Further thoughts on the Pictorial History of Debt

The other day I looked at a graph comparing private and public debt as a ratio. I showed the graph several times, highlighted to identify the various up- and down-trends it shows. Here again is that graph:

Graph #1: Private Debt relative to Public Debt

I'm going back to that graph now, to get the dates of turning-points. These dates are, in particular, low points and high points of the ratio, not necessarily the commonly observed dates for the start or end of named periods such as the "Roaring Twenties" or the "Great Depression".

Graph #1 shows an alternating pattern of up- and down-trends. Graph #2 considers each of those trends separately, and compares for each the growth of Federal debt (blue) to the growth of the non-Federal debt (red):

Graph #2: Comparing Public and Private Debt Growth by Period

The first thing to notice is that the vertical bars are in pairs -- one blue and one red in each pair. The blue is the government debt, and the red is non-government debt.

The second thing to notice is that the tall bar alternates -- blue in the first pair, red in the second, blue again in the third, and so forth. When the blue bar is taller than the red, the line on Graph #1 is going down. When the red bar is taller than the blue, the line on Graph #1 is going up.

The most important thing to notice is the fifth pair, for the 1974 to 1993 period. Both bars are tall. Oh, the blue is taller, definitely. But the red isn't short, as it is in the first pair and the third pair and the last pair. In those other three periods -- 1916 to 1919, and 1929 to 1945, and 2007 to 2014 -- the red bar is extremely short. And in those three periods, what we see on Graph #1 is emphatic downtrend.

For the 1974 to 1993 period, Graph #1 shows only a leisurely downtrend. 1974 to 1993 is a longer period than 1929 to 1945, three years longer. But the decrease visible on Graph #1 is far less in the 1974-1993 period than the other. The reason is that private debt growth remained quite vigorous in the 1974-1993 period.

On Graph #2 the blue bars are very similar for the 1929-1945 and the 1974-1993 periods. Both show close to an 800% increase. But the red bar in the earlier period is near zero, while the red bar in the latter period shows substantial increase.

The lesson I take from these thoughts is as follows: If our plan is to let private debt increase until economic problems abound, and then solve the problem by increasing the public debt -- a foolish plan, to be sure -- if that is our plan, then our solution will be inefficient while rapid private debt growth continues.

The 1974-1993 decline on Graph #1 occupied more years than the Great Depression and World War Two combined, and produced only about one third the decline in the private-to-public debt ratio.

During World War One, government debt growth far exceeded private debt growth. And during the Great Depression and World War Two, government debt growth far exceeded private debt growth. And during the recent post-crisis period, government debt growth far exceeded private debt growth. These were efficient and effective implementations of our miserable plan.

But during the 1974-1993 period, government debt growth only slightly exceeded private debt growth. Therefore, it was many years before uptrend and recovery could begin. And when it finally did begin, the uptrend and recovery could not last long, because the ratio (Graph #1) was already at a high level.

We need a better plan.


// The Excel file.