Tuesday, April 12, 2016

I know what I said yesterday

Yesterday I said the graph speaks for itself. Today I'm going to talk about it anyway.

Graph #1: Economic Growth is better when the Private/Public Debt Ratio is Low
The trend line of RGDP growth varies from above four percent (when the debt ratio is low) to below two percent (when the ratio is high). So I was wondering: What would RGDP look like if we had pegged the debt ratio at a reasonably low number, say 2.5%.

RGDP would have been generally higher. How much higher? Something like this:

Graph #2: With a Reduced Private Debt Burden, GDP Growth Increases
Speaks for itself.


Oilfield Trash said...


This second graph is causing me some "Agita".

So are you saying RGDP increases from less private debt solely due the impact on the deflator?

Seems to me private debt gets two swipes at the deflator, when the spending occurs in the current time period, and the 'Intertemporal Choice'(an individual's current decisions affect what options become available in the future.)

Theoretically, by not consuming today, consumption levels could increases significantly in the future, and vice versa.

Hard for me to understand how a regression formula can anticipate "Economic uncertainty".

The Arthurian said...

Hey OT. Deflator? No deflator! Strictly from the trendline on Graph #1. Note that graph #2 shows actual RGDP and hypothetical RGDP, nothing nominal.

The blue dots show the private/public debt ratio wide-ranging, from approximately 1 to more than 7. The black trendline shows the "average" RGDP growth rate for any value of the debt ratio.

Roughly, now, based on the trendline: The lower the debt ratio, the higher the RGDP growth rate.

I say, let's pretend policymakers were smart enough to keep the private/public debt ratio at a reasonably low level, and let's assume RGDP growth was on average higher as a result, as the trendline suggests.

That's it. I used those improved growth rate values to generate the red hypothetical RGDP line.

No "Economic uncertainty". No allowance for any changes in consequence of the imagined debt ratio policy and the resulting increased growth and income and etc etc etc.

The Arthurian said...

Before posting, I deleted the following notes which describe the process I used to create the second graph.

For any particular year, you can get the private-to-public-debt ratio (the P2P ratio) from this graph. Then plug that number into the trend line equation from Graph #1 to get the "trend RGDP growth" for that year's P2P ratio.

Then take the actual RGDP growth rate for that year, divide by that year's trend RGDP number, and multiply by the trend RGDP number for our hypothetical 2.5% P2P ratio. Do that for all the years, and you get numbers that retain all the ups and downs of the business cycle, but have a different overall trend.

The graph of RGDP based on these adjusted growth rates will show a hypothetical RGDP, one we might have had if policy makers made it policy to keep the P2P ratio at a reasonably low number.

The Excel file.