After a decline in the Debt-per-Dollar (DPD) ratio, the economy is vigorous.
I was looking at this graph back in the 1980s:
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| The Debt-per-Dollar Ratio, 1916-1970 |
There are not a lot of big changes on this graph. There are two: One downturn, and one upturn. To me the fewness of big changes is evidence that the ratio is an important one. And the timing of the changes -- the relation to the Great Depression and to the Golden Age -- is profound evidence of its importance.
Moving on...
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| The Debt-per-Dollar Ratio since 1970 |
In the early 1990s there is a smaller downturn, which was followed by the "Goldilocks economy" of the 1990s. Vigor in the 1990s.
If you need more, you can find the same pattern in "debt service" data:
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| Household Debt Service |
10 comments:
Art
One of my own.
https://fred.stlouisfed.org/graph/?graph_id=322050&category_id=#0
If you want a head scratcher look at the savings as a percentage DPI and the ten year. They move together until 2008.
Read into it what you will, but I do not see anything in here that supports the Vigor in private sector growth you see yet.
IMO the only way to set the stage for renewed credit growth would be to increase interest rates to close the gap between the red and green line with taxes flat or reduced. That pumps more income into the private sector which should cause the gap between the two blue lines to narrow.
Of course this would be very bad for short term growth. The Fed screwed the pooch on this one. They lowered rates to stimulate credit markets, and all they got was asset inflation and increases in wealth.
Try this link
https://fred.stlouisfed.org/graph/?graph_id=322050&updated=9806
OT: "If you want a head scratcher look at the savings as a percentage DPI and the ten year. They move together until 2008."
Interesting. They run close for a long while. Makes me think interest rates are artificially low since 2008...
Sumner says Yes, interest rates really do impact the demand for money. (Your thoughts here.)
Maybe Sumner would also say the interest rate influences the desire to save. At low interest rates, people don't save much. And at high interest rates people save more. You know, like when the MegaMillions jackpot is high and people are buying the lottery tickets like crazy. Just a thought.
Oh! But in the years before 1980, going back to 1960, your green line saving was running much higher than the interest rate. Hm.
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The vigor that I see arises from the shape of the graphs. The debt-per-dollar graph has been falling since 2008. But lately the fall has been slowing and it appears to be reaching a bottom. It looks to me that the graph is ready to start going up. If it goes up, there will be vigor.
The private-to-public debt graph has also reached a bottom and appears ready to start rising. Also, the debt service graph. I expect all these graphs to start going up because I never see them listless low. If they are low, when they stop going down they start going up.
And I expect vigor because "After a decline in the Debt-per-Dollar (DPD) ratio, the economy is vigorous."
My expectation does not arise from looking at details. It arises from big picture, broad sweep monetarism. Yeah, when I look at GDP growth and employment growth and private investment I start thinking like everybody else: "recession". But when I look at my debt ratios starting to go up, all I can say is "vigor".
Hi Art,
I think your analysis is essentially correct.
However it may be premature. If you look at the debt per dollar ratio after the 1929 crash there are a couple of places where it looks like its starting to turn around and then it falls lower. My guess is that the current debt to dollar ratio won't start going up for any length of time until it falls below 50% of its 2008 peak. In the 1929 cycle that happened somewhere around 1944 - 15 years after the crash.
Art
"Interesting. They run close for a long while. Makes me think interest rates are artificially low since 2008..."
Maybe but I think it has more to do with this.
https://fred.stlouisfed.org/graph/?graph_id=322238&updated=5678
Dear OT
You are looking at the wrong mortgage backed securities.
The mortgage backed securities that drove interest rates into the ground were the ones that were not backed by govt guarantees.
http://si.wsj.net/public/resources/images/BN-DW279_RMBS_G_20140728130506.jpg
That chart shows a record of 5 trillion dollars of private investment money that flowed into the US home mortgage market through private mortgage conduits only during the bubble years.
But what is really shocking beyond belief is to look at the stock of mortgages that were financed through these private mortgage conduits.
https://fred.stlouisfed.org/graph/fredgraph.png?g=4t8u
The second chart makes it obvious that these mortgages were vaporizing almost as fast as they were being created. By the time things crashed 60% of these mortgages were already defunct and of course after the crash what was left of these mortgages these mortgages disappeared at a rate about as fast as they had appeared.
That's a huge sum of money flushed down the toilet that explains why the credit markets today are operating on such low interest rates.
Nobody is being forced to buy bonds that have such low rates of returns. The bond buyers are doing it because they got burned so badly.
Jim
I do not think you are following me correctly, when the Fed purchased the private sector's MBS they created new base money to fund the purchases.
QE provided liquidity to the private sector to create new or bid up existing assets.
Some of this new base money was used to purchase treasuries because bond buyers got burned so badly when they realized that MBA AAA does not mean risk free.
Too much liquidity chasing to few treasuries. Interest rate get bid down. Bond prices get inflated.
JMO
Yes we have all heard the story but I'm not buying that story.
Look at it this way - what would have happened if the Fed had not provided the liquidity? I say interest rates would have fallen anyway.
Many people blame the Fed for the Great depression because they failed to provide adequate liquidity but even when the Fed did not provide liquidity, market interest rates fell to even lower levels during the Great Depression.
What your story is saying in essence is that the debt per dollar ratio has been falling mostly because the Fed is pumping up the dollars.
The debt per dollar ratio fell in the Great depression even though the amount of dollars was also falling. Its just a lot more painful when the
amount of dollars are also falling.
Interest rates are the result of a two party transaction.
You are looking at it as if only one side participates.
The borrowers drive interest rates up when they believe that their future will be prosperous and they want to bring some of that future prosperity into the present. Lots of borrowing drives up interest rates.
Debt was increasing at a lot faster rate in the 70's than during the
recent bubble years.
Borrowers drive interest rates down when they don't believe in the bright future. When the future looks bleak they stop borrowing. That is what happened in 2008. the private sector went from adding to their debt by 1 trillion dollars every 3 months to not adding a dime to their debt and interest rates collapsed.
Jim
"Look at it this way - what would have happened if the Fed had not provided the liquidity? I say interest rates would have fallen anyway.
Many people blame the Fed for the Great depression because they failed to provide adequate liquidity but even when the Fed did not provide liquidity, market interest rates fell to even lower levels during the Great Depression."
I would not disagree with you, no FED liquidity in 2008 would have caused a massive flight to safety in Treasuries just as it did during the depression and interest rate would have fallen. But the mechanism of why they fell is the same too much money chasing too few securities. The Fed liquidity in 2008 IMO help prevent a massive deflation of private sector assets.
Private sector panic and additional Liquidity can produce falling treasuries rates. The difference IMO is only the severity and speed at which they fall..
Empirically however you cannot equate what happened in 2008 to the Depression, since existing data on nominal interest rates prior to World War II are both limited in scope and imprecise, but the argument that added liquidity can cause treasuries rates to fall and prevent the deflation of private sector asset is not an unreasonable position and most certainly not just a story.
"What your story is saying in essence is that the debt per dollar ratio has been falling mostly because the Fed is pumping up the dollars.
The debt per dollar ratio fell in the Great depression even though the amount of dollars was also falling. Its just a lot more painful when the amount of dollars are also falling."
It is not a story, the monetary base in both time periods was pump up by the FED. This was additional liquidity to the private sector.
Jan of 2008 was 856 billion, July of 2016 3,793 billion. 4.5X increase
Jan of 1930 5.94 Billion, July of 1938 11 Billion 1.85X increase, if you run this through Dec 1940 17.4 which is 3X increase.
"Interest rates are the result of a two party transaction. You are looking at it as if only one side participates."
No I am not, I made the argument that treasuries rates are getting lower due to the FED providing additional liquidity to the private sector.
Private sector takes this additional liquidity shows up at a Treasury auction and bids up the price of treasuries.
The point is not that the private sector shows up at Treasuries auctions, it that they show up with more liquidity due to the FED.
"Debt was increasing at a lot faster rate in the 70's than during the recent bubble years."
I do not know what this tells you, an increase in the stock of household debt by itself can mean a lot of things. However a Consumer Leverage Ratio (CMDEBT)/ (DPI) tells you a lot more and would put the increase of household debt in the proper context, since a stock of debt is always serviced from a flow of income.
1970 the ratio was 61%
1978 the ratio was 66%
.625% per year increase
2000 the ratio was 93%
2008 the ratio was 128%
4.3% per year increase
Household Debt leverage was not increasing faster in the 70’s.
"The Fed liquidity in 2008 IMO help prevent a massive deflation of private sector assets. "
That is correct. It doesn't have the same effect on Treasuries.
You are saying people were selling their Treasuries so that they can buy more Treasury securities. But with the price about as low as it can go those wouldn't be very bright people.
In the 70's debt was growing at a faster rate than during the recent bubble years.
https://fred.stlouisfed.org/graph/fredgraph.png?g=6wRG
The fact that incomes were growing fast and were expected to continue growing fast was the reason borrowers were willing to borrow so much at such high interest rates.
Interest rates are all about the borrower and lenders belief about the future. The monetary base has nothing to do with it. I will admit that the story about the monetary base has influenced the beliefs about the
future at various times but its a story and like crying wolf it might
work sometimes but don't count on it.
The monetary base before QE was essentially just currency in circulation. The amount of currency in circulation is driven by how much money the public wants in the form of wallet cash.
https://fred.stlouisfed.org/graph/fredgraph.png?g=6wOR
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