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up graph 4 goes down i want to say graph 4 goes down because prices went up writing this in the wee hours here i don t have much to say about these graphs other than here they are but i think it is important to look at different relations of the same data we looked at yesterday maybe something will turn up that suggests yesterday s impression of things was simply coincidence or was not okay now we ve looked at the change in prices relative to real output and the change in real output relative to prices all that s left is to divide graph 3 and graph 4 by debt graph 5 shows what happens when you take the numbers from graph 3 and divide by tcmdo debt you can still see the great inflation there but much reduced and the numbers are very low and drop off to zero because debt is so big and so dominant graph 6 shows what happens when you take the numbers from graph 4 and divide by tcmdo debt the line still goes downhill quickly now the numbers are very low and drop off to zero because debt is so big and so dominant compared to everything else debt is the dominant factor preview or download the excel file contains macros posted by the arthurian at 4 00 am 0 comments thursday june 20 2013 the same nightmare over and over preview download the excel file contains macros for formatting graphs compound annual growth rate calc and kurt annen s visual basic code for calculating hodrick prescott values posted by the arthurian at 4 00 am 1 comments wednesday june 19 2013 what s up at 3 42 this 17 june morning i wrote myself a note when you type cmdebt in the search box at fred what comes up on the screen is a series called tcmilbshno yeah that ll be easy to remember by 6 47am that distressing situation had passed and searching for cmdebt turned up a series named cmdebt and what a relief that was anyway i want to show you a graph of cmdebt two lines on the graph don t compare the lines to each other they re on two different scales just compare each line to itself and visualize its trend what s up cmdebt thru 1975 red right scale and thru 2012 blue left scale the red line goes up till the end the blue line goes up till the end the red line is the same as the blue line but the red one stops at 1975 to show it i put a second copy of the blue line on the graph fred made it red stopped the display of it at 1975 and put its values on the right side scale fred did the rest the two lines show the same data but the red one shows a close up of the early years of the blue line because on the blue line the early years are squished down near zero hard to see what s going on there see that highest peak of the red line if you look straight down from that peak to the blue line you can see the same peak there in blue barely visible the red line shows an upward trend that s hard to see in the blue line but it s there conclusion cmdebt was always going up even in the early years when the blue line looks flat what s that you say you were expecting a more substantial conclusion pfff that s not how it works we look at little facts about the economy because they re fascinating and because we know deep in our heart just how important they are we spend time with them because we love to do that substantial conclusions arise in their own time you can t squeeze them out like never mind posted by the arthurian at 4 00 am 0 comments tuesday june 18 2013 what does it matter anyway when i started out writing yesterday s post i was thinking i had a petty objection to a detail in an interfluidity post i thought my objection was not relevant to steve randy waldman s analysis and i was prepared to present it as an objection in principle an objection that might apply in other situations but not to his analysis writing the post made me work through a few things and in the end i concluded that waldman s analysis is incorrect waldman took a casual look at a graph of consumer debt and thought he saw a significant jump in the pace of borrowing he failed to realize that the spike in the debt gdp ratio resulted from the large drop in nominal gdp growth caused by a sharp fall of inflation waldman s mistake is a common one and obvious once you notice it the jump in the debt gdp ratio was the result of a big undershoot of gdp not a sudden increase in borrowing there was no sudden increase in borrowing that we can point to and say it was this increase in borrowing that compensated for growing income inequality there is a hole in waldman s argument interestingly in remarks on yesterday s post steve waldman said it would be perfectly possible for example for the broad story to be true poorer households must increasingly borrow to maintain aggregate consumption and yet for aggregate borrowings to decline over the period yes it would and i make points like that occasionally myself but here waldman is saying is that his evidence his graph showing that beginning in the early 1980s household borrowing began a secular rise is irrelevant because it doesn t treat distributional questions maybe but now the discussion is getting over my head what i know for sure is his graph does not show any secular rise of borrowing that begins in the early 1980s and if it seems to show that it s an illusion i ve treated this issue before in the red herring post in that case it was scott sumner misreading a debt gdp graph as it happens the same misreading of the same debt gdp ratio that we see in waldman s post sumner identified three big debt surges and analyzed the economy on the basis of those surges as i reported in the herring post the inflation is the reason for what appears to be a flat spot on the graph the inflation eroded debt the growth of debt continued apace my steprate function applied to annual cmdebt numbers from fred shows that the compound annual debt growth rates during sumner s three periods were 1952 1964 10 7 1984 1991 10 25 2000 2008 9 33 during the famous flat spot of 1965 1983 the comparable rate of debt growth was 9 36 that s near 90 of the growth rate for the 1952 1964 debt surge and it is higher than the growth rate for the third debt surge sumner identifies there was no remission debt did not stop growing it barely slowed what does it matter if you misread the graphs you misread the economy that s all links the sumner post the interfluidity post my measuring the erosion of debt pdf my debt and inflation posts posted by the arthurian at 4 00 am 11 comments monday june 17 2013 inequality and something else at interfluidity an older post from january of this year inequality and demand steve randy waldman quotes from paul krugman s inequality and recovery and opens the haranguing with these thoughts let s start with the obvious the claim that income inequality unconditionally leads to underconsumption is untrue in the us we ve seen inequality accelerate since the 1980s and until 2007 we had robust demand decent growth and as krugman points out no evidence of oversaving in aggregate au contraire even waldman contradicts krugman provides links showing evidence of oversaving in aggregate and asks how do we reconcile the high savings rates of the rich with the us experience of both rising inequality and strong demand over the great moderation debt is how we reconcile those things he says those at the less fortunate end of the inequality scale made up for their shortfall of income by borrowing more waldman presents a graph in evidence of this then his post takes an interesting turn he writes rather than arguing over the clearly false claim that income inequality is always inconsistent with adequate demand let s consider the conditions under which inequality is compatible with adequate demand are those conditions sustainable are they desirable long story short he points out the conflict between the economy s need for more lending and the microeconomic evaluations of solvency that might limit the lending limit the demand and limit the growth his conclusion includes this thought if we had any sense at all we d relieve our harried bankers the poor dears of contradictory imperatives to both support overall demand and extend credit wisely all well and good i liked the post i liked the graphs i liked the perspective i liked all of it i have just one problem it s a small problem i don t think it affects waldman s argument it s just a detail so why do i bring it up what does it matter anyway i ll get to that waldman writes i would pair krugman s chart with the following graph which shows household borrowing as a fraction of gdp includes both consumer and mortgage debt see credit market instruments in table l 100 of the fed s flow of funds release household borrowing represents in a very direct sense a redistribution of purchasing power from savers to borrowers so if we worry that oversaving by the rich may lead to an insufficiency of purchases household borrowing is a natural place to look for a remedy sure enough we find that beginning in the early 1980s household borrowing began a secular rise that continued until the financial crisis my problem is that waldman shows a graph of debt and says it shows borrowing debt and borrowing are not the same thing debt is a stock borrowing is a flow debt is the accumulation of borrowings reminds me of what stf succinctly noted at winterspeak some time back saving flow savings stock here s the thing waldman glances at the graph and says beginning in the early 1980s household borrowing began a secular rise that continued until the financial crisis easy to see it on the graph isn t it but it is an illusion the graph shows debt not borrowing and ending in the early 1980s was a great inflation that whittled debt down by whittling down the dollar boosting income and inflating gdp waldman s graph shows an increase in debt that begins after the early 1980s when inflation was suppressed because inflation was suppressed because the denominator of waldman s cmdebt gdp ratio stopped increasing at such a highly inflated rate look at the change in debt annual additions to the accumulation and you ll see a different picture than waldman shows graph 2 quarterly change in debt same debt as waldman shows in billions the annual additions to consumer debt were quite high in the 1980s but after a big jump early the trend is flat through the 1980s it even falls some in the 1990s moreover the secular increase in borrowing does not begin in the 1980s it begins in the late 1970s or the early 1970s or the late 1960s or the early 1960s maybe the secular increase goes back as far as the eye can see the increase is much more secular than waldman indicates much longer lasting that since the 80s implies another look graph 3 percent change from year ago same debt as waldman shows high spikes early then the peaks drop off to the latter 1960s a series of rising peaks follows terminating in the 1980s just when waldman says a secular increase begins oh sure you can attribute those rising peaks of the 1970s to inflation people had to borrow more because prices were going up sure but also prices going up or more precisely incomes going up made all the previously existing debt easier to bear and that happened year after year after year while the great inflation persisted inflation made the debt easier to bear inflation reduced the size of existing debt relative to gdp because of inflation the gdp number went up about as fast as the debt number went up it was this increase in gdp due to inflation that made accumulated debt run flat on waldman s graph but only until the end of the great inflation only until the early 1980s beginning in the mid 1980s falling inflation created what looks like of a sudden surge in the growth of debt on his graph it was not a surge of debt on graph 3 you can see a pretty substantial increase of debt in the 1980s an increase comparable to that of the latter 1970s only the 1980s increase is visible on waldman s graph but clearly the two spikes are near the same size clearly borrowing rose about as fast in the latter 1970s as in the 1980s clearly the secular increase in household borrowing began before the 1980s one more graph graph 4 shows the same debt as waldman s graph but with a different denominator a different measure of income graph 4 new borrowing always occurs in dollars of the current moment but once you take out a loan you have a debt that is stated in the dollars of that fleeting moment after that moment any and all inflation reduces the burden of the existing debt the blue line shows debt relative to income it is comparable to waldman s graph the red line shows debt relative to income in dollars of constant purchasing power the blue line shows the actual burden of accumulated debt the red line shows the actual pattern of borrowing waldman s graph shows the burden of accumulated debt reduced by inflation like the blue line on graph 4 the red line on graph 4 shows the same accumulation adjusted to eliminate the effects of inflation on waldman s the trend is flat in the 1970s because existing debt was eroded by inflation on mine the trend of the red line is steeply upward in the 1970s because new borrowing increased at a rapid pace when steve randy waldman shows you a graph of debt and identifies it as a graph of borrowing he is in error and when he says a secular increase in borrowing began in the early 1980s he is seriously mistaken i said at the top that i like waldman s argument and that in the context of the interfluidity post the errors are minor now having worked through things i m not so sure the argument is good waldman says two things in the us we ve seen inequality accelerate since the 1980s beginning in the early 1980s household borrowing began a secular rise put the two together and it sounds like they re related actually that is the argument waldman makes in the post those of us at the short end of the income inequality scale made up for a shortfall of income by increasing our borrowing despite my objections to the post waldman s argument makes sense to me still makes sense to me but there must be something else going on for it is not true that household borrowing began a secular rise in the early 1980s that increase began much earlier so there was no sudden offset to compensate for the changing inequality something else must have made up the difference perhaps it is as simple as a slowdown of gdp growth growth has been slower since the early 1980s and slower yet in the new millennium growing inequality insufficiently offset by increases in new borrowing might have caused this slower growth thus we may enhance waldman s argument it feels right to me certainly i was uncomfortable with waldman s set the stage claims that until 2007 we had robust demand and decent growth and again that demand remained strong in those years tomorrow what does it matter anyway for more on graph 4 see this post posted by the arthurian at 4 00 am 6 comments sunday june 16 2013 rules for the direction of the mind from rené descartes truly we shall learn how to employ...
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