## Thursday, March 26, 2015

### Oh, my!

With Anonymous 2:09's correction, my graph looks totally different:

 Federal Debt Prior to 1947 is not ignored in this graph
That's quick-and-dirty. I modified the Excel graph in Open Office.

I have to look at this, and think about it. Not tomorrow but probably Saturday the topic will return.

jim said...

I may not understand how your calculations work, but it seems to me that moving the start point to 100% of GDP should just move red line upward by that amount. Don't all the other summed values remain the same?

As a thought experiment, imagine if the annual deficit was inflation adjusted. Suppose if the Treasury sold X amount of bonds in a year to cover X amount of annual deficit and then one year after each sale the bond value was adjusted by the rate of inflation. The bond buyers
would of course adjust their bid price based on this knowledge and if the bond buyers were perfectly accurate their bid adjustment then there would be no change as a result of the inflation adjustment exercise.

The Arthurian said...

"... it seems to me that moving the start point to 100% of GDP should just move red line upward by that amount."

Jim, that is *exactly* what I was thinking. But -- I'll have to recreate the spreadsheet from scratch and think it all through again -- but here's what I now think happens:

Yes, we are adding a lump sum of pre-1947 debt to each year's number. And if the red line showed the debt number, the whole line would move higher by the amount that we added.

But in fact the red line shows a ratio and we altered only one of the two numbers in the ratio.

I had it pretty good in my head this morning, but it sounds a little fuzzy now. But I think that's it. As both numbers grow over time, the lump-sum that we added becomes less and less of a factor.

It was a very big factor at the start, when I had only one or two or a few years' deficits and none of the pre-1947 debt in the mix.

Which is just what the commenter said.

jim said...

Hi Art,
Your explanation makes sense, but I would have expected that 70 years of inflation adjustment would inflate the debt a lot more than the graph indicates.