Sunday, December 4, 2016

If the growth of debt was one-for-one with the growth of GDP before the 1980s, the line would be flat

Bezemer & Hudson:
Growth in credit to the real sector paralleled growth in nominal U.S. GDP from the 1950s to the mid-1980s — that is, until financialization became pervasive. Allowing for technical problems of definitions and measurement, growth of bank credit to the real sector and nominal GDP growth moved almost one on one, until financial liberalization gathered steam in the early 1980s.

If the growth of debt was one-for-one with the growth of GDP before the 1980s, the line would be flat before the 1980s.

Bezemer and Hudson say that the relation was one-for-one until the early 1980s. I don't see it. And this graph shows nominal values. If I showed inflation-adjusted values the increase would be steeper, especially in the 1965-1984 period that you want to say is flat even though it isn't.

I didn't make it up. It's BIS data, from FRED (copyright BIS).

Here is Figure 1 from the B&H article. It follows immediately after the paragraph I quoted above.

Figure 1 from the Article by Bezemer and Hudson
There are three lines on the graph. Forget the jiggy ones, the YOY lines. Just look at the dashed line that runs from lower-left to upper-right. It's not a perfectly straight line but it is pretty straight, and runs consistently uphill.

The dashed line shows the "cumulative difference between credit growth and income growth". It's always going uphill. This means the cumulative difference is always increasing. In other words, from 1953 to 2010 credit growth was consistently faster than income growth.

That's what the dashed line shows.

If you need a better look at change-in-debt relative to change-in-GDP, back in October I showed exactly that. It's a different, more comprehensive measure of debt than Bezemer and Hudson consider. But it shows what's going on. There is a slowdown of debt growth in the latter 1980s, and another during the crisis. But it's all uphill from 1952 to the mid-80s. Just like that dashed line of theirs.

Graph #3
Apart from "technical problems" they say, debt and GDP moved "almost" one-to-one until "the early 1980s." That's not what my graph shows.

It's not what their graph shows, either.


The Arthurian said...

For the record, I agree with much of what Bezemer and Hudson say in their article. I'm not listing all the things I agree with. I'm pointing out a few errors I see in the story they present.

jim said...

Looking at your graph of Total Credit to Private Non-Financial Sector, it is a pretty steady climb from WW2 until 2008, but that represents less than half the total debt today.

looking at the other half of the debt, it is pretty obvious that something quite dramatic happened around 1980

The Arthurian said...

I see I unnecessarily complicated your calculation by using debt relative to GDP!

Your graph starts with decline that lasts to the 1970s. Probably a declining Federal share:

Yes. With the Federal component of TCMDO removed, the line shows increase from the start. But there still is a "disturbance in the force" in the mid-1980s, and the increase thereafter appears more rapid than before the disturbance.

But if you then calculate the inflation-adjusted debt values (and use real GDP) the pre-disturbance region will show much more increase. The dramatic thing that happened in the 1980s was the taming of inflation.