A response to Bezemer & Hudson's "Finance is Not the Economy"

I've been reading Finance is Not the Economy by Dirk Bezemer and Michael Hudson. It's really good. But we need to talk.

You know how, when you look at a graph of debt relative to GDP, the line starts out flat and then suddenly starts going up in the 1980s? Like this graph:

Graph #1: TCMDO Debt relative to GDP

Some people look at a graph like that and say there was an "explosion" of debt in the 1980s. Noah Smith said something like that a while back.

Funny, though. If you look at change in debt relative to GDP, you see a different picture:

Graph #2: Change in TCMDO Debt, relative to GDP

If you put a trend line on this one, it would start low and begin curving up immediately. It would continue curving upward all thru the 1960s and 1970s and into the 1980s. Then, after 1985, a sudden drop.

Why does the first graph run flat when the second graph shows a trend of continuous increase until the mid-80s? I mean, the second graph shows the changes in debt, and the first graph shows the accumulation of those changes. So, why does the first graph run flat?

One word: Inflation.


For near twenty years, beginning in the mid-60s, inflation pushed prices up. It pushed income up. It pushed spending up. And it pushed borrowing up.

Inflation pushed borrowing up. It made new additions to debt bigger. But inflation didn't make existing debt bigger. Inflation only affects new spending.

Inflation also made nominal GDP bigger. All of GDP is new spending, so all of GDP got bigger. Inflation increased the whole of GDP, and new additions to debt, but not existing debt.

When we look at Graph #2 we see big increases before 1980. But those increases don't appear on Graph #1 because the inflation in any given year does not increase the debt of prior years. That's why people say "inflation erodes debt".

Graph #2 goes uphill before the 1980s, but Graph #1 is flat because of inflation.


So anyway: You know how, when you look at a graph of debt relative to GDP, the line starts out flat and then suddenly starts going up in the 1980s? Everybody knows. But no one seems to know it's flat because of inflation. Everyone seems to think there was a magical time before the '80s when the economy grew fast enough to keep the line flat.

Can you see where this goes? It goes to policy. If you think Debt-to-GDP was flat because we used less debt and got more bang for the buck, or if you think it was flat as a result of inflation, it can change how you think about policy. Hey, I'm all in favor of changing policy. But I'm also in favor of avoiding wrong-thinking on the way to developing policy.

Funny thing is, we did use less debt and we did get more bang for the buck, back when there wasn't so much debt. It's true. But it's also true that the line is flat because of inflation.


So I've been reading Finance is Not the Economy by Bezemer and Hudson. Their key idea seems to be that money and credit (and debt) grew in proportion to GDP until the 1980s, and that since the 1980s money and credit (and debt) grow much faster than GDP. The pattern they describe -- a time of stability followed by a time of increase, with the change occurring in the 1980s -- is exactly what we saw in Graph #1 above.

This worries me.


If you look at debt relative to GDP and you want to base policy on it, then you have to take inflation into account. You have to look at "real" debt relative to "real" GDP. Otherwise you cannot be sure what the numbers are telling you.

But every graph of "real debt" that I ever saw was wrong. Everyone inflation-adjusts debt the same way you would inflation-adjust GDP. That's wrong. It's wrong because debt is a stock and GDP is a flow. Debt accumulates over many years. GDP accumulates for one year and starts at zero again the next year.

There's nothing in this year's GDP that is "final spending" from some prior year. Everything in this year's GDP is this year's stuff and can be figured at this year's prices. If you want to figure "real GDP" using base year 2009, you take one year's GDP, divide by that same year's price level, and multiply by the price level for 2009. Done.

That calculation doesn't work for debt. This year's debt includes this year's addition to debt, and last year's addition to debt, and the year before that, and debt from all the way back to the oldest thing that isn't paid off yet. So when you want to figure "real debt" -- when you want to figure the real purchasing power at the time the money was borrowed -- you have to adjust each year's addition to debt separately. If you don't do that, your answer is just plain wrong.

If I was writing the Bezemer and Hudson article, and if I didn't have this fetish about the real purchasing power of additions to debt, I would not have thought twice about it. I would have looked at debt relative to GDP, nominal to nominal. And existing debt from the time of the Great Inflation (and before) would be falsely low, because inflation erodes debt.

If you challenged me on it, I would have said the same thing people always tell me: I would have said the graph of "real debt to real GDP" looks exactly like the graph of "nominal debt to nominal GDP" because inflation cancels inflation.

That's not right, though, because debt is a stock and GDP is a flow. The "real" calculations for stock and flow are different. Stock-inflation divided by flow-inflation does not cancel out.

If you figure nominal debt to nominal GDP, or if you use the wrong "real" calculation, you can expect debt to look flat before the 1980s. I've been reading Finance is Not the Economy and I'm worried that Bezemer and Hudson find debt growing in proportion to GDP before the 1980s because they are using nominal values for debt, like my Graph #1.

Actually, they are. They said so. Their Figure 1 shows "YoY growth in nominal credit to nonfinancial business". They're using nominals. So their key insight, that debt grew in proportion to GDP before the 1980s, may well be mistaken. We won't know until they re-create their graphs with the data correctly converted to real values.


More on the inflation-adjustment of debt:

  •  Illusion, Reality, and the Growth of Debt
  •  By the numbers (2): History is different


EDIT 30 Nov 2016: Revised the first sentence with the word "erode".

The Archdruid on Free Trade

The Archdruid Report: The Free Trade Fallacy

It’s not always remembered that there have been two great eras of free trade in modern history—the first from the 1860s to the beginning of the Great Depression, in which the United States never fully participated; the second from the 1980s to the present, with the United States at dead center—and neither one of them has ushered in a world of universal prosperity. Quite the contrary, both of them have yielded identical results: staggering profits for the rich, impoverishment and immiseration for the working classes, and cascading economic crises.

Since wages are a very large fraction of the cost of producing goods, the overall decrease in wages brings about an increase in profits. Thus one result of free trade is a transfer of wealth from the laboring majority, whose income comes from wages, to the affluent minority, whose income comes directly or indirectly from profits. That’s the factor that’s been left out of the picture by the proponents of free trade—its effect on income distribution.

Getting rid of free trade and returning to a normal state of affairs, in which nations provide most of their own needs from within their own borders and trade with other nations to exchange surpluses or get products that aren’t available at home readily, or at all, gets rid of one reliable cause of serious economic dysfunction.

Recommended reading.

It was all over but the funeral when the red went above the blue

Graph #1: Growth of Financial (red) and NonFinancial (blue) Business Debt, relative to GDP
https://fred.stlouisfed.org/graph/?g=bRAv

That's when it was all over. But when did the trouble start? The next graph shows the blue relative to the red:

Graph #2

The blue line here is the blue (from Graph #1) relative to the red (from Graph #1).
The red line here is a Hodrick-Prescott, showing decline since the beginning.
If you look again, you might see an uptrend in the early 1960s which appears in the Hodrick-Prescott as a brief flattening. If I started the H-P in 1960 it would start with an uptrend.

Graph #3

The ratio doesn't always have to trend downward.
The early 1960s were pretty good, by the way. Also, the latter '90s.

David Glasner as poet

Romer’s most effective
rhetorical strategy
is to point out that

the core of modern macro posits
unobservable taste and technology shocks
to account for fluctuations in time-series data,

but that these taste and techno shocks
are themselves inferred
from the fluctuations in times-series data,

so that the entire structure of modern macro is
little more than an elaborate, sophisticated exercise
in question-begging.

David Glasner, Paul Romer on Modern Macroeconomics, Or, the “All Models Are False” Dodge. (Slightly edited.)


I looked it up. Begging the question means the argument is circular.

In your face, Milt

Milton Friedman:

Truly important and significant hypotheses will be found to have "assumptions" that are wildly inaccurate descriptive representations of reality, and, in general, the more significant the theory, the more unrealistic the assumptions (in this sense). The reason is simple. A hypothesis is important if it "explains" much by little ...
To put this point less paradoxically, the relevant question to ask about the "assumptions" of a theory is not whether they are descriptively "realistic," for they never are, but whether they are sufficiently good approximations for the purpose in hand. And this question can be answered only by seeing whether the theory works, which means whether it yields sufficiently accurate predictions.

From The Methodology of Positive Economics

Robert Solow:

All theory depends on assumptions which are not quite true. That is what makes it theory. The art of successful theorizing is to make the inevitable simplifying assumptions in such a way that the final results are not very sensitive. A "crucial" assumption is one on which the conclusions do depend sensitively, and it is important that crucial assumptions be reasonably realistic. When the results of a theory seem to flow specifically from a special crucial assumption, then if the assumption is dubious, the results are suspect.

From A Contribution to the Theory of Economic Growth

Friedman says an unrealistic assumption is fine if it produces an accurate prediction. Solow disagrees, saying that crucial assumptions must be reasonably realistic.

A Basic Macroeconomic Equation System from Arnold Kling

Short form: A Basic Macroeconomic Equation System

Long form: Introduction to Macroeconomics

The long form includes the short form. But I'm starting with the short one.

The model is pretty simple. As Kling points out, "There is no government or foreign trade sector." So it is only a place to start. But that's okay.

The file is undated. But Kling's example uses the value $8.5 trillion for GDP. That's about what our GDP was in 1997. Maybe the file is from that era.

Hey, I worked thru it and maybe I learned something. The last part of Kling's file is "The Paradox of Thrift". I worked it out in the model, in Excel. I answered Kling's questions:

What happens if people try to save more? In particular, what happens if the marginal propensity to consume falls ...?

The result surprised me. Income falls, but saving does not change. Total income goes down, and saving becomes a larger portion of it. If ... if deflation lowered prices along with incomes, the real value of saving would rise. That would invalidate the paradox. I have never seen this result in any of the "paradox of thrift" stories I've read.

I get it now! As Kling says: "in our simple model, business investment (I) is exogenous." Yeah, it's just a number typed into a spreadsheet cell. It's not calculated. So investment cannot change in Kling's Short Form model. And saving equals investment. So -- in the model -- saving cannot change.

This doesn't mean that the Paradox of Thrift is wrong. It only means that the model cannot show us what happens.

Come to think of it, maybe that was Arnold Kling's point. The first equation he gives us is a simplified version of Y=C+I+G+NX. The only other equation in the model is a calculation for consumption expenditures, the "C" in the first equation. There is no equation for the "I" in that equation, business investment.

Investment is a constant in the model. Therefore, saving is a constant in the model.

Kling says, "For most of the rest of this section of the course, we will be adding variables and equations to the macroeconomic model." Then immediately he goes to the Paradox of Thrift, which cannot possibly work unless the model has more variables and more equations.

Good job, Arnold. You made me think.


// My Excel file

"Where Does Growth Come From?"

What Are the "Ingredients" for Economic Growth? by Scott A. Wolla, from Page One Economics at the St. Louis Fed:

Where Does Growth Come From?

Three factors can create economic growth: more capital, more labor, and better use of existing capital or labor.

Three factors, period. End of story. Nothing remains to be said.

But guess what? I don't agree. (Surprise, right?)

This explanation, Scott Wolla's explanation, is standard fare. You read the same story when you read about the Solow Growth Model. You read the same story from economists and non-economists alike. But something's missing.

Something's left out: Sometimes, times are good. Sometimes, times are hard. They attribute this to varying efficiency. I say they left something out: Good times arise from financial conditions.

When you mention good times, kids like Noah think of the 1990s. But someone ten years younger (Noah says) cannot imagine why. Someone a little older, like my neighbor, thinks of Reagan and the 1980s. Older yet, Jude Wanniski thought that you have to have lived in the 1950s and 1960s to have experienced a good economy.

Good in the '50s and '60s, not so good in the '70s, better in the '80s and '90s, then not so good again. These anecdotals find some measure of support in the numbers:

Graph #1: Economic Growth (gray), Trend of Growth (red), and Trend of Trend (black)

Do you still think these variations have something to do with Scott Wolla's three factors?

Of course!

But do you think no other factor plays a role? You'd be pushing your luck to make such a claim. You'd be saying "evidence of no" where you should say "no evidence of". You'd be making assumptions about unknowns. You could make such a claim only if you refuse to look beyond those first three factors.

I know, I know: There's nothing else in the Solow Growth Model. There's capital, and labor, and efficiency, and that's it. But the Solow model is not the economy. The model is a simplification.

Surreal GDP

The one they call "nominal" GDP is the one that figures the stuff we bought at the prices we actually paid for it. I call that one "actual" GDP.

The one they call "real" GDP is where they take the stuff we bought and figure what it would have cost if prices didn't go up at all. I call that one unrealistic. It is useful, though, if you want to see how much output has increased, apart from how much prices have gone up. It's useful when you're looking at economic growth.

Then there's one they call "per capita" GDP. For that one they take GDP (usually "real" GDP) and divide it by the whole population of the country. Like we each get an equal share.

The trouble with this one is it brings the numbers down from trillions to thousands. So now we're talking about GDP that's the size of your annual wage. It's just so far removed from nominal ("actual") and from real ("unreal") GDP that it is not even comparable. Nominal and real always cross somewhere -- these days it's usually in 2009, and between 14 and 15 trillion dollars. Per capita GDP is nowhere near.

So I had this thought, something I want to call "surreal" GDP. I want to take real GDP per capita and multiply it by population. Only, instead of using population I'm going to use a constant number, as if population was not growing.

It's just like holding prices constant. Except I'm holding population constant.

My constant-population GDP will be a big number, comparable to nominal and real GDP. Mine will equal real GDP in the base year, and that will be whatever year I get the constant number from.

What Surreal GDP will show is similar to what "real" GDP shows. Real GDP shows what GDP would have been if prices never went up. Surreal GDP shows what GDP would have been if prices and population never went up.

Surreal GDP will remove the effects of fertility and immigration (and death!) from the number. Similar to real GDP, it will give a more honest evaluation of our economy's ability to grow, apart from how much the population has gone up. Because it's just a tad hypocritical to encourage immigration to get the population number up so that there is more demand and more labor, so that GDP can go up. It's like faking economic growth.

It is faking economic growth.


So I started with "Real gross domestic product per capita" (A939RX0Q048SBEA) from FRED.

I looked at "Total Population: All Ages including Armed Forces Overseas"(POP) to get a population number. The series starts in Q1 1952, so I used that for my base year. The population then was 156,522 thousand. I used that number for all the years (dividing it by a million to correct for differences in the units). And I went to "Gross Domestic Product: Implicit Price Deflator" (GDPDEF) to get numbers so I could move the RGDP base year from 2009 to Q1 1952.

It's easier to do than to read about. Here's what I got:

Graph #1: Blue = Nominal GDP (Prices and Population Going Up)
Red = Real GDP (Constant Prices; Population going Up)
Green = Surreal GDP (Constant Prices and Constant Population)

For the numbers at the right end, Surreal GDP is about half as much as Real GDP. For the numbers at the left end, all three lines start out equal.

Everybody uses 2009 for the base year. That makes the lines cross in 2009. I think that's a mistake. I used an early date for the base year because, you know, if prices and population are going up, the lines should show it.

Median Income

Median Income (red) is a fun-house mirror version of the Non-Federal/Federal debt ratio we looked at yesterday.

Non-Federal to Federal Debt (blue) and Median Income (red)

Establishing Parameters for Debt

How much economic growth can we get by adding a dollar to Total Debt? Not much:

Graph #1: Change in GDP relative to Change in Debt, and the Hodrick-Prescott Trend Line

Not much, but it does vary. The high point was back in the 1960s and '70s. On average, we added 60 to 70 cents to GDP for every dollar we added to TCMDO debt. That's twice as good as we've done since the mid-80s, as the red line shows. (I'm only looking at the "old normal" economy, before the crisis.)

We can say the 1960s and '70s show the best performance, the highest level reached by the red line on Graph #1. But after about 1968, that line is already going downhill. Economic performance deteriorated in the 1970s. So let's just say the 1960s, then, and forget the 1970s.

But the "Great Inflation" started in 1965. So forget the second half of the 1960s. Let's say that the best performance on Graph #1 is from 1960 to 1964. In those years we gained 60 cents of GDP for every new dollar of debt. And the trend in those years is upward, not downward, and not turning downward.


Why does the ratio on Graph #1 vary? It varies because debt is a drag on growth. Having debt is a drag on growth. It's adding debt that boosts growth. But adding debt increases the debt we have. It's a conundrum.

We need to keep total accumulated debt at the level that gives the most GDP for each new dollar of debt.

Graph #2: Total (Public and Private) Debt as a Multiple of GDP

In the years of its best performance, 1960 to 1964, total debt was about one and a half times the size of GDP. In all of the 1960s and '70s, really, where the red line runs high on Graph #1, total debt was about one and a half times the size of GDP.

Together these graphs tell me that we had the best economic performance when total debt was about 1.5 times the size of GDP. Each new dollar of debt added the most to GDP in the years when total debt was half again the size of GDP.

That's not just the Federal debt, by the way. These graphs show the Federal debt and everyone else's debt added together.


There is something to be said about public versus private debt. But we can't see it on the above graphs. We have to separate public debt from private, and compare the one to the other. This next graph takes the debt we've been looking at (TCMDO at FRED) and separates the Federal debt from all the rest, from the debt other than Federal. Call this other debt "non-Federal". The graph shows non-Federal debt relative to Federal:

Graph #3: Non-Federal Debt as a Multiple of the Federal Debt

In the years 1960 to 1964, our years of best economic performance, non-Federal debt runs between two and three times the size of Federal debt. After 1964, there was never again so little non-Federal debt.


We get the most output from an increase in debt when we have about $1.50 of debt for every dollar of GDP. And the best distribution of that debt is to have non-Federal debt between two and three times the size of Federal debt. So, for one dollar of GDP we want 40 to 50 cents of Federal debt and $1.00 to $1.10 of debt other than Federal. These are ballpark targets for maximizing economic growth.

Graph #4: Targets for Federal and Non-Federal Debt-to-GDP Ratios

// The Excel file (contains VBA code for the Hodrick-Prescott)

Why Labor Productivity is Low: A Pictorial

In response to recession, Debt Service (blue) falls and Productivity (red) rises:

Graph #1: Productivity shown in red.  Debt Service shown in blue.

The post-recession increase in labor productivity is reliably brief.

During the expansion, Productivity and Debt Service both increase:

Graph #2: Productivity shown in red.  Debt Service shown in blue.

Productivity (red) runs low when Debt Service is high, because financial costs interfere with growth:

Graph #3: Productivity shown in red.  Debt Service shown in blue.

Productivity runs high when Debt Service is low, because financial costs interfere less:

Graph #4: Productivity shown in red.  Debt Service shown in blue.

There is a listless transition between falling and rising Debt Service. Productivity is low during the transition:

Graph #5: Productivity shown in red.  Debt Service shown in blue.

We are in a transition now that will soon give way to a more vigorous economy. Debt Service is beginning to increase, and productivity will soon be on the rise.

Checking the revised Debt Service numbers

I expect Debt Service soon to climb from its current low level, bringing vigor to the U.S. economy just as it did in the mid-1980s and then again in the latter 1990s. I keep an eye on debt service.

I noticed that the most recent debt service data at FRED looks different from the previous "vintages" of that data. So I went to ALFRED and put the five most recent vintages together on a graph:

Graph #1: This Story Has Two Different Endings

Sure enough. There is a visible difference after 2013.

Here is a close-up view of the last few years:

Graph #2: The Five Most Recent Vintages of Household Debt Service Data

The most recent version is shown by the line that reaches farthest to the right. Each earlier version stops three months to the left of the later one. The tails of four earlier versions are visible.

For all the earlier versions, it appears that only the last value from the last time was changed. But the most recent version changes everything, all the way back to 2013.

How does this change affect the likely future path of debt service? What do the Excel trendlines show?

Graph #3: Polynomial Trends based on 2013 Q1 thru Last Available Data

These are all "polynomial" trendlines of order 2, based on data since the start of 2013. The black trendline is based on the most recent data revision. It predicts increase, about the same as the earlier releases of the data.

These polynomial trendlines, as I read them, predict growth and vigor for our economy. Growth and vigor, beginning soon. But the polynomial is not the only type of trendline Excel offers. The other types all show continuing sluggishness:

Graph #4: Not All the Predictions Are Optimistic.

The black trendline on Graph #4 is the polynomial type, based on the most recent data release. Same as Graph #3. The other trendlines are other types offered by Excel: power, logarithmic, linear, and exponential. These others all show downsloping trends. They predict continuing sluggishness. They seem to give little weight to the upward-curving of the most recently revised data visible on Graph #2.

I stand by my prediction: Growth and vigor, becoming obvious in 2018.


// The Excel file

Labor Productivity and Debt Service

Graph #1

Graph #1 Markup

// The Excel file

// The FRED source page

There is another way to fight inflation, other than raising interest rates.

From Monetary policy at the time of elections by Silvia Merler at Bruegel:

Kenneth Rogoff says ... Given that the Fed may struggle just to get its base interest rate up to 2% over the coming year, there will be very little room to cut if a recession hits. The two best ideas for dealing with the zero bound (negative rates and higher inflation target) are off-limits for the moment. Of course, there is always fiscal policy to provide economic stimulus. But it is extremely undesirable for government spending to have to be as volatile as it would be if it had to cover for the ineffectiveness of monetary policy. There may not be enough time before the next deep recession to lay the groundwork for effective negative-interest-rate policy or to phase in a higher inflation target. But that is no excuse for not starting to look hard at these options, especially if the alternatives are likely to be far more problematic.

There is another way to fight inflation, other than raising interest rates. If policy makers adopt this new method and use it in addition to manipulating rates, getting the base rate up to 2% over the coming year may be sufficient. Without extra help, rates might need to be at 4 or 5%; but with the extra help, 2% may be enough.

This supplemental method of fighting inflation does not depend on interest rates. Therefore the zero bound is not an issue.

The supplemental method may be categorized as a type of fiscal policy, but it need not be volatile. Nor should it be.


Back when the crisis hit, monetary policy suddenly shifted from an anti-inflationary stance to an anti-deflationary stance. Why? Why was the goal to encourage inflation rather than to prevent it? Because everyone was deleveraging, and deleveraging is deflationary.

Policy makers have the option to use controlled deleveraging as a way to fight inflation.


There is occasional talk of eliminating the tax deduction for mortgage interest expense. The economy may still be far too fragile for that, but the motivation is clear: The tax deduction for mortgage interest encourages indebtedness. Essentially, accumulated private debt is greater than it would otherwise be, because of the tax deduction.

Suppose instead, policy offered a tax credit for accelerated repayment of mortgage debt. This policy would not encourage indebtedness. Just the opposite in fact. The tax credit could be designed to create a tax benefit that is equal to the existing tax deduction for mortgage interest. It could be revenue neutral. Then policy makers could replace the tax deduction with the tax credit without shocking the economic system.

With the accelerated-repayment tax credit in place, private debt would accumulate more slowly than at present. Debt repayment would be more rapid. The net effect would be to reduce inflationary pressures. Properly designed, accelerated-repayment should be a permanent part of policy, just as inducements to borrow are a permanent part of policy.

Nor should we

Keynes did not despair of capitalism as so many other economists did.

- Time Magazine

Economic conditions drive politics

From The Road to Serfdom:

A "merely" economic loss is thus one whose effect we can still make fall on our less important needs, while when we say that the value of something we have lost is much greater than its economic value, or that it cannot even be estimated in economic terms, this means that we must bear the loss where it falls...

Economic changes, in other words, usually affect only the fringe, the "margin," of our needs... This makes many people believe that anything which, like economic planning, affects only our economic interests cannot seriously interfere with the more basic values of life.

This, however, is an erroneous conclusion.

Excerpts from The Road to Serfdom by F.A. Hayek, Chapter 7.

Hayek was writing about central planning, in a chapter titled "Economic Control and Totalitarianism". But the objection to central planning is an application of his argument. Don't be distracted. Look instead at the essence of Hayek's argument: Economic issues can and do "interfere with the more basic values of life."

Economic conditions drive politics. And the more we focus on politics rather than econ, the farther we are from real solutions.

About the vigor created by our next President

Reblogged from August

"The underlying reality of low growth", Neil Irwin says, "will haunt whoever wins the White House in November". I don't think so. I expect vigor, no matter who wins the White House in November.

I think it would be pretty ironic if Hillary Clinton gets elected. Because what I'm looking at amounts to vigor starting about a year into the first term of the next U.S. President. If Hillary is elected, we will be hearing stories that it takes a Clinton to create economic vigor. But Bill Clinton had no more to do with the good economy of the 1990s than Hillary does with the good economy of 2018-2024.

It would be more accurate to say that the changes which created the good years of the latter 1990s happened mostly during the Reagan and H.W. Bush years; and that the changes which will create the good years to come happened mostly during the Obama years.

For the record, the vigor of the 1990s was made possible by a big drop in debt growth (1985-1991) combined with a big increase in spending money (1990-1994). The debt-per-dollar ratio shows this as a decline (1990-1994). That decline was followed by unusually rapid increase (1995-2000). This increase was the source of the funds that made vigorous growth possible in the latter 1990s.

The changes are indicated in red on the graphs below:

Graph #1: The Growth of Total Debt

Graph #2: The Growth of Spending Money

Graph #3: The Debt-per-Dollar Ratio

You can see the same effects in the graph of household debt service.

Graph #4: Household Debt Service

The stage has already been set for the vigor that will be attributed to our next President.

When Labor Share Stops Going Down, Employment Growth Stops Going Up

Labor Share (blue) and the Growth of Employment (red)
Click Graph to Enlarge the Image

As long as labor is getting a smaller share, capital is getting a bigger share, so faster employment growth boosts profit. Then, when labor share stops decreasing, faster employment growth no longer boosts profit.

And again today

The destruction of the inducement to invest by an excessive liquidity-preference was the outstanding evil, the prime impediment to the growth of wealth, in the ancient and medieval worlds.

- J.M. Keynes

1986-1992: Preparing for Goldilocks

Graph #1: Growth Rates of Household Debt, Private Non-Financial Debt, and Non-Federal Debt

Debt growth fell after 1985. Household debt growth fell the least, non-Federal fell most, Private Non-Financial between the other two.

The fall of financial costs helped business keep inflation low. The growth of household debt was enough to bring demand and economic growth up.