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ents monday december 23 2013 following up on saturday i showed consumer debt on a log scale it showed pretty much a straight line increase then i said the log scale graph provided no context for consumer debt and that in context the graph would show much less of a straight line increase so i showed a graph of consumer debt relative to gdp consumer debt in context and sure enough the graph showed much less of a straight line increase something s been bothering me for two days now i remember stuart staniford saying it s hard to read changes in small growth rates on a log graph and i m concerned that my first graph hides changes because it s a log graph i m concerned that my second graph shows much more deviation from the straight line increase because it s not a log graph so i went back to fred and looked at consumer debt on a log scale again and this time i put consumer debt relative to gdp on the same graph and i made sure to show the log values of the second line this time graph 1 consumer debt on a log scale blue and log of the consumer debt to gdp ratio red consumer debt on a log scale shows a straight line increase consumer debt in the context of gdp does not show a straight line increase and this is true even when log values are shown so yes consumer debt relative to gdp fails to show the straight line increase because of the context variable because of gdp it s the context that distorts the picture at fred when you have the ratio of two series you cannot show the values on a log scale to get the same effect you have to take the log of the values i m not sure why that is really but i did look into it the two methods are equivalent posted by the arthurian at 4 00 am 1 comments sunday december 22 2013 impressions consumer debt relative to total credit market debt graph 1 consumer debt relative to total credit market debt gross federal debt relative to total credit market debt graph 2 gross federal debt relative to total credit market debt financial debt relative to total credit market debt graph 3 financial debt relative to total credit market debt posted by the arthurian at 4 00 am 0 comments saturday december 21 2013 between the surges yesterday i said it s obvious from the up trend on the graph that debt was a developing problem already in the 1950s graph 1 consumer debt on a log scale what i meant was if debt became a problem because debt got so big then the problem arose not after debt got big but when the increase first started it s obvious i think see that flat spot in the recent years in the upper right corner of graph 1 that s when the growth of debt finally slowed that s when people decided they had enough it caused quite a disturbance in the economy that slowing of debt growth here s how it looks to me the debt growth slowdown created big problems because debt plays such a big role in the economy i don t know the numbers but suppose 80 of our spending involves debt now imagine that the debt growth slowdown happened much earlier instead in the 1960s maybe when perhaps only 20 of our spending involved debt the effect of the debt growth slowdown would have been much less it s obvious i think graph 1 shows consumer debt the log of consumer debt it shows no ratio it provides no context for the debt in context there would be more variation in the uptrend it wouldn t just go up and up in context it looks like this graph 2 consumer debt in context relative to the size of the economy it s not just up and up on graph 2 it s up and down and wiggle around that s true but you know graph 1 shows a pretty consistent up trend and graph 1 doesn t show anything but consumer debt it shows consumer debt and you can see a consistent up trend in that debt graph 2 doesn t show the same uptrend but graph 2 doesn t only show consumer debt it also shows the size of the economy as given by gdp and you know if consumer debt shows a consistent uptrend and consumer debt in context does not then maybe the disturbance of the trend comes from the context data not from the consumer debt data the changes in gdp throw off the ratio and make it look like consumer debt doesn t have a consistent up trend but it s gdp that s throwing it off it s the context that distorts the picture it s obvious i think scott sumner looked at a graph like my 2 here a while back here s what he said about the graph what do you see i suppose it s in the eye of the beholder but i see three big debt surges 1952 64 1984 91 and 2000 08 okay but remember he s looking at a disturbance imposed on the up trend by a context variable if you look at the same data total consumer debt relative to gdp and also at the change in consumer debt relative to gdp a more complete picture emerges graph 3 consumer debt relative to the size of the economy blue and change in consumer debt relative to the size of the economy red scott sumner identified three debt surges on the graph i ve emphasized in heavier red the two intermissions between those surges the first i show from 1965 to 1983 and the second from 1992 to 1999 both intermissions match up with relatively flat spots in the blue line the flat spots between sumner s surges during the second intermission the red line is relatively low the change in debt is relatively low relative to the size of the economy this intermission then seems to support sumner s view that there was no debt surge in the 1992 1999 period the first intermission is more problematic yes there is a low spot in the red line just before the 1970 recession the blue line is actually going down at that time but after the 1970 recession there is a peak at least as big as any earlier peak in that red line and after the 1974 recession is an even bigger peak this peak rivals the one at the start of sumner s second surge it rivals the mid 1980s peak but the blue line shows only a very mild increase during the post 1974 peak not a strong increase like the one in the mid 1980s why this discrepancy the behavior of the context data is the key to this puzzle that flat spot in the blue line from 1965 to 1983 that flat spot corresponds to the time called the great inflation the time that prices were rising rapidly incomes were rising too and yes new additions to consumer debt were growing also as prices climbed but the old existing debt did not grow with inflation your mortgage payment was the same month after month and year after year meanwhile your paycheck increased along with prices because of the inflation each year s inflating prices helped to enlarge the new increases of consumer debt but each year s inflating paychecks made existing consumer debt smaller in context it is the rapid inflationary increase in the context data the gdp data that distorts the picture of debt growth during the great inflation despite the large increases to consumer debt through the 1970s the increases to paychecks and incomes and gdp made consumer debt growth look like it slowed significantly consumer debt growth slowed almost not at all during the great inflation if you strip away the effects of inflation consumer debt in context relative to the size of the economy shows a strong up trend comparable to graph 1 above graph 4 consumer debt in context like graph 2 blue and consumer debt in context with inflation stripped away red okay there is a bit of a slowdown in debt growth during the great inflation but only a bit and really not like it looks on the second graph it is not a slowdown that merits exclusion from surge status we had rapid debt growth camouflaged by inflation it s obvious i think posted by the arthurian at 4 00 am 3 comments friday december 20 2013 oh daniel at crooked timber daniel says there is a lot of rewriting of the recent past in the secular stagnation view of why we re in the mess we re in basically the thesis is that since about the mid 1990s it has been the case that it has only been possible to achieve anything like full employment in america during periods when the private sector has been chronically over consuming and increasing its debt levels daniel doesn t buy it they got a structural increase in personal sector debt because they wanted one and set policy in order to create one there s no good calling it a bubble or a puzzle now that the shit s hit the fan amen brother i liked the article i don t like that the thesis only goes back to the mid 1990s but that s not daniel s version of course daniel takes us back to when china starts to industrialise and nafta is passed i don t know about china but nafta came into force in 1994 according to wikipedia so mid 1990s daniel does refer to the entire period in question as the greenspan years which gets us back to 1987 nothing before that that i noticed for more or less the entire period in question call them the greenspan years the growth of consumer spending financed by increased consumer debt was the main instrument of policy sure in comments robert waldmann replies a wish is not a plan greenspan clinton and bush might have wished for consumers to borrow and spend but they had no way of forcing people to okay but policy doesn t force people to do things policy induces people to do things and anyway consumer debt was increasing anyway see how the dramatic increase begins right there in the mid 1990s no no i mean right there in 1987 no no debt was going up from the start to be clear i do like daniel s summary of events since the late 1980s those were all contributing factors surely and i very much like where he s coming from in describing the growth in debt as if it was a purely exogenous phenomenon due to nothing other than animal spirits and irrationality there s a really dangerous kind of mistake being made it was policy absolutely it was policy either we encouraged debt or we failed to discourage it or both actually both but here s the thing daniel you don t go back to the time when a problem became obvious and point to that time and say there s the problem things don t happen instantly in the economy things develop the debt that became a problem in 2008 was already a problem for people in the 1990s the debt that was a problem in the 1990s was already creating problems in the 1970s and the debt that was a problem in the 1970s was already a developing problem in the 1950s it s obvious just look at that up trend on the graph posted by the arthurian at 4 00 am 11 comments thursday december 19 2013 a disputed statement is a weak link in a chain of argument at the economist r a quotes from an earlier column another theory holds that high savings reflect a cramping of consumption due to rising inequality of incomes the share of income earned by the top 1 began climbing in the early 1980s and now stands close to the record set in 1928 rich households save more than poorer ones a paper published this year by barry cynamon of the st louis fed and steven fazzari of washington university in st louis estimates that prolific saving by the top 5 has been suppressing demand since the mid 1980s that squeeze was mostly offset by increased borrowing by the bottom 95 they find america and britain unlike germany and japan saw rapid growth in private debt in the 2000s the assertion that rich households save more than poorer ones is something that makes perfect sense to me but apparently is unsupported by evidence of course cynamon and fazzari disagree like krugman i d like to agree unlike most everybody with a stick in this fire i don t know enough about it to contradict anybody for the sake of this post however let s suppose krugman is wrong cynamon and fazzari are right so here s where we stand p rolific saving by the top 5 has been suppressing demand since the mid 1980s that squeeze was mostly offset by increased borrowing by the bottom 95 as evidenced by the rapid growth in private debt in the 2000s let s consider these two groups the 5 and the 95 let s presume income inequality was stable from world war two until 1980 for simplicity assume that the income of the 95 was just equal to the income of the 5 before 1980 each group received half of gdp after 1980 let s suppose income shifts by 1 of gdp each year the income of the 95 falls by 1 of gdp and that of the 5 rises by a like amount sounds like an economic model to me after 25 years of 1 transfers from the 95 to the 5 half of the 95 s annual income has shifted allegiance but i still don t like the disputed line rich households save more than poorer ones disputed lines don t make strong arguments in a post i didn t recommend larry summers put the five versus ninety five thing in terms i like much better when he referred to high spending debtors and low spending creditors in such terms one need not quibble over evidence posted by the arthurian at 4 00 am 3 comments wednesday december 18 2013 secular stagnation strikes again on 12 december 2012 i showed this graph stages of the slowdown in real growth on 15 december 2013 larry summers wrote why stagnation might prove to be the new normal you can see the new normal in my graph twice not a recommendation to read the linked post posted by the arthurian at 4 00 am 0 comments tuesday december 17 2013 worst case unemployment and the output gap part six in a series that starts here a while back i looked at the myth of jobless recoveries okun s law and hodrick prescott calculations the hodrick prescott calc can be used to smooth out a data series like gdp or the unemployment rate it smooths out the ups and downs of the business cycle so you can see the underlying trend okun s law says there is a consistent relation between unemployment and output it says when output drops one percent below trend unemployment rises half a point above trend when output rises one percent above trend unemployment falls half a point below these trends that are part of the okun s law calculation you can use the hodrick prescott calculation to get them now here is what i did a while back in a follow up post after first vehemently denying that such calculations are reasonable i took the unemployment numbers from fred and figured the hp trend for unemployment then i set the original unemployment numbers aside i took the real gdp numbers from fred and figured the hp trend for real gdp then i subtracted the trend from the original numbers this gave me a measure of how far real gdp was off its trend then i took those off trend numbers and divided them in half in half because okun s law says what happens to unemployment is half as big as what happens to output so i just scaled the off trend output values down to fit the unemployment rate then i took those scaled down output values and added them to the underlying trend for unemployment the hodrick prescott trend subtracted maybe i forget then i took these unemployment trend plus off trend output numbers and put them on a graph along with the original unemployment numbers the idea which i got from the myth of jobless recoveries post was that if the two lines turned out similar it was evidence that there is a strong reli...
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