Thursday, April 7, 2016

Way ahead of ya, Steve!

I don't make predictions because I'm always wrong. But it seems the only way to get attention is to make a prediction and turn out to be right. And if ever there was a time for making predictions, this is it. Almost everyone is expecting another recession or crisis and recession. And even Steve Keen says the U.S. cannot have a sustained credit boom comparable to what we saw after World War Two.

I predict a boom of "golden age" vigor, beginning in 2016 and lasting eight to ten years. It has already begun. In two years everyone will be predicting it.

Back in December 2012 I made a comparison of private debt around the 1929 peak and around the 2008 peak:

Graph #1
From the 2008 peak I could only go forward three years to 2011.

Steve Keen shows this graph comparing U.S. private debt reduction since the recent crisis (black) to U.S. private debt reduction during the Great Depression (blue):

Steve Keen's Figure 9: Reduction in Private Debt since Peak Level
Sorry, the image lost quality when I re-sized it. The x-axis label says "Years since peak debt ratio" and the numbers go from 0 to 20 by 2s. The y-axis label says "Index 100=Peak Debt Level" and the numbers go from 0 to 100 by 10s. The graph title is repeated in the caption: "Reduction in Private Debt since peak level".

The blue line is U.S. private debt falling after 1932. The black line is U.S. private debt falling after 2008 . The red line is Japan. This time we're not doing any better than Japan, is Steve Keen's point.

Not much reduction in private U.S. debt in the last few years. The decline of debt after 1932 was substantial and, because of that, we were able to have a long period of vigorous economic growth following the second World War. In Steve Keen's words:
By the end of the War, private debt had fallen to 27% of the peak level reached in 1933 (see Figure 9), and the stage was set for a credit-driven revival in Post-War aggregate demand. From 1945 till 1970, credit expanded at an average 5.7% p.a.—substantially faster than the expansion of credit during the Roaring Twenties. From 1970 until the crisis began in 2008, the expansion in credit averaged 9% of GDP per year.

No such sustained credit-driven boom is possible in either Japan or America today, because the deleveraging after their two crises has only slightly reduced private debt levels. Japan’s private debt ratio today is still 75% of the peak level reached in 1996; similarly, America’s private debt level today is 88% of the peak level reached in 2008 (see Figure 9).

Those numbers again: U.S. private debt fell way down to 27% of the Great Depression peak, but only fell to 88% of the 2008 peak. They got rid of 73% of Great Depression debt; we got rid of 12% of Great Recession debt. "Deleveraging" Keen says, is "the crucial difference between Golden Age America and today". I agree, but ...

I want to re-do Steve Keen's graph, get rid of the Japan data, and add a third peak for U.S. data. I'll add the 1990 peak. But I don't want to look at raw debt numbers. I think the important ratio is debt per dollar of spending-money. I'll look at that instead.

For the Depression era I'm using net private debt and M1 money from the Historical Statistics, Bicentennial Edition. For the more recent data I'm using "Total Credit to Private Non-Financial Sector" and "M1 Adjusted for Retail Sweeps" from FRED. Annual data.

Graph #3
Ohhh! I'm hyperventilating! On Keen's graph, deleverage since 2008 has been only slight. On my graph it is comparable to the deleverage after 1932, and far exceeds the deleverage after 1990.

It was the deleveraging of 1990-94 that made possible the "Goldilocks economy" of the latter 1990s. If the mild deleverage of the early 1990s gave us a good economy, then the strong deleverage since 2008 should give us something comparable to the "golden age" that followed World War Two. Comparable in vigor, not in duration.

Let's look at duration.

The deleverage following 1932 lasted 14 years. The golden age following 1947 lasted perhaps to 1973. But let's say with Minsky and Keen that it lasted only to 1966. That's 19 years golden, after 14 years deleverage. Roughly, three years' deleverage gives you four years boom.

Compare that to 1990. Deleverage lasted to 1994, so four years. That means we should have had five or six years of boom: 1995 to 2000 sounds about right to me. High productivity lasted beyond the year 2000, but by 2000 the DPD ratio had returned to its pre-1990 trend. The financial slack in the economy was all used up.

So, we have a number for predicting duration.

I'm not offering investment advice here. I'm just trying to determine what the debt-per-dollar ratio tells me. It tells me things are gonna be good for a few years. Better than the good economy of the latter 1990s.

For how long? We run out of data after 2013, after five years deleverage. From the graph it looks like we might get another year or two before DPD starts rising again. In early March I said first quarter 2016 is the bottom. I'll go with that and say 2015 is the last year of deleverage.

That's seven years deleverage. Seven bad years.

Seven good years to come? We shall see. But if three years deleverage gives you four years boom, seven years deleverage could give us nine good years.

But I hate to see the mess of debt we'll be in by then if Congress doesn't create some incentives to accelerate the repayment of debt, and soon.

// The Excel file...


The Arthurian said...

Atlanta Fed GDPNow Model Currently Predicts 4.5% GDP Growth for Q4 2017

The Arthurian said...

On 1 November 2017 Edward Harrison writes: "Yesterday I promised you to 'look at individual economic data points and tell you why I think they bolster the case for optimism about the economic trajectory.'"

On 7 April 2016 I said "In two years everyone will be predicting it."

The Arthurian said...

From Tim Duy's Fed Watch PDF dated 13 November 2017:
"The Federal Reserve believes the economy currently operates close to if not a little beyond full employment. The unemployment rate fell to 4.1% in October, well below the Fed’s longer run estimate and the 4.4% low of the last cycle. And note the broader U-6 unemployment rate, which includes measures of underemployment, fell to 7.9%, the low of the last cycle.

By these metrics, conditions are fast approaching those the late-90’s. I believe the economy will sustain enough momentum to hit that point within the next six months.

On 7 April 2016 I said "In two years everyone will be predicting it."

The Arthurian said...

Dr. Ed's Blog, June 7, 2018: US Economy: Pedal to the Metal