Don't look at today's graph. Just look at the data-set titles in the top blue border.
The two data series shown on the graph are the two main components of total credit market debt owed. The two main components are "financial" and "nonfinancial" debt.
Not "financial" and "real".
Not "financial" and "productive".
Not "productive" and "nonproductive". Nothing like that.
Doesn't this show what the real focus is, among policymakers? And isn't that focus the real problem?
15 comments:
I with you on your point about the titles and what they imply. However I couldn't resist looking at the graph, and defacing it.
So I added a line for federal debt held by the public with no funny business other than converting millions to billions.
The way it tracks with financial, until it doesn't, makes me wonder about the relationship and whether the split is a footprint for something. Financial "innovation" maybe? Bubbles?
Remarkable how they run together on your graph, and then they don't. When there's a sudden change like that in a graph, my first reaction is always "probably some change in the tax code". There may be some of that this time, but what comes to mind is the Federal budget balancing of the latter 1990s.
TCMDODFS on a log scale seems to show a straight-line trend to the latter 1980s, then a slight slowdown...
But holding a straightedge up to the graph, I'd say it's a straight line till after the 1974 recession, then it picks up in the late 1970s and again briefly in the early 1980s. By about 1995 it returns to the same straight-line path as before 1974, and slows further after 2000.
Those upticks in the 1970s and 1980s, that's financial innovation.
It's hard to imagine that the growth of financial debt has been slowing since the latter 1980s. But that just shows how truly vast the numbers were, even then.
The late 80's slope break really is surprising.
But holding a straightedge up to the graph, I'd say . . .
Perfect place to use the Excel Slope function, I'd say.
Also, I really wouldn't read too much into the graph series titles. As I understand it, they are intended to be descriptive to facilitate a key word search. Financial and non are legitimate categories. It's quite unlikely that these titles have anything to do with the focus of policy makers, who in all reality, are probably not even aware of them.
Cheers!
JzB
The same "financial" and "nonfinancial" categories are common in the Statistical Abstract also.
Hi Art,
I'm a little confused by your attitude towards debt. You seem to be saying that being in debt is beneficial to the financial sector and detrimental to everyone else. How do you explain that?
-jim
Jim
Using credit boosts the economy, but it also creates debt, and debt tends to undermine the boost.
Using credit to counteract the drag from debt can work, but it means an ever-bigger new use of credit is required to obtain a boost.
For the past five years the central objective of the Federal Reserve has been to get people borrowing again, because using credit boosts the economy.
They seem not to realize that the longer they postpone the payback, the bigger the payback must be. You cannot only have yin; you must also have yang. You cannot only have day; you must also have night.
The Fed thinks they can have only day, only boost, and never have payback. Foolhardy.
//
I don't know if debt is "beneficial" to the financial sector. But debt IS the product of the financial sector. It's what they deal in.
Debt as a cost to the financial sector is just as bad as debt as a cost in the productive sector. The solution is to have less of that cost.
Art wrote:
"For the past five years the central objective of the Federal Reserve has been to get people borrowing again, because using credit boosts the economy."
I don't know what the Fed is thinking, but I see what the Fed is doing.
What the Fed has done is maintain the growth of bank deposits in spite of the fact that there has been no growth in bank loans. Apparently bank loans are not the only way to create deposits.
It also appears to me that the Fed's influence on interest is not the only influence it has on bank lending. The Fed has considerable regulatory powers to ensure banks make safe and sound loans. I'm not seeing any evidence of loose policy in this area.
All that makes me wonder how you came up with the notion that the Fed's entire focus has been "to get people borrowing again"?
-jim
Jim,
Everything the Fed has done has been an attempt to push rates down. Why? "Declining yields and rising asset prices ease overall financial conditions and stimulate economic activity" -- Ben Bernanke
Bernanke wants to get people borrowing again. He equates borrowing with economic growth, as almost everyone does.
Hi Art,
It looks to me that the statement:
"Declining yields and rising asset prices ease overall financial conditions and stimulate economic activity"
has very little to do with encouraging more borrowing.
People spend more when they pay less interest on existing debt and lots of debt contracts have been either rolled over to lower interest or renegotiated at lower interest. That frees up a huge amount of money for spending. Look at corporate and household debt service costs in recent years to see how much money.
Rising asset prices are the result of investors being motivated to move out of credit markets instruments which have record low yields into equity markets and that causes asset values to rise. Rising asset prices makes people think they are making more money and thus they tend to spend more. It looks to me that low interest does what Bernanke says it does even without one more penny of new borrowing.
I agree that low interest is favorable to more borrowing, but I don't think it is fair to claim that is the sole intended purpose without evidence.
Bank lending has been flat for 5 years. That is in part because there are not many credit worthy borrowers applying for loans, but it also is because the banks are being extremely cautious in lending. I suspect a lot of that caution is coming from regulatory pressure from the likes of the Fed.
Jim: "All that makes me wonder how you came up with the notion that the Fed's entire focus has been 'to get people borrowing again'?"
I just found this...
"The fed funds rate has been at the zero lower bound (ZLB) since the end of 2008. To provide a further boost to the economy, the Federal Open Market Committee (FOMC) has embarked on unconventional forms of monetary policy (a mix of forward guidance and large-scale asset purchases)."
...from a Macroblog post of 20 Nov.
I read it as saying that the FedFunds rate has been at zero to provide a boost to the economy, and unconventional things have been done to provide a further boost.
I read "to provide a boost to the economy" as meaning "to get people borrowing again." What else could it mean??
I just found this...
All the way back in 2002, Bernanke in his speech “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” proposed what would become his program to fight deflation in response to the 2008 financial crisis: a zero fed funds rate and large-scale Treasury debt purchases aimed at bringing down interest rates to encourage economic activity.
... from WSJ MarketWatch.
Bringing interest rates down, to encourage economic activity. Once again, it seems the Fed's focus has been to get people borrowing again.
I just found this...
monetary policy as currently practiced targets creditor balance sheets. Asset prices rise as interest rates are driven down. The goal is to stimulate expenditure by lowering borrowing costs
... from Rajiv Sethi.
Driving interest rates down, to stimulate expenditure. Once again, it seems the Fed's focus has been to get people borrowing again.
I just found this
"The theory behind QE is that the Fed can reduce interest rates via asset purchases (which supposedly creates demand for debt) while also strengthening the bank balance sheet (which entices them to lend)." -- Cullen Roche, 9 August 2010.
Roche doesn't think that it's "true" but it is the official story.
So when Jim says "I don't know what the Fed is thinking, but I see what the Fed is doing", well, I don't know what they're thinking, either, but I do know what they are saying.
If the Fed's plan started out being to get people borrowing again, but then changed into propping up bank deposits, well, that just shows how bad the downturn really was, doesn't it.
I just found this:
"Post-crisis growth, mild as it’s been, has been largely a function of debt, which central banks encouraged and enabled." -- John Mauldin, July 13, 2018.
But to be clear, they don't encourage and enable the growth of debt. They encourage and enable credit use, and the spending that goes with it, in order to improve economic growth.
The debt that accumulates from the use of credit is generally overlooked and, of course, that is the source of our troubles.
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