Thursday, December 4, 2014

Day 16, Page 12

I've been trying to stick to the topic, Clopper Almon's The Craft of Economic Modeling. Pretty good success, but I've had to skip a few days' posting. Perhaps you noticed.

The first of these "modeling" posts is dated 18 November. As of today, that's 16 days and counting. Now I'm going to present a short excerpt from page 12 of the book. And then I'm going to drift a little from topic.

In Table 1.2 Professor Almon presents a list of NIPA categories "as a sequence of equations". And then he makes sense of it. He takes GDP and, by gradually adding or subtracting NIPA categories, clarifies how it differs from Personal Income. Along the way, Almon tells me things I need to know, For example:
Finally comes the puzzling pair

   -      netintm      Net interest and miscellaneous payments on assets
   +      piint      Personal interest income.

Net interest is all interest paid by business less interest received by business. It is also all the interest that is included in GDP. Interest paid by consumers on credit cards, automobile loans, or installment credit is not counted as part of Personal consumption expenditure and therefore is not part of GDP... Similarly, interest on the national debt is not part of Government purchases of goods and services... Interest paid by business -- and thus included in the price of goods -- is, however, included in GDP. In particular, interest on home mortgages is included because home owners have been converted into a fictional business in the NIPA; they rent their homes to themselves and the imputed space rental value of these homes, including the interest costs, is part of Personal consumption expenditure. This pair of lines, therefore, removes all interest that is in GDP and adds back all the interest received by persons. The net effect is positive because of the large interest payments of the government to persons.

Now don't you feel as if you know more than you did two minutes ago? I do. Every time I read that paragraph.

You know my fascination with finance, and with the cost of interest. So eventually -- one doesn't spend 16 days on 12 pages without reading at least some of it more than once -- eventually I found myself at FRED, in the search box with net interest.

Eleven pages of results. Halfway down the first page or so I saw Net interest and miscellaneous payments on assets. Whoa! What's that? Net interest and miscellaneous payments on assets.

And what does Professor Almon discuss? Net interest and miscellaneous payments on assets. It's a match.

Oh wow. Okay. That can't be coincidence. So I looked at that item in the search results. There are two entries:

     1. Annual data going back to 1929.
     2. Quarterly data going back to 1947.

I graphed the two of them together:

Graph #1: Net Interest and Miscellaneous Payments on Assets

Yeah, okay. How about on a log scale?

Graph #2: Same as Graph #1, but on a Log Scale
Oh my.

Okay. Now not log, but relative to GDP:

Graph #3: Same as Graph #1, but as a Percent of GDP

There it is -- cyclical behavior. Now I'm in my element.

Note that the decline-from-peak since 1980 has lasted twice as long as from the 1932 peak, so far. And the low we've reached so far is still three times as high as the low we reached in 1946.


Jerry said...

It's suggestive, but it would put the "Great Recession" into the 80s instead of 2008, wouldn't it? (Maybe the delay is the action of all of the safety mechanisms put in place the first time around. In which case, the mechanisms bought time (20 years!) for policymakers to fix it before the crisis hit. We just had the wrong policymakers.)

The Arthurian said...

Yes: Safety mechanisms postpone the moment of crisis, while allowing the underlying problem to grow worse. It is like preventing small forest fires.

Perhaps it is this way:

When the rate of interest (or net interest income) is rising, the "F" (financial) and "P" (productive) sectors are both doing well.

When the rate of interest is falling, it means that in order for finance to do well, "F" must coddle "P". Finance must provide inducements by lowering the rate of interest. The interest rate then continues to fall while "P" deteriorates. But falling interest income means that "F" is deteriorating as well. Eventually comes the crisis, the debt-per-dollar peak. For a while, then, only few do well.

If you can ignore the circus colors, see this graph.