Hindsight

Change in TCMDO, corrected for inflation. Log of that, so that a constant rate of growth looks like a straight line.

Graph #1: Natural Log of the Inflation-Adjusted Change in "Total Credit Market Debt Owed"

Same graph in Excel, with a Hodrick Prescott trendline:

Graph #2: Ditto, plus Trend

Straight lines indeed. The red line is flat, briefly, before 1958... Straight line uphill, 1958-1986... Straight line downhill, 1986-1992... And straight line uphill, 1992 to the crisis. I stopped the HP calc at that point so that the later decline did not drag down the earlier years' numbers.

The media would tell you debt is a problem over there on the right, where the blue line is broken and there is no red line.

Most people would tell you debt was a problem in the 2000s, where the red line goes above the 3.5 level, or maybe where it goes above 3.

Lots of people would tell you debt went up during the Reagan years. For some reason, most people don't seem to know about the great slowdown of debt growth, 1986-1992. Too many media stories, maybe.

Apart from that downtrend, I would say the only time the graph does not show a problem is in the early years, the early 1950s. That's the only time the trend does not show increase. Looking at this graph, you could have known by 1961 that debt was going to be a problem.

Krugman figures it right

From Doing the Math:

Wonkblog links to a lovely piece by E.O. Wilson on how much math you need to do research. Wilson’s answer is, not much; and I agree...

But the intuition is crucial, and not just for writing academic papers. If you’re going to talk about economics at all, you need some sense of how magnitudes play off against each other, which is the only way to have a chance of seeing how the pieces fit together... Or maybe the thing to say is that higher math isn’t usually essential; arithmetic is.

I'm there, buddy.

Logging

I know two ways to make a "log" graph at FRED. You can "Apply a Transformation to the Formula Result", selecting the "Natural Log" option. Or you can modify the graph settings, and check a checkbox to make the vertical scale a log scale.

The first method changes the values of your data, and gives you regularly spaced numbers on the vertical scale.

The second method does not change the values of your data, but gives you irregularly spaced numbers on the vertical scale.

Each of the graphs below shows one data series two ways. The blue line uses the first method, where taking the natural log changes the values. The red line uses the second method, which keeps the original values but adjusts the vertical scale.

The blue line in each of the following examples is plotted on the left-hand scale, and the red line on the right scale:

Graph #1

Graph #2

Graph #3

Why, you may ask, do the graphs show different mismatches? For population the lines run parallel. For GDP, they cross in the middle. And for debt, they meet at the end.

Really, this is a matter of stretching or sliding one line a little more or less than the other. It has to do, I think, with the automated selection of "round numbers" for the vertical scale values. But despite these slight mismatches, you can see that the two methods of creating a log graph produce lines of similar shape.

DKuehn on FDR, in 2013

From Hoover on Keynes, in 1936:

The New Deal is kind of an amorphous blob of a lot of different ideas and programs. There were some very good public investments. But there was also a lot of bad tinkering and price fixing. Much of that got struck down. Overall it wasn't particularly impressive as fiscal policy. The general sense of economists is that fiscal policy didn't really get much of a chance until WWII. Monetary policy made a difference earlier in the thirties. On the margin some spending helped people. There is an interesting literature on the impact that Roosevelt had on expectations. But little was done in the way of proper macroeconomic policy.

A lot of words, there. Let me show you in one picture what FDR did:

FDR was President from 1933 to 1945

Not so amorphous after all, is it.

Malaise

In The Reagan Years at ushistory.org we read:

Americans were fed up.

In 1980, confidence in the American economy and government hit rock bottom. Looking for a change and the promise of a better future, voters turned to Ronald Reagan for answers.

His message was clear. Government has become too big... Taxes are insanely high... Military spending should be increased... Morality and character need to be reemphasized... It's time to feel good about being an American again.

Reagan's election brought a dramatic change to the federal government.

Yes, Reagan's election brought a dramatic change to the federal government. But don't forget: Americans were fed up, and ready for change.

Why? In a word, malaise.

So when you hear people blaming our economic troubles on policy "since Reagan" or "since the 1980s" you might want to think twice about that. Yes, our economy headed off in a different direction in the 1980s. But it was an attempt to solve a problem.

Did it work? Hell no. But that doesn't mean Reaganomics created the problem. The problem just found a different outlet since the 1980s -- unemployment, rather than inflation. But the problem that existed since the 1960s continued into the 1980s, and continues yet today.

That problem? Excessive reliance on credit.

A second look at the heteconomist post

The other day I looked briefly at PeterC's Why Neoliberals Pretend Private Debt Doesn't Matter and Public "Debt" Does. Time for a second look.

Consider the opening sentence of the post. PeterC writes:

The neoliberal policy approach in the decades leading up to the crisis basically amounted to enticing or pushing people into increasing levels of private debt.

What is "neoliberal"? Wikipedia doesn't help. Bill Mitchell writes of "the early 1980s (as the neo-liberal onslaught began in earnest)."

The early 1980s, then. Since Reagan, basically. Same as my K-R Shift. And actually, in his post PeterC writes

...the neoliberal attack on workers' pay and conditions from the early 1980s onwards was highly orchestrated.

The early 1980s it is. So reconsider Peter's opening thought, revised:

The policy approach since the early 1980s and up to the crisis basically amounted to enticing or pushing people into increasing levels of private debt.

Is it true? It must be true, right? I mean, how else did we end up with all this debt.

Yeah, but take a look at the rate of debt growth since the 1950s:

Graph #2: Percent Change in the Non-Federal Portion of TCMDO (blue)
If I did it right, the red line is a Hodrick-Prescott trend of the debt data.

The first thing that happened "after the early 1980s" was a slowdown in debt growth! A slowdown beginning in the mid-1980s. Immediately after the early 1980s there was a major downtrend in the growth of debt.

But by the late 1990s, the growth rate of debt was back to normal. Back to 10% annual, give or take. Back where it was before the neoliberals took over. Back where it was in the Keynesian years.

What's different is that in the Keynesian years, excessive debt growth led to inflation. In the neoliberal years, excessive debt growth led to unemployment. That's the main difference.

The problem is the excessive debt growth: the excessive reliance on credit, the excessive cost of circulating money, excessive finance, excessive accumulated savings, excessive accumulated debt, all the same thing. It's a cost-push problem.

The liberal solution to the cost-push problem is inflation. The conservative solution is unemployment. The Arthurian solution is to reduce financial costs by reducing the size of finance, providing more money to balance against less debt, using policy to limit the amount of creditmoney that can be generated from a dollar of money.

The Arthurian solution is to reduce the factor cost of money.

De-Trending

It was easy. I couldn't even remember the name Hodrick, so I Googled prescott filter excel. Jackpot.

There is a how to use PDF, short, says you give it a range of cells and a number (a constant). The long version: Select a range of cells for your results, type =HP( , select the range of cells containing the data to be filtered, type in a comma, type in the constant, and close the parentheses. But don't hit ENTER.

Instead, hold down CTRL and SHIFT and then press ENTER. That's it. Then you can make a graph or whatever, from the results.

Holding down CTRL and SHIFT while you press ENTER is standard Excel stuff. They call it "array formulas" which sounds pretty complicated... but all you have to do is hold down CTRL and SHIFT while pressing ENTER. How complicated is that?

None of that works, though, if you don't have the Hodrick Prescott filter installed. No problem. Among the search results is a link to Kurt Annen's HP-Filter Excel Add-In at IDEAS. There are three separate files you can download:

1. an XLA file, an Excel add-in which adds the HP( ) function to the built-in Excel functions.
2. the Visual BASIC source code for the HP( ) function.
3. an example.

For most people the simple thing would be to install the add-in. (The PDF linked above tells how.) For me, the simple thing was to copy the Visual BASIC source code and paste it into a code module. That way I got to look the code over a bit. It looks like a very complicated (arithmetically) version of a "moving average" calculation, or something comparable. That's a crude description; I didn't work through all the arithmetic. But the result you get from the HP filter serves the same sort of purpose as the result you get from the moving average calc.

Anyway, after it's installed one way or the other, it's as easy to use as =SUM( ) or any other Excel function. I expect to explore it, and to use it.


What number do you use for the constant?... for the "Lambda" as they call it?

At the EViews User Forum, Trubador explains:

Rule of thumb is:
Lambda = 100*(number of periods in a year)^2

In this respect, for:
Annual data = 100*1^2 = 100
Quarterly data = 100*4^2 = 1,600
Monthly data = 100*12^2 = 14,400
Weekly data = 100*52^2 = 270,400

I think you have got the idea...

1600 for quarterly data. That was easy to remember. I didn't even have to look it up again, the first time I tried it.

Drewtedlock quotes Trubador

Rule of thumb is:
Lambda = 100*(number of periods in a year)^2

and responds:

There is additional research that suggests using a power of 4 instead of 2. See Ravn and Uhlig (2002). http://ideas.repec.org/a/tpr/restat/v84 ... 1-375.html

(I didn't explore his link.)

And a hint from Trubador: "I'd suggest you to seasonally adjust your series first."


When I have an hour or nine to spend on it, web:reg provides an interesting discussion.

// Update 30 March 2014: For a look at how changing the constant affects the result, see mine of 19 March 2014.

// Update 16 September 2014, Recommended Reading: There is an interesting analysis of the Hodrick-Prescott filter, how it works, and some problems with it, in Blogs review: HP Filters and business cycles at bruegel.org.

Don't give up, JW

In Borrowing ≠ Debt, JW Mason writes

while higher growth may not be within reach of policy, higher inflation and lower interest rates certainly are.

via Random Eyes

Leaving out financial debt this time, instead of Federal debt:

Graph #1: Non-Financial Debt relative to GDP
Click Graph for the Random Eyes page

(Yeah, it's a stock relative to a flow, but people like to look at debt relative to GDP.)

Reminds me of Scott Sumner's analysis of debt, with surges and remissions. Sumner wrote: "I see three big debt surges: 1952-64, 1984-91, and 2000-08."

The first flat spot is flat because of the Great Inflation. The third is flat because of the Great Recession.

What caused the second?

Elimination of the interest deduction slowed the trend. And then I have to say the vigorous economic growth that arose in the 1990s (a result of slower debt growth) boosted GDP and kept the trend flat while the vigor endured.

This is related to Fisher Dynamics I think. The graph shows three ways to slow the increase of the debt/GDP ratio: nominal growth, real growth, and no growth.