Saturday, December 10, 2016

It's not a metaphor


From page 22 of How to Predict the Next Financial Crisis (PDF, 30 pages, 2012) by Steve Clemons and Richard Vague:

Creating consumer demand — the goal that so often eluded policymakers from Roosevelt forward — is a straightforward process. In 1990, the U.S. consumer debt-to-GDP level was 62 percent. In 2000 it was 70 percent. Today, even after some deleveraging, it is 88 percent. Reduced demand is largely a function of these high levels. Reduce the debt, and demand reappears.

"Reduce the debt, and demand reappears."

It's not a metaphor for something else. It is offered as a way to fix the economy.

If Clemons and Vague are right, we must be able to see it in the numbers. Okay, so here is consumer debt. Or more precisely, household debt:

Graph #1: Household Debt
There, after 2009 or so, the debt was reduced. Now it's going back up again. So, where's the improvement to consumer demand?

And you know what? Consumer demand was good in the 1990s, after about 1994. That was the time they call "the Goldilocks years", when everything was "just right". Where's the reduced debt that made those years good? Ha!

Oh, you know what? The quote says "debt-to-GDP" but I only showed debt. This next graph shows consumer debt-to-GDP:

Graph #2: Household Debt relative to Income
After 2009, debt is reduced. Not much, but more than on the first graph. On this graph, the "going back up again" did not happen yet. But it looks like it might start soon.

And the 1990s? There's a sharp increase in the mid-1980s, not a reduction of debt. And then from the mid-80s to the year 2000, persistent increase. Again: no reduction of debt appears on this graph.

Let's try one more graph. This one shows household debt, relative to the quantity of money that's used as income. That's the money we use when we make payments on our debts -- and the money we spend on other things, instead of using credit:

Graph #3: Household Debt relative to the Money We Use as Income
After 2009 debt is reduced. Reduced a lot this time: more than on the other graphs. But debt looks a little less ready to start going up again just now.

And the 1990s? Well look at that! Yes, on this graph debt fell a bit in the early 1990s, just before productivity improved and the economy got pretty good for a while. There it is in the numbers, the reduced debt that made the "Goldilocks" years good.

4 comments:

Oilfield Trash said...

Art

This is why the 90's were so good.

https://fred.stlouisfed.org/graph/?graph_id=349227

OER and HPI were on the same page. No additional debt to fund housing speculation.

The Arthurian said...

Yeah okay, O.T. That's making sense now. And "no additional debt" for almost all the time between the 1991 and 2001 recessions. As opposed to none of the time between the 2001 and 2009 recessions.

Oilfield Trash said...

Art

"And "no additional debt" for almost all the time between the 1991 and 2001 recessions. As opposed to none of the time between the 2001 and 2009 recessions."

Yes since GDP no longer measures gains from housing speculation (since we no longer measure what people pay for homes in CPI), private debt to GDP measurements will get really bad when home prices diverge from OER. Inflated HIP(Home Index Price) cost, larger about of debt to buy the home with less GDP contribution, higher percentage of Private debt to GDP.

Even if you adjust it to Real GDP you still do not get it right since we use OER to calculate the deflator.

You have to get really fancy and strip out the OER contribution to the deflator and proxy the effects of what a reasonable HPI has on the deflator.

It looks like we have built in another housing bubble, I guess we will see.

https://www.advisorperspectives.com/dshort/updates/2016/11/23/fhfa-house-price-index-up-1-5-in-q3

The Arthurian said...

Oilfield,
"... GDP no longer measures gains from housing speculation (since we no longer measure what people pay for homes in CPI) ..."

And

"Even if you adjust it to Real GDP you still do not get it right since we use OER to calculate the deflator."

Yeah so I can't avoid the problem by using the deflator I guess.

This is one complicated mess & I'm having trouble getting a handle on it.