Monday, April 16, 2012

If you do not look, you can not see

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

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

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

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

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

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

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

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

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

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

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

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

Graph #3: The Rest of the Debt as a Multiple of the Public Debt
Debt other than the Public debt increased from approximately equal to the Public debt in 1950, to four times the Public debt in 1974. Since that time it has been variable at a high level.

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

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

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

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

I challenge the premise.

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

Related post: How the Scientist Thinks

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