Quick and Dirty: TCMDO per GDP 1960-1975

Following up on Unfinished thoughts...

Total Debt relative to Nominal GDP

A general uptrend from 1960 to 1965, while the CPI increased 9 percent.

A general downtrend from 1965 to 1969, while the CPI increased 16 percent.

A general uptrend from 1969 to 1975, while the CPI increased 46 percent (can that be right?)

A general uptrend overall, while the CPI increased 82 percent.


Inflation, as a solution to the debt problem, is at best unreliable.

The Limbo: CFPY

It occurs to me that if I take the Limbo graph, eliminate the early years where there's no data...

// something I have only started to think about in the past few days

...and take a look at "percent change from year ago" values, I'll get a look at the varying slope of the graph. This could be useful because the slope is related to economic performance.

Graph #1

There ya go. Ah, but what do the tea leaves say? That is the question.

First thing I notice is a trend-of-peaks. Starting with the first peak after 1960, running to the highest peak in 1983, there are four peak points that lie on a straight line. Five, if you count the "low" high-point of 1971. This rising trend indicates some kind of increasing severity, perhaps.

Next thing I notice is, the peaks seem to be associated with recessions, almost without fail. At the right end we have the spike associated with the Paulson crisis, tallest thing on the graph. Probably the height of a point indicates not so much severity as the strength of the federal response to recession.

On the other hand, note that before 1974 the entire trend-line is below zero. This means that the federal debt was growing more slowly than everybody else's debt -- generally 5 to 10 percent more slowly -- until 1974. The private economy's strength gave out with that 1974 recession.

I also observe a peak in 1991 followed by a long and atypical decline lasting until 1998 or so. In the middle of that decline there are two breaks (at perhaps 1993 and 1996) which make the decline something of a zig-zag. I think something happened in there to make this decline atypical. I think if this part of  the trend was typical, the 1993-1996 downtrend would have been an uptrend. And maybe the 1998 low would not have been as low as it turned out to be.

Graph #2

Come to think of it... the 1993-1996 period was when the federal budget was moving toward balance...

Graph #3

... and just before that, there was an unusual increase in the growth of M1 money in the early 1990s...

Graph #4

... which followed on the heels of a significant decline in the growth of debt that began in the mid-1980s...

Graph #5

... all in all, creating a noticeable swoop in the debt-per-dollar graph from 1990 to 1994, just before the good years -- just paving the way for the good years that began in 1995. Good years, that permitted the federal budget to be briefly balanced, before things went bad again.





Yeah, the slope of the Limbo is related to economic performance.

Unfinished thoughts

Deflation in a time of excessive debt is the worst possible solution, because debt does not deflate with income.

Inflation in a time of excessive debt reduces the debt problem, because debt does not inflate with income.

The notion that inflation can be used to solve our debt problem is a tempting one. But it depends on our ability to increase the quantity of money without increasing the accumulation of debt. If debt grows as fast as money or faster, the debt problem is not resolved. Capiche?

Our most significant inflation occurred between 1965 and the early 1980s, as the blue line shows:

The red line shows that total debt increased continuously relative to money, during that period. In other words, debt grew so fast in those years that the debt-per-dollar ratio was not reduced, despite the printing of money enough to cause all that inflation. The imbalance between money and debt was not corrected, despite all that inflation.


Suppose we look at it another way: The existing accumulation of debt becomes easier to bear after a period of inflation. That is Paul Krugman's argument, right?

Here's my argument: The accumulation of debt becomes easier to bear after inflation, if and only if the accumulation of debt does not grow faster than prices go up.

The increase of prices is given by the Consumer Price Index. If I divide total debt by the CPI and the trend line goes down, then debt grew more slowly than prices went up, and inflation solved the problem. But if the trend line goes up, then debt grew more rapidly than prices went up, and inflation did not solve the problem.

Even during the inflation of the 1970s, total debt increased more quickly than prices went up. Inflation did not solve the debt problem. Krugman's solution was tried, and failed, in the 1970s.


Oh, but I have forgotten to allow for the increase of real output. Very well then: Let us look at total debt relative to nominal GDP, so that we allow for both real growth and price inflation at the same time. If the trend-line continues to increase during the inflationary period, then again we must say that Krugman's solution has failed.

The rate of increase was noticeable slow in the 1965-1980 period, but the trend line continues upward. Debt increased faster that real output and the price level combined. In other words, the inflation of those years did not reduce the burden of debt in our economy.

But we didn't really need to look at another graph to know it. We knew it already, because the 1970s were sluggish, not golden, and the 1980s were not much better.

Islamic Finance

Prompted by an article on Islamic Finance in the Financial Times: The US: Moves are under way to lower barriers. "Changes in tax law are being considered, says Aline van Duyn."

Many years ago I learned that the Church in Europe forbade charging interest on loans in the Middle Ages... and that Islamic law forbids it, still to this day.

My reaction then, as now, is that these two religious institutions agreed on the trouble interest and debt can bring upon society and agreed in their reaction against it.

In Europe, or so I have read (somewhere), the Church's rule opened the door for Jews to become Europe's bankers. And then, it seems to me, the troubles that arise from excessive interest became (in the practical but small minds of Christian Europeans of the time) troubles arising from Jews.

I'm not making this up. I'm just putting fragments together. Whether any of them are true, I cannot say. But lacking any other story, I take it for history.

It was Longshanks -- King of England in the Braveheart movie -- who expelled the Jews from England. Because nobody liked them, because of the banking thing. Centuries before Hitler.

Little fragments.

I know nothing of Islamic law. But Islam arose after the fall of Rome. And I can imagine that concentrations of wealth and income were far greater then than now, and interest was just that much more of a burden. And two religions had the same reaction to it.

Krugman's graph

From Paul Krugman's Inflation and Debt (Wonkish) (May 28, 2011, 10:44 am):

Household debt as % of personal disposable income

The rapid increase of household debt between 1950 and 1965 created the demand that drove the golden age economy.

The lack of increase between 1965 and 1985 brought the golden age to an end and produced a listless economy.

The large deficits and optimistic expectations of the Reagan era gave consumer spending a boost in the mid-'80s.

Consumer debt growth slowed then in the late '80s and continued at a slower pace for a decade, probably because the tax deduction for interest expense was eliminated.

Rapid debt growth resumed after 2000, perhaps in part because of pent-up demand from the previous decade.

And then the inevitable crisis changed everything.

Severity

The text following Graph #3 of the earlier post today boldly presumes that the 1974 recession was substantially more severe than the 1970 and 1980 recessions.

Following a link from JzB's GDP Revisited - Part 1 to Calculated Risk turns up this graph:

The container article introduces GDI as the income-measurement version of GDP. (GDP is the output-measurement version; income equals output; but measurements are imperfect. The graph shows both GDI and GDP, and there are discrepancies.)

The graph...

...is constructed as a percent of the previous peak in both GDP and GDI. This shows when the indicator has bottomed - and when the indicator has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%.

For my purpose here, I'm looking at the bottoms. The low points. The graph shows clearly that (going back to 1959) the 1974 recession was substantially worse than any but the recent Great Recession -- at least when measured by the GDI. The 1982-83 recession comes in a distant third. The 1970 recession was among the mildest.

//

The graph presents information in an unusual way. But I think it is a great way to show the severity of recessions.

The Limbo before 1980

Graph #1: This is Graph #9 from mine of 22 May

This is Graph #9 from mine of 22 May. If you follow the fast-dropping trend line from the start, the fall slows down gradually before ending (after a few wiggles) in 1980 or '81. After that, there were new policies in place and the trend line looks different. So let's just look at the first part of the thing.

Graph #2: The first half of Graph #1

Boring. Let's zoom-in closer, to 1965-1981.

Graph #3: The last half of Graph #2

Oh... Okay. The falling trend line is interrupted by the near-recession of 1967... and again (but less) by the actual recession of 1970... and again (pretty severely) by the pretty severe recession of 1974. But then the 1980 recession seems to have no effect.

But no, that's not true. A response to the 1980 recession is visible in the change that occurs between 1979 and 1980 on the graph. So that's three recessions out of three in the 1965-1981 period, plus one near-recession. I think we can say with confidence that recessions have some effect on the trend line of this graph.

And that only makes sense. Because the trend-line goes down when non-federal debt -- private debt, say -- is growing faster than the federal debt. And that doesn't happen during recessions.

Private debt grows faster when the economy is growing.
Federal debt grows faster when the economy ain't growing.

So the trend line of these graphs is in a sense an indicator of economic growth. The greater the down-slope, the better the economy. The greater the up-slope, the worse.

The Limbo after 1980

Graph #4: The last half of Graph #1

Now here is a roller-coaster! It doesn't even look like the same data.

There is a general and quite severe uptrend from 1980 to 1995. This would indicate that economic growth was not particularly good.... But that doesn't seem quite right. Growth was certainly better then than in the 2007-2010 period where again there is a severe uptrend.

So let me take another look. There is a severe uptick associated with the 1982 recession; okay, this fits the rule that "The greater the up-slope, the worse the growth."

Then there is a flat spot, 1983-1989. People generally say the economy was quite good in those years. Note that the fiscal policy of the time called for abnormally large federal deficits (by the standard of that time). In other words, there was a conscious policy effort that drove the trend-line up. And the fact that the trend line goes up so gradually in those years says that private debt grew very nearly as fast as the federal debt. Well, there ya go: That rapid increase in private debt was the source of the economic growth of the period.

Next on the graph, from 1989 to 1994, there is a long and dramatic uptrend in federal debt relative to non-federal, but not much of a recession. This up-trend is due in part to continued federal deficits. But I think it is also due in part to reduced growth of private-sector debt, a result of tax-law changes that I have noted in previous posts.

In any event, by 1995 we reach a high point in the trend line, and so there is some space for the trend to fall for a time. There is slack. The trend line falls from 1995 to 2001, and then again to 2007.

The 1995-2001 decline is associated with the balancing of the federal budget and with an expansion of private debt during the good years of the late 1990s -- the years that Jazzbumpa calls a "bronze" age.

The 2004-2007 decline may be associated with the Bush tax cuts, but I have not looked in to that.

Last but not least, the massive spike of 2007-2010 is associated with the Great Recession.

Tax policies and other factors play into it, but the trend line of the Limbo graph has a clear relation to the quality of economic growth.


The trend line of Graph #1 before 1980 shows a gradual transition from rapid decline (rapid economic growth) to less-rapid decline, to no decline at all and terrible economic growth.

The graph is a growth gauge, and another measure of credit efficiency.

Assumptions

Me and my buddy B had some discussion at work t'other day about the weight-per-square-foot of steel plates.

10.21 lbs per square foot, for quarter-inch thick plate.

In our work, we need to know weights of things, because we make assemblies that are supposed to float when they go into the water.

Anyway, next morning I was looking at his fabrication drawings for that job. Found a big aluminum plate on a couple drawings. Figured those were old, and the plate spec got changed to steel, but I couldn't find a drawing for the steel plate.

So when B came in, I asked: That 10.2 number we were talking about, that was for a steel plate, right?

He knew right away where I was going.

"I never even thought about it," he said. "I just grabbed the steel book..."


He did half a day's work, making adjustments for the weight of the plate, based on a wrong number, assuming it was the right number. Didn't catch it 'til I asked about it.

Now, suppose he was an economist, not a draftsman. And suppose he was working back in the 1970s when stagflation arose and the economy started going south. And instead of figuring the weight, suppose he was figuring out why the economy was going south and what could be done about it. And suppose instead of half a day, it was half a century before anybody pointed out the mistake.

By then, of course, it wouldn't be just one mistake. By then there would be a whole system in place, built on flawed assumptions. Faulty explanations would be embedded in the minds of economists all over the globe. It would be difficult to get the thing corrected, even when it was obvious the economy was sinking.


BTW, an aluminum plate of the same size weighs about one-third as much as a steel plate -- based on the one plate we were looking at.

Harvey's new assumptions

Heteconomist.com links to John T. Harvey on Inflation. The Harvey link is a four-page article prefaced by an advertisement, with a confounded graphic that makes you wait while it scrolls text up and down the screen every time you turn the page.

Impatience aside, the article reviews the equation of exchange MV = Py. Harvey says nothing new until the last paragraph of page three where MMT stuff comes into play. Even then, it doesn't get interesting until Harvey states his "new assumptions with respect to M, V, P, and y". I want to look at some of his new assumptions about M.

A precise definition and identification of money is elusive in a modern, credit-money economy...

As Jude Wanniski said (Reader's Digest, Feb 1995, p.49): "You have to have lived in the 1950s and 1960s to have experienced a good economy." Sadly, many people have never known a "good" economy. Some of those people do studies and base their views on stats going as far back as the 1970s. Those studies consider only the bad economy. Those views are based on a bad economy.

It is no doubt true that "A precise definition and identification of money is elusive in a modern, credit-money economy." But, that definitions are 'elusive' is not the problem; it is a result. The problem is that we have become a modern, credit-money economy: Define money and regulate it, and financial innovation will come up with something new and unregulated -- and then money is undefined, again.

The problem is excessive debt. Additions to debt are created when the quantity of "modern, credit-money" is increased. Debt is already excessive, and has been since the 1970s. Creating more debt in an environment of already-excessive debt does more harm than good. Yet this is what happens in a modern, credit-money economy.

Because central banks almost always target interest rates (the price of holding cash) rather than the quantity of money, they tend to simply accommodate demands from banks. When private banks communicate that they need more reserves for loans and offer government debt to the Fed, the Fed buys it. It’s the private sector that is in the driver’s seat in this respect, not the central bank.

Because central banks almost always target interest rates, rather than the quantity of money, they tend to simply accommodate demands from banks.

And what happens if central banks stop targeting interest rates and start targeting the quantity of money again? What happens then? The central banks no longer provide reserves on demand. So the private banks cannot make loans first, and get the reserves to cover them, later. So then, banks need deposits before they can lend. So then it is no longer true that "loans create deposits".

Does the MMT argument fall apart in that moment?

First Robin of Spring?

Driving home from work I saw a new-car carrier half full of little economy cars.

Does it mean the recession is over?

Or is somebody hiring truckers to drive around the countryside to make people think the recession is over....

The Limbo

How Low Can You Go

This is Graph #9 from mine of 22 May. It shows Gross Federal Debt. It shows how much Federal debt there is, compared to how much other debt there is in the U.S. economy, debt other than the Gross Federal Debt.

Federal debt used to be the big portion, back when the economy was good, after World War Two, for 20 years or more. But all the while, the Federal debt portion was shrinking, and the other portion was growing.

Then, in the 1970s the Federal portion stopped shrinking and started growing about as fast as the rest of debt. Oddly then -- or, as I think, by no coincidence at all -- the economic growth boom ended. We have been in the doldrums ever since.

...except for the late '90s boom, when the Federal portion again was falling.

One solution that comes to mind, one way to get another growth boom, would be to reduce the Federal debt (as many people wish to do). The trouble is, the Federal debt is already so low on this graph that it barely has room to drop further. Before the Federal debt can fall, it has to go up again. There are two ways to do that.

We can have massive increases in the Federal debt and deficits, as we have had recently. But that makes total debt bigger, and that in itself is a problem.

And it won't work anyway, unless "other" debt is falling.

The other way is to reduce the level of "other" debt. Reduce non-Federal debt. We can do this by waiting 20 or 30 years or more, while people gradually reduce their debt by hook or by crook. Or we can do it by an act of policy: debt forgiveness, or something equally quick and painless.

We might even benefit from a strategy that increases the Federal debt and uses the money not to expand government but just to pay off private-sector debt.

Infinite Diversity in Infinite Combinations

Krugman writes:

The eurozone looks like the United States — there is no good reason to raise rates. To be fair, on the labor side things look a bit different: there are actual labor shortages in some parts of Europe, reflecting both low labor mobility and the extreme asymmetry of the European shock. But raising rates for all of Europe because parts of Germany are doing well is, as I’ve written before, worse than the one-size-fits-all policy euroskeptics warned about; it’s one size fits one.

Mmmm...

The 'one size fits one' link brings up a graph that shows Germany doing far better than Spain with respect to employment. Krugman's point seems to be that we need different policies for different conditions, even if those conditions occur at the same time.

Well, they could break up the European Union. As an American I rather like that approach. Why should anybody else in the world be as big as the U.S.A.?

But I have a better way to solve the problem. Below is an excerpt from mine of 23 July '09. What it says is we should stop jacking up interest rates to fight inflation. It says we should remember that the money that causes inflation is created by borrowing.

It says we should fight inflation by un-doing the thing that creates inflation: by paying off the debt that results from the borrowing that creates the money that causes prices to increase.

It says the biggest borrowers should pay the highest rate of taxes. It says the tax rate should come down if the borrower accelerates repayment of the loan.

It is a plan to reduce debt by fighting inflation and to fight inflation by reducing debt.

It is the sort of solution that Krugman is looking for but has not found.

From my old post:

I'm not big on making proposals. My interest is to understand the past or, rather, to understand the process. If we understand *how* the economy works, solutions will present themselves. However...

#1. The use of credit adds to the quantity of money in circulation. Therefore, the repayment of debt is a way to fight inflation. I would set up tax incentives to encourage people (and businesses) to pay off their debt a little faster than we have done since the 1970s say. Accelerated repayment of debt would fight inflation and reduce debt at the same time. Sweet.

#2. Taking that a step further, I would change the income tax. (I'm not talking about the LEVEL of taxation, but the EFFECT of it.) When a person (or business) borrows, his/her debt-to-income ratio increases. I would make the TAX RATE vary with the debt-to-income ratio. Your tax rate would become variable, like the rate of interest. And at a comparable percentage as well, I imagine. You could reduce your taxes by reducing your debt!

#3. The variable rate of taxation would *replace* the variable rate of interest in our economy. And the Federal Reserve would therefore be able to keep interest rates permanently low. This would be beneficial for economic growth.

#4. In the long view, I foresee that the "credit cycle" would become a thing of the past. Indeed, everyone would have his own credit cycle. But the economy as a whole would see no cyclic pattern. Thus, the major force that drives the business cycle would be eliminated. Economic growth would be driven by low interest rates and other factors, but there would never be an accumulation of debt that leads to recession or depression. Long view, of course.

Too Giamatti to Fail

Too Big to Fail was on TV last night, and it brought this to mind:

A long while back, the wife and I went to see The Negotiator in the theater. Good movie, with Samuel L. Jackson and Kevin Spacey. It was the first time I saw Paul Giamatti in anything.

There was one big family in the theater that must have been Giamatti's relatives. Every time he was on screen, they were all hootin and hollerin, laughing and celebrating... They had to be relatives.

Anyway, since then I could always identify Paul Giamatti.


About Too Big to Fail:

Just remember, everything they're talking about in the movie has to do with the crisis stage, which came some 40 years after our economy started failing. It's not like they stepped up and took the bull by the horns or anything.

They still think of those 40 years as pretty good times.


Put finance people in charge of policy, and they cannot see debt as a problem.

The other big debt

I don't mean to be neurotic about this... but I want to compare my new look at debt to my earlier look.

The gold line here is the new look, based on the FRED numbers -- Total NonFederal Debt as a multiple of Total Federal Debt. Like Graph #8 from mine of the 22nd:

(TCMDO - FYGFD) / FYGFD

The blue and red lines show what I took to be Total Private debt as a multiple of Total Public debt. Where I messed up was that I counted "financial debt" entirely as private debt. In the gold line I fix that.

Just to add to the confusion, some of the difference between the lines here is because for the gold line, the government share includes only Federal debt, not state and local. The red and blue include all government: federal, state, and local.

Whatever. The lines show the same general trend. No longer can I say the economy ran into trouble when the multiple reached 3, and ran into crisis when the multiple reached 5. But that's okay.

There's still a lot more debt to consider than just the Federal debt.

And it is still true that times were good when the NonFederal debt was relatively low, in the 1950s and '60s. And that times have been hard since NonFederal was high.

I can't get no satisfaction

From yesterday's post:

That's the number one most popular debt graph at FRED today:
Federal Government Debt: Total Public Debt (GFDEBTN)... The units are Mar Jun Sep Dec, End of Month, which I will call MJSD going forward.

From Mankiw:

Never make up your own acronyms.

You're kidding, right?

I have MJSD... I have DPD (debt per dollar)... I have MRTO (money relative to output)... I have EROC (excessive reliance on credit)... I have TOT (totally off topic)... I even have CAPUT (capacity utilization) though I cannot be the first guy to think of that one.

If you are satisfied with economics as it is today, then you have no need for new acronyms. But if you have an original thought, and you keep coming back to it, and every time you do it grows in significance, and if you have already reduced the thought to a single phrase that you use often, then maybe it is time to adopt an acronym.

If the world adopts your acronym, then your original thought was a good one.

Dunno, maybe Mankiw is satisfied with economics as it is today.

A new look at debt

It is 1:30 in the morning, and I have no post written for 4:00 AM. But I woke up with a thought.

Graph #1

That's the number one most popular debt graph at FRED today:
Federal Government Debt: Total Public Debt (GFDEBTN)... 1966/3/31-2010/12/31... The units are Mar Jun Sep Dec, End of Month, which I will call MJSD going forward. (These units are incompatible with "quarterly" units. That affects the combinations of data I can look at.) The graph goes back to 1966, the year I graduated high school.

Note that the number tops out at 14 trillion.

Graph #2

My graph #2 is number six on FRED's list of debt graphs:
Total Credit Market Debt Owed (TCMDO)... 1949:Q4 to 2010:Q4... Quarterly data. The graph goes back to 1949, the year I was born.

Graph #3

Graph #3 shows the first two, together. TCMDO is given in billions. Total Public Debt is given in millions, so I divided by 1000 to convert it to billions.


Using the data above, I cannot divide the one debt number by the other because the "frequency" differs: The one data set is quarterly and the other is MJSD. FRED simply reports an error.

Graph #4

This is number four from the FRED list of debt graphs:
Gross Federal Debt (FYGFD)... 1939 to 2010 ... Annual. The value of the latest observation here is 13528.8 billion, as compared to 14025.215 billion for the GFDEBTN graph above. Close, but not a match.

Graph #5

That's the two graphs of Federal debt, combined. Indistinguishable, in my book. The red line starts earlier, and the blue line finishes later, that's about the only difference. Oh, and FYGFD is annual numbers.

Q: Why does the one graph show 14 trillion federal debt, and the other show 13.5 trillion?

A: Apparently because the 13.5 number is from an earlier date. That's what the graph suggests to me.

You with me so far, Hayward?


It's 2:27 AM... How'm I doing?

Graph #6

Graph #6 is total debt as a multiple of total Federal debt.

Graph #7

Graph #7 is like Graph #6, but inverted.


2:35 AM. The clock is running.

Graph #8

Graph #8 shows non-Federal debt as a multiple of the Federal debt. It has been pretty high for a long time.

This graph is my carefully-done version of a comparison between public and private debt. The old graphs are not trustworthy, so I'm doing some new ones.

Graph #9

Graph #9 is like Graph #8, but inverted. Federal debt (relative to non-Federal debt) starts high but drops quickly, then slows. But the decline comes to an end with the 1974 recession.

The Federal number is not quite as low as it looks, because this graph does not start at zero. But the Federal debt has been stuck in the neighborhood of 30% of non-Federal debt since the late 1960s. A long time.


2:53 AM.

Graph #10

This is the graph I woke up wanting to see. Year-to-year change in total debt, compared to year-to-year change in the Federal debt.

The big red spike on the left is Federal spending during World War II.

In the 1950s and '60s the growth of Federal debt was substantially lower...

Graph #11

Graph #11 is the same as Graph #10, but it eliminates the big red spike by starting in 1949. So we get a close-up view of what remains.

In the 1950s and '60s the growth of Federal debt was substantially lower than that of non-Federal debt. There is a red spike in 1968, associated with the near-recession of 1967.

There are red spikes associated with the 1970 recession and the 1974 recession and the 1980 and 1981 recessions. That is what pushed Federal debt growth upward: recessions. The Federal government was trying to promote economic growth. They were trying to do right by us, I think. Things just got away from them.


I've been meaning to re-do my debt graphs for quite some time. Gene Hayward found an error in my ways, back in April.

I was like a deer in the headlights. Didn't know what to do first. And I ended up doing nothing. Dumbass.

But it was getting harder and harder for me to write. And I went to bed last night with nothing scheduled to post this morning. But I woke up early and I'm on the case now.

Gene -- Thanks for keeping an eye on me. Everybody, really. Thank you.

Art

// 3:25 AM. Gonna take a nap now.

If it cost nothing, debt would be no problem

Below is a list of significant moments, based on simple dollar tallies. Everyone else on the planet, it seems, wants to attribute economic conditions to world events -- to some war, some technological innovation, some policy decision, some business mentality, some foreigners, or some defect in character.

Sure. Most of those event-issues are related. Many of them create disturbances in the force. Some of them may even be causal. But all those things together comprise a scatter-brained, patchwork tale. My story ties everything together with one common theme. An economic theme: dollar tallies.

Graph #1

1. By 1929, the level of debt was so high that it caused a depression.

2. By 1947, the level of debt was low enough to permit vigorous expansion. During the expansion, debt grew with gusto. And as long as accumulated debt remained yet small, economic growth was superb. That era is today considered a golden age.

3. By 1973, the level of debt again reached the high point that had previously led to depression. Debt was again high enough to hinder growth, and the golden age ended. But from the 1947-73 experience, policymakers understood that golden economic performance is associated with the rapid growth of debt. Policies designed to improve economic growth therefore ignored the possibility that debt had grown beyond its economies of scale, and that debt itself was hindering growth.

4. Nevertheless, in 1986 a slowdown of debt growth began. This slowdown continued until about 1992. Coincidentally, some time around 1986 the declining rate of saving changed direction, and began to increase. The increase continued also until around 1992. (Thanks to Liminal Hack for pointing out the saving-rate trend.)

Graph #2

Graph #3

I am not yet convinced these changes are related and significant. I am not yet sure whether I interpret the graphs correctly. The downtrend on Graph #2, or rather the trend change on that graph, may not begin at the peak of the third tall hump in 1986, but at the tail end of that hump, in 1989. Remains to be seen. In any event, there was a significant decline in debt growth during 1989-1992.

Graph #4

5. Coincidentally, after 1989, the rate of increase of M1 money accelerated, and continued to accelerate rapidly until about 1994. This increase, combined with the reduced debt growth noted above, was a prelude to the mini-golden age of 1995-2004.

A similar (if smaller) disturbance is visible on Graph #4, between the years 1985 and 1990. This may be related to the apparent rate inversions beginning around 1986, shown on Graphs #2 and #3 above.

6. By 1994, the economy had more "spending money" than it was used to. In addition, the level of debt had fallen enough to create financial "slack" in the economy. It was again possible for debt to increase rapidly for a few years before bumping up against the limits of financial innovation. And rapid debt increase is what happened next.

Graph #1 shows extremely rapid debt growth during the years 1995-2004, the time of the mini-golden age. As during the period 1947-73, it was the debt growth that in a sense "sponsored" the economic growth. The economy was good because rapid credit expansion was possible.

7. By 2004 the level of debt had again increased enough to interfere with economic growth. For the next few years the level of debt continued to rise rapidly. GDP did not.

On Graph #1 you can see a departure from trend between the labeled points 5 and 7. The downtrend was a necessary preparation for growth. The uptrend was the moment of improved growth. By point 7, debt growth had returned to trend, and growth of the economy was again impeded by excessive debt.

8. In 2008, just beyond the graph, the crisis hit. The rising trend of debt once again has started to decline -- just as it did after 1929, and just as it did after 1989.


Graph #1 shows three separate peak-events. It shows debt increase leading to crisis in 1929, followed by debt decline leading to a golden age for the economy.

It shows debt increase until 1990, followed by debt decline leading to ten years of significantly improved economic growth -- a golden decade.

And it shows debt increase leading to crisis in 2008, followed by debt decline. And the possibility of a golden future.

Four peak-events, if we count the 1985-1990 disturbance on Graph #4.

If we want our economy to recover -- if we want another period of "golden" growth -- then we must again reduce the level of debt, so that rapid debt expansion is possible.

Keynes preferred the "quasi-boom" to the "semi-slump". As do I. We have lived with a semi-slump since the mid-1970s, and it is time for something better. The quasi-boom arises when debt is low enough to permit a vigorous boom, and debt is capped off at that relatively low level.

// Related link: Credit Efficiency

The trouble with Bill Mitchell

From the Billy Blog, 16 May 2011:

...my principle concern when it comes to economics is how we can keep unemployment and underemployment low. That was the reason I became an economist in the late 1970s, when unemployment sky-rocketed in Australia and has been relatively high ever since. So when I read commentary which I know would worsen unemployment (levels or duration) if the opinion was influential I feel the need to contest it. That has been my motivation in economics all my career.

Approach economics with an agenda, and the agenda will interfere with the science.

Changes

The shape of this one interests me:

1. Increasing until about 1970.
2. Increasing more quickly and more unstably until about 1986.
3. Declining until about 1992.
4. Increasing with regularity until the crisis.
5. Decline.

It isn't the last stage that intrigues me. We're well aware of that.

And it's not the increasings that intrigue me. Debt increases when the economy grows. That's normal.

Though why the rate of growth of debt must increase, why we think it is okay, this is a question worth asking.

I am fascinated by the decline in the rate of debt growth, from 1986 to 1992 or thereabouts. Why fascinated? Because debt growth slowed significantly, and we didn't have a crisis like we had with Lehman and all. And then a golden decade started soon after. That's why. Fascinated.

Wasn't there a revision of the tax code in 1986?

Indirection

From the Wikipedia article on Indirection --

A famous aphorism of David Wheeler goes: All problems in computer science can be solved by another level of indirection.... Kevlin Henney's corollary to this is, "...except for the problem of too many layers of indirection."

-- which cracked me up. And which leads to this observation:

All problems in economics can be solved by using more credit... except for the problem of excessive reliance on credit.

...but it rhymes.