Wednesday, May 4, 2016

I'll see your 'no recession' and raise you seven good years

One paragraph from Wells Fargo, February 2016:
Focusing on the next six months, our predictive model says there is a 12% probability of a recession occurring. For perspective, what the model is showing looks no worse than what was predicted from 1983 to 1988, or in the late 1990s. This justifies why we view the recent market corrections as being driven more by fear than reality. In 1984, there was a fear that inflation would rear its ugly head again, but it didn’t. The fear was real, but reality didn’t live up to the fears. We’re probably going through something similar now.


The source of the 12 percent chance? "Policy errors—like the Federal Reserve being too eager to hike interest rates".

Me, I don't have a predictor for recession. What I do have is an eye on credit use.

Note: The following graphs all show total credit to the private non-financial sector, from the Bank for International Settlements. Copyright, 2016, Bank for International Settlements (BIS).

Total credit to the private non-financial sector is going up again:
Graph #1
That's a sign of growth. Good growth for some years, because debt is below what we can bear.

Private credit use still has room to grow:
Graph #2
Still has room to grow, even if debt stays below the 10% growth rate.

Relative to Base, private credit use is starting to climb:
Graph #3
Couple thoughts on this one:

The ratio is low largely because of all the quantitative easing that took place. It's not like we paid off so much debt. Private sector deleveraging (as Steve Keen says) has been trivial.

However, the ratio is as low now as it was in 1955. This means our financial system is ready for another period of growth and inflation comparable to what we had between 1955 and 2007. Put that in your pipe and smoke it. Our financial system is ready for another period of growth and inflation comparable to what we had between 1955 and 2007.

We are much better now than we were in the 1950s at multiplying base money into credit money. So it need not take anywhere near 52 years to reach the next peak. If we expand base into credit rapidly, be prepared for some double-digit inflation. But hey, that would just reduce the burden of existing debt. Which was probably the point all along, come to think of it.

Remember, though, that turning base money into credit money generates more debt. We really do need policy to accelerate the repayment of private sector debt, in order to keep private debt from accumulating. It would fight inflation, too, that policy.

Relative to Federal debt, private debt is starting to climb:
Graph #4
That's a very good sign.

Right now, we're at about the same place on the curve that we were in 1995, when our economy was starting to give us good years. We'll get those again, the good years. But we have to prevent debt from going up as fast as it did in the late 1990s.

If only we had some kind of policy to accelerate the repayment of debt.

Last graph today. Just for you, because you think debt-to-income is important:
Graph #5
Right now, we're right on trend with the mid-1990s, where we were before debt got us into trouble. Right on trend. And the trend line goes up, so debt can go up and that will be okay. For a few years, anyhow.

If we get those accelerated repayment incentives in place, we can keep getting good growth while private debt goes down.

// Related post: An Arthurian Future


The Arthurian said...

On Graph #4, compare where we are now to where we were in the mid-1990s. Rounding the bottom now as then, and starting to turn upward.

"Starting to turn upward" (after a substantial downtrend) heralds the onset of a time of particularly good growth. This happened just before the Roaring '20s, and again just at the end of the Second World War, and again in the first half of the 1990s as you can see on the graph, and it is happening again now.

You can take my word for it, or you can review the sequence of graphs in my Pictorial History of Public and Private Debt

The Private-to-Public debt ratio is not as low now as it was in 1946. But it is lower now than it was at the bottom in 1993. Therefore, I think the growth this time could turn out to be better than the growth in the good years of the latter 1990s.

Auburn Parks said...

I find it amazing that you still believe in the money multiplier fantasy. Its like you havent been paying attention to the last 7 yrs. Stuff like this really destroys your credibility on the subject matter. There is no meaningful relationship between reserves and bank lending as banks dont lend their reserve assets to the public.

The Arthurian said...


1. Because you do not QUOTE the particular words that you are replying to, you leave me guessing what the fuck you are talking about. As usual.

2. I think you are responding to my use of the word "multiplying".

3. Here's how I think of you, Auburn. You seem to be a guy that has learned (or maybe only memorized) a few key points about the economy. And your idea of having a discussion is to do word-matching, find the word "multiplying" in something I wrote, look up the information you have on that word, and then parrot that information back at me in an attempt to insult me.

4. I don't always think you are an asshole, Auburn, but today I do.

5. The topic of the above post is ...? Answer that question, and we can have a discussion.

John Q. Taxpayer said...

Hey Arth,

I am a new follower and I enjoy your information. What are your thoughts with Steve Keen about private debt and his believe in a "private debt crisis"?

Auburn, you literally have no clue how banking works. The money multiplier is in lows to great depression levels, and I am not confident that lending would reach close to 1970's levels.

Banks need to settle interbank settlements and withdrawal of cash, once a deposit gets created via loan. What do you think happens when a person gets the credit from the bank, spends the credit, and it goes into another bank?

Reserves are important.

The Arthurian said...

Hello John Q! Yeah, I like Keen a lot. He & I both think our economic problems have monetary origins.

Keen seems to see the problem as too much private debt. I agree it's private debt. But I see the problem as an imbalance -- an excess of private debt relative to public debt, or relative to base money, or relative to spending money M1. But we think alike, mostly.

Glad you like it.