Tuesday, March 22, 2016

Scattered Thoughts on the Private-to-Public (P2P) Debt Ratio

If I take TCMDO debt -- All Sectors; Debt Securities and Loans; Liability, Level -- and subtract out the Federal portion of that debt, I'm left with something I call the Non-Federal debt. If I take the non-Federal debt and look at it relative to the Federal, I get the red line in this graph:

Graph #1: The Private-to-Public Debt Ratio (red) and the Growth Rate of RGDP (blue)
The red is the same data I looked at twice recently -- but only the FRED part this time, so it starts after World War Two instead of during World War One. Sigh... Also, the data frequency is semiannual instead of quarterly because -- spoiler alert -- I'm going to show a scatterplot, and it turns out that "Quarterly, End of Period" is not the same as "Quarterly". Sigh...

The blue line is inflation-adjusted GDP, the so-called "real" GDP. Percent change from year ago. Semiannual. And (in case you missed it) blue.

The scatterplot caught my eye:

Graph #2: The Scatterplot Version of the Previous Graph with
the Debt Ratio on the X-Axis and the RGDP Growth Rate on the Y-Axis
What caught my eye is this: On the left, the dots fit themselves pretty well to an up-and-down pattern. On the right, the dots fit themselves mostly to a left-and-right pattern. And in the middle, there's just a jumble of dots.

That jumble is mostly between 3¼ and 5¼ on the X-Axis. But if you look, most of the activity of the red line on Graph #1 is between 3.25 and 5.25 on the vertical axis:

Graph #3: Showing the "Activity Zone" of the Red Line
In other words, there is a big cluster of dots there on the one graph because that's mostly where the red line is, on the other.

For the record, the activity zone is too high. If the red line ran mostly below the 3.25 level instead of mostly above it, our economy would be in a lot better shape. But that's neither here nor there, I guess...

You can see that the red line is mostly between the two dotted red lines (in other words, between 3.25 and 5.25 on the X-Axis of Graph #2). Below the lower dotted line are the dots that fit themselves to an up-and-down pattern on the left on Graph #2. Above the upper dotted line are the dots that fit themselves to the mostly left-and-right pattern on the right on that graph.

I want to take Graph #2, the scatterplot, and separate the dots into those three regions: left, right, and middle. Then I want to look at the dots in those three regions and look at the Y-Axis values, the RGDP Growth Rate values. I want to get the average of the RGDP Growth Rates for each of those three regions. It looks to me like the left will show a high average rate of growth, the right will show a low average rate, and the middle will show in the middle. But we don't have to guess.


Out with the dogs, I was thinking about the scatterplot dot behavior. On the left, when the P2P debt ratio is low, we see RGDP growth following the expected, business-cycle-like behavior: up and down, up and down, up and down, and so forth. On the right, where the P2P ratio is high, we see RGDP growth behaving unexpectedly. And large changes in the debt ratio have relatively little effect on RGDP growth. Moreover, the highs and the lows of RGDP growth are lower on the right (when P2P is high) than on the left (when P2P is low).

I'm thinking these differing behaviors of RGDP growth may show up in the Phillips curve. When P2P is low, the curve behaves as Bill Phillips described. When P2P is high, it does not. Hey -- it's just a thought. I can't prove it yet. I haven't even looked into it yet. I'm just sayin, there is more to this P2P story than anyone realizes.


I downloaded the data from the scatterplot graph and eliminated rows before the second half of 1951, where some values were missing. I ended up with data from 1951 H2 ("H" for half, as opposed to "Q" for quarter; that's FRED notation) to 2015 H1. I got 128 rows of data.

Of the 128 items, 30 show P2P ratios less than 3.25. These have an average growth rate of 4.06 percent.

Of the 128 items, 19 show P2P ratios above 5.25. These have an average growth rate of 2.01 percent.

The balance, the 79 items with a P2P from 3.25 to 5.25 (inclusive) have an average growth rate of 3.05 percent.

So yes, as we might have expected, a low private-to-public debt ratio is associated with a high rate of RGDP growth. And a high P2P debt ratio is associated with a low rate of RGDP growth.

What else is new.

// The Excel file.

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