The return and maintenance of economic vigor

I started predicting vigor in March of 2016. Then in July 2016 I showed a graph of Household Debt Service Payments at a low point and ready to rise:

I called vigor because financial costs are down:

Graph #4: The Fall and Rise of Household Debt Service Payments

Financial costs have fallen from 13% to 10% of Disposable Personal Income. And now consumers have 3% of DPI to play with. Look at the extreme right end of the blue line on the graph: The line is starting to go up again. Already.

In March I said "We are at the bottom now, ready to go up." Four months later I showed it going up. Debt service is starting to go up again already, I said.

But then, a year after my original prediction of vigor, commenting in March 2017 on the graph shown above, I said

The uptick at the end of Graph #4 seems to have fizzled out. The link shows TDSP thru the end of 2016: https://fred.stlouisfed.org/graph/?g=db7Y

Unfortunately, I wasn't clever enough to capture the graph as an image, and TDSP has since changed. The link in my comment doesn't show what I was looking at in March of 2017, which was something like the red line here:

Graph #1: Household Debt Service as of March 2016 (blue) and March 2017 (red)

The tiny uptick at the right end of the blue line was gone (or perhaps just slightly lower, now that I see this comparison!) and the newer data was flat. But I was still confident. "Vigor will come," I said.


When I looked just now at the graph linked in my March comment, it was the current version. The data had been revised, and the flat end was gone. Debt service is rising again. It is struggling to rise (as you might expect following a debt crisis, while people remain cautious) but it is rising. I marked up an interesting similarity:

Graph #2: Household Debt Service as of October 6 2017

Two very brief, very tiny maximums in the data, one after each major decline.

I expect what happens after the second tiny maximum will look a lot like what happened after the first: uptrend, a sign of economic vigor. And since the more recent major decline is much bigger, I expect the uptrend will also be bigger this time. We will see economic vigor again, for perhaps a decade.

All that remains is for us to take advantage of the good years: Use the time to prevent another decade of bad years. All we need to do is limit debt growth to something sustainable. Better yet, we should seek the debt-to-GDP ratio that's most conducive to growth. We want to be like a surfer riding a wave of debt, where the wave carries us forward at speed but does not grow to the size of a mountain.

It can be done. To have a vigorous economy, we need lots of borrowing (and that day is coming). But lots of borrowing creates lots of debt. The obvious solution is to pay down debt: to pay down debt faster than we have done in the past. We need policy to make that happen.

Accelerating the repayment of debt may slow the economy some. But so does raising interest rates. We can use accelerated repayment of debt as an anti-inflation policy, along with the interest rate hikes that policymakers already rely on. If accelerated repayment is used, rate hikes will be needed less. And debt will be lower.

But there is something else: Raising interest rates affects all new borrowing, and that curtails economic growth. That's not the best outcome. Accelerated repayment of debt, on the other hand, affects people who have already borrowed. It only slows the economy for those people. People planning to borrow are not hindered by this new approach to inflation control, so economic growth is less severely reduced.

The new policy has to allow for the fact that we're starting with a high level of debt. It must reduce debt gradually, so that people are not thrown into crisis by it. That may seem to defeat the purpose, but it does not. As long as debt is going down, we're on the right track. And almost immediately after the level of debt begins to fall, the economy will begin to improve.

We never had policy that accelerates the repayment of debt. That's the reason private debt got so big. We have lots of policies that encourage the use of credit, and none to encourage repayment. To make policy more balanced, more sensible, we need policies that accelerate the repayment of debt. This way we can keep policies that encourage credit use (and enjoy the growth that results from those policies) but avoid having debt grow to an unsustainable level.

We still do have a mountain of debt to deal with. Some people might worry that "accelerated repayment" would make life difficult for debtors. But there is no reason the policy should be punitive. At the start, the new policy must help us reduce our debt: It must not be punitive. Once debt falls back to a level that is compatible with a vigorous economy (and stabilizes there) the policy can be made neutral. It need never be punitive.