Components of Debt

Hard to untangle some of these lines, but for the record:
Blue = Household Sector
Red = Nonfinancial Corporate Business
Green = Domestic Financial Sector
Gold = Federal Government
Purple = Nonfarm Noncorporate Business

Graph #1: Change from Year Ago, Components of Total Debt, Annual Data
Click Graph for FRED Source Page

One thing that stands out: the green peaks of financial debt, repeating all across the graph, growing for the most part much faster than any other sector.

Another thing that stands out is the Federal government debt, gold, low on the graph until 1970. Then it gets pretty much lost in the mix. But you can see, rising between the green peaks, gold peaks after the recessions of 1975 and 1982 and 1991.

Third thing that stands out: After the 1982 recession and until about 1993 there is a general downward trend in growth of all these components of debt. Gold first, then the red and purple business sectors, then the blue household sector, and finally even the green financial sector.

These slowdowns of debt growth combine to produce an actual slowdown in dollars of debt accumulated between the last quarter of 1985 and the first quarter of 1993, shown in red on Graph #2:

Graph #2: Total Debt, Quarterly Change in Billions
Click Graph for FRED Source Page

This is actually the only significant slowdown in debt growth since 1950, apart from that big one there at the end.

The big one at the end got a lot of people interested in the economy. But the 1985-1993 slowdown did a lot less damage and had some interesting consequences. In particular, soon after it ended came the latter 1990s, a period noted by economists for unusually good economic performance.

What if that sequence -- less debt, then better growth -- wasn't just a coincidence?

Side Door

Two examples from Sumner, on lies told in the teaching of economics:

1. We argue that the Keynesian model superseded a “classical model” that had a vertical AS curve, and assumed flexible wages and prices. In fact, no such classical model existed prior to 1975. Instead, the old Keynesian model replaced something closer to the modern new Keynesian model. The model of Fisher/Hawtrey/Cassel and many other interwar economists featured sticky prices, short-run non-neutrality of money, and a self-correcting mechanism that brought us back to the natural rate on the long run. In Fisher’s case there was even a Phillips Curve.

The textbook story is a good pedagogical device. But it’s not true. It’s not even close to being true.

In fact, no such classical model existed prior to 1975. The whole thing is made up. No wonder the financial crisis caught economists with their pants down.

Sumner's second example is a very big deal:

2. We explain that inflation can be produced by fiscal stimulus, supply shocks, and/or monetary stimulus. Then we talk about the Great Inflation mostly by referring to two shocks. The first was the huge fiscal stimulus of the 1960s, when LBJ ran up huge deficits to finance the Vietnam War and the Great Society without raising taxes. Except that this never happened. Then in the 1970s OPEC jacked up oil prices twice, and this caused the high inflation of the 1970s and early 1980s as the SRAS curve shifted to the left. Another lie, as SRAS was shifting to the right during the 1970s.

That, and inflation took off well before OPEC’s price hike.

In an endnote to his post, Sumner adds:

PS. If you are wondering why the LBJ story is a lie, recall that the huge budget deficits began under Reagan, and were associated with a big fall in inflation.

I don't "recall" things. I always have to check things.

The first graph shows deficits relative to GDP. The second shows deficits relative to Federal spending.

Similar patterns.

It would be easy to say there was a long-term uptrend -- higher in the 1960s than the '50s, higher again in the early 1970s, higher yet in the late 1970s, and highest in the 1980s.

That's not at all what Sumner says. Sumner says "huge budget deficits began under Reagan" (in the 1980s). I think Sumner oversimplifies.

Clearly, however, there is much less blue in the first half of these graphs than in the second half. Deficits were a lot smaller before 1975 than after. So I am willing to accept Sumner's denial that a huge fiscal stimulus began in the 1960s with LBJ and the Great Society and the Vietnam War.

This is a very big deal. The two shocks that are taught to us as being the cause of the Great Inflation are lies, Sumner says.

So let me pry open a side door here, make my own way out of Sumner's box, and ask: So then, what caused the Great Inflation? It wasn't the liberal spending, and it wasn't OPEC, so what was it?

Brother, it was the cost of finance.

Self-Referencing and Self-Reversing

In Möbius Logic: Puzzles that cannot reach binary resolutions, a post from 2007, Weekend Fisher writes:

The old logical puzzle

This sentence is false.

has a Möbius topography. Like the Möbius strip, it is self-referencing and self-reversing.

Because this is kind of an odd concept, let me repeat: Fisher establishes the definition of a Mobius loop as self-referencing and self-reversing. He offers examples, including Harry Potter's villain and Möbius logic in philosophical debates. Fisher provides a significant conclusion:

I would simply point out that when the debate is framed as a Möbius loop, it has been framed in a way that is entertaining but renders progress impossible. We have the tools to recognize such a logical structure. Once a presentation has been identified as a Möbius conundrum, we can know from the outset that no resolution can come from that particular way of framing the question.

Potential Output is a trend line connecting past, present, and future. If the present doesn't turn out to be as good as we expected while it was still the future, then our old estimate of Potential Output must have been wrong and it is okay to revise the past...

I have trouble with that logic. Even apart from the concept of changing the past (see yesterday's posts) I am troubled by the way Potential Output is used. I'm not sure, but maybe Weekend Fisher's analysis will be helpful. So let me just throw this out there.

Potential Output is "self-referencing". As William T. Gavin says, "the accuracy of our estimate [of potential GDP] depends on the accuracy of our long-term [GDP] forecast." Self-referencing. The best-case estimate of where GDP will go, depends on where GDP actually goes.

Potential Output is also "self-reversing". David Altig quotes The Washington Post's Neil Irwin:

What's amazing is that the Fed's newest projections, released in December of 2012, look like they could have been copy and pasted from 2009, just with the years changed

With every new estimate, the story is that GDP growth will be slow for the next year, and then things will pick up. Each year, the prior year's prediction of "good growth soon" is reversed. Self-reversing.

Potential Output, as used today, is self-referencing and self-reversing. Fisher says we "know from the outset that no resolution can come from that particular way of framing the question" and that it "renders progress impossible".

Revising the past, in the past

As an afterthought to this morning's post, the graph below is reproduced from the Economic Report of the President, 1977 (PDF) from FRASER:

Potential GNP 1964-1977, Old and New ("new" = 1977)

The thing is so old it uses GNP, not GDP. Note the "old" trend line and the "new" one. The new one is lower, just like with Altig and Gavin's graphs. For the 1977 Report of the President, they revised the past back to 1964.

We've always been at war with Eastasia

The protagonist of the novel, Winston Smith, is a member of the Outer Party who works for the Ministry of Truth (Minitrue), which is responsible for propaganda and historical revisionism. His job is to re-write past newspaper articles so that the historical record always supports the current party line.

- Wikipedia

Let me start with the justification. In What Is Potential GDP and Why Does It Matter? (PDF, 2 pages), the Fed's Willian T. Gavin writes:

Looking back in time, potential output is relatively easy to measure because we have reliable methods to extract smooth trends from historical data. However, measuring potential output in real time is more difficult because only past data are available to estimate the trend.

PGDP is a trend line. As a trend, it must summarize the present and the future as accurately as it summarizes the past. But it is difficult to know the present trend, because it depends on the future. And it is even more difficult to know the future.

Fair enough. But what comes of these difficulties is a policy of historical revisionism:

Graph #1, Source: What Is Potential GDP and Why Does It Matter? (PDF)

The estimate created in 2011 changes the past back to 2005 or before.


Recently, the Fed's David Altig showed a similar graph:

Graph #2, Source: Nature Abhors an Output Gap (Macroblog)

Altig's graph begins in the first quarter of 2009.

For the estimate created in 2011, the value for 2009 is lower than the 2009 value from the estimate created in 2010. For the estimate created in 2012, the 2009 value is lower still. And the estimate created in 2013 shows an even lower value for 2009. Every year, we tell a different story about the past. We've always been at war with Eastasia.

Mr. Gavin's explanation notwithstanding, I'm not sure this practice is reasonable.

When in Rome (2): The Two Economies

Today we look at Historical Echoes: How Do You Say “Wall Street” in Latin? by Marco Del Negro and Mary Tao. It is an earlier post, related to the one I looked at yesterday. Three bits of it:

The Forum. This is where finance happened in ancient Rome. According to the historian Jean Andreau (“Banking and Business in the Roman World”), both run-of-the-mill banking and high finance took place in the Forum.

Run-of-the-mill banking was regulated in ancient Rome, and argentarii needed to maintain accounts of their transactions.

Aristocratic finance—the faeneratores—was quite a different business, a sort of proto-“shadow banking system.” Elite financiers weren’t subject to any special regulations.

Some things never change.

When in Rome...

From Historical Echoes at Liberty Street Economics, Historical Echoes: Cash or Credit? Payments and Finance in Ancient Rome by Marco Del Negro and Mary Tao:

Imagine yourself a Roman citizen in the 1st Century B.C. You’ve gone shopping with your partner, who’s trying to convince you to buy a particular item. The thing’s pretty expensive, and you demur because you’re short of cash. You may think that back then such an excuse would get you off scot-free. What else can you possibly do: Write a check? Well, yes, writes the poet Ovid...

In ancient Rome, they had something comparable to our checking accounts.

But was there a market for nomina, just like there’s one today in, say, mortgage-backed securities? According to both Barlow and Harris, the answer is yes.

In ancient Rome, there were advanced financial markets.

What if you had to transfer money to somebody in a different part of the globe? As the Roman dominions expanded into Greece, Spain, North Africa, and Asia, Roman finance actually faced this logistical problem....

This is intense. Remember, we're talking ancient Rome here:

It worked as follows: The publicani were private companies in charge of tax collection in the provinces (as well as many other tasks; see “Publicani,” by U. Malmendier). They had a branch in Rome and one in Thapsus. So, you’d give them the silver in Rome (or transfer them some nomina) and they’d divert some of their tax collection in North Africa to Caius. This is also how the Republic would finance its public spending overseas. Since taxes were collected throughout the provinces, by trading claims on taxes Romans could transfer funds across the globe–or at least to the part of the globe they had conquered.

Sort of like Western Union and the IRS rolled up in one. A thousand years (and one dark age) later, the nearest Europe could come to what Rome had was embodied in the Knights Templar.


So if anyone asks whether ancient Rome had an economy that could have been subject to financial strains comparable to those in the world today, the answer is yes.

If anyone wants to know if I think it was finance that toppled Rome, the answer is yes.

Historical Analysis

From What happened in the 1970s? A Macro-Historical Perspective at Historical Analysis:

Minksy states declaratively that ‘the truth of the essential Keynesian proposition— that increased government spending and tax cuts, if carried far enough, will halt a precipitous decline of the economy—was conclusively demonstrated in the recession of 1974-1975.’

The 1970s can be seen, then, not as a failure of Keynesianism, as is commonly believed, but as a great success, perhaps even the greatest to date, particularly if we argue that bringing about recovery in the 1930s is less significant than outright preventing depression in 1975.

A very long post -- an essay, really -- very good, and very well documented.

Explaining the growth of private-sector debt

Originally posted 19 April 2011

I've done several posts lately on the same theme and largely all showing the same graph of public and private debt.

I've tried to suggest that private debt is the big debt, and that the big debt is the big problem.

Before I get too far off that topic I want to restate my thinking on the reason private debt grew so large.

Debt is not the result of spending, nor of excessive spending. Debt is the result of credit-use, plain and simple.

All of our economic policies encourage the use of credit, because we think we need credit for growth. None of our policies encourage the repayment of debt.

So we accumulate debt, and we just let debt accumulate. It's policy.

Meanwhile, on the other hand, and at the same time we think that printing money causes inflation. So (despite what you've heard from everybody else on the planet) our economic policy has reduced the quantity of money relative to GDP.

So we have less spending-money, and we use more credit. That is my explanation of the growth of debt. Simple, right?

It's all policy. We think we need to use more credit for growth (no matter how much debt we have). And we think printing money causes inflation (and using credit doesn't). It's all just bad policy.

And apparently almost nobody realizes that the cost of all that debt is the cost that drives prices up and living standards down, and hinders economic growth besides.