If you do not look, you can not see

At Wikipedia, the U.S. "public" debt is the debt of the Federal government (as opposed to state and local governments). It includes both "Debt held by the public" (which is included in FRED's TCMDO as FGTCMDODNS) and "Intragovernment debt" (which is not part of TCMDO, but is included in FYGFD and also GFDEBTN).

GFDEBTN shows quarterly data, but only goes back as far as 1966. FYGFD only shows annual data, but goes back to 1939. At first, I didn't notice the late start of GFDEBTN, and used that data to produce this graph comparing "Public" debt to "Other" (non-Public) debt:

Graph #1: The Public Debt as a Percent of the Rest of Debt, since 1966

Wow! -- It's all over the place. The Total Public Debt (converted to billions) relative to all the other debt in our economy, and expressed as a percent.

But this is not the first time I've looked at these graphs, and the picture shown in Graph #1 was not the picture I was expecting. That's when I looked closer and noticed that the numbers don't start until 1966.

BTW, 1966 is the year I graduated high school, and I can still remember that far back. Heck, I remember thinking the '66 Pontiac GTO was a dream car. The price of gasoline back then was, I don't know, maybe 32 cents a gallon? Those days are gone. Pontiac is gone now, too.

Interesting thing about Graph #1. Despite 4, 5 years of private-sector deleveraging, and despite 4, 5 years of earth-shattering Federal deficits, the level of Public debt today, the most recent level shown, is no higher than it was in the mid-1990s (just before the "macroeconomic miracle"). And it is lower today than it was in 1966. Public debt, relative to all the other debt in our economy.

But 1966 has us already into the so-called Great Inflation, and approaching the end of the so-called Golden Age. Graph #1 shows mostly troubled times for our economy. So I did the graph over, this time using FYGFD, to see as many years as possible:

Graph #2: The Public Debt as a Percent of the Rest of Debt

This graph shows the same relation as Graph #1. It just shows more years. But you can see that the high point around 2010 appears on both graphs. You can see that the high point of the mid-1990s appears on both graphs. And you can see that the high point of 1966 on Graph #1 shows up on Graph #2 as a point higher than everything else that comes afterwards.

What Graph #2 shows, which Graph #1 does not, is that the decline from the 1966 high is really a decline from the much higher level in 1950 (or before). So you have to go back to Graph #1 and re-imagine it to see the blue line falling from way-high up, falling, and falling to its 1966 level, and continuing to fall then as the graph shows, until 1974 when it takes its first significant bounce.

If you only look at the graph for 1966 and after, a lot of important info is left out.

The Public debt declined until 1974 when it reached a low of 25% of "other" debt. If we take Graph #2 and flip it over and look at "Other" debt relative to the Public debt, we will see "Other" debt rising until 1974 when it reaches four times the level of the Public debt.

Graph #3: The Rest of the Debt as a Multiple of the Public Debt

Debt other than the Public debt increased from approximately equal to the Public debt in 1950, to four times the Public debt in 1974. Since that time it has been variable at a high level.

That's when things went bad, 1974, because of the massive accumulation of debt other than the public debt. That was the end of the Golden Age, and the midst of the Great Inflation. Since that time, the economy's performance has been variable, at a low level.

A lot of people say we must reduce the Public debt. Just about everybody else says yeah, but to do that we must first increase the Public debt. I say hey, why don't we just reduce "Other" debt through some kind of massive debt forgiveness?


A post at Economic Logic, titled Increasing public debt is a consequence of financial liberalization and inequality opens with this premise:

The current debt crisis is the culmination of a long process of public debt accumulation over the last three decades in developed economies.

I challenge the premise.

The current debt crisis is the culmination of a long process of private and other non-public debt accumulation until 1974, when the economy broke under the burden of that debt. Since that time both Public and Other debt have grown more rapidly, but this growth has not solved the debt problem.


Related post: How the Scientist Thinks

Ouroboros and Irony

To solve a problem in computer programming, you break the problem down into smaller parts and solve each part separately.

That technique works very well.

To solve the problem of debt, it seems to me, many people like to break the problem down into small parts and then say: Look! There is no big debt problem!

That technique doesn't work.

I'm pretty confident that finance grew because productive-sector profits were declining, making finance relatively more attractive. And I am fairly confident that financial costs are the primary contributor to declining productive-sector profits. Ouroboros. It becomes necessary to reduce the size of the financial sector so that the productive sector can grow. Irony.

But I distrust the notion of putting limits on finance. Sht runs downhill, and soon those limits will be on me. The US Congress is not wiser than the Roman Senate, nor less self-interested.

If we -- the nonfinancial sector -- use half as much credit, the financial sector will shrink. The easy way to use half as much credit, without hindering growth, is to pay off old debt. Continue with the new uses of credit that become spending and create growth, but accelerate the repayment of debt to reduce the total demand for credit.

I keep coming back to the question that if we just need credit for growth, then why do we need credit use at 350% of GDP? And I keep coming back to the observation that there is nothing natural about the size of the debt accumulation we have achieved. It must be a result of policy.

Yes, I want to achieve the same thing that can (presumably) be done by imposing limits on me. But my plan of attack is different, and my thinking goes all the way back to the rudimentary assumptions that underlie policy.

I want more fiat money in the economy to make up for the reduction of credit use. (That's the whole plan.) But the quantity of fiat money has been reduced (see: M1/NGDP) while our use of the more expensive credit-money has increased. The quantity of fiat money has been reduced because of our assumption that printing money causes inflation.

Meanwhile, our use of credit has increased -- leading to the bizarre accumulation of debt -- because of our assumption that credit use is good for growth. (See "irony".)

Velocity

From Asymptosis:

There’s about $10 trillion in MZM right now, and GDP (annual spending) is at about $14 trillion.* The money stock turns over about 1.4 times per year.

and this important footnote to the $14 trillion:

* Note that this does not include spending on intermediate goods — those that are turned into final goods within the accounting period — or used stuff. Adding these into total spending when calculating velocity might yield interesting insights. See Nick Rowe, Macroeconomics and the Celestial Emporium of Benevolent Knowledge.

GDP counts only "final" spending. Basing the velocity calculation on GDP is like figuring your average speed during a cross-country trip, based on the time and distance of the last mile of the trip.

If you want a realistic measurement of how often the average dollar is spent, you must consider all the spending that occurs in a given period of time. I have an acronym for that: TEA, or Total Economic Activity. There is no such measurement in the statistics.

Quite frequently in newspaper articles you can find GDP described as "total economic activity." That is an error.

Land, Labor, Capital, and Finance

A post by Gunnar Tomasson of Gang8, on the Keen-Krugman dispute. Most of it escapes me. But not all:

Back to Samuelson. On another occasion in the late 1970s, I wrote to him and stated that it was logically impossible to integrate money into a unified general equilibrium framework because NO real factors of production were involved in the supply of modern (electronic) money.

In other words, something which cost nothing to produce could not in principle be placed in an equilibrium setting with something whose production required inputs of real factors of production (labor and natural resources).

Forget the context. Or, go read it. Whatever. I need to focus on a detail.

Tomasson says no real factors of production are involved in the supply of modern money, and money costs nothing to produce. I think he refers to the central bank's ability to create money by 'pushing a button on a computer'.

By contrast, credit or bank money does involve real factors of production. Those are the factors Thomas Philippon has in mind when he says, "The sum of all profits and wages paid to financial intermediaries represents the cost of financial intermediation."

But wages are wages, and profits are profits. Apart from those payments to labor and capital, there is the payment to finance: interest.

And, you know, if you have a few dollars in savings and earn just a few pennies interest on that money, to that extent you are part of finance.

If we say excessive finance is the problem then you are not part of the problem, for your few pennies are not excessive, certainly. Not to worry about that.

In TWON, Book 1, Chapter VI, Adam Smith wrote:

When those three different sorts of revenue belong to different persons, they are readily distinguished; but when they belong to the same they are sometimes confounded with one another, at least in the common language.

I think of myself as a workingman; my neighbor thinks himself a capitalist. Both of us to some extent receive interest income. The sources of revenue are often confused.

Smith didn't include finance among his sorts of revenue, but I do. Interest is not the same as wages, not the same as profit, and not the same as rent. Therefore there must be a separate category into which interest costs resolve themselves.

At the start of capitalism -- Smith's time -- finance played a very small role. At the end of capitalism -- our time -- it plays a very large role. The cost Smith overlooked was negligible. Today, we can no longer afford to overlook the cost of finance.

Holding that thought

Just came across this old comment from Clonal:

Art,

You said,

the burden of debt declines when there is inflation

That is true only if I do not take on more debt with time, and my income keeps up with inflation

Absolutely true, and extremely important. I have come to rely on this thought more and more in the months since I read it.

Private Debt 2012 (15): $870B + $693B + $730B + ...

From the CONVERSABLE ECONOMIST:

There are two kinds of news stories about student loans. One group of stories emphasize the huge total of student loans. Calculations from the New York Fed for the end of 2011 find: " The outstanding student loan balance now stands at about $870 billion, surpassing the total credit card balance ($693 billion) and the total auto loan balance ($730 billion)." The Student Debt Loan Clock, which for illustrative purposes continually updates the total student loan debt outstanding, is on the verge of crossing $1 trillion.

The second group of stories emphasize the problems of particular students who have large loans and great difficulties in paying them back...

The outstanding student loan balance now stands at about $870 billion, surpassing the total credit card balance ($693 billion) and the total auto loan balance ($730 billion)

Some things cannot be said often enough. Excessive private debt is the problem.


Timothy Taylor is the Conversable Economist and the Managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul, Minnesota, which can be read free on-line courtesy of the American Economic Association.

In the linked post, he writes

Sometimes student loans pay off; sometimes not. What facts and concerns should the average student thinking about such loans be keeping in mind?  Christopher Avery and Sarah Turner tackle this question in "Student Loans: Do College Students Borrow Too Much—Or Not Enough?" in the Winter 2012 issue of my own Journal of Economic Perspectives.

Taylor considers some of the issues raised in the article:

Most students are borrowing amounts that are within standard loan guidelines

"My own guess," Taylor writes, "is that part of what is happening here is that larger loan burdens are being offset by lower interest rates, so the overall ratio of loan payments to income has risen by less than one might otherwise expect."

The median level of student borrowing isn't excessively high.

He quotes from the article: "Examples of students who complete their undergraduate degree with more than $100,000 in debt are clearly rare: outside of the for-profit sector, less than 0.5 percent of students who received BA degrees within six years had accumulated more than $100,000 in student debt."

Students considering loans should think about the typical employment and pay prospects for that major.

Taylor: "I do think that many students agonize a little too much over their major, while not agonizing enough over the extent to which they are building a skill set."

That struck me as a funny line. I don't know why.

Some students borrow too little...

Taylor: "Sending a message that all students should try a few years of college, even if it requires taking on tens of thousands of dollars in loans, is borderline irresponsible."

Wow!

Timothy Taylor's conclusion:

Given the growing wage gap between those with a college degree and those without, it will make economic sense for lots of students to borrow, especially at today's rock-bottom interest rates. But with student loans, we're talking about young adults often in their late teens and early 20s making financial decisions that could be with them for decades to come. It's a transaction that should be made with caution and consideration.

My conclusion:

I'm not Ann Landers. This is not a personal advice blog. I don't have much interest in "stories [that] emphasize the problems of particular students". What interests me are the big, sweeping forces that arise from aggregate economic activity, which in turn affect the environment in which economic activity occurs. What interests me is the setting that gives rise to (for example) "the problems of particular students" -- particularly when it seems to be that more and more particular students are having such problems.

"Several decades ago," Taylor writes, "it was a low-risk option to spend a few years working part-time and attending a big public university". But the environment has changed.

I'm not into coping. I'm into solving. I will never recommend that you are cautious and considering when you make your personal decisions. Nor will I recommend you throw caution to the wind.

What I do recommend is that you think about why things have been getting generally worse for "several decades" now. Think about the accumulation of private debt and ask yourself whether it plays some role in that decline.

If you don't have an answer, that's fine. Just keep asking the question.


My first visit to Timothy Taylor's site was to his The Price of Nails.

Fascinating.

The Good Son

"Fritz"   1998-2012

Incompleteness (2)

After working out my first impressions for yesterday's post, I went back to Mason's at Rortybomb to finish the read and explore the links.

I tried to read Taylor's article, but if you don't subscribe to the Wall Street Journal you only get a fragment. Nothing relevant.

I read the article on Hoenig and was really surprised.
• Hoenig calls for the breakup of large banks.
• In 1996 he "warned about the dangers of expanding the federal safety net to cover financial institutions trading complex derivatives"
• In 1999 he warned "about big, interconnected financial companies."

Hoenig says several things critical of the bigness of finance. That's significant, because apart from the level of interest rates, what matters is the number of times interest costs occur in the economy -- and that has everything to do with the bigness of finance.

He even says

The central bank has to be, in a way, a neutral player, and yet we find ourselves trying to stimulate, and the effect is further leveraging

"Further leveraging" of course means growth of the accumulation of debt; so we agree on the problem, Hoenig and I. But his very next thought shows that he has not yet put one and one together:

If I thought zero rates would bring jobs, I’d want it forever. But it distorts the economy.

He says it is the low rates that distort the economy. Low rates that lead to further leveraging. I don't think that's particularly true. Graph #1 shows the Effective Federal Funds Rate and the Percent Change from Year Ago of Total (TCMDO) Debt:

Graph #1: The Rate of Interest (blue) and the Growth of Total Debt

The blue line -- the interest rate determined by policy -- rises irregularly to a 1981 peak, then falls irregularly to zero.

The red line shows percent change in debt. Total debt. The three largest increases in debt appear near the middle of the graph: before the 1970 recession, and before and after the 1980-82 recessions. The three largest increases in debt occur while the interest rate was at or near its maximum. So it does not seem to be true that low rates are the rates that lead to increased leveraging.

Graph #2 shows the same:

Graph #2: The Rate of Interest (blue) and the Growth of Private Debt

Both graphs show that leverage increases all the time, except now (since the crisis) and also for a while after the mid-1980s (due perhaps to changes in the tax code). The rate of interest seems to have relatively minor effects on the growth of debt.

So it doesn't look like low rates distort the economy.

One who focuses on interest rates but fails to consider also the accumulation of debt is missing the more significant factor.

Results and the Claims of Causality

At Rortybomb, JW Mason examines the idea "that the root cause of the crisis is that interest rates were too low for too long."

Mason quotes John Taylor, who says the Fed "held interest rates too low for too long and thereby encouraged excessive risk-taking and the housing boom."

Mason quotes Thomas Hoenig of the Fed:

We as a nation have consumed more than we produced now for well over a decade. Having very low rates for an extended period of time encourages us to continue focusing on consumption, but to correct our imbalances, we have to focus on production. If I thought zero rates would bring jobs, I’d want it forever. But it distorts the economy. In 2003, when we lowered rates and kept them there because unemployment was 6.5 percent — look at the consequences.

Mason writes:

More broadly, this view is associated with so-called Austrian Business cycle theory, which holds that macroeconomic instability is fundamentally due to departures of the market interest rate from the natural rate... In this view, an artificially low interest rate encourages investment in assets whose returns are lower than the true social rate of discount; when interest rates return to their natural level, investment will be depressed until this excess stock of physical capital is worked off.

That's just the opening part of the post, a concept laid out so it can be evaluated. I didn't get to Mason's evaluation yet. I have to work through the introductories.


It is an easy thing to tell a story and end it with the terrible problems of recent years. That doesn't mean there is any relation between the story and the terrible problems. But it can seem there is this relation, because stories end with conclusions.

John Taylor's story "encouraged excessive risk-taking and the housing boom".

Hoenig's story is "we lowered rates and ... look at the consequences."

Not part of Mason's introductory material, Paul Krugman's story is that we cannot lower interest rates enough because they're already at the lower bound and ... look at the consequences.

I'm not siding with Krugman here. I'm just pointing out that the outcome is always the same. The outcome is always that our problems, the things we don't like in the economy today, are explained by the storyteller's story. The stories always explain the problems. Even when the stories are opposites.


Well, you'd have to expect that, wouldn't you? I do the same thing, I suppose. The goal of the storytellers is to explain the problems.

Still, some stories are better than others. Some stories are thin. "Look at the consequences" is thin. "The results we have are due to the factors I describe" is thin.

Let's take them in order. For John Taylor, low rates led to excessive risk-taking and the housing boom. Low rates for too long.

Sure, there is a parallel of some kind between excessive duration and excessive results. (The parallel is in sentence construction and thematic echoing.) And low rates do encourage borrowing and spending and economic activity in general -- or at least we think they do. But Taylor makes it sound like "risk-taking" is a bad thing, though it is the basis of the entrepreneurial spirit. And Taylor relies on results when he says low interest rates led to the housing boom.

Specifically, Taylor seems not to address the reason the "macroeconomic miracle" of 1995-2000 devolved into the "housing boom" of 1998-2005. Granted, Mason's excerpt leaves out most of what Taylor said. And granted, Taylor would have jacked up interest rates sooner and created the slump in housing sooner. And brought on the crisis sooner, I suppose.

The reason the "miracle" devolved into the bubble is simple and should be obvious: Profit must have been better in the bubble. Money goes where money is, and there was money to be made in the housing bubble, more than in a miracle.

Of course, there is the duration thing that Taylor speaks of, excessive duration. But it's easy to see this, in hindsight. Taylor is pointing out the obvious here, the results. He is not showing that he explains those results. He relies on the existence of the results to make his case for him. This is not good science. It is not even good argument.

Now I will say again the Taylor quote from Mason's introduction is very brief. And I've not yet read the source article. But the brass ring here is not to make claims about causes of things. The brass ring is to demonstrate causes. Some stories are thin.

Taylor's solution would have been to jack up interest rates as the "miracle" was turning into the bubble, and create a recession then if need be. Given that the reason for that turning was the profit motive, the question is not when is the best moment to cripple the economy. The question is why is productive effort consistently less profitable than speculation?

The answer, of course, has to do not only with the level of interest rates, but also the frequency of application of the rate of interest as a cost in our economy. To speak of interest rates but fail to consider the reliance on credit, is to present an incomplete and largely incorrect argument.


The quote from Thomas Hoenig is longer. I will break it up.

We as a nation have consumed more than we produced now for well over a decade.

Well, sure. Production went to China, and consumption followed. The consumption still counts as what we do, but the production doesn't. You have to expect this, when a "mature" and mismanaged economy promotes international trade, and a young and vigorous economy takes advantage of it.

The same owners that used to make money here now make money in China. Microsoft, Google, they're all over there. Why is this encouraged?

Having very low rates for an extended period of time encourages us to continue focusing on consumption, but to correct our imbalances, we have to focus on production.

Why does having low interest rates promote consumption but not production? It's nonsense. Business is drawn to low costs. Does Hoenig suggest business would be better in the U.S. if the high cost of borrowing drove business away?

Or maybe Hoenig means we have to consume less and save more, so that money is available for investment. But if there's money to borrow for consumption, then there's money to borrow for investment. And anyway, if consumption was up, aggregate demand was up, and aggregate supply should have been brought up thereby.

We've been focusing on production since Reagan, by the way. Supply side economics, and all that. It has not worked, of course, and the government has felt pressure to do more for the demand side as well because of it, but this does not mean we have not focused on production. What it means is, the focus on production has failed.

If I thought zero rates would bring jobs, I’d want it forever. But it distorts the economy.

Zero interest rates distorts the economy? This is your concern, Hoenig? Look at the Fed Funds rate:

Graph #1: Federal Funds rate (blue) and 7-year Moving Average (red)

What goes up must come down. The bigger they are, the harder they fall. Look at the trend since 1981, Hoenig, and tell me you couldn't see zero rates coming. We gave supply-side economics thirty years, and it gave us the Great Recession.

In 2003, when we lowered rates and kept them there because unemployment was 6.5 percent — look at the consequences.

There you go again, Hoenig. The results we got are not evidence that your version of the story is right.