Sunday, September 25, 2016


A version of yesterday's graph where both series are quarterly:

Graph #1: Public (red) and Private (blue) Debt Path Comparisons
There's a bulge in the 1990s, and a bulge expanding since the 2009 recession.

I want to put a line right down the middle between the red and blue lines, like a centerline.

Graph #2: Public and Private Debt Paths, with Path Average (dashed black)
I just took the average of the two indexed values. It was easier than I expected.

If I take the black line and subtract it from itself and show it on a graph, it will be a nice, flat line at the zero level. That makes sense, right?

If I take the red line and subtract the black line from it, I will keep the basic shape of the red line but transform it down so it runs somewhat above the zero line. If I do the same for the blue line, it will run a little below the zero line.

Graph #3: Indexed Public (red) and Private (blue) Debt with their Average Subtracted Out
Ain't that neat? Subtracting the average creates symmetry. (Don't ask me how I know how to do this. It comes from doing it all the time.)

The text at the top of the graph was taking too much space, so I deleted the dashed black line. Couldn't see it anyway, as it was hidden by the horizontal axis.

I see something in #3 that I couldn't see in the earlier versions of the graph: There is a bulge between the 2001 and 2009 recessions. So that makes three bulges, not two.

And if you get a close-up of the graph, you can see a bulge between the 1974 and 1980 recessions, and a little one between the 1980 and '82 recessions. Lots of bulges, then. And what I said yesterday -- recessions come when the bulges close -- is confirmed.

Since it appears the bulge on Graph #3 is not going to close any time soon, I don't think we'll have a recession for another five years at least. Probably longer.


Upon close inspection I see no bulges before 1974. In other words, the bulge doesn't close for the 1970 recession. But the data (inexplicably) only goes back to 1966, so I can't talk about recessions before 1970.

The bulge doesn't close for the 1991 recession, either. But I might be able to explain that one: private debt growth slowed a lot between 1985 and 1992. This unusual debt behavior is probably somehow related to the unusual bulge behavior. Maybe I'll look into that... some other time.

For now, I must point out the obvious: the future is not guaranteed. But it seems to me that the bulge we are in right now is a bulge that will close with a recession, like the two bulges before it, and the non-bulge that ended in 1991, and earlier bulges going back to the 1974 recession.

I assume the current bulge will close. In other words I expect the blue line on Graph #3, over the next several years, to continue curving upward, making the sort of "bowl" shape that we have talked about before.

I also expect the red line, over the next several years, to continue curving downward, developing an inverted bowl. And I expect the two bowls, coming together, to pinch off economic growth and give us a recession. (That's just imagery. I'm not making a claim about causal relations here.)

Due to these expectations on my part, with some confidence I predict that our next recession will occur just as the two bowls are meeting. Therefore, I want to go to Excel and use second order polynomial trends -- my bowl maker -- to determine when the public and private debt trends will meet, pinching off the bowl we are in right now.

With a little work in Excel, I can put a date on the start of our next recession.


I know they're symmetrical, but I did 'em both anyway:

Graph #4: Future Path of Public Debt for Graph #3

Graph #5: Future Path of Private Debt for Graph #3
Both these trends are based on data from 2008 Q2 to 2016 Q1.

So I added those two estimates of future debt to a version of Graph #3 in Excel. Added a bunch of years to the right end of the graph. And deleted some years from the left end to make room. Here's what I got:

Graph #6: Predicting the Closing of the Current Bulge
Wow, that's a big bulge.

Okay, so around 2024. This graph of debt relations predicts our next recession to start some time around 2024.

Ridiculous, you think? Maybe. But let me try to talk you out of that.

The dashed lines meet in the first half of 2024. But the recession might start a year or two before the lines actually cross. So, 2022 or 2023 perhaps. 2022 is only six years from now. Maybe that's a less ridiculous prediction.

That ignores years gone by. Our last recession ended in mid-2009, according to NBER dates at FRED. Seven years ago. And I've read articles written by people apparently hungering for recession, suggesting that after seven years of growth we are already due for another recession.

It could be. But the bulge on the graph screams disagreement.

And besides, the claim that we've just finished up seven years of growth and now a recession is due, it seems to me that's the ridiculous claim. Growth was, what? Half what it should have been? So don't call it seven years. Call it three and a half.

Add six or seven years more to that, and we get an expansion nominally ten years in length. Know what? The expansion of the 1990s lasted ten years. It's not a ridiculous number.

I want to say: "No recession before 2022." I just don't want to jinx it.

// The Excel file

1 comment:

The Arthurian said...

Paul Krugman:
"... there’s a definite change in the character of recessions after the mid-1980s. Before then, recessions were basically brought on by the Fed, which raised interest rates sharply to curb inflation ...

Since then, however, inflation has been well under control, and booms have died of old age — or more precisely, they have died because of overbuilding and an excessive level of debt.

In today's post what I am talking about is recession arising (after 2022) from what Krugman calls "an excessive level of debt." We could have a recession well before 2022 if the Fed jacks up interest rates to create one.

It's interesting that the last three recessions before the mid-1980s were all preceded by bulges like the ones I've shown today. It makes me wonder whether those bulges were created by the Fed's interest rate actions. This would seem to be the case, if Krugman's observation is correct.