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nly modifications in the earlier design all crises have involved debt that in one fashion or another has become dangerously out of scale in relation to the underlying means of payment posted by the arthurian at 4 00 am 0 comments sunday january 11 2015 financial business debt the graph shows financial business credit market instruments liability level billions of dollars annual not seasonally adjusted or tcmdodfs at fred the trend line is exponential by excel based on the years 1950 1975 just like the past two days graphs the graph shows financial business debt hugging the early trend not for 25 years but for a full 50 only around 2002 does the debt fall away from trend slowly at first massively after the crisis posted by the arthurian at 4 00 am 7 comments saturday january 10 2015 business debt graph 1 the graph shows nonfinancial business debt and an exponential curve based on the early years the blue line is the sum of two fred series nonfinancial corporate business ncbtcmdodns and nonfinancial noncorporate business nnbtcmdodns both annual both in billions etc etc etc the exponential curve is an excel trendline based on the years 1950 1975 just like the household debt graph from yesterday graph 1 shows business debt growing faster than trend in the latter 1970s and 80s then slowing until about 2000 then slowing further you could say the 1978 2000 path is an s curve where business debt still followed trend and business debt has been falling below trend since 2000 or you could say business debt growth has been declining since 1990 you d be right either way if you are patient and attentive you will have noticed that this is the third in a series of posts comparing debt to trend sector by sector me my mind wanders i look for entertainment that takes us this time a little off topic think of it as background graph 2 the blue line on graph 2 is the same as on graph 1 the sum of two fred series red is corporate green is noncorporate both are nonfinancial tomorrow we look at financial debt nonfinancial corporate red is higher than nonfinancial noncorporate green but both lines vary and both trend upward so it is hard to see how they compare so we turn to graph 3 graph 3 graph 3 shows how much nonfinancial corporate business debt there was for each dollar of nonfinancial noncorporate business debt since 1950 it falls from three dollars to a dollar and a half then rises to two and a half then falls to a dollar and a half again and appears now to be on the rise again it s easy to want to think of graph 3 as showing the relative size of corporate and noncorporate business probably not a good idea there are better measures of business size this just compares debt size posted by the arthurian at 4 00 am 3 comments friday january 9 2015 household debt the graph shows debt of households and nonprofit organizations hstcmdodns at fred annual data 1950 2013 in blue the graph also shows the exponential trend of this debt for the early years 1950 1975 the graph shows that the growth of household debt remained close to its 1950 1975 trend until the crisis in other words household debt grew at pretty much the same rate before 1975 and after by way of contrast the gross federal debt grew much faster after 1975 than before based on the graph we saw in the previous post government debt grew slowly until the mid 1970s when the rapid growth of private debt caused a slowdown of economic growth and something had to be done it s fun to say the growth of government debt is the problem fun but it s not right civilizations die from suicide posted by the arthurian at 4 00 am 0 comments thursday january 8 2015 gross federal debt graph 1 gross federal debt blue and the golden age trend red the red line is an exponential curve based on the federal debt of the golden age think of it as showing what the federal debt would have been if we didn t grow the federal debt since the 1970s in an effort to restore economic vigor people today say the growing federal debt is a problem it is important to remember that in the 1970s and 80s the growing federal debt was a solution federal debt growth failed as a solution because it didn t grow faster than private debt that didn t happen because of all the safety net stuff that postponed the crisis since the 1970s because we prevented economic collapse back then we didn t get a private debt collapse back then and private debt just kept getting bigger so private debt kept getting bigger and since the 1970s when it became a problem the federal debt has been getting bigger in an effort to solve the problem so now both the private and the federal debts are massively big and apparently there are two kinds of people in the world those who complain about the size of the federal debt and those who do not complain about the size of private debt there cannot be a good ending when all debt is massively big but the only remaining option and the only one we have not tried is to reduce private debt policymakers refused to do that and debtors could not because policy undermined their efforts so at last the economy took up the challenge and gave us an economic crisis and for a few years private debt fell but this is not a thing we can leave to chance we must learn that keeping private debt to a low level is a good thing and policymakers must learn it also and policymakers must act posted by the arthurian at 4 00 am 0 comments wednesday january 7 2015 failures and tcmdo growth failures and tcmdo growth are not unrelated i took failures from earlier today put it in context i e divided by inflation adjusted gdp showed it in blue and put the annual percent change in tcmdo debt on the same graph the debt number is scaled down to make the two high points roughly equal there is definitely a relation between failures and the decline of debt so there is definitely a relation between debt growth and economic growth i just think we need to be careful and cautious when we attempt to describe that relation looking again at the above graph it is interesting that the high peak in the blue line seems to occur at the same moment as a secondary drop in the debt trend after 1970 the red line shows three substantial peaks and three bottoms that seem to sustain the general upward trend of debt growth the last of those three bottoms comes just before 1990 and just after the red and blue lines cross the red line briefly jogs upward again but that is the moment that the blue line peaks and concurrent with the fall from that great blue height the red line drops making a substantial departure from its general upward trend i think that s interesting i wonder what policy was doing just then and i wonder in particular whether monetary tweaks had anything to do with it i wonder in particular whether monetary tweaks had anything to do with it before you object to that thought please recall that debt is a monetary phenomenon and that a fiscal policy of deficit spending is very much a monetary tweak posted by the arthurian at 4 00 pm 0 comments failures posted by the arthurian at 4 00 am 0 comments tuesday january 6 2015 u k prices since 1209 measuringworth posted by the arthurian at 4 00 am 1 comments monday january 5 2015 reductions in the growth of private debt have been associated with every recession for the last 50 years it is one thing to say as auburn parks says that every recession for the last 50 years has been associated with reduction in the growth of private debt but that is not the same as saying every reduction in the growth of private debt creates a recession which is what auburn seems to want to say i can accept implicitly that when there is a recession the use of credit will fall but i do not accept the assumption that whenever the use of credit falls recession is certain and even if it is true that there was a recession every time credit use fell in the last 50 years it does not mean the economy has to work that way all it means is that policy has set things up to work that way and if it is true that policy set things up to work that way then the real problem is the thinking that underlies policy the real problem is the flawed assumptions that underlie policy to summarize the thought reduction in the growth of private debt need not be associated with recession you want to keep that in mind when you think about the design of policy posted by the arthurian at 4 00 am 3 comments sunday january 4 2015 it also explains why the fiscal multiplier is low in comments here on the problem with quantitative easing auburn parks said the real problem with qe is that it doesn t add any govt liabilities for the private sector to hold as wealth i quoted that back to him and replied so you are saying that the real problem with the economy is that there is not enough financial wealth for the private sector to hold you would have to convince me geerussell said this is a great excuse to roll out this old chart from way back he linked to this graph graph 1 dollars of private debt for each dollar of federal debt black line right scale the graph shows a measure of private debt red a measure of federal debt green their sum blue and their ratio black the black line shows that for every dollar of federal debt there was from four to six dollars of private debt reading the right side scale then in the mid 1990s it went to eight dollars of private debt and in the 2000s it went briefly to nine dollars of private debt for every dollar of federal debt geerussell writes there are two ways to reduce the burden of debt reduce private debt or increase the equity on which it rests i d say there s a pressing need to pursue both avenues geerussell s point is that if the high level of private debt relative to federal debt is a problem then we can solve that problem either by reducing private debt or by increasing federal debt or both i can t argue with that arithmetic but i look at things differently if the high level of private debt relative to federal debt is a problem i want to understand why the ratio is so high i ask why is private debt so high and why is federal debt so low funny isn t it federal debt is not low it is only low relative to private debt because private debt is so massively big anyway apparently both geerussell and austin parks would be happy to see the federal debt increase i d rather see private debt decline why is private debt so high if we don t answer that question private debt could stay high despite a significant increase in federal debt i mean if we grow the federal debt on purpose to make the black line fall private debt might increase faster also so that the black line does not fall if the black line does not fall the ratio remains high here is an updated version of the previous graph graph 2 an updated longer term version of the black line on graph 1 graph 2 goes back two decades further into the past than 1 it also uses improved measures of public and private debt so the high values achieved on graph 1 are only about half as high on 2 four instead of eight in 2001 4½ instead of 9 in 2008 but the two graphs show the same pattern economic growth in the 1950s and 60s was generally good supported by strong and persistent growth of debt as you can see from the strong uptrend on the graph during those decades there was a little hesitation in 1967 and again during the 1970 recession as the ratio reached 2 5 to 1 and 3 to 1 then from the 1974 recession to the early 1990s the ratio ran flat or trended slightly down economic performance was not impressive in those years because debt and financial costs had already reached a high level eventually the ratio fell a bit and by the mid 1990s started climbing again and the economy was good again while the ratio climbed but climbing pushes the ratio higher financial costs take more of a bite out of profits and aggregate demand and the economy slows again finally the burden of debt broke the economy we had the crisis and great recession and the ratio started falling it is lower now than it was at the onset of the 1990s boom and that is promising but at 2 5 dollars of private debt per dollar of gross federal debt the ratio is still high today it was increase in the private debt ratio that made vigorous growth possible we see this 1950 1970 we see it 1994 2000 and we could see it again soon increases in private debt make the economy vigorous but the increases push the ratio up making further increase less likely and when the ratio runs high the economy runs into trouble we need the ratio low in order to attain a sustained period of economic vigor is increased government participation the solution to the problem well was there a fall in government participation that caused the problem no government participation did not fall graph 3 debt in billions total private debt red and gross federal debt blue the high ratio could have been caused by the fall of government participation or by the rise of private participation but government participation did not fall it grew so the high ratio was not caused by the fall of government participation so it must have been caused by the rise of private participation we use credit for growth therein lies the problem i worried above that if we grow the federal debt on purpose to make the black line fall private debt might increase faster also so that the black line does not fall if the black line does not fall the problem remains that is in fact what we see between 1971 and 1991 on graph 1 the black line wanders along a horizontal trend path this means that private debt was increasing at about the same rate as the federal debt you can see it on graph 2 also the red line runs roughly flat from 1970 to 1990 so if it is true that the federal government increased spending and deficits in an attempt to restore economic vigor to our flagging economy then it must be true that private debt increased more rapidly also at about the same rate as the federal increase graph 4 shows the gross federal debt as given in fred s fygfd series that s the blue line the red line is an exponential trend line generated by excel for the years 1945 to 1974 graph 4 gross federal debt blue and the golden age trend red the red line is an exponential curve based on the federal debt of the golden age think of it as showing what the federal debt would have been if we did not grow the federal debt on purpose to restore economic vigor think of the gap between the red and blue lines as extra debt accumulated in the process of trying to drive the private public debt ratio down trillions and trillions and trillions of dollars did all that extra federal debt push down the ratio on graphs 1 and 2 no it did not we know that private debt and federal debt grew at about the same rate for near 20 years from 1970 to 1990 or so twenty years of unimpressive economic growth the boost to federal spending created an inadequate boost for the economy because private debt remained high if your plan is to fix the economy by expanding 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