## Saturday, April 23, 2016

### Quarterly: Private Debt relative to Public Debt

At FRED, when you get the Real GDP series GDPC1 it defaults to Quarterly frequency. When you get the series TCMDO ("all sectors" debt) or FGTCMDODNS ("Federal government" debt) it defaults to "Quarterly, End of Period". Now, like me, you might think quarterly is quarterly. But when you try to make a scatterplot of GDP and debt, disappointment sets in:

For scatter plots, both data series in a pair must have the same frequency. The following data series pair has been skipped: data series #1 with frequency Quarterly and data series #2 with frequency Quarterly, End of Period.

Switch to Annual frequency, and you get the scatterplot.

I don't think it's a technical measurement problem. I think it's a programming glitch. Regardless, I couldn't do my scatterplots using quarterly frequency at FRED. So defying all logic, I switched to Annual, looked at the scatterplot at FRED, then exported the annual data to Excel and did all my work there anyway. I could have been using quarterly data all along since I was working in Excel. But no.

Guess what frequency I'm gonna use now.

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Here's a first look. I used my graphing VBA code on it, which is for line graphs, not scatters. So it came out with lines instead of dots. Then I added some "how it looks" (HIL) lines -- trendlines by eye -- in red:

 Graph #1:Scatterplot Preliminary with HIL Lines
Darned if it doesn't look like a hill! Up, gracefully, to a high point at the last quarter of 1965. Down thereafter amid a scribble of activity. It is interesting that "low" activity (below the HIL line) subsides when the debt ratio (on the horizontal axis) is between 2.5 to 3.25 or so. I thought the optimum range for the private-to-public debt ratio would be lower, around 2.25 to 2.5 as in the early 1960s. I still think that. But I'm keeping an open mind...

With the dots shown and the connecting lines removed and an overall trendline added (by Excel) now it looks like a scatterplot:

 Graph #2: Excel's Trendline (red) shows Growth is Better when the P2P Ratio is Low

I duded up some VBA code to subset the data series into consecutive 12-quarter periods and display the period trendline for each:

 Graph #3: Many Trends to Look At

If you feel the need to identify the trendlines, download the Excel file. Hover over a trendline in Excel and a little label pops up to identify the start-date of that 12-quarter period.

This is crude as hell, but hey: If you want good GDP growth, keep private debt to no more than 3.25 times the size of the Federal debt.

Policy guidance.

Richard McGee said...

Should I conclude that raising the public debt and lowering private debt are equally effective means of promoting good GDP growth?

The Arthurian said...

Hi Richard. Good question. Raising public debt would tend to be inflationary. Lowering private debt would tend to be deflationary. I do not see inflation and deflation as solutions. I see them as problems. I do not recommend either.

The economy is always in motion. Therefore, if we can create a tendency, that will be enough. If by some new policy we encourage people (consumers and businesses) to pay down their debt at a faster rate, we will reduce the growth rate of private debt. That is all we need to do.

Such a policy would tend to reduce inflation, and could be used for that purpose. I like the "symmetry" of it: I borrow, and then policy encourages me to reduce my debt. As opposed to what we do now: I borrow, and then they raise interest rates.

We have many policies that encourage the use of credit, but we have no policy that encourages repayment of debt. This is why we have so much private debt today.