blue line is Federal debt. The red line is everybody else's debt. Both are shown "relative to GDP".

The text below is from yesterday's post.

Debt relative to GDP
BLUE: Federal debt
RED: Everybody else's debt
When is the blue line below zero?

It was below zero until 1970. Of course, there was not much debt relative to GDP (other than Federal debt) in those days. And GDP growth was good.

And the blue line was below zero most of the time until the 1982 recession. There was still not a huge amount of "other" debt relative to GDP in those days.

But after 1982 the blue line almost never goes below zero again, because there was lots and lots of debt relative to GDP, Federal and other debt -- mostly other. And all of that debt hindered economic growth. And when growth is slow, the blue line goes up.

Oh yeah. The blue line does go below zero from 1994 to 2000, when the economy was growing well again. That was right after the years 1990 to 1993 when debt other than Federal debt went down. Relative to GDP, of course.

If you want to get the Federal debt down, you want to think about calling for all sorts of policies to reduce private debt so we can get the economy growing again.


Thursday, January 10, 2013

A story about the Federal debt and everybody else's debt

The blue line is the Federal debt.

The blue line always goes up at the gray bars. The gray bars are recessions. Federal debt always goes up during recessions. See for yourself:

Percent Change from Year Ago, Total Public Debt as a Percent of GDP

The blue line mostly goes down where there is no recession. If you want to get the Federal debt down, be on the side of more and better economic growth.

On the left-hand scale, the numbers go from 30 down to -10. When the blue line is below zero, the Federal debt is getting smaller as a share of GDP.

When is the blue line below zero?

It was below zero until 1970. Of course, there was not much debt relative to GDP (other than Federal debt) in those days. And GDP growth was good.

And the blue line was below zero most of the time until the 1982 recession. There was still not a huge amount of "other" debt relative to GDP in those days.

But after 1982 the blue line almost never goes below zero again, because there was lots and lots of debt relative to GDP, Federal and other debt -- mostly other. And all of that debt hindered economic growth. And when growth is slow, the blue line goes up.

Oh yeah. The blue line does go below zero from 1994 to 2000, when the economy was growing well again. That was right after the years 1990 to 1993 when debt other than Federal debt went down. Relative to GDP, of course.

If you want to get the Federal debt down, you want to think about calling for all sorts of policies to reduce private debt so we can get the economy growing again.


Wednesday, January 9, 2013

Art history

The first graph from yesterday's post:

Graph #1: Total Debt per Dollar of Spending Money, 1916-1989

Dated 1993, twenty years ago now. (Three ring binder holes are visible if you enlarge the image.) Printed on a dot matrix printer. Does Epson still make printers?

The graph was created using a program I wrote myself in the C language oh, so many years ago. That's how I got the vertical lines at key points, like 1933 and 1946.

See how the graph starts with 1916? That's a hint about the source data. Back when I started gathering economic data, in the late 1970s and before the internet, I would go to the library and scour the shelves. Eventually I found the Historical Statistics of the United States, Colonial Times to 1970 -- the Bicentennial Edition.

These days, you can get that online along with annual updates called Statistical Abstracts -- but they're no longer collecting data or issuing the Abstracts. You know: budget cuts.

Anyway, back then I relied on the Historical Statistics. For the Debt-per-Dollar graph, if I remember right, for debt I used Series X 393 and for money, Series X 414. The one covers the years 1915-1970 and the other 1916-1970, so I ended up with a graph that starts at 1916.

The Debt-per-Dollar graph was one I found quite interesting, because it showed just three strong trends. So I would go back to the library every once in a while, pull out the latest Statistical Abstract, and append some data to my files and my graph.

Each Stat Ab provides a few consecutive years of data, five to seven years maybe, the most recent values. It also shows older values, but only for every fifth year. So the Stat Ab for 1978 might provide values for 1955, 1960, 1965, and 1970-1976.

Somewhere along the way, they changed the way they figure the numbers. On my old graph you can see a high point at 1960, a high point at 1965, and higher numbers from 1970 and after. I have lower values for the other dates of the 1960s and for before 1960. The high points and the high later values come from editions of the Statistical Abstract. The lower values come from the Historical Statistics.

I never knew what to do about that discrepancy. I just went with the newest numbers that were available, and ended up with obvious high points on what should have been a smooth line.

Between 1980 and 1989 on the old graph you can see a similar disturbance in the values. I always figured it was due to data revisions or my own mistakes. But can see the same disturbance in the FRED graph below, along with a much larger disturbance from about 1991 to 1994.

Graph #2: Total Credit Market Debt per Dollar of Spending Money, 1959-2012
Still with me? Good.

The old graph -- I did dozens of graphs by hand (with a pencil) when I was getting started with this stuff. But the Debt-per-Dollar graph struck me immediately as significant because it showed just three strong trends: a developing problem, a period of recovery, and a golden age.

The new graph had wiggles in it that I taught myself to ignore on the old graph. Even the big wiggle there, 1991-1994. Ignored it. But then one day I was reading about periods of good economic performance and I put one and one together.

The old graph shows a long downtrend from 1933 to 1946. Economic performance was good starting the next year, from 1947 to 1973.

The new graph shows a brief downtrend from 1991 to 1994. Economic performance was good starting the next year, from 1995 to 2000.

The economy is good for a while, immediately after the burden of debt is reduced for a while. This cannot be coincidence.

The new graph provides confirmation of a hypothesis arising from the old graph. That hypothesis: Before the economy can grow again, debt-per-dollar must fall.

We must reduce total debt relative to circulating money. Still with me?