Monday, September 12, 2016

Putting numbers on vigor (4: Projecting household debt)

Well, I left myself a mess. In part 3 of this series we came up with several possible futures for household debt. What to do with them, what to do.

This is the debt we're looking at, household debt:

Graph #1: Household Debt
The image is current as of 10 September 2016. The last data value shown is for the first three months of 2016. That point on the graph represents just over 14 thousand billion dollars of household debt. That's just about the same as it was at the start of the so-called Great Recession.

This next graph shows that same data, in Excel, along with three estimates of household debt out to the end of 2025.

Graph #2: Household Debt and Three Projections
The most interesting thing about this graph is that it makes 14 thousand billion dollars look like nothing.

The red and green lines we saw before, in black. They are Excel's trend lines in the first graph of 10 September.

The red line here extends the trend based on data from 2010 Q1 to 2016 Q1. The green line extends the trend based on data from 2013 Q1 to 2016 Q1. We see slower growth of debt in the green line than the red. These lines show nothing more than a continuation of changes that occurred in the last few years. The difference originates in the choice of years the trends are based on.

Based on my notes of 8 September, I'd say the green line here is probably a low-ball estimate of debt growth. The red line represents a more likely path for future debt growth; that would be my guess. But I think there is some chance that debt will grow at a faster rate than indicated.

I took the difference between red and green, and added that difference to the red line to get an even higher estimate of household debt in the years ahead: the gold line. Based on the three projections shown, by the end of 2025 household debt will be something over $20 trillion, something over $25 trillion, or something over $30 trillion.

I want to use the red line on Graph #2 as a base line. Household debt may accumulate at a slower rate (green) or a faster rate (gold) but I expect it to be somewhere in the neighborhood of the red.

To this graph I want to add the estimates of future debt based on Graphs #4 and #5 of 9 September. For these I have to work out values based on the trend lines, and then take "debt service" out of those values to get predictions of future household debt.

Trying to think of a way to present this mess of lines. Colors, you know. I'll keep the historical data blue. But I'll change the red, green and gold from Graph #2, making all three red for the next graph. The middle of these three lines is my "baseline estimate" for household debt over the next decade. The other two red lines are low-ball and high-ball estimates. The three red lines together show the central path and a plausible range for that debt.

This leaves any color other than red or blue which can be used for the "polyline" estimate (see Graph #4 of 9 September) and the "power" estimate (Graph #5 of the 9th) and also a "linear" estimate (see the Excel file linked below).

I'll show the historical data back only to the year 2005, and make the graph taller to spread the lines out a bit.

Graph #3: Household Debt and Six Projections
Okay. Look at the three lowest projections -- dark gray, light gray, and dashed red. These are pretty well clustered together. The dark gray line is based on Excel's "power" trendline using historical data from 2010 to 2016. The other two use historical data from 2013 to 2016, the period of slower increase.

The green line is based on a linear trend line and on the "slower" 2013-2016 data.

All the lines end a little above 20 trillion, a little above 25 trillion, or a little above 30 trillion, as before.

So what does it mean that the three new lines run fairly close to the three red lines? It certainly does not mean that my predictions are right. I think it means that I maintained the same assumptions all through the process of calculation and that I didn't make any really big mistakes.

But it might mean that I failed to maintain my assumptions and made one or more lucky mistakes that nicely offset the changes in my assumptions.

Hey, this is prediction. I'm only trying to get an idea what might happen. It doesn't "mean" anything. But it is useful, because if I get an idea what might happen to household debt, maybe I can get an idea what will happen to economic growth.

Talk about assumptions!

Anyway, having looked at all these lines, I think I will just keep the red lines and forget about the rest. That will give me a range of possible paths to the future.

And somehow, we end up back where this post started, with just the three lines.

// see also 2020 vision

// the Excel file

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