Thursday, July 11, 2013

Cost Hinders Growth

Graph #1: More and More Debt, Compared to GDP

If you look, you can find lots of people saying what a bad thing it is that we have so much debt, compared to GDP.

I agree. In my view, excessive debt -- total debt, I mean, not just the Federal debt -- is the reason we no longer get good growth. The cost of the debt hinders growth.

But good or bad, growth is measured as changes in GDP. GDP and changes in GDP and debt are knotted like tangled fishline. If the data and relations were less tangled it would be easier to show the thing I want to show: that excessive debt hinders growth.

On the graph below, the blue line shows a comparison of debt to GDP, as in the graph above. But this time the ratio is inverted, so it shows GDP relative to debt. Inverted: You can see that the blue line starts a little above 1 on the one graph, and a little below 1 on the other. You can see that it reaches a value of 2 around 1987 on the one graph, and a value of 1/2 around 1987 on the other, and that in both cases the blue line has a nearby "kink". And on the Graph #2 you may be able to see a second kink, just at the end of the 2008 recession, which corresponds to the high point on Graph #1.

Graph #2: Less and Less GDP, Compared to Debt
The red line also shows GDP relative to debt, like the blue line on Graph #2. But the red line is based on the change in debt and the change in GDP, from 12 months earlier. The blue line is the ratio of GDP (figured as an annual total) to total accumulated debt.

Does this graph show anything interesting? Or is it completely obvious that the ratio of changes, though jiggy, would follow closely the same pattern as the ratio of totals? I'm not sure. I've not stared at the graph long enough.

I am tempted to think there's an obvious reason for the similarity of the two lines, or for the similarity of their overall trends. After all, total debt is nothing more than the accumulation of the annual changes in total debt, and GDP is ... But no, come to think of it, GDP is *not* an accumulation of annual changes in anything.

For total debt, the annual increase adds to all that was there before. For GDP, none of what was counted before is counted in the next new total. And yet the choppy red line seems to follow closely the path of the smooth blue line. What explains this?

Could it be that some feedback emerges from the ratio of totals, feedback that affects the vigor of GDP growth? A cost, perhaps, that imposes itself upon GDP?

The cost debt, perhaps?

Excessive debt is the reason we no longer get good growth. Cost hinders growth.


Jazzbumpa said...

I think if you just take your graph 2 from '72 on, the red line will be a pretty good match to Felete's, up until your double whip-saw at the G. R.

FWIW, Fekete means "Black" in Hungarian.

Do you know if he is European or American?


Anonymous said...

Re: graph #2

The math dictates that over periods when the blue line is flat , the red line will cycle around the blue line so that its average value during the period is equal to that of the blue line.

When the blue line is flat at a value of , say , 1.0 , it means that $1 of gdp is matched by $1 of debt. If debt and gdp cycle up and down , but on average at the same rate of growth , then the ratio remains the same and the blue line is flat.

If the blue line is flat at a value of 0.5 , the percentage rate of change in gdp still happens at the same rate as for debt , the difference being that it is no longer at a 1:1 ratio , rather at a 1:2 ratio.

When the average value of the red line falls over time , it by defintion means that the value of the blue line will fall as well, since the stock of debt is growing at a faster rate than gdp , which makes the gdp/debt ratio fall.

At any given ratio , a stable blue line means that income ( i.e. gdp ) is being generated at a rate such that leverage remains unchanged. More ideally , leverage would decline. This pretty much defines the debate about productive vs unproductive debt.

I think the picture is more clear if you use the TCMDODNS series , i.e. nonfinancial debt. This is presumably private and/or public debt directed to the productive economy. The blue line as well as the cycles of the red line are stable pre-1980 and during the 90's. Even though the 90's had the tech bubble , it was largely financed via equity , so the gdp/debt ratio was stable and the rates of change of each component were about the same , on average.

The 80's and 2000's were when the red and blue lines diverged , suggesting that unproductive debt was more prevalent then. We may find ourselves repeating those mistakes if we don't make some changes going forward.

Jazzbumpa said...

I'm not going to disagree about cost hindering growth. But - here's more to it than that.

This graph shows the debt of the finance sector as a percentage of the total - increasing from 5% after WW II to 35% in the previous awful decade.

There is your nonproductive debt.

It's mainly devoted to rent seeking.


Anonymous said...

After seeing Jazz's comment , I think I should clarify my statement above that I think it's more useful to look at the nonfinancial debt metrics.

By no means do I think that financial sector debt is unimportant. I think it's important because it's the signature of a parasite that's consuming the real economy. Finance needs to be weed-whacked back to a size relative to the rest of the economy more like what we had 40 or 50 years ago.

My point was only that by looking more closely at nonfinancial debt accumulation , you can determine those periods when such debt was more or less productively used - by the "real" economy.

Podoloski advani said...

ohh a nice article

Elektrownia fotowoltaiczna

Jazzbumpa said...

Anon -

I agree completely.



The Arthurian said...

JzB: "FWIW, Fekete means "Black" in Hungarian. Do you know if he is European or American?"

Austrian, I think.


I am going to take a guess and say that "productive" debt helps to increase GDP and "nonproductive" debt does not.

Otherwise I do not know what those terms mean when applied to debt.

Jazzbumpa said...

Art -

Yes, I think that gets at it.

Debt to use in real investment is productive.

Financial debt does not qualify.


Anonymous said...

" I am going to take a guess and say that "productive" debt helps to increase GDP and "nonproductive" debt does not."

I'd take it one step further to suggest that the most productive debt is for investments that can generate the income stream to pay off the debt. Debt used for consumption will raise gdp , and even create jobs if enough people are using debt to consume , but no income stream is generated for the debtors , so eventually they hit the wall. Still , even consumption debt generates gdp , so it's better than debt used for speculative finance , like Jazz says , which just redistributes gdp.

Look for some of the work by economist Richard Werner , who focuses quite a bit on this distinction.