Sunday, March 20, 2016

Designing the Future

I happened to notice the straight-line trend in household-debt-to-GDP:

Graph #1: Household Debt as a Percent of GDP. Red Highlight 1987Q1 to 1999Q4
The red line. I got wondering if that trend was sustainable. I mean, like this:

Graph #2: With the 1987-1999 Trend Extended Fore and Aft
You can see how the debt-to-GDP ratio went above the red line in the 1950s and '60s. But it peaked in 1965 and came down again, then stayed below the red line until that 1987-1999 stretch. After that it went quickly high, gave us a crisis and some problems, then came back down again. And now it's just below the red.

I was going to say I don't think there is any such trend as that red line and, if there is, I would certainly expect it not to be linear. However, my description of it turned out stronger than I expected. I'm still by no means convinced that the red line shows a trend that exists. But now it doesn't seem such a crazy thought.

Suppose that trend does exist.

I'm looking at the right end of the graph. The debt ratio is just below the red line. Just below, and going down, but going down slowly now, ready to start rising soon.

Suppose it does start rising soon.

I want to look at the future in terms of that red line. Yeah, the one that I doubt. (But what if it does exist?)

Okay. Let's imagine a future.

I re-created Graph #2 in Excel. Then I took debt-to-GDP and put a curved trendline on it, a second order polynomial to extend the blue line out to 2020 (but in black). As you can see, by 2018 debt-to-GDP goes above the red line, just as it did a few years before the crisis. In other words, if present trends continue, we are already on our way to another financial crisis:

Graph #3: Household Debt as a Percent of GDP (blue), the 1987-1999 Trend (red),
and the 2011-2015 Household-Debt-to-GDP Trend Extended to 2020 (black)
Is there an alternative? Of course there is. We must choose the red trend, not the black. Choose the one Alan Greenspan called the new economy. The one Robert J. Gordon called a macroeconomic miracle. The one Maynard Keynes called a quasi-boom. Choose policies that give us the red trend, not the black.

You remember the 1990s. The economy was pretty good. Choose the red trend, not the black.

// The Excel File with Graph #3. (Not sure if Google Drive handles the graph properly.)

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