Tuesday, August 10, 2010

Public v Private (5)

Very happy with yesterday's graph. It shows a good long history of a relation I've been pondering for a while -- the relation between public and private debt.

And for the full 90-plus year period, my graph shows events and conditions clearly: It shows World War I. It shows the Roaring '20s, two phases of the Depression, WWII, the "golden age" of the 1950s and '60s, and the end of that age in the 1970s. It shows the budget-balancing of the 1990s, and it shows the onset of the Paulson crisis.

The graph also shows little difference between the 1970s and the 1980s, which in itself is interesting and invites further investigation.

But one thing the graph fails to show is the level of debt. Do we have a lot of debt, or just a little? This graph gives no hint. But I think I have a way to fix that.

Graphs of total debt relative to GDP are a dime a dozen on the Internet. Here is one you may have seen a while back. It shows  debt very high recently -- three and one-half times GDP as of 2008. The graph also shows a tall, thin spike at the time of the Great Depression. But if you look at it, you'll notice this spike starts as the Depression hits. It was not the high level of debt that caused the Depression, but the Depression's falling GDP that caused this spike in the trend.

Here's a critique of that graph, and an alternative graph. Two thoughts on the alternative:
1. There is a discontinuity in the debt numbers, just as there is on my graph from yesterday. So, I'm thinking I didn't misinterpret the numbers.
2. Their graph emphasizes non-financial debt, the low line in this graph. Perhaps there are reasons to separate financial from non-financial debt. But debt is debt. Separating debt into two categories only makes it look like less debt. That's not a solution.

Come to think of it, the recent financial crisis was primarily a crisis in the financial sector which spilled over to the productive sector. So perhaps it is true that financial debt is the problem child, but all debt suffers because of it. If financial debt is the problem, total debt is the bigger problem. No problem is solved by pretending debt is less than it is.

And, come to think of it... Why do they always talk about the "financial" sector and the "non-financial" sector? Shouldn't it be the financial sector and the productive sector??? Don't ya think?

Here's my own version of total debt relative to GDP. The three colors indicate three data sources, the same sources that stand behind yesterday's graph. This one also has the discontinuity.

In order to make yesterday's graph show whether debt is high or low, I want to multiply this graph into that one. I want to factor it in, the way Milton Friedman factored the price level into his MRTO graphs before comparing them to the price level.
So I took the numbers behind that graph, found the biggest value (3.52577... for 2009) and divided all the values by the biggest value. This gave me a version of the graph where all the values are between zero and one.

Then I took the values from yesterday's graph and multiplied them by these index values. The result is a history of the relation between public and private debt, stretched in proportion to the total debt in our economy.

The resulting trend-line will be (and should look like) a combination of yesterday's graph and the "total debt relative to GDP" graph.

This graph is the result of my efforts. It looks much like yesterday's graph, but is stretched upwards where index points are high: The increase since the mid-1990s is much bigger. The Roaring 20s increase is somewhat bigger. And the plateaus are gone -- stretched upward to look like increases, because total debt really was increasing.

Yesterday's graph, for comparison ---------------->

You know, I like yesterday's graph better. The "indexed" version fiddles too much with the numbers and doesn't show much for the effort. Anyhow, we already know the debt was increasing. The "public versus private" graph is a look at other things, things too often overlooked.

And I like this one better because it is full of easily identifiable features. One can see the wars. One can see the Depression and the Crisis. One can see the "golden age." One can see the federal budget coming briefly into balance. And one can see plateaus.

Like I said: Very happy with my "Public v Private" graph.

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