Wednesday, April 13, 2016

Reinforcing the P2P:RGDP growth connection

Last couple days we looked at the FRED data for private debt and public debt (the ratio of one t'other) and RGDP growth. When I say "FRED data" you should know it means the numbers only go back to some time around 1950.

With one page from an old edition of the Historical Statistics and a quick download from MeasuringWorth you can take the story back to the 1916-1970 period. So, I did. Here's the ratio of private debt to public debt:

Graph #1: The P2P Ratio (Private Debt per Dollar of Public Debt)
When I saw it I said: Oh yeah, I did look at that before.

I put dots on the line to show the data points that define the line's shape. Notice, right at the start, the data point for 1916 is way high. It's a good inch (on my screen) down to the next data point, the 1917 point. Big drop. Another big drop, not quite so big, between 1917 and 1918. After that, it's soon back to normal.

Those first data points come right in the middle of World War One (1914-1918). It's the winding down of that war that let things get back to normal.

I'm a little uncomfortable using data that starts in the midst of a big change like that. A couple years before 1916, and I don't know where we'd be. So I can't say anything about the first few data points. I'm only comfortable evaluating the years since about 1920, where a new pattern establishes itself.

Anyway, we can take the vertical axis values -- the debt ratio values -- and stretch them out on the horizontal axis of a new graph. On the vertical axis of this new graph we can show the growth rate of inflation-adjusted GDP. Plot the data as a "scatter" and add a trend line to get the gist of it, and this is what you get:

Graph #2: Real Growth and the P2P Ratio, 1916-1970
Well look at that: We got the same exact values on the horizontal axis here -- from zero to sixteen -- that we got on the vertical axis of Graph #1. That's Excel's finesse, not mine. And see that one blue dot way over by itself on the right? That's the data from 1916 on Graph #1, the high point.

Ignore the outlier from 1916 and do the graph again, and it comes out like this:

Graph #3: Real Growth and the P2P Ratio, 1917-1970
With that one dot gone, the others spread out across the plot area. Also the black line -- the linear trend line that Excel calculates for me -- the black line is downward-sloping and not almost perfectly flat, the way it is on Graph #2. Removing that one dot had a big effect on the trend line.

The downward slope of the trend line here is reminiscent of the downward slope on Monday's graph. As on Monday, the trend line tells us that high rates of real GDP growth are associated with low levels of private debt relative to public debt, and low rates of real GDP growth are associated with high levels of private debt relative to public.

Graph #3 runs from 1917 to 1970. Monday's graph runs from 1948 to the most recent annual data, 2014. There is some overlap. Actually, it is the "golden age" that shows up on both graphs. Maybe that influences the result? Maybe it's the golden age that makes the trend line downward sloping? So let me eliminate the overlap. This next graph runs from 1917 to 1948 and leaves off where Monday's graph picks up.

Graph #4: Real Growth and the P2P Ratio, 1917-1948
Still downsloping. Once again, the trend line shows high RGDP growth when private debt is relatively low, and low RGDP growth when private debt is relatively high.

Two graphs. Two separate time periods, covering almost 100 years. And both graphs show the same thing.

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