plus ça change, plus c’est la même chose.

From the Wall Street Journal:

Obama's Dividend Assault
A plan to triple the tax rate would hurt all shareholders.

...the new dividend tax rate in 2013 would be 44.8%—nearly three times today's 15% rate.

And on and on, not at all like news. More like a rant.

Here's what I noticed: There is no mention of the 100% deduction for business interest expense.

So the plan, apparently, is to keep encouraging credit use and the accumulation of debt. To reward and encourage finance rather than production and productivity.

It's a bad plan.

FCM and the Long View

Using Jazzbumpa's source,

I dug up productivity data from the BLS website, which took quit a bit of digging. Fortunately, Skeptic at Reality Base did the same thing, and identifies the data series - year-over-year non-farm productivity growth (% change) as PRS85006092.

we can now take a longer-term view of productivity and the Factor Cost of Money.

The BLS site offers "Major Sector Productivity and Costs" and provides numbers with units given as "% change quarter ago, at annual rate". I couldn't get "change from year ago" numbers but it probably doesn't matter.

I grabbed the data for all the years I could get -- back to 1947. (Annual numbers since 1948.) Popped 'em into a Google Docs sheet and fiddled with moving averages to get something fairly smooth.

Brought my "FCM per GDP" numbers into the file and threw a graph together:

Source: My Google Docs Spreadsheet
Edit 8 Feb 2019: The old link to the live graph is not working. But the graph is okay
in the spreadsheet. So I replaced the live graph link with an image.

In outline: Productivity goes down as the Factor Cost of Money increases; and productivity goes up as the Factor Cost of Money declines.

Looking at the early years, one could argue that productivity and the FCM moved up together when the FCM was very low, when finance was still facilitating economic performance. On my graph the two travel together until 1962, then veer apart. If I plotted the moving average at the last year of the period, the separation date would be 1966. So, somewhere in the 1962-1966 period is when finance became excessive and started hindering rather than helping economic performance.

FCM and the "Macroeconomic Miracle"

I still want to look at the Factor Cost of Money in relation to the "macroeconomic miracle" years.

Robert J. Gordon, 2002:

NBER Working Paper No. 8771
Issued in February 2002

This paper examines the sources of the U. S. macroeconomic miracle of 1995-2000 and attempts to distinguish among permanent sources of American leadership in high-technology industries, as contrasted with the particular post-1995 episode of technological acceleration, and with other independent sources of the economic miracle unrelated to technology.

Dean Baker and John Schmitt, 2007:

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.

James Kahn and Robert Rich, 2011:

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.

Mary Amiti and Kevin Stiroh, 2007:

Chart 1 Trend Labor Productivity Growth

Source: The Conference Board and Groningen Growth and Development Centre, Total Economy Database, January 2007, http://www.ggdc.net. Notes: Labor productivity is defined as real GDP per hour worked. Trend estimates are based on a Hodrick-Prescott filter with a smoothing parameter of 100.

That blue line on their chart shows US productivity dropping off continuously from 1961 to 1978, dragging the bottom till 1993, then rising during the "miracle" years.

Finally, I came upon BLS productivity numbers for 1990-2011. I figured the annual change in productivity, and plotted that against the Factor Cost of Money as a percent of GDP:

Source: My Google Docs Spreadsheet

I'm not making any bold claims for this graph. But it looks to me like productivity and the factor cost of money tend to move in opposite directions.

Keep in mind that productivity is not a policy; it is a goal. Monetary policy is policy. So if there is causality, it is the factor cost of money that influences productivity. Not that monetary policy presently pays attention to the factor cost of money. But maybe they should.

//

In evaluating my graph, I would ask that you not only point out its weaknesses but also examine its possible strengths. Ask, for example, Does it make sense?

For example: If our basis for comparison is Krugman's concern with the Zero Lower Bound and the need to have negative interest rates to revitalize the economy, then yes, it makes sense in that context. Negative interest rates would reduce the Factor Cost of Money, and reducing the FCM would enhance productivity and growth.

Given this basis of similarity, let me point out what the FCM captures. It is not only the rate of interest, but also the size of accumulated debt that affects the cost that inhibits growth.

Examine the strengths.

FCM: PAIR and the FedFunds Rate

I took Graph #2 from yesterday's post and renumbered it:

Graph #1: Federal Outlays for Interest relative to the Two Measures of Debt

The graph shows FRED's FYOINT ("Federal Outlays: Interest") as a percent of the Federal debt, for both the $10B and $14B version of the Federal debt. I'm considering the lower set of numbers as the "average" interest rate paid by the Federal government on its gross debt.

I'm in the early stages of using that set of numbers as a proxy for the average interest rate paid by everybody else on all the debt owed other than the Federal debt. I'm calling this interest rate the PAIR, or Proxy Average Interest Rate.

I took and slapped the FEDFUNDS rate onto the graph, for comparison:

Graph #2: PAIR and the Federal Funds Rate

PAIR and FEDFUNDS move in the same general direction, up together until the early 1980s, and down together thereafter. FEDFUNDS is a lot more variable, of course, but that's because the Fed jerks it around to influence economic activity. Then too, the PAIR is an average interest rate for debt accumulated over many years, so you might expect it to be slow-moving.

As the FEDFUNDS rate is essentially the lowest interest rate we have in the US, I have to say the PAIR is really a lowball estimate. Probably a good average for government debt, but even the red line is probably lower than the actual average interest rate on private sector debt.

FCM: The Factor Cost of Money -- Further Review

Turns out, the info I needed to figure the Factor Cost of Money is right there in FRED.

A quick search turned up four data series on the Federal debt:

Series	MaxValue	Units	Description
GFDEBTN	$14B+	Millions	Federal Government Debt: Total Public Debt
FYGFD	$14B+	Billions	Gross Federal Debt
FYGFDPUN	$10B+	Millions	Federal Debt Held by the Public
FGTCMDODNS	$10B+	Billions	Total Credit Market Debt Owed by Domestic Nonfinancial Sectors - Federal Government

The $4 billion difference between the first two series and the last two is the $4 billion of the Federal debt held internally by parts of the Federal government such as the Social Security Administration.

The two series that end up something over $14B look similar to each other on the graph. And the two that end up in the neighborhood of $10B look similar to each other.

Graph #1: The Federal Debt, four ways from sunday

One of the two series that passes $14B is given in Millions, and the other in Billions. Same is true for the two series that end up near $10B. I want to use the debt number as a denominator under the interest number, interest paid by the Federal government. And the interest number is given in Millions, so I will use the two debt series that use Millions, and ignore the two that use Billions.

Graph #2: Federal Outlays for Interest relative to the Two Measures of Debt

Graph #2 shows FRED's FYOINT ("Federal Outlays: Interest") as a percent of the Federal debt, for both the $10B version and the $14B version of the Federal debt.The red line shows the average interest rate the government pays, based on the smaller debt number. The blue line shows the average interest rate the government pays, based on the bigger debt number.

I'm assuming that the blue line is the accurate one... In other words, I'm assuming that "Federal Outlays: Interest" includes outlays for interest paid to the Social Security Administration and the other government agencies holding parts of the Federal debt. The government don't get to NOT pay the interest, just because of who holds the debt. I think.

The lower line on Graph #2, the blue line, shows the same peak as the vertical bar graph I showed a few days back, a peak around 7½% in the early 1980s:

Graph #3: The Proxy Average Interest Rate (PAIR)

So the interest rate I have figured is a lowball estimate.

Also, Federal debt has always been considered less "risky" than anybody else's debt, so the Federal government has typically paid lower interest rates than anybody else. So again, when I use that rate to estimate the total interest cost of the private sector, that number is a lowball estimate.

Friedman did it with strawberries

The Fallacy of Composition

"Composition" is the notion that what's good for the goose is good for the whole damn flock. The "fallacy" is that it's not always true. Sometimes, what applies to the individual does not apply to society as a whole.

From the epilogue of Money Mischief, by Milton Friedman:

... the contrast between the way things appear to the individual and the way they are to the community. If you go to the market to buy some strawberries, you will be able to buy as many as you wish at the posted price, subject only to the dealer's stock. To you, the price is fixed, the quantity variable.

But suppose everyone suddenly got a yen for strawberries. For the community at large, the total amount of strawberries available at a given time is a fixed amount. A sudden increase in the quantity demanded at the initial price could be met only by a rise in price sufficient to reduce the quantity demanded to the amount available.

For the community at large, the quantity is fixed, the price variable -- just the opposite of what is true for the individual.

Private Debt 2012 (8): Smoke 'n' Mirror, Smokin' Gun

Based on "Total Credit Market Debt Owed" (TCMDO) from FRED, the Federal government's share of debt (in red) and everybody else's share (in blue):

Graph #1: The Federal Debt is a Wisp of Smoke

The blue line is our share -- private sector, mostly. The red line is the Federal share.

The Federal government's share really can't get much lower. Oh, it could drop from 20% of the total, back down to 10%. But that's where it was when our recent troubles started. So maybe that's not such a good idea.

As a matter of fact, the Federal debt was at its lowest on this graph for pretty much the whole first decade of the 21st century -- and that was the time of the weakest economic boom we ever had!

Oh, to be sure, the Federal government had a lot of debt at the time. But not compared to the rest of us!

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

MICROBES

From The Money Illusion:

Back in late 2008 and early 2009 most people focused on “the debt crisis” as being “the problem.” But debt is a problem only to the extent that it exceeds one’s ability to repay the loans, which depends on one’s income.

MICROBES, I say.

I say again: MICRO BS. "One's income" is micro. The relation of one's debt to one's income is micro. The sum of all debts relative to the sum of all incomes IS STILL MICRO.

Ours is a MACRO problem.


The fly in Sumner's ointment is the pretense that income can exist without debt. He says debt is only a problem if it is too heavy for your income, but he forgets that in our economy, almost all income comes from somebody using debt. We do not increase income without increasing debt; at the macro level, this is the problem.

Income CAN exist without debt, of course, but only if we change the way we do things. We have to increase the quantity of money relative to output and at the same time decrease the amount of credit generated from every newly printed dollar. But as long as people continue to think money and credit are the same, that will never happen.

Sumner does not call for the necessary change. He says:

A few of us market monetarists argued that you also needed to look at the denominator of the debt/income ratio, not just the numerator.

By looking at the denominator of the debt/income ratio, he means: Look at income. Well yeah, income is too low. Income is GDP, and GDP is too low, so income is too low. If you don't get a headache because this is such basic stuff, well, you should.

GDP growth has been too slow since the mid-1970s. What's that, going on forty years now? GDP growth has been too slow for 40 years, for the most part getting worse all the while. The money illusionist waves his hand and pretends that the whole GDP problem never existed until "late 2008" or something. And with that magical analysis, Sumner declares that the problem is not excessive debt, but insufficient income.

Does it matter? Well, yes: Excessive debt IS THE REASON INCOME HAS BEEN LAGGING for forty years.

The solution that calls for "more income" is likely to be nothing but an inflationary solution. That's because we're not getting growth. If we don't get growth, all we get from an expanding NGDP is more "N". And don't forget, it's debt that hinders growth.

Sumner ignores the numerator. He ignores debt, the hinderer of growth.


Debt relative to income is high. Sumner says we can solve the problem by increasing income via inflation. Did that work, say, in the 1970s?

Graph #1: Debt-to-Income (blue) and Debt-to-CPI (red)

Not really. Here's a close-up through 1980:

Graph #2: Debt-to-Income and Debt-to-CPI (up to 1980)

Maybe it did work for the latter half of the 1960s. Inflation pushed NGDP up, and at the same time inflation reduced the burden of existing debt: Inflation increased Sumner's denominator and decreased his numerator simultaneously. And all it took was a 23% increase in prices in the five years between 1965 and 1970. Meanwhile, total debt increased 44.6%, almost twice the rate that prices went up.

Prices couldn't go up fast enough to keep up with the growth of debt. After 1970, inflation got worse, but Sumner's "debt to income" ratio WENT UP ANYWAY.

As long as debt continues to increase, inflation cannot solve the problem of excessive debt. And debt hinders growth.

Dwell on it.

Estimating the Factor Cost of Money (2)

Picking up where I left off yesterday...

So I worked out some "average interest rate" numbers, uploaded the file to Google Docs, and cleaned it up a bit.

I'm calling this interest rate the Proxy Average Interest Rate, or PAIR.

Graph #1: PAIR, the Proxy Average Interest Rate

Now I want to look at total debt and use my average interest rate to figure a total interest cost for each year.

Then I'm gonna want to compare that number, the factor cost of money, compare it to wages and profits, see how things changed over the years, and see how those changes fit in with good times and with hard times.


Got annual TCMDO (debt) numbers from FRED, added them to my Docs file, and figured the interest owed each year at the PAIR rate. I just multiplied TCMDO debt times the PAIR rate. This series I'm calling the Factor Cost of Money, or FCM.

Graph #2: FCM, the Factor Cost of Money

Next, I got annual GDP numbers from FRED and added them to the file.

And I took a quick look at the Factor Cost of Money as a percent of GDP:

Graph #3: FCM as a Share of Total Income

Then, because it looked interesting, I compared FCM per GDP to the FedFunds rate.

Graph #4: FCM as a Share of Income, and the FedFunds Rate

You can see a similarity between the two data series. Sure, because the interest rate is one of the determinants of the Factor Cost of Money. But there is also a difference between the two series, and this is due to the other determinant: the level of total debt, which continued increasing from the early 1980s to the late 2000s while interest rates were falling. So the FCM has been more than the FedFunds rate, ever since interest rates started falling in the early 1980s.

As you can see, recently the FedFunds rate has been down almost to zero, but the Factor Cost of Money has not dropped below 5% because there is so much debt, public and private. And 5% is well above what the Factor Cost of Money was at the start of the graph, when our economy was having its Golden Age.

You might object, saying

Yes, yes it's true: The Factor Cost of money started out well below 5%. But it reached 5% before 1970, and the Golden Age continued on to 1973.

Right! It was the increase in the Factor Cost of Money that killed off the Golden Age.

In the early years, the Factor Cost of Money was less that five percent of GDP and was growing only slowly. In other words, the drain of income from the productive sector to the financial sector was at a minimum. Never again has that cost been so low. And never again have we had a Golden Age.

Estimating the Factor Cost of Money (1)

If you Google interest cost or interest cost data or stuff like that, it's pretty easy to find how to figure the cost of a loan, and pretty easy to find info on everybody's favorite fall guy, the Federal government.

But it is hard to find info on interest costs in the private sector.

So I had a thought: Why don't I use the total interest cost on government debt to figure an "average" interest rate for government debt each year, and then use that number as a proxy for the average interest rate of private sector debt.

I don't know how totally valid this approach might be. But it is representative. It will give me something to look at -- assuming I can find the relevant data for the Federal government!

//

Got it. The OMB site has a Historical Tables link with a good handful of Excel files available for download.

Table 6.1 shows the composition of Federal outlays for 1940–2016, including Net Interest. Table 7.1 shows Federal debt at the end of the year for the same period. I took the ratio to get an average interest rate for the whole Federal debt.

It's got the same 1982 peak that you might see in the Federal Funds rate. No surprise there, I guess.

See that odd short bar in the middle, around 1977? That's an accounting adjustment labeled "TQ" (Third Quarter) in the file. (It's in both tables.) If I use these numbers as a proxy for the average private-sector interest rate, I'm just gonna delete the TQ line.

Everyday

You probably won't be able to tell from my post here, but I actually liked Josh Hendrickson's post -- and also the one Marcus Nunes links in his comment there. So you know.

From Nominal Income and the Great Moderation at The Everyday Economist:

The period from 1984 through 2007 was one that exhibited a marked decline in macroeconomic volatility. As such, it is commonly referred to as the Great Moderation. This period has potentially important implications for policy. If, for example, the reduction in volatility was the result of smaller “exogenous shocks” to the economy, then we can largely view the period as one of good luck. However, if the reduction in volatility can be linked to a change in policy, then this period can potentially provide guidance as to how policy should be conducted in the future.

...??

Not too much macroeconomic volatility in the Dark Age, either. Sometimes I don't understand where people are coming from. It's not just this guy, Josh Hendrickson, who wrote the post. It's the whole notion that "moderation" is "great".

No. It's bigger than that. Or smaller, probably.

First there was the golden age. The economists of the time had basically nothing to do with that, but that didn't stop them from saying things like President Lyndon Baines Johnson's Budget Director Charles L. Schultze said: "We can't prevent every little wiggle in the economic cycle, but we now can prevent a major slide" (reported in Time magazine, 31 Dec 1965).

Later came the great moderation. Economists really had little to do with this, either, except possibly by accident -- as is suggested by Josh Hendrickson's ambivalence regarding luck versus policy as the source of the moderation. But that didn't stop them from saying things like "My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades." - Robert E. Lucas, Jr. (PDF), January 10, 2003.

History is written by the victors -- and economic history is written by people claiming to be right. Reminds me of what I wrote in Christina at '50:

The paper presents the myopic and egotistical view that '50s policy was right because it is comparable to modern policy.

The authors write: "We show that policy in the 1950's was actually quite sophisticated." They do not say "actually quite sophisticated by present standards;" but that is clearly what they mean.

They do not say "the policy of the 1950s was surprisingly sophisticated," which would have expressed surprise. They say policy was "actually quite sophisticated." The words actually quite seem to suggest arrogance rather than surprise -- as if coming from a position of modern superiority.

See? I'm doing it, too.

My wife bakes for the dogs

I have nothing else to say about that.

JW Mason (4): See? It's Micro

My continuing saga of reading JW Mason's Fisher Dynamics in Household Debt (PDF, 31 pages).

From page 6:

Discussions of leverage typically focus on the saving decisions of individual units.

JW Mason (3): "Because Debt is a Stock"

My continuing saga of reading JW Mason's Fisher Dynamics in Household Debt (PDF, 31 pages). Page 5

Because debt is a stock, its adjustment must take place over time; an economic unit targeting a substantially lower level of leverage will typically seek to reduce its consumption relative to its income over a number of periods, producing an ongoing drag on aggregate demand.

I was gonna let that stand by itself, because it is beautiful. But I kept reading, and I had a thought. This is the next sentence after the one quoted above:

Unlike other factors depressing output whose effects should not be expected to persist once the initial cause is removed, a crisis that results in many units finding themselves with leverage levels that are seen to be "too high" may lead to a long period of depressed output even after the initial crisis is resolved.

Well sure. Debt is not just a stock. Debt is an accumulation over time. (That's what a stock is, I guess.) It took sixty years -- from the start of the Golden age in 1947 to the start of the crisis in 2007 -- to accumulate enough debt that we couldn't deal with it. So it should come as no surprise that we cannot solve the debt problem in the blink of an eye. The solution is to reduce by half or more the debt it took a lifetime to accumulate.

JW Mason (2): What Context for Debt?

My continuing saga of reading JW Mason's Fisher Dynamics in Household Debt (PDF, 31 pages).

Part 2 of Mason's paper opens thus:

Traditionally, economists have attributed only a minor role to leverage (the ratio of economic units' gross liabilities to some some measure of their income or net worth) in understanding macroeconomic outcomes

A few days back I had some trouble understanding the interest coverage ratio, which looks at some portion of income as a multiple of total interest owed. Leverage is the leviathan relative of that, looking at total debt owed as a multiple of some measure of income.

Graph #1: Debt per GDP

Let me again make the point that looking at debt relative to income -- widely used by lenders in micro-economic encounters, even if it plays only a "minor role" in "macro" analysis -- looking at debt relative to income is like inbreeding: Every dollar of debt becomes somebody's income. Income is a false support for debt. A sudden urge to deleverage will undermine income (as we well know). And income can collapse faster than debt can be repaid. This is the truth that Irving Fisher spoke, and Steve Keen speaks today.

EDIT: Changed "Debt is a false support for income" to "Income is a false support for debt." Oops! 1 August 2014

Graph #2: Debt per Dollar

I prefer to look at debt relative to the quantity of unencumbered money: relative to M1 or Base. Relative to the money that must be used to repay debt. The money for which "the quantity of money" is reduced when debt is repaid. Spending money.

But Mason prefers to look at the same ratio that everybody else looks at, debt relative to income. Mason prefers the same guide used by lenders and policymakers in the run-up to the recent financial crisis. Debt relative to income:

What constitutes a sustainable ratio of government debt to GDP has long been a central concern for public finance; more recently the behavior of, and limits to, the debt-income (or debt-net worth) ratios of other economic units have become salient questions as well.

And again:

If units' assets are not reliable sources for either funding or market liquidity, then the capacity to service debt out of current income becomes paramount.

Sure. But total income is equal to the sum of its micro-economic parts. Aggregate money measures, on the other hand, are macro measures. Mason and the others prefer a micro-economic analysis of the macro-economic problem.

// See also: Context

A Birthday, and my War on Debt continues

Apart from all else, happy birthday to my son Jerry!


It is occasionally said that fighting the supply of illegal drugs has failed to stem the drug trade, and fighting demand would give better results. If people were somehow convinced not to buy illegal drugs, the drug trade would wither away.

I see the same solution for a different problem, another four-letter word that starts with "d": Debt. If we can somehow convince people to borrow less, and pay back more, then debt need never again accumulate into the kind of problem it has become for us. If we cut demand in half, the business of lending will shrink, and creditors will have to find better things to do with their money. Productive things, perhaps.

Don't get me wrong. I don't blame borrowers for the mess we're in today. I don't even blame lenders. I blame policy. (You... you can blame lenders if you want. But if you want lenders to change, you still have to change policy.)

All Hills and Valleys

The unlimited deduction for corporate interest payments originated in 1918. Since then the history of our economy has been a long ride up the hill of debt accumulation, down the hill of global depression and war, and up the hill of economic recovery and debt accumulation again. You can see that, here:

Graph #1: Debt per dollar of Income Generated with that Debt

It is easier to see the hills and valleys here:

Graph #2: Debt per dollar of Spending Money

The second graph also, I think, better conveys the scale of the current problem.

A tax deduction for corporate interest payments means that corporations don't pay income tax on the income they use to pay interest. It makes borrowing money a way to avoid paying income tax.

Of course, businesses can also deduct the money they spend paying their employees. Wages are a deductible cost, just like interest. But for the cost of interest you get money to spend. For the cost of wages, you get attitude.

But I guess if you borrow money and use it to pay wages, you get to deduct the wages and the interest payments from your taxable income!

The tax deduction for interest expense encourages businesses to borrow. That's good for economic growth -- or it would be, if there was not already too much debt in our economy. Still, it should be clear that increased borrowing has not been a very great boost for economic growth for a decade or more. Forty years, more like.

Follow the Money

Consider the years after World War Two, up to the end of the time before Reagan. This period, some three decades, includes both the Golden Age and the Great Inflation.

Interesting: The Great Inflation begins around 1965 -- basically in the middle of those decades before Reagan. And more and more, I am coming to think that the Golden Age ends around 1965, though it is often said to run into the 1970s. One might say this period encompasses both the Keynesian era and the death of the Keynesian era.

Graph #3: Interest Costs Rise as Employee Compensation Falls

All through those years, corporate interest costs increased as a portion of total corporate income tax deductions, and corporate compensation of employees fell. Corporate interest costs absorbed corporate income, making that money unavailable for wages and salaries, and unavailable for profits.

Graph #4: Interest costs eat into Wages

By 1965, interest costs were starting to push up prices. In the 1970s, the news reported a "wage-price spiral". But wages were not the problem. Wages were not a rising share of corporate costs. Wages were a falling share.

The cost of interest was the problem. And it was fully deductible.

// UPDATE 2:44 AM 2/19/2012

Graph #1 was developed on Sheet1 and Graph #2 on Sheet7 of my Debt-to-GDP spreadsheet (Google Docs).

Graphs #3 and #4 come from Sheet1 of the Components of Corporate Cost spreadsheet. This sheet is a copy of the one linked in my comment below.

// UPDATE 6 October 2015

Due to changes in Google Docs, the graphs in this post were not being displayed. So instead of trying to use "interactive" graphs I just did screen captures of the four graphs and stuck them in the post in place of the empty rectangles that were being displayed. Too many words.

I fixed it.

Private Debt 2012 (7): Confusion

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


Sometimes I say excessive private debt is the problem.

Sometimes I say excessive total debt is the problem.

Which is it, Art?

The problem is not the Federal debt. The Federal debt is not the problem. Everybody is focused on the Federal debt, and nobody can solve the problem, because the Federal debt is not the problem.

So, I always say: Private debt is the problem.

Pretty soon, maybe, the people who focus on the Federal debt will open their eyes and see that the Federal debt is not the problem. And then they too will say that private debt is the problem.

As soon as that happens, I will always say: Yes, but total debt is the problem.

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"???