Sunday, September 6, 2015

"I wish there could have been less [controversy]"

Let's start with the number that has us by the balls -- the Federal debt:

Graph #1: The Federal Debt
Please don't tell me it doesn't have us by the balls, or I'll have to tell you you're an idiot.

Here, let me point out that I didn't say it rightly has us by the balls. Of course, I didn't say it wrongly has us, either... Oh, but you know? I did say that. Probably a hundred times on this blog, if not in so many words. And you know it, too.

It was always my intent to skip this drivel, and just show you some graphs, and tell you what I see. But it turns out that people don't read carefully. And they already have their own conclusions. Well, not their own, but somebody else's conclusions that they parrot as their own. And those people cannot really see what I'm showing them, because they are unwilling to take it one step at a time.

They prefer to reject every step along the way. You know, like idiots.

Anyway, if you look at Graph #1, the Federal debt seems to run essentially flat until, oh, the 1974 recession. Or at least until 1970.

But guess what... It doesn't even run flat in the years before 1970:

Graph #2: The Federal Debt To 1970
Even though it looks flat on Graph #1, the Federal debt increased regularly and consistently from 1957 to 1970. No biggie, no biggie, don't be an idiot. We're just looking at pictures here.

The Federal debt increased about 35% in the dozen years or so between 1957 and 1970. (Compare that to the 100% increase -- from 2000 billion to 4000 billion -- in a dozen or so years from the latter 1980s to the latter 1990s on Graph #1. And that's not the fastest increase. It is just easy to see.) So the Federal debt was on the increase in those early years, if at a slow pace.

Oh, by the way, the above graphs show the Federal government's portion of "credit market debt", essentially the same as the portion "held by the public".

Graph #3: Measures of the Federal Debt
On Graph #3 the bright blue line is the Federal government's part of "credit market" debt, same as shown on the first two graphs. The red line is the Federal debt "held by the public". The red line is annual data and the blue is quarterly; this accounts for at least some of the difference between the two. But there isn't much difference.

The green line is the "gross" Federal debt. It includes the part held by the public and also the part held by various Federal agencies -- Social Security, and like that.

FYI, for the rest of the graphs in this post we're looking at "credit market" debt, not "gross" debt.

Attention Idiots: Please notice that I still have not said anything about whether or not the Federal debt is a problem. We're just looking at it. Gathering a little information. Confirming things we know, and maybe learning a thing or two. (My memory's not the best, so I can learn things today that I might have learned before.)

Okay. On Graph #1 we looked at the Federal debt. But it was just dollars of debt. Or... you know, billions of dollars of debt. But there's no "context". We can see the debt is higher at the end than at the start. But we don't really know how that fits to the economy.

Yeah, I know: We do know. Or probably you do know. But we have not looked at it yet in this post. You know what that means? It means you're not allowed to discuss how it fits to the economy. Not yet. You still have to be patient and wait and pretend that you're interested. Because I still didn't get to the point.

If we go back and get the data from Graph #1, Federal debt for 1950-2015, we can give it a context by showing it "relative to GDP":

Graph #4
Now, in Graph #4, we're looking at what Noah was looking at in his Why did rich-world deficits start exploding around 1980? post.

We're looking at the US data that Reinhart and Rogoff were looking at in Growth in a Time of Debt (PDF, 6 pages).

And we're looking at the US data in A contribution to the Reinhart and Rogoff debate: not 90 percent but maybe 30 percent (via Reddit).

Now, idiots, I'm getting to the point.

When you look at the Federal debt relative to GDP there are lots of things you're not looking at. The usual practice among economists, I guess, is to say ceteris paribus, "with other things the same".

Well... one of the things left out, when you look at the Federal debt relative to GDP, is the debt of everybody other than the Federal government. That's a lot to leave out, all by itself. And the debt of everybody else was not "the same", unchanged and unchanging, while the Federal debt was growing.

Let's look at that.

Graph #4, above, shows the Federal government's part of credit market debt, relative to GDP. It's in blue on Graph #4. The same data is shown again, in blue, on Graph #5:

Graph #5
Graph #5 also shows the rest of credit market debt, relative to GDP, in red. That's all of credit market debt except the Federal government's part. And the Federal government's part is now low on the graph, because everybody else's debt is such a big, big number. Too big to hide under the doormat of ceteris paribus.

The red line, by itself, peaks at 320% of GDP. Add the blue and red together, and you're up around 350% of GDP at the peak. That's 3½ times the value of all the goods and services produced that year, 2009 or whatever year it was.

That's a lot of debt.

And that makes me think: Maybe we're using the wrong "context" variable. Rather than looking at debt "relative to GDP", why not look at debt relative to debt? Why not look at the Federal part of credit market debt as a percent of credit market debt? And why not look at the rest of credit market debt, other than Federal, as a percent of credit market debt? Why not?

Graph #6: Federal and Other Shares of Total Credit Market Debt
The line that runs low, the blue line, that's the Federal government's share. The red line that runs high, that's everybody else's.

If excessive debt is the problem, it's not the Federal part that's giving us trouble. It's our part. And I think we know that. We all want out of debt.

And that's a damn good idea.


jim said...

What I see in graph #6 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.

One possible exception is 1966-1968

geerussell said...

Good post. I've long been a fan of looking at debt:debt ratios as a basis for judging financial health/stability.

The Arthurian said...

Thanks, Gee. Hey, I remember that graph from a while back.

Jim, agreed! Rising private debt in the "golden age" (pre-1974) and in the "goldilocks" years (latter 1990s).

Of course, the trouble with rising private debt is that it eventually gets to a high level and starts to interfere with growth. That's one reason I say we should use accelerated repayment of debt to fight inflation, rather than jacking up interest rates.

Pick a level of private debt that is conducive to growth, and use that level as a target level. Adjust repayment incentives to reach that target, with the Fed fine-tuning things with small rate adjustments if needed.

The Arthurian said...

Jim, there was a "near-recession" in 1966 or '67 that is probably related to the wiggle on the graph at that time. Maybe that near-recession means 1966-68 is NOT an exception to your rule?

netbacker said...

I have been using Graph #5 for a few years to explain Private Debt *IS* the problem.

netbacker said...

I believe I got the idea for the graph from your blog a few years ago. So a big thanks to you. :)

The Arthurian said...

A big thanks back at you, netbacker. The trend line on your graph makes an impressive statement. Oh, and I do love that Bart at the blackboard background image.