This is the graph I had in mind

UPDATE: In a comment, Jim points out that my change-in-debt numbers are quarterly, not annual. So all the changes I think of as annual changes in the post are actually quarterly changes. The annual changes are about 4 times bigger. Wow.

Two new graphs at bottom of post.


My Graph #1 from Monday shows "change in debt" compared to "change in the size of the economy". It shows that, as a rule, debt increases more than GDP does. Not really a surprise, that.

But if we do more than just the math, if we mix in a little economics -- if we admit we think credit use is good for growth -- then we have a problem. For debt is evidence of credit use, and Monday's graph says credit use is not good for growth. It says that credit use has become less and less effective in generating economic growth.

But that wasn't the graph I wanted. What I wanted to look at was "change in debt" compared to "size of the economy". This graph:

Graph #1: Quarterly Change-in-Debt compared to the Size of the Economy

Here's an interactive of it:

Source: FRED data, my Google Docs spreadsheet

Starting from an average of around 2 percent -- meaning that in the early 1950s, the annual quarterly increase in debt was about 2% of the size of the economy -- the trend sweeps up to a peak near 7.5% in the mid-1980s, drops to around 3% by 1993, and rises again to near 10% just before we broke the economy in 2008.

That's total US debt, not just government debt.

Three percent -- that's about how much GDP grows in a pretty good year.

3% GDP growth in a good year... 3% debt growth in a slow quarter!

The graph shows a general trend of increase, with two major interruptions. The more significant interruption follows the recent crisis, an extremely rapid and deep decline. Nothing else on the graph compares.

But the more interesting interruption, I think, is the 1986-1993 decline. It is a large drop, easily half the size of the recent one, but it took near a decade to work itself out. So there was no sudden and severe crisis to deal with. Only a relatively mild recession in 1990.

This unusual decline actually shifted the whole trend line downward. Thereafter the uptrend resumed, but from a lower starting point.

This unusual decline is something we have looked at before. The decline relieved pressure and created some slack in the financial system. This unusual decline in my view is the key change that created the opportunity for rapid growth of debt to resume in the latter 1990s.

That rapid debt growth -- unwise as it may have been, in hindsight -- opened the door for the rapid economic growth of the 1995-2000 years, growth that economist Robert J. Gordon has called a macroeconomic miracle.

Unfortunately, the miracle growth soon ended, but the rise in debt growth did not. Debt growth continued right up to the moment when everything fell apart, when jets of debt crashed the World Trade Center of our economy and turned it to dust and rubble.

Erectile Function

Today's graph shows several things. It shows that what goes up, must come down. (But I don't want to focus on the crisis just now.) It shows the unusual 1986-1993 decline that has such a prominent place in my argument (but that also is for another day). And it shows a general tendency of increase. This is my focus today.

It is the 'coming down' that gets everyone's attention, because it creates problems for people. But for the economy, for the system we rely on without recognition (except in the 'coming down' moments)... for our economy the coming down is a solution.

For the economy, the 'going up' is the problem. The increasing monetary imbalances are the problem. The increase of debt, relative to GDP and relative to income and relative to circulating money is the problem.

Today's graph shows that our new uses of debt tend to increase with time. Why? It's what we do. But I say policy is to blame. Passively, policy let it happen. Actively, policy encouraged it. We have plenty of policy devices intended to provide more credit and to encourage the use of credit. Why? Because policymakers think we need credit for growth.

But we have no policy that encourages the repayment of debt, which would free up credit so it could be borrowed again, put newly to use, and help to give us the growth we're looking for.

We have many policies that engorge the supply of credit and many policies that arouse the demand for credit, but no policies that provide protection by encouraging the paydown of accumulating debt.

This is the reason the graph shows uptrend. Policy makes it so.

Like a Black and White Cookie

Monday's graphs show a decline in "debt productivity". The graphs show that it took more and more extra debt, as the years went by, to get an extra dollar of output.

Today's graph shows that we've been trying really hard to get that extra dollar of output. We've been pushing debt up and pulling debt up and levering debt up every which way we can, just to get more output. Fools that we are, we think accumulated debt has the same effect as new uses of credit, while just the opposite is true.

Our grand plan to expand debt has been undermined by the declining effectiveness of credit-use as a tool for boosting economic growth. In the end, we have achieved only a massive expansion of debt and the worse economic growth in a lifetime.

Isn't it time to change the way we think about debt? For credit use is evidently not so good for growth. Not any more. And the reason is simple: There are two sides to debt.

There is the borrowing, the new use of credit, the spending, and the economic boost we get from it. The bright side.

And there is the dark side: the obligation, the accumulated debt, the payback, the reduction of boost that must come eventually. The residual effect.

Despite all the inducements and enhancements and encouragements of policy to get us borrowing more today, we do not borrow more. They pushed us beyond our limits, and we refuse. So the economy is sluggish.

It will remain sluggish until debt is no longer excessive.


TWO UPDATE GRAPHS:

Graph #N, Quarterly (blue) and Yearly (red) change in Debt, relative to GDP

Wow. And (just to see it) I compare yearly to quarterly, dividing the yearly by four:

Graph #N: Testing for Similarity, I divided the Yearly by Four

Second look at the Stockman quote

David Stockman:

Typically the private and public sectors would borrow $1.50 or $1.60 each year for every $1 of GDP growth. That was the golden constant. It had been at that ratio for 100 years save for some minor squiggles during the bottom of the Depression. By the time we got to the mid-'90s, we were borrowing $3 for every $1 of GDP growth. And by the time we got to the peak in 2006 or 2007, we were actually taking on $6 of new debt to grind out $1 of new GDP.

Somebody the other day pointed out that the relative stability of debt/GDP ratio, expressed here as "$1.50 or $1.60 each year", that the stability arose from the combination of a rising private sector debt ratio and a declining government debt ratio. (Sorry, I have no idea where I read that.)

It's true. From 1960 to 1975 give or take, the declining red line of Federal debt balanced the rising blue line of non-Federal debt, so that total debt (the green line) was really quite flat for those 15 years or so:

Graph #1
RED: Federal debt, declining until the mid-1970s.
BLUE: Non-Federal debt, rising 1960-1980 and generally.
GREEN: Total debt, apparently stable from 1960 to the mid-1970s.

In closeup:

Graph #2: Same as Graph #1, but ends with 1985

Yeh, the green line is sort of stable between the 1960 recession and the 1970 recession, after which a slow increase is visible. Lots of people consider 1970-1980 stable. I consider it the start of an uptrend. I see David Stockman's $1.50 in the 1960s, rising through the 1970s to $1.60, on its way to still higher numbers.

"Relative" stability. True enough. It's important, too: If the Federal debt could have kept declining at a fast enough rate, the increase in non-Federal debt would not have resulted in the growth of total debt.

Unfortunately, as the Federal debt ratio approached zero, it became impossible to maintain a rapid rate of decline. Here, leave GDP out of it, and look at Federal and other debt as shares of total debt:

Graph #3: Federal (blue) and Non-Federal debt as shares of total debt (thru 1985)

They start out just about equal in the early 1950s. But by 1974 Federal debt (the blue line) falls to about 15% of the total. And non-Federal debt (the red line) rises along a mirror-image path to about 85% by 1974.

Look at the path of the red line: It is not a straight line. It slopes up more at the beginning, and less at the end. It's a curve that shows a very gradual slowing of private debt increase. Similarly, the Federal debt shows a gradual slowing of decline.

These curves are typical mathematical patterns that you often see when something is approaching a limit. Private debt cannot possibly increase beyond 100% of total debt. Not can Federal debt decrease beyond zero. The slowing of these curves is a natural and unavoidable phenomenon.

Where was I going with this? Oh, yeah. After Stockman's "$1.50 or $1.60" observation, he says: That was the golden constant. It had been at that ratio for 100 years save for some minor squiggles during the bottom of the Depression.

I don't think so. I think "some minor squiggles" was the last time we had the sort of economic problem we have today, the monetary imbalance, the excessive debt. And I think it is no coincidence that those minor squiggles happened at the time of the Great Depression. Those squiggles are related to economic depressions.

Here. Here's Stockman's minor squiggles as seen by Global Finance:

Graph #4: Three Peaks in Total Debt relative to GDP, 1870-2008
EDIT 10 June 2019: For a link that still works see the Financial Times

There -- that towering peak in the middle, starting right around 1930, that's Stockman's "minor squiggles". What the hell was he thinking?

See the low point then, near 1950? Below 150% of GDP. Then in the 1960s it rises to 150% -- Stockman's $1.50 -- stays there only briefly, then begins to climb by 1970.

If you look at just that part of it, there where debt is at or below the 150% line, that was our "golden age". Those were the good years. A long time ago.

To the left of the Great Depression peak, just before 1930, there is something more like "minor squiggles" there, in the so-called Roaring 20's. Those squiggles were a warning sign that was ignored. And the decade before that? 1910-1920? Similar squiggles, not so big as in the 1920s but bigger than those before 1910. Ignored.

Oh. And that lump way over there on the left, between 1870 and 1880? That lump, that's the start of the Long Depression. Wikipedia says of it:

At the time, the episode was labeled the Great Depression, and held that title until the Great Depression of the 1930s. Though a period of general deflation and low growth began in 1873, (ending about 1896), it did not have the severe "economic retrogression [and] spectacular breakdown" of the latter Great Depression.

It did not have the severe economic retrogression and spectacular breakdown of the latter Great Depression. I should say not. And you can see why in the Global Finance graph there.There is no sharp peak in the 1870s, as there is in the 1930s. The sharp peak is a "spectacular breakdown" that occurs when the collapse of GDP sends the debt/GDP ratio through the roof. Didn't happen in the 1870s.

As a result, the depression of the 1870s lasted a long time as monetary balances were only gradually restored, balances between circulating money (not shown) and debt. I'm talking out my ass here, as I have no data on circulating money in the 1870s. But based on what I've analyzed in the years following the first World War, I describe what must have happened with the 1870s depression. If you have the data and you prove me right, then consider these remarks a prediction, and your confirmation of these remarks a confirmation of my economic theory. If you prove me wrong, so be it.

The long depression lasted so long because there was no severe and sudden breakdown that purged the system of debt and freed the economy to grow again. Absent the severe breakdown, it took many years to resolve the imbalance created by excessive debt. We see exact the same situation persisting in Japan today, after twenty-some years of "the lost decade."

Exactly as we will have for ourselves if we manage to avoid a GDP collapse while failing to resolve the debt problem. We're half a decade in, already.

The solution, of course, is to wipe out private debt while avoiding that spectacular breakdown. Easier said than done? Dunno, I'm not there yet. I'm still trying to get people to accept my analysis of the problem.

I got this one by accident

After you make a FRED graph, you have to check the formula in the left side border.

I put TCMDO on a new graph and changed the units to "Change, Billions of Dollars". Then I added GDP to the graph to use as a denominator. FRED automatically set the units to the same as I had selected for the previous series. Makes sense FRED might do that, maybe. But it wasn't what I had in mind.

Graph #1: LOG of (Change in Debt per Change in GDP)

To my eye, the trend is flat at 5 from start-of-data to maybe the mid-1970s. Thereafter, it slopes up. Reading from right to left, perhaps the upslope starts earlier.

By accident, this graph turned into another look at "debt productivity", which Jim looked at a while back:

This graph shows how debt and GDP have have grown relative to each other

[increase in GDP]/[increase in debt]

Prior to the meltdown there seem to be a steady trend of declining productivity increase per dollar borrowed.

Downsloping from 1966 to the crisis. (Divide GDP by debt (like Jim), and the line goes down. Divide debt by GDP (like me) and the line goes up.)

Ron Robins also looked at debt productivity a while back:

For decades, each dollar of new debt has created increasingly less and less national income and economic activity...

Getting less and less economic benefit from each dollar of new debt is becoming an enormous and onerous problem for the US...

According to Dr. Kurt Richebacher, writing for The Daily Reckoning, US credit expansion in 2005 was $3,335.9 billion and matched by nominal GDP growth of $752.8 billion, equalling $4.43 in new debt for each dollar of GDP growth. In 2006 total credit market debt increased $3.9 trillion while nominal GDP (seasonally adjusted) grew by $686.8 billion showing that it took $5.68 of new debt for each dollar increase in GDP.

Grandfather Hodges also considered debt productivity:

Please note this is a ratio chart - - a plot of debt as a ratio to national income - - called the 'debt ratio.'

If the economy performed with less debt each year per dollar of national income growth, meaning better debt productivity, then the chart trend line would be pointing downward.

But, the line points up - - each year more and more rapidly upward it soars.

This means the economy has been performing with less debt productivity each year...

Even The Economist looked at debt productivity:

Like alcohol, a debt boom tends to induce euphoria. Traders and investors saw the asset-price rises it brought with it as proof of their brilliance; central banks and governments thought that rising markets and higher tax revenues attested to the soundness of their policies.

According to Leigh Skene of Lombard Street Research, each additional dollar of debt was associated with less and less growth.

And just as I was looking for a way to wrap up this post, a new comment linked to an interview with David Stockman and provided this teaser:

Q: Why are you so down on the U.S. economy?

A: ( Stockman ) It's become super-saturated with debt. Typically the private and public sectors would borrow $1.50 or $1.60 each year for every $1 of GDP growth. That was the golden constant. It had been at that ratio for 100 years save for some minor squiggles during the bottom of the Depression. By the time we got to the mid-'90s, we were borrowing $3 for every $1 of GDP growth. And by the time we got to the peak in 2006 or 2007, we were actually taking on $6 of new debt to grind out $1 of new GDP.

 
// Related posts

• Accumulation
• Why
• Credit Efficiency

Federal Debt Held by Federal Reserve Banks

Graph #1: Billions of Dollars

Graph #2: Relative to GDP

Graph #3: Relative to Gross Federal Debt

Graph #4: Relative to Total Credit Market Debt Owed

I've asked this question before...

If you go to FRED, type TCMD in the search box, and hit ENTER, you get a list that starts out like this:

It's pretty useful. You can check some checkboxes and click Add to New Graph and FRED will graph them for you. But that's not my question.

Every one of these categories except the first one is identified as either DNS or DFS -- as Domestic Nonfinancial Sector debt or as Domestic Financial Sector debt.

Everything is categorized as either Financial or Nonfinancial.

Why?

Why not categorize them as either Financial or Productive?

Better yet, why not categorize them as Productive or Nonproductive?

That's my question.

Policy forced our hand

From yesterday's 4 o'clock post:

Anyway the problem is not that we're idiots who just couldn't resist borrowing. Policy forced our hand. Policymakers thought it would be good if we got all choked up with debt.

According to the new Fisher Dynamics paper by Mason and Jayadev, the increase in household debt since 1980 is due entirely to lower inflation and higher real interest rates, and to reduced growth:

...important financial changes beginning around 1980 have been in contributing to household debt, independent of any changes in household behavior. Specifically, if average rates of growth, inflation and interest remained the same after 1980 as before 1980, household debt burdens in 2011 would have been roughly the same as they were in the early 1950s, despite the sharp increase in borrowing in the early 2000s.

"If average rates of growth, inflation and interest remained the same..."

But lower inflation was not an accident of policy. It was the plan. And increasing real interest rates was the method by which that plan was accomplished. As Josh Hendrickson put it:

Put succinctly, the Taylor principle refers to the idea in which the central bank raises the nominal interest rate more than one-for-one with realized inflation. In other words, the central bank increases the real interest in response to higher realized inflation.

Reducing inflation was the plan. Raising real interest rates was the method. And reduced growth was the tradeoff, the opportunity cost of reducing inflation.

If Mason and Jayadev are right, the increase in household debt since 1980 is entirely due to anti-inflation policy.

And of course, our pro-growth policy has always been to encourage the use of credit.

Revenge of the Dodo Bird

Went to FRED, got the numbers on total debt, GDP, and prices during the Great Inflation:

Between 1965 and 1970 when TCMDO/GDP "went down" we see a 44.61% increase in debt, and a 44.40% increase in GDP.

It took a price increase of 22% or 23% to "inflate debt away" enough that GDP grew almost as fast as total debt, over those five years.

Between 1970 and 1980 when TCMDO/GDP "didn't go up" we see a 192% increase in debt and a 168% increase in GDP while prices approximately doubled.

Debt increased 14%+ more than GDP increased during that decade, despite the raging inflation.

Do we really want to do that again? It is what led to Reaganomics.

Is the slow growth of debt really the same as the decline of debt? It is not.

//

Please note, these are not my claims, that the ratio "went down" before 1970 and that it "didn't go up" after 1970. My claim is that debt always goes up.

Watching the Dodo Bird Fly

In a post entitled Fear of inflation, Char Weise wrote:

The WSJ blog reports that companies are worried that inflation will rise in coming years...

Of course, raising inflation expectations is precisely the point (or should be, if the Fed is doing its job properly) of the Fed's program of quantitative easing...

[T]he fact that the businesses that were surveyed believe inflation will be higher than the Fed's target 5-10 years from now is an indication that the Fed's statements about its inflation target are not credible. And this lack of credibility should actually be helping to stimulate the economy.

Okay, I accept all that. But then Char says

[I]t would be preferable if the Fed were to loudly proclaim that yes, it does intend to let inflation rise above 2 percent in the future.

Char wants inflation.

I want to know at what moment it was that the inflation problem was magically transformed into the inflation solution. I responded to Char's post:

But are economists not embarrassed and ashamed to call for inflation?

Defending economists, Char said

I'm not ashamed to call for more inflation. Higher expected inflation would lower real interest rates and help get us out of the recession. An inflation rate of 3-4% would not have significant harmful economic effects relative to the current 2%.

No significant harmful effects? Depends who you ask, probably. I let that go.

I replied:

I understand that.... But I think the problem is excessive private debt, not excessively stable prices.

Defending a principle, farm land investment said:

[T]he private sector absolutely must deleverage. However, isn't it also true that a bit of inflation above trend would lessen the real value of these debts and contribute to the private sector deleveraging process, essentially helping to "inflate debt away"?

It's funny, you know? Change the phrasing a little bit, and it makes you think. "A bit of inflation above trend," FarmLand said.

What trend?

I think FarmLand was talking about the inflation trend. But I think for his plan to work, for inflation to inflate debt away, inflation has to be above the trend of debt growth. Otherwise prices increase but debt increases faster, and we get further behind.

I pointed this out in the Microbes post:

Debt relative to income is high. Sumner says we can solve the problem by increasing income via inflation. Did that work, say, in the 1970s?

Not really.

Maybe it did work for the latter half of the 1960s. Inflation pushed NGDP up, and at the same time inflation reduced the burden of existing debt: Inflation increased Sumner's denominator and decreased his numerator simultaneously. And all it took was a 23% increase in prices in the five years between 1965 and 1970. Meanwhile, total debt increased 44.6%, almost twice the rate that prices went up.

Prices couldn't go up fast enough to keep up with the growth of debt. After 1970, inflation got worse, but Sumner's "debt to income" ratio WENT UP ANYWAY.

As long as debt continues to increase, inflation cannot solve the problem of excessive debt.

And I pointed it out in Dancing with Steve:

Keen still fails to see the cost of debt in general as a cost issue for the economy. A factor cost issue.

I quoted Steve Keen:

[W]hen debt rises faster than income, and finances not just investment but also speculation on asset prices, the virtuous cycle gives way to a vicious positive feedback process...

My reaction?

debt ALWAYS "rises faster than income" -- except at the end

and I showed this graph:

Graph #1: Total Debt relative to GDP (GDP is Income!)

Debt ALWAYS rises faster than income, except at the end.

Jazzbumpa disagreed with that, of course:

Have another look at Fig. 1 of the current post; no growth from 1960 through the mid 70's. Very little growth over the first three decades shown.

And where is the break point? right after 1980. Hmmmmm.

Jazz sees everything in terms of 1980. Sure, debt increased faster after 1980. Sure, the uptrend was gentle before 1980. But still it went up!

If you look at that first half of the graph, debt increased more before 1965 than after. After 1965, we had the "Great Inflation" which (as farm land investment suggests) helped to reduce the burden of debt by inflating it away.

Still, between 1950 and 1980, debt increased substantially as a multiple of GDP:

Graph #2: Total Debt relative to GDP, through 1982

Between 1965 and 1980, despite accelerating inflation, debt increased relative to GDP.

Invert that ratio and take another look. On the graph below, the blue line shows GDP relative to total debt. See if you can find the spot where inflation reduced debt enough to let the blue line show an up-trend:

Graph #3: GDP relative to Total Debt, and Prices

Oooh! There it is! From 1965 to 1970, the blue line goes up.

Whoop-de-do.

The green line shows the price level as measured by the CPI. The red line shows the price level as measured by the GDP deflator. Both measures show a slight, straight-line uptrend to about 1965, then definitely rounded upward curves as inflation accelerated from 1965 to 1980, and then continued inflation after 1980 but again as straight-line uptrends.

Focus on the years from 1965 to 1980, when inflation was raging. To see how inflation affected debt and income, look at the blue line.

A reminder: GDP is "output" but it is also a measure of "income" because transactions are two-sided. When somebody buys some of the output, somebody receives income. The one number is recorded in two places: as income, and as output.

The blue line shows output (or, income) relative to total credit market debt owed. The general trend is downward, meaning that output (or, income) grew more slowly than total debt. The steeper the downtrend, the more slowly output increased. The flatter the blue line, the closer output growth was to debt growth.

Between 1965 and 1970, the blue line actually trends upward. For those few years, income grew faster than debt.

For the rest of the years of the Great Inflation, 1970 to 1980 or '84  maybe, the blue line trends down again -- slowly at first, then faster as time goes by. As inflation got worse during the 1970s, the plan to inflate debt away proved itself to be more and more a failure.

Why? Because -- as Char says -- inflation stimulates spending. And since we use credit for money, when we spend more we create more debt. And if debt hinders economic growth (which it most certainly does), then creating more debt slows the growth of GDP and pushes the blue line down.

You cannot reduce debt by controlling only one variable unless that variable is debt.

If you control only income, and you inflate income, and you do not stop the commensurate increase of debt, you have done nothing to reduce debt relative to income: You have done nothing to solve the debt problem.

Debt increases more quickly than prices:

Graph #4: Total Debt and the CPI

Debt always increases more quickly than prices, except during severe recession:

Graph #5: Total Debt relative to the CPI

We cannot inflate debt away. In order to solve the debt problem we must deal with debt directly.

Private Debt 2012 (9): Policy forced our hand

All of the drivel and nonsense about the need to cut spending and balance the Federal budget -- where does it come from?

I think it comes from the fact that taxes are high. Taxes are high, and still they have deficits, so they must be spending too much. I think that's the whole argument.

What are the responses to that argument? I see three responses. There are people who say taxes are NOT high, that taxes are the lowest they've been since the 1950s. Those people are fools I think, thinking other people are fools who will believe it.

And there are people who say paying more taxes is okay. But they don't seem to be winning the argument.

And then there are people who say "tax the rich". This is the crudest response of the three. These people seem to be winning the argument. Not winning against the "taxes are high" argument, but winning out over the other two responses. So in the end we're getting something like a movie title: Crude and Cruder.

That's not how you fix the economy.


At Business Insider, a long post from July of last year by Henry Blodget. Mostly charts and graphs, not too much reading. Looks like a pretty good summary of the facts to me. I was pleasantly surprised.

But in all of that post, the word "debt" is used exactly one time: referring to "war debts" as a reason for raising tax rates in 1945.

ZERO mention of private-sector debt.

ZERO mention of economic growth and how debt hinders growth.

ZERO mention of prices and inflation.

In Henry Blodget's article, the whole world revolves around tax rates and government spending. Oh, I know, that's his topic. And the article impressed me. (It surprised me, as I said.) But you can't fix the problem if you don't look at the problem. And tax rates and government spending are not the problem. They are results of the problem.

The problem is that private sector debt increases costs and hinders growth. Government spending on social programs follows from that, as does the decline of living standards. Tax increases come next, and growing budget deficits. And taxes seem even higher than they are because times are tough and living standards are falling, and we get by by borrowing more, and the government encourages that behavior because they don't really know how to fix the problem, and private debt grows more. And private sector debt increases costs and hinders growth.

Oh yeah, yeah yeah: We're deleveraging now. Sure. But creating a depression is not really a good solution to the problem. Anyway the problem is not that we're idiots who just couldn't resist borrowing. Policy forced our hand. Policymakers thought it would be good if we got all choked up with debt. They still think that.

This is the thinking that has to change.