Thursday, March 3, 2016

We are at the bottom now, ready to go up.


The way to read the debt-per-dollar ratio is this: It goes up until there is a big economic problem, it goes down while that problem is being solved, and it goes up again after the problem is solved.

Graph #1: Dollars of Debt per Dollar of Spending-Money in the U.S. Economy, 1916-2015
The 1990 peak was created by policy rather than by problems.

It is important to note that when the downtrend ends and the uptrend begins, the economy for a while is very, very good. For example: the "golden age" of 1947 to 1974 or thereabouts, and the "macroeconomic miracle" that started in the mid-1990s. When the trend changes from downward to upward, we can expect the economy to be very good for some time.

Graph #2: All Sectors Debt (blue) and Non-Federal Debt (red) per Dollar of M1 Money 1959-2015

Now... Look at the recent data at the right end of the graph. Debt-per-dollar has been coming down since 2008. It has come down pretty far. Not far enough, in my opinion. Still, the DPD lines are starting to flatten out, both of them. I think pretty soon they'll show up-trend. I think the economy is going to be very good, pretty soon.

When?

I got the Graph #2 data from FRED. I looked at just the last part of it, since the fourth quarter of 2008, where the lines are going down. I took the red line, non-Federal debt relative to M1 money, and added a trend line for it. I used a polynomial trendline of order 2, and extended the trendline out 25 quarters (six years plus) past end-of-data. This is how it came out:

Graph #3: Extending the 2008-2015 DPD Trend out to 2021
The first quarter of 2016, where we are right now, is number 30 on the X axis.

I've got the trendline equation so the numbers show a dozen decimal places. Looks funny, but I do that to get an accurate curve when I use the equation to re-create the curve.

After I got the equation, I made another graph like Graph #2 but with the black trendline added in. To create that trendline I used the equation shown on Graph #3. This time I extended it out to 2030. Have a look:

Graph #4: DPD with Trend out to 2030
We're right there right now. DPD is ready to go up right now.

Remember: When the downtrend turns and an uptrend begins the economy for a while is very, very good. This is not going to be your typical anemic recovery. This is going to be the full tilt, rapid output growth, rapid productivity growth, high performance boom.

I can't promise you it'll last long, because the level of debt is already very high. But it'll be a good one while it lasts.

// The Excel file.

If only they would use the accelerated repayment of debt as their main tool for fighting inflation, we could have that permanent quasi-boom.

//

This is not investment advice
and as I always say, I don't make predictions.
I'm just looking at a graph.

3 comments:

The Arthurian said...

"The 1990 peak was created by policy rather than by problems."

I suppose you could say the peaks are always created by policy. Okay, but in 1933 and 2007 policy makers didn't act until economic catastrophe had struck.

The debt-per-dollar graph lets you see catastrophe while it is still in development.

The Arthurian said...

"The way to read the debt-per-dollar ratio is this: It goes up until there is a big economic problem, it goes down while that problem is being solved, and it goes up again after the problem is solved."

Economic performance is exceptionally good at the beginning of the DPD uptrend. But as DPD increases, financial costs increase. Rising financial costs compete with wages and profit, the factor costs. As DPD increases, therefore, the financial sector improves at the expense of the productive sector. Output and living standards begin to falter.

The unfaltering performance of finance makes it increasingly appealing, which boosts the growth of finance relative to the productive sector and further weakens the latter. Ultimately, the productive sector can no longer sustain the cost of finance, and crisis makes the problem evident.

In sum: During the uptrend of DPD, the economy starts out good, but the economy weakens as long as the uptrend continues. It is the sustained uptrend of DPD that creates the failure.

What was it Minsky said?

The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.

The Arthurian said...

Not exactly what I predicted, but The Wall Street Journal of 10 October 2017 reports:

"IMF Raises Global Economic Outlook for This Year and 2018
The International Monetary Fund’s World Economic Outlook report forecasts growth of 3.6% this year and 3.7% next year"

For the US their graph shows 2.2% growth in 2017 and 2.3% in 2018.

2018 should definitely be better than that.