Sunday, September 13, 2015

2½ Times Longer and 2½ Times Deeper


On Thursday I said

The blatantly obvious problem with excessive credit use is the cost of it.

Jim responded:
This graph suggests the cost of debt is not a problem much less THE only problem.


The burden of debt on households is currently the lowest it has been in 40 years (or more).

I responded:
Jim, the other day you said:
"What I see in [the other day's graph] is that whenever the ratio of private debt to all debt is going up it corresponds to a period of what is generally regarded as good economic times. And when the ratio is going down those are periods generally regarded as bad economic times."

I bring this up because I think one can see the same correspondences in your graph: increase (and good times) in the mid-1980s and in the mid-1990s; decline (and bad times) in the early 1990s and since the crisis.

Note that the decline since the crisis is about twice as deep as the early 1990s decline, and lasts about twice as long. Also, we appear to be at the same point on the curve now as in late 1993 -- almost ready to have an uptrend and good economic times for a while.

Your observation that "The burden of debt on households is currently the lowest it has been in 40 years (or more)" seems to be a reference in particular to the sharp decline during the past 8 years, the decline that followed from the crisis. That decline corresponds to bad economic times, as you so correctly point out.

And now that the decline seems to be bottoming out, I am willing to say we might be ready to begin a period of good times of approximately the same duration as the decline. But you seem to say that if I was right about the cost of debt being a factor related to economic performance, then the economy would be in the midst of good times right now because the cost of debt is already low.

Not at all. For the cost of debt has only just become low. So now, conditions will be able to improve.

The increase in debt (or, really, the use of credit (which is recorded as an increase in debt)) adds to good economic times. But existing debt is a cost that subtracts from good economic times. When existing debt is low it does little to hurt the good economy, and when existing debt is high it does much to hurt the good economy.

Therefore, an uptrend in credit use that begins when existing debt is at a low level is likely to be vigorous, and may continue (though with decreasing vigor as the level of existing debt rises) until the damage done by existing debt equals or exceeds the benefit derived from new credit use.


I'm not good enough with photoshop to superimpose the graphs


Okay... I'm looking at this part of what I said:

Note that the decline since the crisis is about twice as deep as the early 1990s decline, and lasts about twice as long. Also, we appear to be at the same point on the curve now as in late 1993 -- almost ready to have an uptrend and good economic times for a while.

Suppose we take Jim's graph and stretch it out a few years into the future. FRED lets me do that, but when I capture and display the link, it reverts back to 2015. Anyway...

Here's a screen shot:

Image #1

Next I change the blue line to dashed red, turn off the recession bars, stretch the graph out to the year 2030 again, and take another screen shot of it.

Then I load it into Paint.NET, use the "magic wand" (at 20% tolerance) to erase the white background, and save the file as a GIF:

Image #2

Then I crop it so it shows just the 1990s, and put a black border on it. Actual size:

Image #3

Then I open up Image #1 so I have two files to work with in Paint.NET. I create a new layer for Image #1.

I switch back to the cropped GIF file, make it twice as big, no, 2½ times as big, and copy it.

Then I switch back to Image #1, paste the cropped GIF into place, save and "flatten" the file, and show you what I got:

Image #4
See how the blue line, after the 2007 peak, follows very much the same path as the first few years of the dotted red overlay? This doesn't guarantee that anything will happen tomorrow, of course, but the striking similarity of the two downtrends makes me think that the uptrends might also turn out similar.

So we could soon get a few years when the economy seems pretty good again while debt races upward even faster than it did before the crisis, if we have the stomach for it. When those good years come, you know whatever political party is in power will claim all the credit.

Right now, though, nobody expects a few good years.

I don't either.

11 comments:

jim said...

I was responding to this statement:

"The blatantly obvious problem with excessive credit use is the cost of it."

In the last 8 years the amount of household debt has remained pretty much unchanged but the burden of household debt has dropped from the highest point on the graph to the lowest point with no change in debt.

Thus, your "problem" statement that one follows the other is not at all "obvious"

I agree that the cost of debt to households (and to business?) appears to be correlated with economic expansion/contraction (buy not to the quantity of debt).
And its worth exploring why that correlation exists.

The Arthurian said...

Jim, I think you said that before, and I didn't "get" it. Okay.

I would say they are trying to solve the problem of excessive debt by reducing the cost of it rather than the size of it. I am not comfortable with that solution, but it does seem to confirm my statement that it's the cost of debt that's the problem.

Who this "they" is, they who are solving the problem, and precisely what they are doing... I guess that's all of us and what we've all been up to for the last eight years.

Jazzbumpa said...

I agree that the cost of debt to households (and to business?) appears to be correlated with economic expansion/contraction

Well, here is the correlation.

https://research.stlouisfed.org/fred2/graph/?g=1Pgk

It looks like a correlation, but I think that is a mirage. Eliminate the 5 extreme points at the top left and the 8 at bottom right - that's 13 out of 141 - and you're left with an amorphous blob in the middle.

Cheers!
JzB

geerussell said...

Hi Art,

Don't know if you've seen this already but being interested as you are in the cost of debt I thought you might find it useful.

How much income is used for debt payments? A new database for debt service ratios

The Arthurian said...

Wow, thanks Geerussell. I have to take some time with that.

Jazz, connect the dots by turning on the line that connects them. Your amorphous blob begins to take on definition. I see mostly downsloping (left-to-right) lines, suggesting that higher cost-of-debt is associated with lower GDP growth, and lower cost-of-debt with higher growth.

These downsloping lines appear to be flatter when the cost of debt is lower, and more sloping when the cost of debt is higher.

Some of the lines are upsloping (left-to-right). I suggest that these show phase changes, times when people are learning to deal with a permanently higher level of debt cost, for example. We saw something comparable in Noah Smith's Phillips Curve graph a few years back. As I recall, you rejected the phase-change interpretation of that graph...

Yours is a good graph, Jazz. But if you want to see something other than an amorphous blob, you have to look for what might be hidden within it.

I find it odd, Jazz, that you reject outright the concept that financial costs play a role in economic performance.

jim said...

@ Jazz
If you were following the discussion: It started with the ratio of private debt to all debt. That ratio drops on every single recession since 1950 for a few years and then slowly climbs upward till it hits the next recession and then repeats. The debt service graph has similar characteristics - particularly since 1990.

Another measure of the state of the economy that follows this pattern is real household median income.

https://research.stlouisfed.org/fred2/graph/?g=1Puq

Jazzbumpa said...

@ jim -

Sure - but is there a causality relationship, and if so, which way does it flow?

@ Art -

I am not rejecting the idea that financial costs play a role. Whee did you get that idea? in fact, that is pretty close to the core of my beliefs. I was just saying that this specific data set doesn't offer much evidence, for or against.

I wanted to turn the line on that graph, but couldn't find the right button.

When you did, I immediately thought of Noah's old post - and mine, which you commented on, at the time.

http://jazzbumpa.blogspot.com/2011/08/is-phillips-curve-valid.html

Your phase change idea is totally consistent with what I said back then. So now I want to look at this in time slices.

But my plate is really full, through the middle of next week, so It'll have to wait.

Cheers!
JzB

The Arthurian said...

Jazz: "is there a causality relationship, and if so, which way does it flow?"

Costs have consequences

Jazz: "I am not rejecting the idea that financial costs play a role. Where did you get that idea?"

:)
I remember removing an "It seems" from my remarks, to strengthen my statement.
Jim said "the cost of debt ... appears to be correlated with economic expansion/contraction"
You said "It looks like a correlation, but I think that is a mirage."
That's where I got the idea.
Maybe I overstepped?

"I immediately thought of Noah's old post - and mine"

YES. Thanks for the link. I was remembering yours.

"So now I want to look at this in time slices. "

Excellent. Do me a favor: Include some tips and tricks on how to break up a time series to show different colors in Excel graphs. Maybe you have an easier way than what I've tried.

//

I definitely think these two graphs -- Noah's Phillips curve and your scatterplot -- I think both graphs have similar time-analysis issues. I think things can be said about your scatterplot which are fairly obvious, and true; I think the same statements must apply to Noah's Phillips Curve though they are less obviously true.

I don't remember specifics, but I think Milton Friedman undermined Keynesian economics by misinterpreting the Phillips Curve. And I think these Less Obvious Truths undermine Friedman. See mine of 4 AM today.

Jazzbumpa said...

Excellent. Do me a favor: Include some tips and tricks on how to break up a time series to show different colors in Excel graphs. Maybe you have an easier way than what I've tried.

I don't know what you've tried. I define a number of data columns, each for a given time span. You have to play around with it to get the data sets breaking at the right points in time.

I can't say if that's easier or not. It's the only way I can think of.

JzB

The Arthurian said...

Jazz: "I don't know what you've tried. I define a number of data columns, each for a given time span. You have to play around with it to get the data sets breaking at the right points in time. I can't say if that's easier or not. It's the only way I can think of."

Yeah, okay. Separate columns. Yeah, I've done that. But it is tedious and time consuming. I know you've done a lot of graphs where you split up one data series into several sections with different colors. Thought maybe you had a trick.

Thanks.

Jazzbumpa said...

Sadly, no tricks.

Here is a cut through this stuff.

Gimme some comments.

http://jazzbumpa.blogspot.com/2015/09/household-debt-service-vs-gdp-growth.html