Nightmare!

From Tim Duy at Seeking Alpha:

St. Louis Federal Reserve President James Bullard graciously responded to my latest post regarding his much considered speech. I actually do not enjoy drawing Bullard's attention, in that it makes me fear that one day I will find that my access to FRED has been disabled.

JW Mason: Fisher Dynamics in Household Debt

At the Slack Wire, JW Mason introduces his and Arjun Jayadev's new study of debt, a 31 page PDF.

From the Abstract:

Specifically, if average rates of growth, inflation and interest remained the same after 1980 as before 1980, household debt burdens in 2011 would have been roughly the same as they were in the early 1950s, despite the sharp increase in borrowing in the early 2000s.

Unfortunately, the costs of debt led to inflation in the 1960s and '70s, which led to the suppression of growth since the 1980s. (Through the whole period, of course, debt burdens continued to increase and were encouraged by policy to increase.) The deleterious effects of debt on prices and on aggregate demand made it impossible for "average rates of growth, inflation and interest [to remain] the same after 1980 as before 1980".

That's my story, and I'm sticking with it.

From the Abstract:

If lower private leverage is a condition of acceptable growth, then in the absence of a substantial fall in interest rates relative to growth rates, large-scale debt forgiveness of some form may be unavoidable.

Yes. We have to to something like that. I still say print money and use it to pay off debt. Pay off private sector debt so the private sector can grow, so the economy can grow. Let us reduce financial costs and turn the difference into increased wages and profits. Oh, and let us use our increased income for growth, instead of using so much debt. Because if the private sector resumes the increase of debt, then we have not really solved the problem.


Page 2:

when the motivation is concern over credit constraints, liquidity, or financial fragility, it is also important to consider the evolution of debt in isolation from assets.

The quote above is a call for economists to stop ignoring private debt. It is the next necessary step after Keen's observation that

Non-economists might expect professional economists to pay great heed to these indicators—after all, surely private debt affects the economy? However, the dominant approach to economics—known as “Neoclassical Economics” —ignores them completely, on the a priori grounds that the aggregate level of private debt doesn’t matter: only its distribution can have macroeconomic impacts.

Page 2:

While outside the scope of this paper, it seems clear that it was only the massive increase in federal borrowing that allowed the private sector to deleverage successfully in the 1940s.

Mmmm. I'd like to see more on that. I get it. I got it from MMT I think. But I don't have it. I need to keep kicking it around until it makes sense to me the way DPD makes sense to me. I'll get there eventually.

Meanwhile, let me point out that if the problem is excessive debt and the need to deleverage, then the solution ought to be neither another world war nor another massive expansion of the role of government in society. All we need is to pay down the debt. We could do it with Congress and the Treasury, but they'd be likely to bicker forever and to expand the role of government anyway.

I'd rather have the Federal Reserve stand up and say: Oops, we made a mistake. We thought it would be okay to let the accumulation of debt grow faster than the quantity of base money and M1 and unencumbered forms of money, but we were wrong. Now we see we are wrong, and we wish to set things right. We will make an adjustment. We will print money and use it to pay off debt and thus remove the liabilities from the private sector, and rescue creditors as an accidental byproduct of our efforts. We will no longer print money and use it to buy up risky assets, rescuing creditors but leaving debtors to hang, leaving the economy in tatters. Please note that this is a temporary, emergency measure, and that our policy will change again as debt falls to a level that enables economic recovery and growth.

Page 3:

JW Mason's Figure 1: Non financial Leverage, 1929-2011

Figure 1 suggests that policymakers have good reason to be concerned with rising leverage; but also suggests that private leverage should be at least as much a focus of discussion as public leverage.

Amen!

Page 3 (bottom):

between 1980 and 2000 households reduced their borrowing compared with the prior two decades, but saw a rise in their debt burden.

Mason follows that observation by returning to his focus:

The increase in household leverage over this period is fully explained by Fisher dynamics -- that is by the increased burden of existing debt in an environment of higher nominal interest rates and lower inflation. This is in sharp contrast with the usual story of rising household borrowing after 1980...

But let me stick to my focus and point out that it makes perfect sense that "between 1980 and 2000 households reduced their borrowing compared with the prior two decades" because growth was slower after 1980 than before. It's like confirming what I thought I knew.

And yes, a rise in the debt burden would be a consequence of, for example, lower inflation and higher interest rates. But don't forget that the policies that led to lower inflation and higher interest rates were created consciously and on purpose, to fight a prior problem: the inflation of the 1970s.

And I return again to the notion that when the inflation arose in the '70s it came not in tradeoff with unemployment, but as a complement to unemployment. The "stagflation" of the 1970s was a new and different problem, and it could not be solved by people who were used to thinking of a tradeoff between inflation and unemployment.

Like Solomon, then, policymakers split the stagflation problem in two. They took a "both" problem and dealt with it as two separate problems. They would fight inflation with monetary policy; and they would invent new tales of government and regulation to deal with unemployment and growth.

And as with Solomon, splitting this baby was not the answer.

Encumbered Money

From Does expanding the amount of debt free money reduce indebtedness? at RALPHONOMICS:

Money can be split into numerous different categories. But one type of categorisation is to split money into so called “debt free” money, and in contrast, money which consists of a debt which is passed from hand to hand.

Central bank created money (monetary base) is essentially debt free. In THEORY this money is a debt owed by the central bank to the holder of such money, but central banks make absolutely no promise to give anyone anything (e.g. gold) in exchange for this money. Thus it is essentially debt free.

In contrast, commercial bank created money is essentially a debt which is passed from hand to hand. I’ll call this “debt-encumbered” money.

Yeah. Money that comes from the central bank is NOT debt.

In the days when you could turn in your paper and get a fixed amount of gold for it, yes, the paper was a promise to pay gold. It was an IOU for gold. It was a debt.

Not any more.

Today, the dollar has taken the place of gold. You don't get something FOR the dollar; you get the dollar. There is no more promise to pay something for central bank money, for government-issue money.

It's different with bank-issue money, to be sure. It's a heavy word, encumbered, but that is somehow appropriate, given the burden of private debt today.

//

Taking a second look at this...

I like Ralph's word "encumbered".
I like that he defines two types of money, encumbered and debt-free.
I really like Ralph's view that central bank money is not debt because there is "absolutely no promise to give anyone anything in exchange for this money." I would add that the central bank creates this money "from nothing" -- which means it doesn't ever have to be paid back!

I have just a touch of trouble with the notion that "commercial bank created money is essentially a debt which is passed from hand to hand." It isn't. If money was a debt, an obligation passed hand to hand, nobody would want it.

When you take out a loan, you and the bank create new money and new debt. That twin creation is a new use of credit. Then you spend the money you borrowed, and you are left with the debt. The debt does not circulate; the debt stays with the borrower. And the new money, well, once separated from the debt, it becomes indistinguishable from money created by the central bank.

The reason it is important to define two types of money has to do with debt. When you or I create money, we also create debt. But when the central bank creates money, NO DEBT IS CREATED. Our money is created by creating debt. Central bank money is not.

When you take these two types of money, or practical versions of them (like "spending money" and "total debt") and make a ratio of them, the ratio is an indicator of the cost of credit use, which must be compared to other costs in the economy.

Excessive cost inhibits growth.

The excessive cost of credit-use is an unnecessary cost. Rather than letting people create money and debt at the same time, central banks should provide enough debt-free money to accomplish to same amount of economic activity. This way there is no change at all, except interest costs are reduced, so cost-push inflation is reduced, so that profits and wages and living standards improve.

Productive Argument, with a Touch of Irony

In their 2007 article The Real Economic Crisis, Dean Baker and John Schmitt attempted to shift attention from "the bursting of the US housing bubble" to "the sharp deceleration in productivity growth since the middle of 2004."

From the article:

Between 1947 and 1973, the golden age of postwar capitalism, productivity growth averaged about 2.8% per year in the United States.

From 1973 through 1995, however, productivity growth took a nosedive, with the average rate dropping to just 1.4%.

From the mid-1990s on, however, official productivity growth again accelerated rapidly, returning to a 2.9% rate reminiscent of the golden age. Quite suddenly, though, in the second half of 2004, productivity growth dropped sharply.

Again, summarizing those dates, we observe:

1947-1973	1973-1995	1995-2004	2004-2007
GOOD	NO GOOD	GOOD	NO GOOD

Andolfatto links to The Productivity Slowdown Reaffirmed by James Kahn and Robert Rich, and offers a snippet from their opening paragraph:

Economists generally agree that productivity is the primary ingredient for sustainable growth in GDP and wages. The August productivity data release provided some clarification regarding trend--or long-run--GDP growth, but the news was not good: Following a resurgence of strong productivity growth in the late 1990s and early 2000s after nearly a quarter-century of slow growth beginning in 1973, the latest reading from a trend tracking model now indicates that slow productivity growth returned in 2004.

Kahn and Rich do indeed reaffirm the termination dates 1973 and 2004 noted by Baker and Schmitt -- and reaffirm the "goldenness" of the 1947-73 period.


David Andolfatto's post is a follow-up to his What output gap? on James Bullard's "wealth shock" theory.

Thus in the new post Andolfatto expands on the consequences of overestimating Potential GDP or trend growth. He refers again to Kahn and Rich:

It is widely believed that the difficulty of detecting a change in trend growth contributed significantly to the economic instability of the 1970’s, as policymakers were unaware of the slowdown in productivity growth for many years, and only much later were able to date the slowdown at approximately 1973. This resulted in overestimating potential GDP (at least so the conventional wisdom goes) and setting interest rates too low, and double-digit inflation followed not long after.

If the Fed permits money-growth commensurate with an over-estimate of Potential Output, the result will be inflation. The argument for slower money growth today gains strength by comparison with the 1970s (because we know what happened then). But this does not mean the argument is correct.

We don't know that the circumstances are similar. We cannot measure Potential Output. It is all a guess. Dismiss the analogy to the 1970s, then do what you will with the rest of their argument.


At the Fed, they attribute changes in productivity trends to "events such as wars, changes in government policies, or structural change in the economy" (Kahn and Rich). Elsewhere, that is. Anywhere but at the Fed.

I on the other hand attribute changes in productivity trends to changes in the debt-per-dollar ratio, the reliance on credit and the factor cost of money. Nowhere but at the Fed.

Here's the thing. At the Fed, they're wearing blindfolds and swinging sticks, trying to hit Potential GDP. Meanwhile, I am saying that what they think are changes in Potential Output are simple results of changes that you can see in the debt-per-dollar curve.

[ Part 1 ]	[ Part 2 ]	This is Part Three

++"Wealth Shock"

Krugman has an interesting take on James Bullard's "Wealth Shock" idea:

Maybe the idea is that the burst bubble reduces demand, and hence leads to lower production.

Yeah, that's how I took it, though I had to wait for Krugman to make it clear. But what else can it be, if a "wealth shock" leads to lower GDP? It's not that we're suddenly able to produce less. It's that we're suddenly buying less. That follows from the wealth effect.

I don't buy the "wealth effect" story, myself. I'm with Jazz on that:

given empirical data that closely links consumption to income, how can consumption depend "primarily on wealth rather than income?"

But falling demand due to a "wealth shock" and its wealth effects, was the only way I could make sense of Bullard's rather direct words: "The negative wealth shock lowers consumption and output."

Krugman, again:

Maybe the idea is that the burst bubble reduces demand, and hence leads to lower production. But at that point you’re into a Keynesian world of deficient demand, and you should be talking about ways to close the gap, not accepting it as a fact of life.

I thought that was clever, rubbing Bullard's nose in his own Keynesian poo.

...you should be talking about ways to close the gap, not accepting it as a fact of life.

I'm with Krugman on that. Here's mine:

If [Andolfatto] was trying to explain why GDP was slumping and why potential GDP was slumping -- because of excessive private debt, for example -- I would have some use for his analysis. But like Bullard, he brushes aside any concern with "special factors and headwinds". David Andolfatto seems to be saying only that things are bleak and we ought not expect anything better.

We do expect better. However, Krugman tells only one side of a story. Yes, demand is inadequate. The other side of the story is that demand must be excessive. According to Bullard, remember, inflation is already above our new explicit 2% target level. He wouldn't tell us that unless he thought it time to start pushing interest rates up again, to curtail demand. So demand must be excessive in Bullard's view.

Only two percent? Yeah. And if I thought Bullard's "wealth shock" analysis was right, I'd support him at two percent. Other people think we ought to push the inflation target higher, up to four percent maybe. If I thought that would solve the problem, I would support it. But the problem is certainly not that prices are going up too slowly. That's not the problem at all.

The problem, as Krugman said, is that we're in a world of deficient demand. But it's an inflationary world of deficient demand. So, wait: Let's not talk about ways to close the gap. Let's talk about how we got into this mess. Because this world of simultaneously insufficient and excessive demand is a result of the problem that needs to be fixed.

We got into this mess when everybody started deleveraging. Paying down debt. Rather than borrowing more and spending more, we started borrowing less and paying off more. So the reduced borrowing is spending that we're not doing, and the paying off is more spending that we're not doing. A double-whammy on spending.

So, paying down debt is the problem? No. Paying down debt is our solution to the problem. The problem is that we had so much debt in the first place. Private debt.


I left Bullard hanging.

Bullard is concerned about inflation. Now I know, a lot of people just want to dismiss that concern, because we have bigger problems. But you can't just dismiss arguments you don't like. You have to deal with them and show them wrong, or accept them.

Or bide your time and don't jump to any conclusions. That's always a good rule.

So, the inflation. I don't think inflation is a crisis. But I don't like a two percent target. I like a zero target (even if I can only fail to achieve my target). And I really don't like the doublespeak that says "a constant price level" when it means "a constant inflation rate". Bill Mitchell recently pointed out an example of that:

In that Press Release, the ECB said it main role was to achieve “price stability” (that is, stable inflation)

Anyway, Bullard. He says if we overestimate potential output and set policy by it, we will encourage excessive demand and we will get inflation like we got in the 1970s. (And, he says, inflation is already above target.)

Everybody else says the economy is not growing enough, and we don't have jobs enough, and unemployment is too high, and demand is insufficient, not excessive.

How can there be such a difference in views? I think the trouble arises from the way we explain inflation. Here's Mitchell again:

Inflation is driven by nominal aggregate demand growth that exceeds the capacity of the economy to respond in real terms – that is, to increase output.

Too much money chasing too few goods. For Billy, as for Milton and Anna, inflation is caused by excessive demand -- by demand "that exceeds the capacity of the economy to respond". Demand being excessive relative to potential output is the cause of inflation, they say. Exactly what Jim Bullard says.

If you think of inflation along those lines, and you admit we're getting inflation already, then you end up thinking that "the capacity of the economy to respond" must somehow have been crippled. You end up thinking that there must have been a sudden drop in potential output. Exactly what Jim Bullard says.


But all we need -- if we wish to undermine Jim Bullard's argument -- is to realize that demand-pull isn't the only inflation story there is. There is also a cost-push inflation.

Economists seem always to pooh-pooh and ha-ha the concept of cost push inflation. But it makes perfect sense to me.

There is a nice short Wikipedia article on cost-push inflation and if I take two parts of it and put them in reverse order, I get what seems to me an excellent explanation of cost-push inflation:

Monetarist economists such as Milton Friedman argue against the concept of cost-push inflation because increases in the cost of goods and services do not lead to inflation without the government and its central bank cooperating in increasing the money supply.

Keynesians argue that in a modern industrial economy ... a supply shock would cause a recession, i.e., rising unemployment and falling gross domestic product. It is the costs of such a recession that likely causes governments and central banks to allow a supply shock to result in inflation.

I accept both sides of that disagreement. It doesn't even seem to be a disagreement, with the order reversed like that. Here's what I see:

Yeah, it is demand that affects prices. More demand pulls prices up more. Less demand pulls prices up less. And demand expresses itself as spending. And spending is done for the most part with money -- money and credit. With things that work like money.

So, the quantity of money has to have an influence on prices. The quantity of stuff that works like money. I accept that. (I accept it even though I do not accept the graphs Milton Friedman offered to convince us of the truth of it.)

But if something happens -- a "shock" call it, pathetic as that explanation is -- and it drives costs up, then the existing quantity of money has to stretch to cover the higher prices that accompany increasing costs. And if the money doesn't stretch enough, then the spending has to shrink. And if the spending shrinks enough, you get a recession.

And if the central bank has a "dual mandate" to keep prices stable and to keep the economy growing, getting a recession means it has failed to meet its mandate.

And if the central bank decides to take a safe, "middle of the road" position, it ends up compromising between recession and inflation, and getting some of each.

And the inflation we get in such circumstances arises (as monetarists argue) because the quantity of money was allowed to expand. But actually, the prices had to go up anyway, because the costs were going up; and the central bank opted to allow some of that cost-push inflation to continue rather than creating another recession.

That's what it was like in the 1970s. That's the future Jim Bullard sees. The alternative is to figure out why we have cost-push, and to fix that problem.

At the root of cost-push you will find the ever-increasing cost of accumulating debt.

[ Part 1 ]	This is Part Two	[ Part 3 ]

Bleak Apologists

Federal Reserve economist David Andolfatto says maybe there is no output gap.

The output gap is the gap between where we are and where we ought to be. People who see an output gap think we ought to be on the same GDP path we were on before the crisis. But, Andolfatto says, maybe potential output has collapsed. Maybe "where we ought to be" has collapsed, and maybe where we are today is as good as it gets. Andolfatto, and his boss James Bullard, and their friends Cochrane and Taylor.

Bullard writes:

For those who take the “large output gap” view, the expectation is for real GDP to grow rapidly after the recession comes to an end, as the economy catches up to its potential. It is like a rubber band, there is supposed to be a bounce back period of rapid growth. In fact, most analysts have been looking for exactly this effect since the summer of 2009. It has not happened. This has led to a lot of analysis concerning special factors and headwinds that might be inhibiting the “bounce back” effect.

The wealth shock view puts a different expectation in play. The negative wealth shock lowers consumption and output. But after the recession ends, the economy simply grows from that point at an ordinary rate, neither faster nor slower than in ordinary times. It is more like an earthquake which has left one part of the land higher than another part. There is no expectation of a “bounce back” to a higher level of output after the recession ends. This is closer to what has actually happened since mid-2009.

Taylor's graphs show both circumstances:

Large Output Gap, and Bounce-Back after the 1981 Recession

Wealth Shock, and NO Bounce-Back after the 2008 Recession

Bullard seems to be saying that it's potential output that is wrong, that a realistic evaluation would have us push the red line down to meet the blue, rather than expecting the blue line to bounce back up and meet the red.

Talk about lowering expectations!

What Bullard's "Wealth Shock" view means, if true, is less income all around -- "perhaps 5.5 percent" less, he says. Or, if the proceeds of growth are not evenly distributed, more that 5.5 percent less, for most of us.


Andolfatto writes:

I think that Bullard makes a persuasive case that the amount of household wealth evaporated along with the crash in house prices should likely be viewed as a "permanent" (highly persistent) negative wealth shock... The implication is that the so-called "output gap" (the difference between actual and "trend" GDP) may be greatly overstated by conventional measures.

The view that one takes here is likely to influence what one thinks about monetary policy. The conventional view seems to support the Fed's current policy of keeping its policy rate close to zero far into the future. In his speech, Bullard worries that this may not be the appropriate policy if, in fact, potential GDP has experienced a level shift down (or, what amounts to the same thing, if conventional measures treat the "bubble period" as the economy being at, and not above, potential).

Fair enough. If we think of the housing bubble years as "normal" we are probably overestimating potential output now. And if that's the case, our overestimate does not apply only to the years after the recession.

The housing bubble years. Bubble years are good years -- unsustainable, but good. So the housing bubble years should have been better than normal I should think. After all, housing is the backbone of the U.S. economy. A magnificent boom in housing should have made the whole economy magnificent. And yet Robert Brenner observes

the business cycle that just ended, from 2001 through 2007, was -- by far -- the weakest of the postwar period...

Despite the major stimulus provided by a bubble in housing, the performance of the economy was weak. Weak, when it should have been better than normal.

David Andolfatto wants us to think that our expectations were too great. He is concerned that we'll get policy wrong if we think of the economy in those years as normal rather than bubbly -- "if conventional measures treat the 'bubble period' as the economy being at, and not above, potential." And weak as the economy was in those years, Andolfatto wants us to think of 2001-2007 as above potential.


If DA didn't stop there, I might agree with him. If he was trying to explain why GDP was slumping and why potential GDP was slumping -- because of excessive private debt, for example -- I would have some use for his analysis. But like Bullard, he brushes aside any concern with "special factors and headwinds". David Andolfatto seems to be saying only that things are bleak and we ought not expect anything better.

And Bullard? Good god, Bullard is ready to create another recession right now. In the opening statement of his 6 Feb 2012 paper, he says

At the January meeting, the Federal Open Market Committee (FOMC) took an important step forward by naming an explicit, numerical inflation target for the U.S. of 2 percent, as measured by the personal consumption expenditures (PCE) price index.

We now have an official inflation target of two percent. Next, Bullard says

In a targeting context, inflation means headline inflation... By the headline PCE measure, U.S. inflation is running somewhat above target right now, at 2.4 percent...

We are now ABOVE our official inflation target of two percent. It is time, Bullard implies, time to jack up interest rates and tamp out growth.

This is Part One	[ Part 2 ]	[ Part 3 ]

IMPROVED Google Docs Spreadsheet Charts!

Lots of new formatting options for my Google Docs charts.

For example, I can now set the font size for the chart title. Not a big thing, maybe, but a HUGE improvement. Thanks, Google!

Alan B. Krueger: The Rise and Consequences of Inequality

From a Whitehouse blog

(Click the four-arrows icon in the lower right corner for a full-screen version.)

The Rise and Consequences of Inequality in the United States: charts

View more presentations from White House

Dancing with Steve

It's getting difficult for me to avoid reading Steve Keen.


In Economics in the Age of Deleveraging Keen identifies the "Age of Leverage" -- for the US, the years between World War Two and 2007 -- and the "Age of Deleveraging" (the years since 2007). He provides two graphs showing dramatic increase in private debt followed by sudden decline, and says "only the Great Depression compares".

And Keen says this:

Non-economists might expect professional economists to pay great heed to these indicators—after all, surely private debt affects the economy? However, the dominant approach to economics—known as “Neoclassical Economics” —ignores them completely, on the a priori grounds that the aggregate level of private debt doesn’t matter: only its distribution can have macroeconomic impacts.

Keen objects to the notion that "the aggregate level of private debt doesn’t matter". In other words, Keen thinks the aggregate level of private debt DOES matter.

He doesn't put it in those words, exactly, but that's what he is saying: The level of debt matters. I like to say the level of TOTAL debt matters; Keen here says it's the level of PRIVATE debt that matters. But anyway total debt is composed mostly of private debt, so we are not very far apart.


So then I was thinking maybe Keen had changed his view since I read him some time back. Actually, since my first post that references Keen. In that post I wrote:

Keen says the "superficially good economic performance" since the mid- to late-80s was "driven by a debt-financed speculative bubble." I say it was driven by the growth of debt. I say the host of Debtwatch has overstated the case.

I was saying it is the level of debt that matters: An excessively high level of debt is the problem. Keen was arguing that the problem was not the level of debt, but the use to which debt was put: speculative use. Keen had explained:

... the debt added to the economy’s servicing costs without increasing its capacity to finance those costs. At some stage, the growth of unproductive debt had to falter, and when it did a serious financial crisis would ensue...

But I thought otherwise:

Keen's explanation is wrong. It suggests that if all the debt was productive debt, there would have been no problem. That's blindly optimistic. Accumulating debt would have created the crisis eventually, no matter how you label that debt.

So. In the older post (June 13th, 2010) Keen said the problem was not debt, but "unproductive debt" specifically. In his recent post, however, he seems to suggest it is the aggregate level of debt that matters. He seems to say that the problem results from how much debt there is, rather than what kind of debt it is. I thought he was coming around to my way of thinking. I was bejabbered.

Bejabbered, but wrong. In the recent post Keen says

an increase in debt adds to aggregate demand—and it is the primary means by which both investment and speculation are funded.

Speculation, again. The level of debt matters to Steve Keen because it influences "both investment and speculation". If not for speculation, he says, things would be grand!

Keen remains concerned about the difference between productive and speculative debt. His remarks regarding the level of debt arise from his concern with the level of speculative debt. Keen still fails to see the cost of debt in general as a cost issue for the economy. A factor cost issue.

Keen, from the recent post:

If the change in debt is roughly equivalent to the growth in income ... then nothing is amiss: the increase in debt mainly finances investment, investment causes incomes to grow, and the economy moves forward in a virtuous feedback cycle. But when debt rises faster than income, and finances not just investment but also speculation on asset prices, the virtuous cycle gives way to a vicious positive feedback process: asset prices rise when debt rises faster than income, and this encourages more borrowing still.

Keen sees no problem with accumulating debt, as long as that debt was created for productive use and not for speculation.

What I see is that debt ALWAYS "rises faster than income" -- except at the end:

Graph #1: Total Debt relative to GDP (GDP is Income!)

If there is any question in your mind that excessive debt can create problems in the economy, check out the Debt Accumulation item in my sidebar....

// UPDATE FOR JIM & JAZZ

Graph #2: Total Debt relative to GDP, through 1982

Graph #3: Total Debt relative to GDP, 1962-1972

Well look at that! Sure enough, the ratio went DOWN from 1965 to 1969.

Oh no-no wait! It went up from 1966 to 1968.

So what do we have?  1965-66 and 1968-69 the ratio went down.

THOSE were the years when debt was "productive"???