Saturday, June 6, 2015

one dna

People are always pointing out that the debt-to-GDP ratio ran flat until around 1980, and then began its relentless upward climb.

I always point out that inflation pushed GDP upward a lot more than debt in the 1960s and '70s. Inflation aside, debt was growing faster. But inflation pushed GDP up and kept the ratio flat until the end of the Great Inflation in the early 1980s. Then, when the inflation rate fell, the debt-to-GDP ratio became a more honest measure. Suddenly the rapid growth of debt was easy to see.

Nobody seems interested in this story, maybe because it interferes with the political stories they like to tell.

This graph compares "total financial assets" (TFA) of financial business to TFA of households. No flat spot in the 1960s and '70s here.

FRED Graph 1dna
Financial business assets were half that of households in the early 1950s, but the ratio tripled by the time of the 2009 recession.

Household assets increased a lot, of course. But assets of financial business increased a lot more, and a lot faster.

Now you're gonna tell me finance is a good thing; we need finance. Sure. But we don't need so much of it. Look to the time in our economic history when the economy was good -- the 1950s and '60s. And look at where the ratio was, then.

1 comment:

The Arthurian said...

Perhaps you want to say that, from personal experience, you know with certainty that we need a lot of finance, more than I seem willing to accept.

I would point out that your personal experience has been gathered almost entirely in an economy where finance was already excessive. Finance has been excessive in the U.S. economy at least since the mid-1970s. Your personal experience is tainted, all our personal experience is tainted, by this problem that does not go away.