Monday, July 1, 2013

Catfish: "in order to keep up a steady rate of GDP growth, we had to saddle ourselves with ever more cheap and dangerous debt."

As a follow-up to yesterday's post, I want to look at Felix Salmon's evaluation of debt and GDP growth:
From 1970 through the beginning of the crisis in 2008, GDP grew at a pretty steady pace. But the amount of debt required to generate that output just got bigger and bigger — the rate of growth of the credit market was much faster than the rate of growth of GDP. In 1970, GDP was $1 trillion while the credit market was $1.6 trillion: a ratio of 1.6 to 1. By 2000, when GDP reached $10 trillion, the credit market had grown to $28.1 trillion: a ratio of 2.8 to 1. And by mid-2008, when GDP was $14.4 trillion, the credit market was $53.6 trillion. That’s a ratio of 3.7 to 1.

In other words, in order to keep up a steady rate of GDP growth, we had to saddle ourselves with ever more cheap and dangerous debt.

Yeah I know. But in fact, we did not "keep up a steady rate of GDP growth". Growth varied:

Graph #1: The Growth Rate of Real GDP

Annual growth rates were all over the place, as the blue line shows. The H-P trend is by no means steady, as the red line shows. And the straight-line ("linear") best-fit for the red line (black) starts out at over 4% annual growth and ends up at 2%. A steady rate of GDP growth? I don't think so.

We must look more carefully at debt growth and GDP growth -- separately, so as not to mistake changes in the one for changes in the other -- and in some detail.

For starters, the next graph shows the rate of growth of total (public and private) debt:

Graph #2: The Growth Rate of Total Debt
In the 1950s and '60s debt growth was relatively slow.

Now look at the red line on Graph #1. The 1950s and '60s show the highest two peaks in the GDP growth trend. It took some debt to get that growth, sure. But it was the best growth. And it was the smallest change in debt, except for debt since the crisis.

Still on Graph #1, look now at the 1980s and '90s. These decades show the two next-highest peaks in the red line, the GDP growth trend. The first of these reaches its high point in the mid-1980s, and the second in the late '90s.

Now on Graph #2 we see that the highest peak of debt growth is a mid-1980s peak. This debt is the debt that drove the red peak of GDP growth of the mid-1980s. Here we have GDP growth that's a percentage point worse than we had in the '50s and '60s. And it took the the largest percentage increase of debt to get that so-so growth.

After the mid-1980s the growth of debt slowed noticeably until about 1992. This respite eased financial costs somewhat, so that after 1992 a moderate growth of debt -- comparable to that of the 1950s and '60s -- was sufficient to drive the GDP growth shown as the red peak of the 1990s on Graph #1. The red peak of the '90s is as good or better than the '80s peak. And it was achieved at a much lower rate of debt growth.

There is lots of interesting stuff going on in these graphs. Felix Salmon offers an oversimplified picture. GDP growth was not "steady", certainly. Nor was there a continuous, regular increase in the ratio of debt to GDP.

Misread the graphs, and you misread the economy.

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