tag:blogger.com,1999:blog-2098432983500045934.post8615679124294388177..comments2024-03-12T22:19:32.339-04:00Comments on The New Arthurian Economics: Debt is built in many layers, each with its own price levelThe Arthurianhttp://www.blogger.com/profile/16501331051089400601noreply@blogger.comBlogger14125tag:blogger.com,1999:blog-2098432983500045934.post-79359486675504123252015-08-15T22:25:05.046-04:002015-08-15T22:25:05.046-04:00Whoa Art!
I admit my comment, like many of mine, ...Whoa Art!<br /><br />I admit my comment, like many of mine, was probably somewhat oblique, but I dont think it missed the mark as much as you think.<br /><br />Lets look at your post and the comments, including mine.<br /><br />You start out your post by quoting Nathan Tankus and his argument that inflation doesnt erode the burden of debts. He pulls a quote from Krugman where Krugman talks about falling inflation worsening the burden of debt.<br /><br />Now I dont care about GDP deflators, CPI, or whatever a this point. Tankus is referring to private debt while Krugman is likely referring to public debt. Or.. Krugman is using the same framework for evaluating public debt and private debt...... which is DEAD WRONG! That is my first point. <br /><br />Now you and Jazz go back and forth in the comments talking about how, when or whether to inflation adjust certain metrics and argue the merits of one or the other.<br /><br />My next point is that inflation adjusting public debt metrics has some merit. I might disagree with some on exactly what the inflation adjustment eventually means but I think it is of some use to think about public debt from year to year and consider what inflation has done to it. The reason being, I think, is that public debt is held as an asset in private portfolios so the "value" of that asset is dependent on 1) real growth in value and 2) inflation. I would argue that it means nothing to the govt since it never affects their ability to pay, but it does ("it" being inflation) does matter to the private sector holder of the debt.<br /><br />For private debt, one where people owe banks, I think inflation adjusting is a worthless concept and I started to explain why. Thats where I was talking about paying inflation adjusted dollars to banks. <br />You said;<br /><br />"I am trying to make people understand that the calculation used to convert "nominal" GDP to "real" GDP gives the wrong answer if you use it to convert debt. It's not even economics, really. It's arithmetic."<br /><br />I agree completely. But I want to take it a step further and say stop thinking about debt to GDP ratios for public debt the way you think about debt to income ratios for private debt. GDP is not the govts income!<br /> Greghttps://www.blogger.com/profile/03139782404004492965noreply@blogger.comtag:blogger.com,1999:blog-2098432983500045934.post-14421879855119876612015-08-15T17:38:14.786-04:002015-08-15T17:38:14.786-04:00Thanks, Jim. I like that.
The upper graph on this...Thanks, Jim. I like that.<br /><br />The upper graph on this Wikipedia page<br /><br />https://en.wikipedia.org/wiki/File:USDebt.png<br /><br />shows gross and public debt in trillions of 2010 dollars. In other words, inflation-adjusted debt. Everybody figures it the same way you'd figure real GDP from nominal.<br /><br />I guess nobody ever stopped to think about it.<br /><br />The R program used to generate the graph is also shown on that page. Can you read R ?<br />The Arthurianhttps://www.blogger.com/profile/16501331051089400601noreply@blogger.comtag:blogger.com,1999:blog-2098432983500045934.post-53925180248748170502015-08-15T17:25:33.284-04:002015-08-15T17:25:33.284-04:00Who the fuck was talking about "paying inflat...Who the fuck was talking about "paying inflation adjusted dollars to banks", Greg?<br />The Arthurianhttps://www.blogger.com/profile/16501331051089400601noreply@blogger.comtag:blogger.com,1999:blog-2098432983500045934.post-15250786430784598942015-08-15T16:38:28.574-04:002015-08-15T16:38:28.574-04:00Art wrote: "I am trying to make people unders...Art wrote: "I am trying to make people understand that the calculation used to convert "nominal" GDP to "real" GDP gives the wrong answer if you use it to convert debt."<br /><br />If you use that method to calculate real interest rates it will also<br />give you the wrong answer. To get real interest rates you just take nominal interest rate and subtract the rate of inflation. No multiplying or division. <br /><br />I don't know why one might expect to calculate one thing the way one calculates another thing. jimnoreply@blogger.comtag:blogger.com,1999:blog-2098432983500045934.post-41214679193234582062015-08-15T16:25:42.159-04:002015-08-15T16:25:42.159-04:00Greg, You mentioned about 30 things that I did not...Greg, You mentioned about 30 things that I did not bring up, ceteris paribus and all that. <i>None</i> of what I was saying had anything to do with debt being financialized and traded as an asset, for example.<br /><br />I am trying to make people understand that the calculation used to convert "nominal" GDP to "real" GDP gives the wrong answer if you use it to convert debt. It's not even economics, really. It's arithmetic.<br /><br />Trying with little success, I should say.<br /><br />BTW, did you see Brian Romanchuk's post?<br />http://www.bondeconomics.com/2015/08/inflation-and-debt-burdens.html<br />The Arthurianhttps://www.blogger.com/profile/16501331051089400601noreply@blogger.comtag:blogger.com,1999:blog-2098432983500045934.post-49309165981401036122015-08-15T12:51:15.043-04:002015-08-15T12:51:15.043-04:00I think one issue here is conflating terminology b...I think one issue here is conflating terminology between discussions of private debt and public debt. <br /><br />Much of what you say Art is true regarding our public debt, but that is because it is consistently financialized and traded as an "asset" so its value does fluctuate with inflation. Prices of bonds rise as interest rates fall and interest rates falling are generally something thought of as a fight against deflation, hence inflationary. Since the govt is the one making the payments on the debt and there is never a question as to whether the payments CAN be made (in the US any way) there is some validity to looking at the changing value of the dollars you are getting in various years, hence there is some meaning to the terms "real" or "inflation adjusted"<br /><br /> Its mostly meaningless when discussing private debt. I borrow 10,000 today at 6% for 5 years my payments do not change regardless of the inflation rate. My ability to make them doesn't change unless my income changes. Are there inflation affects on my nominal income? Perhaps my salary has COLAs but if not, a rising cost of everything else (of necessity) mean my debt payment leaves me with less disposable income. That being said I think its not helpful to think of this in terms of "real" vs "non inflation adjusted". The debt payments aren't of any more or less value to the banks who are receiving them, they have already built interest into the equation. Its silly I think to talk about people paying inflation adjusted dollars to banks and inflation doesn't help borrowers pay their debts to banks unless they are having rising incomes during the inflationary times.<br /><br />Thats my $.02Greghttps://www.blogger.com/profile/03139782404004492965noreply@blogger.comtag:blogger.com,1999:blog-2098432983500045934.post-59798404075540585482015-08-15T05:48:46.426-04:002015-08-15T05:48:46.426-04:00"Thus, we can talk about the current year in ..."Thus, we can talk about the current year in the context of some base year. This allows us to estimate what the value of GDP, etc, would be if the size of the measuring stick hadn't changed."<br /><br />Yes. If we want to see how much the economy has really grown, for example, inflation adjustment is useful. That's why I say <a href="http://newarthurianeconomics.blogspot.com/2015/08/the-inflation-adjustment-of-debt.html" rel="nofollow">"Real" numbers provide the better measure of growth.</a><br /><br />"Also notice that the inflation adjusted value of 2015 GDP is LESS than the nominal value, not more than, as per your algorithm."<br /><br />But I don't use my algorithm for GDP. I use it for debt, because debt is an accumulation over many years. Each year's addition to outstanding debt must be inflation-adjusted separately. <br /><br />Suppose we set debt aside, and consider GDP for a moment. Let me take your graph g=1DjX, change the frequency to annual for simplicity, and download the data from FRED. Now I have a set of "flow" values in two forms: actual values, and inflation-adjusted values.<br /><br />Now pretend there is another variable that people talk about: <b>Aggregate Output</b>. This would be the accumulation of GDP over many years. Here is the relation that concerns me:<br /><br /><b>Deficits are to GDP as Debt is to Aggregate Output.</b><br /><br />My algorithm applies to Debt and to Aggregate Output, not to Deficits or GDP.<br /><br />If I take the FRED numbers for Real GDP and add them all together, the number I get will be <b>inflation adjusted Aggregate Output</b><br /><br />When I make a <a href="http://3.bp.blogspot.com/-7lVKJUE_xmU/Vc8BOo5AgtI/AAAAAAAAOKo/FtZ0hhj2Fsg/s1600/Aggregate%2BOutput%2B-%2BNominal%2Band%2BReal.png" rel="nofollow">graph</a> showing Aggregate Output and Inflation-Adjusted Aggregate Output, the Inflation-Adjusted line runs higher,<i>even at and after the base year</i>.<br /><br />"I'll ask again, why do you think inflation adjusting debt is worth doing, has any meaning - practical, theoretical or abstract; and what do you expect to do with it?"<br /><br />Krugman says inflation erodes debt. If that is true, then I should be able to show it on a graph. I have shown it. The inflation-adjusted line is higher, even at and after the base year. If the graph turned out like your g=1DjX graph, with the inflation-adjusted numbers lower than the nominals after the base year, then it would show no erosion of debt by inflation. My algorithm shows inflation-adjusted debt is higher, which is what we would expect from Krugman's statement.<br /><br />Noah Smith asks <a href="http://noahpinionblog.blogspot.com/2015/03/why-did-us-deficit-start-exploding-in.html" rel="nofollow">Why did rich-world deficits start exploding around 1980?</a> A big part of the answer to that question is that the Great Inflation came to an end at that time. Noah fails to deal with that.<br /><br />I have seen graphs of inflation-adjusted debt where people have used the same calculation that you would use for GDP: The value for any given year has that particular year's price level divided out, and the base year's price level multiplied in. That's fine for GDP. <br /><br />It's even fine for annual deficits. But with debt, the value for any given year consists of borrowings from many prior years. Therefore, <b>there is no one particular year's price level that can be used to remove the effects of inflation</b>. To solve this problem, we can break up debt into annual deficits, inflation-adjust the deficits separately, and then sum them up to get inflation-adjusted debt.<br /><br />If inflation-adjusting debt is worth doing, then it is worth doing right.<br />The Arthurianhttps://www.blogger.com/profile/16501331051089400601noreply@blogger.comtag:blogger.com,1999:blog-2098432983500045934.post-35089908230578372142015-08-14T23:51:24.603-04:002015-08-14T23:51:24.603-04:00OK. But compare this graph.
https://research.stl...OK. But compare this graph.<br /><br />https://research.stlouisfed.org/fred2/graph/?g=1DjX<br /><br />Notice that in the base year nominal and inflation adjusted GDP are identical. That's what I was getting at. From the 2009 perspective, 2015 is the future.<br /><br />All this is saying is that if we measured 2015 GDP in 2009 dollars, the number would be smaller because 2009 dollars were bigger than 2015 dollars. Thus, we can talk about the current year in the context of some base year. This allows us to estimate what the value of GDP, etc, would be if the size of the measuring stick hadn't changed.<br /><br />That is all inflation adjustment is good for. It provides a context, but one that is confusing, and can be easily misunderstood or abused.<br /><br />Also notice that the inflation adjusted value of 2015 GDP is LESS than the nominal value, not more than, as per your algorithm.<br /><br />The previous base year was 2002, IIRC. That would give you a completely different set of even smaller post-2002 numbers. So any inflation adjustment is a totally arbitrary exercise. And, again, will be different for any selection of base year.<br /><br />If the Fed decided to use 2015 as the base year, the allegedly "real" values all will change again, with "real" and nominal values identical for 2015.<br /><br />This is suggesting to me that there is a conceptual flaw in inflation adjusting a stock. <br /><br />I'll ask again, why do you think inflation adjusting debt is worth doing, has any meaning - practical, theoretical or abstract; and what do you expect to do with it?<br /><br />JzB<br /><br /><br /><br />Jazzbumpahttps://www.blogger.com/profile/07337490817307473659noreply@blogger.comtag:blogger.com,1999:blog-2098432983500045934.post-41033048171326992862015-08-14T15:44:26.181-04:002015-08-14T15:44:26.181-04:00Jazz: "You can never inflation adjust a curre...Jazz: "You can never inflation adjust a current value."<br /><br /><a href="https://research.stlouisfed.org/fred2/search?et=real+estate&st=real&t=quarterly%3Breal&rt=quarterly&ob=sr&od=desc" rel="nofollow">Really?</a><br />The Arthurianhttps://www.blogger.com/profile/16501331051089400601noreply@blogger.comtag:blogger.com,1999:blog-2098432983500045934.post-47383510848109660332015-08-14T12:03:11.053-04:002015-08-14T12:03:11.053-04:00Art -
No. My comment to the earlier post made exp...Art -<br /><br />No. My comment to the earlier post made explicit that I grok the difference between "real" and real! You are obfuscating.<br /><br />I don't have a vocabulary problem.<br /><br />I have a problem understanding that when the real (i.e. factual and documented) total of your outstanding debts is $10,000 you perform a calculation that says it's "real" (i.e. inflation adjusted) value is $14,275. This is why Nathan said you were being incoherent.<br /><br />Your problem is conceptual. You can never inflation adjust a current value. Your debt level is what it is, and your income level is what it is, all in today's dollars. <br /><br />Otherwise, I will be delighted to lend you $10,000 tomorrow morning and have you pay me back $14,275 in the afternoon.<br /><br />Cheers!<br />JzB<br /><br />Jazzbumpahttps://www.blogger.com/profile/07337490817307473659noreply@blogger.comtag:blogger.com,1999:blog-2098432983500045934.post-49558091900686550382015-08-14T09:57:06.035-04:002015-08-14T09:57:06.035-04:00Jim: "You seem to be saying that if there was...Jim: "You seem to be saying that if there was no inflation AND everything else remained the same your debts would be a lot higher. But that seems a bit backwards to me. If there was no inflation then your income and the price you pay for things would be lower and debt would remain the same."<br /><br />If debts are higher and everything else is unchanged... If debt is unchanged and everything else is lower... Either way, the debt-to-GDP ratio goes up. The two scenarios you describe differ because of the choice of base year -- either near the start of data, or near the end. That's why the one scenario seems "backwards" relative to the other.<br />The Arthurianhttps://www.blogger.com/profile/16501331051089400601noreply@blogger.comtag:blogger.com,1999:blog-2098432983500045934.post-46235399423203061032015-08-14T08:35:18.017-04:002015-08-14T08:35:18.017-04:00I'll admit I'm confused by what you mean b...I'll admit I'm confused by what you mean by real<br /><br />You seem to be saying that if there was no inflation AND everything else remained the same your debts would be a lot higher. <br /><br />But that seems a bit backwards to me. If there was no inflation then your income and the price you pay for things would be lower and debt would remain the same.jimnoreply@blogger.comtag:blogger.com,1999:blog-2098432983500045934.post-19353199170402261472015-08-13T18:52:18.677-04:002015-08-13T18:52:18.677-04:00"Your real debt today = exactly your nominal ..."Your real debt today = exactly your nominal debt today, because inflation has no effect in the instant, and that is where you live... You owe exactly what the sum of your debt statement say you owe, not some finagled, fictional number."<br /><br />Jazz, you're not confused by the unfortunate word "real" are you???<br />The Arthurianhttps://www.blogger.com/profile/16501331051089400601noreply@blogger.comtag:blogger.com,1999:blog-2098432983500045934.post-29066990320806091752015-08-13T17:14:53.390-04:002015-08-13T17:14:53.390-04:00My debt today includes money I borrowed last year ...<i>My debt today includes money I borrowed last year to buy a car, and money I borrowed several years back when I bought a house. </i><br /><br />So far, so good.<br /><br /><i>To figure my "real" debt correctly I would have to divide part of my debt by last year's price level and part of it by the price level when I bought the house. </i><br /><br />No. Your real debt today = exactly your nominal debt today, because inflation has no effect in the instant, and that is where you live.<br /><br />What you actually owe on any given day is the sum of your car debt and house debt and credit card debt and whatever else you might have borrowed from somebody else last week. The inflation rates on the days that you bought the car the house and whatever are irrelevant.<br /><br />You owe exactly what the sum of your debt statement say you owe, not some finagled, fictional number.<br /><br />These real vs nominal adjustments only make sense when you are trying to normalize some measure across time, so that you can compare the value at t(1) to the value at t(2) and not be thrown off by the changing purchasing power of money.<br /><br />But you are going at the whole thing backwards. If you want to inflation-adjust debt, you can't start from some arbitrary t(0) in the past and calculate up to now, By doing that you get an unreal debt which is greater than your actual debt. And it will be different for every t=0 that you might chose. <br /><br />You have to run your calculations the other way, and inflation adjust the past with t(0) = now, and all the other t's as negative.<br /><br />But what does that get you?<br /><br />What are you trying to accomplish?<br /><br />Cheers!<br />JzBJazzbumpahttps://www.blogger.com/profile/07337490817307473659noreply@blogger.com