Thursday, November 13, 2014

U.S. Public and Private Debt Relative to GDP, 1916-1970


Graph #1

... and the more recent picture:

Graph #2

Work with me here.

Graph #1 shows private debt (red) at a high level in the 1920s, and rising. Public debt was low by comparison, but drawn upward by troubles -- World War One, and the Great Depression, and World War Two. From around 1933 private debt started falling, finally (during World War Two) falling below the level of public debt.

After the time of troubles, public debt (blue) started falling. Private debt (red) started rising. And our economy had a Golden Age.

Graph #2 shows that, after the Golden Age, public debt (blue) fell a little more, then leveled off, and finally started rising. Rising since about 1980. After the Golden Age, private debt (red) continued to rise, then continued to rise, and finally rose until the sudden crisis that occurred just before 2010.

The late peak, just before 2010, I want to compare it to the 1930s peak during the Great Depression. I want to compare the two situations. The two sets of circumstances.

Before the time of the first peak, private debt was high. But then it fell severely. Public debt grew in response to the troubles, and finally public debt rose above the level of private debt. Soon thereafter, the troubles disappeared.

Before the time of the second peak, private debt was high. And it continued to rise without letup. Public debt grew in response to troubles that arose, but private debt continued to grow faster than public debt, Therefore, there was no end of troubles after 1974. There was no end of troubles after 1987. And there is no end of troubles today.

What's different about the two peaks? What's different is the growth of private debt. During the Great Depression, private debt collapsed. But since that time -- since the end of the Second World War -- there has been no collapse of private debt. No collapse until the crisis. Private debt only grew higher.

And if you think of it in simple terms, you can see that the end of troubles for some reason requires public debt to rise above the level of private debt (just as it did in the 1940s).

Well, that was easy to do in the 1940s, for private debt was falling.

Since probably 1966 we have needed public debt to again rise above the level of private debt. But this has been impossible to achieve, because private debt has been rising faster than public debt.

The people who say we need more Federal spending are right, except for one thing. Federal spending has been "more" since 1980 and it has not solved the problem. It has not solved the problem because private debt is not falling.

Private debt is growing faster than public debt. That is what has to change.

You with me?

3 comments:

Auburn Parks said...

"What's different about the two peaks? What's different is the growth of private debt. During the Great Depression, private debt collapsed. But since that time -- since the end of the Second World War -- there has been no collapse of private debt. No collapse until the crisis. Private debt only grew higher."

I wonder how big an impact bankruptcy and defaults had in the fall of private debt post 1929. Seems like me that the policy goals of today were to avoid defaults and bankruptcies as much as possible. This would lead to a much slower decline in private debt through payback out of low incomes instead.

"The people who say we need more Federal spending are right, except for one thing. Federal spending has been "more" since 1980 and it has not solved the problem. It has not solved the problem because private debt is not falling."

My take would be that income distribution is the key element here. Like I said yesterday, the Govt can spend 100s of trillions of dollars, but if that money goes nowhere but into the stagnant accounts of the already wealthy and not spent, it will not matter to GDP. The circulation of the money is probably more important than the nominal level IMHO.

"Private debt is growing faster than public debt. That is what has to change."

I think the problem is what the private debt is being created to do. Mortgage debt that fuels real estate, commodity, and equity bubbles is bad. But private debt to increase factory production because consumer spending is so strong is not bad. Its hard to predict what the right ratio of deficits to private debt per year is.

Right now the average is something like 80% private and 20% public (not historically this high, but the post GFC years have brought the post 1980 average to this level). Maybe 50-50% should be a starting goal and see how things play out.

However this would mean something like permanent 10-15% of GDP deficits to get the scale right. Which I have no problem with but the public will take some convincing :)

Oilfield Trash said...

Art

I know you like Keen and this link is very relative to this post

http://www.debtdeflation.com/blogs/2012/12/06/briefing-for-congress-on-the-fiscal-cliff-lessons-from-the-1930s/

Enjoy.

Jazzbumpa said...

I think Auburn is on to something.

Plus, look what happens with defaults and bankruptcies [or a jubilee]- the rentier class loses. This is a defacto wealth distribution downward.

And, as I've said before, not all debt is created equal. What it's used for matters - a lot.

Cheers!
JzB