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deral 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 government spending well your plan has already been tried it didn t work why didn t it work to be blunt it didn t work because we didn t have a depression in those years a depression would have wiped out a lot of private debt while the government spending was pumping money into the economy that didn t happen instead the private sector took every new dollar of government money and diced it up into many more dollars of private lending and debt instead of falling private debt increased why is private debt so high because we have many policies that encourage the use of credit and no policy that encourages repayment of debt increasing federal spending and federal deficits will not restore vigor unless policies are put in place to limit the expansion of private debt for example by tax incentives for accelerated repayment related posts debt relatives the cousins fred federal spending as a of gdp blue and federal deficits as a of federal spending red more cowbell posted by the arthurian at 4 00 am 10 comments saturday january 3 2015 fdr and the hodgepodge story from try everything by brad delong when it became clear in late 2008 that the global economy was headed toward a crash at least as dangerous as the one that had initiated the great depression i was alarmed but also hopeful we had after all seen this before and we also had a model for how to mitigate the damage unfortunately policymakers left it on the shelf for three and a half years following the start of the great depression us president herbert hoover s top priority was to balance the budget trying but ultimately failing to restore business confidence in 1933 newly elected president franklin d roosevelt changed course adopting a simple yet radical strategy try everything that might boost demand increase production or reduce unemployment and then keep doing the things that work roosevelt abandoned attempts to balance the budget increased the money supply and initiated deficit spending he took the united states off the gold standard had the government hire workers directly and offered loan guarantees to those in danger of losing their homes he cartelized the oil industry and instituted aggressive antitrust policies to break up monopolies brad delong s model of what fdr did is a hodgepodge fdr tried everything delong says i ve seen that story before but i have trouble with the hodgepodge story oh i don t deny that fdr did all sorts of things bold persistent experimentation he called it if i remember my leuchtenburg but it was no hodgepodge fdr did one thing he reduced the debt per dollar ratio the turning points shown on this graph at 1933 and 1947 correspond remarkably with the beginning and the end of the fdr administration posted by the arthurian at 4 00 am 0 comments friday january 2 2015 their way of thinking if you get the fred graph of gdp and click the notes tab you ll find a link to the nipaguid pdf 28 pages i still think it s funny that they still use an 8 character filename for it but that sure will come in handy if you re using dos 3 2 a guide to the national income and product accounts of the united states here s the bit that got me writing the most recent comprehensive revision of the nipas which was released beginning in 2003 further improved and updated the accounts for example an improved measure of banking services that includes the services received by borrowers was introduced previously such services were only allocated to depositors because of that revision the work of lenders who created our massive private debt is now included in gdp so gdp is bigger and the ratio of debt to gdp is less because the work of creating debt now counts as part of gdp buying a used car from your neighbor no that s not in gdp raising your own children and doing your own housework no that s not in gdp capital gains no that s not in gdp but creating more debt yeah we count creating debt in gdp the mindset is the problem we think they think creating more debt is a good thing that...
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