Friday, February 3, 2017

Advice for Beginners: Toward a solution to the problem of debt

Nick Rowe, November 29, 2011:
Why has (private) debt increased?

Anyone got good graphs, showing private debt/income ratios back over several decades?

[and in comments]

He's got a good graph for the US, since 1916.
But debt to income ratios may not be the most informative way to look at debt. That's the way everybody looks at debt, and the problem remains unresolved. I suggest debt to circulating money, the money that is used to pay down debt. As this ratio increases, it becomes increasingly difficult to pay down debt. And I suggest the ratio of private debt to public debt, because it is closely related to good times and hard times.

Paul Krugman, November 29, 2011
Debt History

As part of that long-term project, I’ve been looking at the long-term debt history of the United States, using both the Fed’s flow of funds data (which start in 1952) and the earlier, not quite comparable, data from Millennial Historical Statistics. Here’s what I think is a key chart; it shows nonfinancial private-sector debt as as percentage of GDP:

One thing that jumps out is the surge in the debt ratio during 1929-33, which is due to a plunge in GDP rather than a rise in debt — call it Irving Fisher’s revenge. Another is the fall in the debt ratio during World War II, reflecting a combination of income growth, low borrowing, and some very helpful inflation; I’d argue that this debt reduction played a key role in the economy’s ability to avoid a relapse into depression.

But a broader point is the U-shaped trajectory over time. This matches up with a lot of things. Gary Gorton’s “quiet period” of freedom from financial crisis probably has a lot to do with low debt, as well as deposit insurance. The trajectory also matches long-term trends in income inequality and political polarization.

More on this eventually; for now, I think the data are really interesting.
Krugman points out "the fall in the debt ratio during World War II" which, he says, "played a key role in the economy’s ability to avoid a relapse into depression." Well, sure. But beyond that, the debt reduction played a key role -- the key role -- in creating the economic vigor of the post-WWII period by permitting demand to expand more rapidly than income, as debt was again able to increase from a low level.

Arthurian, December 18, 2009

The problem is debt. We need to reduce debt.

We need tax incentives that get us to pay off debt faster than we do now. That will reduce debt. That will reduce the debt problem.

Accelerated repayment of debt also fights inflation. And it makes the financial system stronger.

All the pieces of the puzzle fit.
I offer an idea that needs to be taken seriously by people who know more than I do. Two years later, Krugman is pointing out the obvious, and Rowe is looking to start thinking about debt.
I wonder what ever happened with Krugman's long-term project, and what ever happened to his focus on private debt, and Rowe's.

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