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eady as low as they can go rates have been falling since 1981 and now they are at the zero lower bound we can t really lower interest rates more and that means we can t reduce the cost of credit by lowering interest rates so what s left the only choice left is to reduce how much debt there is it s simple when you get right down to it posted by the arthurian at 4 00 am 5 comments wednesday june 26 2013 ballparking the cost of credit economic forecasts and statistics are often based on guesstimates wikipedia i had reason recently to read again steve randy waldman s persnickety followups on inequality and demand i should probably read the cynamon fazzari paper he links but i got distracted by a shiny object at the end of his post this shiny object setting aside everything that interests srw and his readers all i want to know at the moment is how the effective federal debt interest rate is calculated the answer is contained in the uppermost text on that graph fyoint gfdebtn 100 federal outlays interest divided by federal debt total public debt yeah divided by gross federal debt that s what i wanted to see when i left off with this i thought the gross debt number was the right one to use it is good to see the thought confirmed on someone else s graph in addition to the effective interest rate on federal debt the above graph shows the comparable rate for household debt i m thinking the federal rate is a low one and the household rate a high one relative to the average for all debt consumers on average probably pay a higher rate than businesses the government a lower rate there s about five percentage points difference between the federal rate and the household rate on waldman s fred graph i m thinking i want to split the difference and add 2½ to the federal rate to get a number i can use for the effective interest rate on all debt in the us it s just a guess but it gives me something to work with fred s fyoint goes back to 1940 gfdebtn goes back only to 1966 when you re old as me 1966 is nothing i ll use fygfd instead as it goes back to 1939 gfdebtn is quarterly and fygfd is annual but i m not losing anything by going with the annual values as the interest number is annual anyway fyoint and gfdebtn are both in millions while fygfd is in billions so i do have to convert for units but in exchange i get a graph that goes back to 1940 graph 2 my guesstimate of the effective interest rate on total debt in the us note using fygfd red takes us back to 1940 gfdebtn blue only to 1966 oh yeah that s definitely worth it note that graph 2 shows a peak at a 10 rate of interest 2½ points higher than waldman s green peak i ve already added the two and a half now about debt fred s tcmdo includes credit market debt it excludes borrowing done outside of credit markets as when the federal government borrows social security funds so i want to subtract from tcmdo the federal portion of it which is today about 12 trillion and to what s left i want to add the gross federal debt which is now about 17 trillion that will give me a number for all the debt i know about graph 3 all the debt i know about total credit market debt less federal debt held by the public plus gross federal debt see how the blue line just curves up and up until the start of the recent recession things are different since that recession the comments i will be making about the cost of this debt will refer to what was happening before the recent recession my objective as always is to understand what led to the crisis now if graph 3 shows the amount of debt and graph 2 shows the estimated effective interest rate on all that debt i can just multiply the numbers together and get the total amount of interest paid in dollars billions of dollars i ll have to not multiply by 100 in figuring the interest rate other than that the top line of graph 4 will show the line across the top of graph 3 multiplied by the second line across the top of graph 2 okay graph 4 graph 4 estimated total interest paid billions of dollars do me a favor check my work it s early yet the calculation is complicated and i ve had only one cup of coffee so far this morning visible on this graph in the last four recessions are disturbances to the general uptrend a small flat spot in 1982 a longer flat spot around 1990 about as long but down rather than flat around the year 2000 and down again three or four times as far down in the most recent recession flat spots are probably visible in the earlier years as well if you zoom in on the graph and look but they seem to be getting worse now i want to take graph 4 showing the money paid as interest and look at that number relative to gdp graph 5 estimated total interest paid relative to gdp on this graph you can see interest costs rising from the 1950s to the early 1980s during those years interest rates were going up and debt was growing like crazy since the early 1980s the graph shows a mild downhill trend during these years interest rates were going down and debt was growing like crazy total interest costs in our economy based on this estimate range from a low of 6 cents per dollar of gdp in the early 1950s to ten cents in 1970 to 15 cents in 1980 to 20 cents in 1990 today or at the end of 2012 i suppose the total cost of interest in this country still amounts to 15 cents for every dollar of gdp that s a lot of interest cost brother as you know to fight inflation our policy restricts the quantity of money when there is too much money in the economy reducing the quantity of money relative to gdp will reduce inflation before the crisis i m saying when there s not too much money in the economy reducing the quantity of money doesn t help but that s another story to fight inflation policy restricts money to stimulate growth policy encourages spending these policies are contradictory and they lead to the situation where we have little money and we use a lot of credit how much credit do we use well credit we re using is called debt graph 3 shows how much credit we re using graph 4 shows what it costs and graph 5 compares that cost to the size of our economy but suppose our policies had been different for all these years suppose that back in the 1960s we realized that there was not too much money in the economy but rather too much use of credit suppose we had changed our policies then so that they stopped excessively discouraging the use of money and started encouraging payback of debt it could have been done easily you know it s not like we use gold for money we have a flexible monetary system the problem is not that we can t keep our monetary balances at optimum the problem is that we don t know what the optimum is we think using credit is good for growth perhaps you think it still today even though we have 60 trillion of credit already in use and everybody thinks it s a burden and a risk and everybody wants to reduce their debt see this debt problem didn t develop because everybody wants to reduce their debt it developed because people think using credit is always good for growth even when there s way too much credit in use already the problem isn t people of course the problem is policy we set up policies no i refuse to take any blame for it they set up policies designed to encourage the use of credit and let debt accumulate and when the use of credit started causing inflation they blamed the money instead and restricted the money and still they encouraged the use of credit and the accumulation of debt and that s how we ended up with 60 trillion of debt and 2 4 trillion of interest cost in a 16 trillion economy when there s too much money in the economy the right way to fight inflation is to restrict the quantity of money when there s too much credit in use the right way to fight inflation is to accelerate the repayment of debt posted by the arthurian at 4 00 am 7 comments tuesday june 25 2013 http fredqa stlouisfed org 2011 10 06 the market vs gdp with fred graph whichever series we chose we should chose the nominal rather than the real the reasoning here is simple our market indexes are not inflation adjusted so our base shouldn t be either fred i was looking for colors to match the default background blue of the fred graphs went to fred searched for graph color values didn t get lucky clicked everything and searched again the third hit caught my eye the market vs gdp i risked a click i got a lesson in how to use fred to make a graph nothing on color values that s so 1990s i guess but i did find oh they want to see the stock market as a percentage of gdp or gnp okay that might be interesting no not the graph anyway skimming past fred instructions about things i already know i come to this for this graph we could really choose either gdp or gnp as gnp is a little more comprehensive we ll choose it the nominal series for our base note whichever series we chose we should chose the nominal rather than the real the reasoning here is simple our market indexes are not inflation adjusted so our base gdp gnp shouldn t be either gnp is a little more comprehensive than gdp that s interesting given that it s coming from people who work at fred i wonder what it means but i m not focused today on which data to use or how to get it today i m focused on what they think at fred about dividing nominal values by inflation adjusted values as a rule they don t like it let me repeat that they don t like it i don t like it either i don t like it when it is used to fake evidence that printing money causes inflation i don t like it when it is used to fake evidence that rising labor costs cause inflation posted by the arthurian at 4 00 am 0 comments monday june 24 2013 millions of millions fred s default for federal debt total public debt gfdebtn so i m looking at the graph this morning noticing that the federal debt is up around 17 not down around 14 like an older graph i was looking at 17 million huh how come the federal debt is so low the highest value on the vertical axis is 18 million all the values are millions yes the axis label says millions of dollars no dummy the highest value is 18 million million dollars 18 trillion didn t have my coffee yet posted by the arthurian at 4 00 am 0 comments sunday june 23 2013 a simple question at interfluidity mark a sadowski summarizes mason and jayadev 2012 they find that whereas the household sector borrowed heavily in the 1946 64 period and more often borrowed than not in the 1965 80 period the household sector ran a primary surplus throughout the 1981 99 period with the sole exception of 1985 only more recently during 2000 2006 did the household sector borrow heavily again nevertheless household sector debt as a percent of disposable personal income rose substantially during 1981 99 due to high real effective interest rates and low rates of growth in nominal income the household sector ran a primary surplus throughout the 1981 99 period household sector debt as a percent of disposable personal income rose substantially during 1981 99 don t these facts suggest that household sector debt was already too high by 1981 posted by the arthurian at 4 00 am 0 comments saturday june 22 2013 krugman i believe in the debt overhang story enough to be worried paul krugman canadian household debt has kept rising even as the us level has declined so if the new non bank centered view is right canada ought to be quite vulnerable to a big deleveraging shock despite its boring banks of course people have been saying this for several years and it hasn t happened yet but remember the us housing bubble took a long time to pop too i m not exactly making a prediction here but i guess i believe in the debt overhang story enough to be worried and canada is certainly an important test case okay and then from the conference board of canada there s this and this think of the world in terms of cost the growth of debt is a cost if that cost goes high enough it breaks the economy income inequality is a cost that drains spending power from the 99 if income inequality is a little higher in the us than canada the cost is higher too combine the higher cost of debt in the us with the higher cost of inequality in the us and you can see why the us economy broke and the canadian economy didn t can we put it all into a formula and predict the day canada s economy breaks i wouldn t even try but i ll tell you this the object is not to get just as close as we possibly can to the breaking point our economy was good in the 1960s that s the target we ought to shoot for a level of debt like we had in the 1960s and a level of inequality like we had in the 1960s that s the target it s a start posted by the arthurian at 4 00 am 0 comments friday june 21 2013 being fair and balanced following up on yesterday s post where the uptrend to crisis pattern of debt dominated all three graphs graph 1 year to year change in tcmdo debt in billions graph 2 revision to the first graph to allow for rising prices graph 3 revision to the second graph to allow for real growth the two considerations price increases and real growth had almost no effect on the pattern of increase in debt debt was the dominant factor but you know it was only three graphs so today i want to look at variations on the relations we looked at yesterday maybe it was just a fluke that made debt seem to dominate the other factors yeah right all these graphs from yesterday and today are based on three fred data sets tcmdo debt gdpdef the gdp deflator as a measure of prices gdpc1 as a measure of real inflation adjusted gdp yesterday we looked first at the year to year difference in debt for the second graph i divided the year to year number by the price series and i divided that result by real gdp for the third graph not much science in that sequence of events it s just where my mind thoughts took us today i want to start with the year to year difference for prices and for real gdp as we did yesterday for debt graph 1 the gdp deflator as a measure of prices usually a graph of prices shows the percent change this graph only shows the difference in the deflator value from one year to the next at about 4 5 the high point on graph 1 is lower than what we usually see and the later values are higher than usual near half the peak but that high point is part of the great inflation to be sure graph 2 change from prior year value of inflation adjusted gdp in billions of 2005 dollars there is a general uptrend throughout the period but as with the previous graph this graph shows a simple difference not percent increase okay next i want to take the other data series and divide by it that s what i did yesterday when i started with debt today i save debt for last graph 3 shows the graph 1 values divided by real gdp you can still see the great inflation that high spot that should go from the mid 1960s to the early 1980s a little hard to read the dates graph 4 divides the graph 2 series by the price level where graph 2 went up graph 4 goes down i want to sa...
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