Wednesday, April 8, 2015

The 'ending year' is a problem

I like writing. It's like private time. I get to block out the world and play with things in my head. (I don't even listen to the radio in the car. That's how much an introvert I am.) But sometimes the world interferes: Too many dogs demanding attention... too much going on at work, demanding attention... and the wife, demanding attention. Eh, that's all just excuses.

I like writing regularly and keeping the blog alive and reading the responses to the things I say. I like being right, and I like being corrected when I'm not, and I like being forced to think about things (so, thank you). Still, sometimes it's hard to write.

I have a problem with Gene Callahan. One of us is an asshole, him or me. The thought that it might be me makes it hard to write. Why? I don't know. It just does.

I have a bigger problem with my 'inflation adjustment of debt' stuff. (That's what this post is about. It's not always easy to tell I guess.) There was one problem, pointed out in two anonymous comments a couple weeks back. That was a good criticism, excellent in fact. I resolved that one pretty well I think.

But along the way there was another comment, this one from Jim:

I would have expected that 70 years of inflation adjustment would inflate the debt a lot more than the graph indicates.

Yeah, I would have expected that, too. But Jim hit me with it too soon. I was still getting acclimated to the other adjustment to the calculation. Things soak into my brain at their own speed, there's nothing I can do about that.

Like Jim, I expected a different result on the graph. But unlike a lot of people, I am willing to accept what graphs show me, and fit my thinking to that.

But then, if there is a mistake in my calculations, I really want to direct my attention to the mistake rather than fitting my thinking to it. Wow. You know, the lumber yard burned down the other day. Nothing left. I don't know why this comes to mind now. Anyway...

I wanted to look at the difference between 'real' and 'nominal' debt measures... when inflation "erodes" debt things get better for debtors and (equally) worse for creditors. I wanted to look at interest paid on debt, and see how well it fills the gap between the real and nominal debt measures. Things like that fascinate me.

I laid out a plan using some made-up numbers to clarify (for myself) what I wanted to do with the numbers. That part was easy. It was much more difficult, for some reason, fitting actual numbers to the plan. Attention-demanding.

But as I worked it out, it became obvious to me that the debtor is only "responsible" (I use the word loosely) for the creditor's loss during the time that the debtor owes the creditor. If you have a dollar and you hang on to it for ten years, and there is inflation during that ten years, hey, it's your loss.

If I borrow that dollar and pay you back five years later, then if during that five years there is inflation, the erosion of value contributes to the gap between 'real' and 'nominal' debt totals. (I am not saying debtors should make up the difference. I am trying to clarify how big the difference is, to get a better feel for the growth of debt.)

And when I pay back the creditor and I don't have his dollar any more, if there is inflation after that it's on him.

That's the key concept.

If I want to see the size of the erosion of debt in 2009, say, then I have to do my funky year-by-year calculation, breaking 2009's total outstanding debt into the yearly additions that accumulated, and for each of those years figuring the erosion of debt for that year's addition to debt, from that year to 2009. And that should be exactly right.

But if I want to see the size of the erosion in 2010 instead, I have to adjust for inflation from the year of borrowing to the ending year 2010, not 2009.

Here's the problem. I was an idiot. I was using 2009 for the ending year, to figure all the values, because I was using a GDP Deflator that has 2009 for its base year. So all the years before 2009 on the graphs I did for these post, all the years before 2009 show the gap bigger than it really was, and all the years after 2009 show it smaller that it really was.

The outcome, or what I expect the outcome to be, is that Jim was right. I expect to see 'real' debt peel away from 'nominal' debt, faster and higher than my previously corrected graphs show.

My graph that was wrong showed the faster and higher thing. I thought that was right. That's why I needed the anonymous help to fix my mistaken start-value calculation.

But I think when I fix the ending-value calculation, using inflation from the earliest data to 1960 for the 1960 calculation, from earliest data to 1961 for the 1961 calculation, from earliest to 1962 for the 1962 calculation, and leaving 2009 out of the calculation except in the year 2009, I think the graph will show something more like what Jim and I were expecting to see.

But I still have to work it out.

I'm just gonna post this and run. I'm already late to work, and the dogs are still out. But I'm pretty sure when I did the 'inflation adjustment of debt' thing a year or two ago, I did the ending calculation correctly, I mean, what I'm saying now is the correct calculation. I didn't check that, but I think that's right.

So anyway, now that I've laid out my confusion and I hope made it less confusing, maybe I can get back to writing and doing the calcs I need to do.

Thanks for listening.

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