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ecomes a drag on growth and for household debt we report a threshold around 85 of gdp now doesn t this imply that the overborrowing is a recent phenomenon taking the us federal debt as the gross federal debt fygfd the federal debt reached 85 of gdp in 2009 but one year earlier this debt was only 70 of gdp did the bis think it a problem then household debt fred has a time series on that hdtgpdusq163n but it only goes back to 2009 so i used the household sector debt from the tcmdo series and looked at that relative to gdp not a perfect match but fair anyway household debt went above 85 of gdp in 2004 apparently maybe a couple years earlier if we imagine the blue line running parallel to the red one on this fred graph finally setting financial debt aside as bis does i looked at nonfinancial corporate business debt as a percent of gdp this peaks below 55 and according to the pdf must be no part of the problem for the hell of it then i looked at total credit market debt owed by domestic financial sectors as a percent of gdp this one reaches 85 already by the 2001 recession and peaks at 120 during the crisis i should point out however that the bis pdf does not identify a problem level for financial debt the earliest of these trouble points appears before 2004 but not much before still if debt is accumulating if it is heading for a benchmark shouldn t we be able to say there are prior benchmarks at lower levels that ought to have been taken as some sort of warning that might not take the bis guys all the way back to the 1960s but it would point them in the right direction but i don t think they re going that way the question they ask is when does debt go from good to bad they want to know how long they can wait before calling debt a problem they want to know how close they can get to the edge because when a bank steps back from the edge it makes less money this is not how the problem gets solved this is the way the world ends posted by the arthurian at 4 00 am 0 comments labels 1966 places i go no 1 in a series perhaps it s the early hour but this made me laugh out loud what s the difference between eligible employees and employees eligible to participate only an unnecessary sort of zeal as if those who cannot participate are strictly forbidden to try from michael leddy s how to improve writing no 1 in a series posted by the arthurian at 3 00 am 0 comments friday june 15 2012 chasing down nordhaus wanted to confirm that there is a nordhaus at yale who is the source of that macromath pdf i used in my 4am today there is a william nordhaus at yale and i m satisfied he s the source of that pdf here s his home page this is kinda neat he has this g econ project going the g econ research project is devoted to developing a geophysically based data set on economic activity for the world the basic metric is the regional equivalent of gross domestic product gross cell product gcp is measured at a 1 degree longitude by 1 degree latitude resolution at a global scale he shows the globe but ignores national boundaries instead he divides the surface of the earth into small squares and shows an output stack in each square representing the gdp or gcp of that small region four globes are available on his sidebar i started with the large pixeled contour globe wow hey thanks for the macromath pdf professor posted by the arthurian at 4 00 pm 0 comments for example not sure who i have to thank for this i googled graph of us real output since 1800 and turned up macromath_v2 pdf the url includes the words nordhaus and yale edu so professor nordhaus maybe let s graph us real gdp since 1800 using an arithmetic scale and a logarithmic scale also show a constant growth curve in the log scale which is more useful arithmetic graph log graph from this example you can see why economists like to put log x t on the vertical axis for output prices and other trended variables because a series with a constant growth rate is a straight line because a series with a constant growth rate is a straight line yesterday i said it is always an unwavering path a straight line on a log chart this straight line path is the universal fundamental assumption whether we think it exists or not the straight line is the wrong picture the long term trend looks like a sine curve it looks like a business cycle only longer than the normal business cycle longer than a kondratieff wave longer than david hackett fischer s great wave i m looking at a really long business cycle what we normally think of as civilization the rise and fall of civilization the log graph above shows the straight line that economists always assume but the logged data shows a curve that relative to the straight line is high in the center and low at the ends it is some kind of curve a sine curve maybe the graph runs 200 years from 1800 to 2000 that is one tenth of a 2000 year cycle no i don t call this evidence but i do call it interesting posted by the arthurian at 4 00 am 0 comments thursday june 14 2012 the unit root thing arcane unit root no i don t understand wikipedia says in time series models in econometrics the application of statistical methods to economics a unit root is a feature of processes that evolve through time that can cause problems in statistical inference if it is not adequately dealt with if a linear stochastic process has a unit root the process is non stationary otherwise it is stationary something like that based on the wikipedia article apparently it is something that can be calculated sometimes maybe this rang a bell from the same article the diagram above depicts an example of a potential unit root the red line represents an observed drop in output green shows the path of recovery if the series has a unit root blue shows the recovery if there is no unit root and the series is trend stationary the blue line returns to meet and follow the dashed trend line while the green line remains permanently below the trend the unit root hypothesis also holds that a spike in output will lead to levels of output higher than the past trend okay the dotted line is potential gdp the red line is actual gdp the blue and green lines are two possible post crisis paths we seem to be on the green path this is exactly what james bullard was talking about what john taylor worked out and john cochrane showed what david andolfatto presented and what i reviewed a few months back see especially cochrane s presentation of taylor s graphs i was totally fascinated by bullard s approach i didn t know it had all this backstory among the ending thoughts of the wikipedia article the issue is particularly popular in the literature on business cycles research on the subject began with nelson and plosser whose paper on gnp and other output aggregates failed to reject the unit root hypothesis for these series since then a debate entwined with technical disputes on statistical methods has ensued while the literature on the unit root hypothesis may consist of arcane debate on statistical methods the implications of the hypothesis can have concrete implications for economic forecasts and policies arcane debate indeed paul krugman the wikipedia article links to him provides a relevant example which i ve highlighted march 3 2009 9 06 pm roots of evil wonkish as brad delong says sigh greg mankiw challenges the administration s prediction of relatively fast growth a few years from now on the basis that real gdp may have a unit root that is there s no tendency for bad years to be offset by good years later i always thought the unit root thing involved a bit of deliberate obtuseness it involved pretending that you didn t know the difference between say low gdp growth due to a productivity slowdown like the one that happened from 1973 to 1995 on one side and low gdp growth due to a severe recession for one thing is very clear variables that measure the use of resources like unemployment or capacity utilization do not have unit roots when unemployment is high it tends to fall and together with okun s law this says that yes it is right to expect high growth in future if the economy is depressed now but to invoke the unit root thing to disparage growth forecasts now involves more than a bit of deliberate obtuseness how can you fail to acknowledge that there s huge slack capacity in the economy right now and yes we can expect fast growth if and when that capacity comes back into use kling responds but the unemployment rate is not trend stationary either the natural rate tends to wander around this all comes up because i came upon a link from besttrousers at reddit reddit links to a pdf 50 pages a paper dated 1989 written by lawrence j christiano and martin eichenbaum from a time before computers by the look of it from the opening of the paper macroeconomists have traditionally viewed movements in aggregate output as representing temporary fluctuations about a deterministic trend according to this view innovations shocks to real gross national product gnp should have no impact on long run forecasts of aggregate output increasingly however this view of aggregate fluctuations has been challenged following the important work of nelson and plosser 1982 numerous economists have argued that real gdp is best characterized as a stochastic process that does not revert to a deterministic trend path let me ask a question what is this trend that may or may not exist it is always an unwavering path a straight line on a log chart this straight line path is the universal fundamental assumption whether we think it exists or not the straight line is the wrong picture the long term trend looks like a sine curve it looks like a business cycle only longer than the normal business cycle longer than a kondratieff wave longer than david hackett fischer s great wave i m looking at a really long business cycle what we normally think of as civilization the rise and fall of civilization the cycle of civilization change that dotted line to a sine wave with a 2000 year period and all your assumptions about stationary non stationary and unit root go out the window posted by the arthurian at 4 00 am 0 comments labels cycle of civilization wednesday june 13 2012 if you have to have a metaphor i really liked the opening of the cecchetti mohanty zampolli pdf debt is a two edged sword used wisely and in moderation it clearly improves welfare but when it is used imprudently and in excess the result can be disaster i liked the two edged sword metaphor all the while i was writing yesterday s post soon as i finished i had another thought perhaps our troubles with debt arise from the ambiguity of the double edge debt is good and debt is bad perhaps if we only thought of debt as bad we would stay out of trouble or if we only thought of debt as good we d never think ourselves in trouble nah it s good and bad and we just have to deal with our confusion on the matter oh there are explanations sure the pdf opens with one from the abstract at moderate levels debt improves welfare and enhances growth but high levels can be damaging so it s not the debt that gives us trouble but the level of debt low levels of debt or moderate levels as the bankmen say are not problematic but high levels of debt are a problem i agree my key phrase is excessive debt but remember how it was when you were a kid when you are little everything is out of reach when income is little even moderate debt can be insurmountable low and high big and small these are relative terms that s how we get into trouble we don t see the debt as too high until we re in trouble then it is obvious but then it is too late we need a better way to look at debt the double edged sword is a useless metaphor that does not keep us out of trouble to make it right we need an extra word credit debt is always bad credit is always good but using credit creates debt before you use it opm other people s money is credit it is credit until you use it but the moment you spend a borrowed dollar all that s left is debt you don t have the money anymore after that you just have the debt debt is the record of credit we have put to use a record of money borrowed and not yet paid back credit is always good because it is available for use or because you re using it adding to aggregate demand boosting the economy keeping somebody working it s all good debt is always bad because you don t have the money anymore you don t have the credit anymore you just have the obligation to pay back money you no longer have let me revise the bit i quoted from the pdf debt is not a two edged sword debt is one edge perhaps the sharper edge the other edge is credit money the sword is finance if you have to have a metaphor the sword is finance posted by the arthurian at 4 00 am 7 comments tuesday june 12 2012 where the supply side does not matter the rex nutting post links to the real effects of debt a 34 page pdf by stephen g cecchetti m s mohanty and fabrizio zampolli just a brief look at moderate levels debt improves welfare and enhances growth but high levels can be damaging when does debt go from good to bad we address this question using a new dataset that includes the level of government non financial corporate and household debt in 18 oecd countries from 1980 to 2010 our results support the view that beyond a certain level debt is a drag on growth debt is a two edged sword used wisely and in moderation it clearly improves welfare but when it is used imprudently and in excess the result can be disaster for individual households and firms overborrowing leads to bankruptcy and financial ruin for a country too much debt impairs the government s ability to deliver essential services to its citizens high and rising debt is a source of justifiable concern we have seen this recently as first private and now public debt have been at the centre of the crisis that began four years ago data bear out these concerns and suggest a need to look comprehensively at all forms of non financial debt household and corporate as well as government over the past 30 years summing these three sectors together the ratio of debt to gdp in advanced economies has risen relentlessly from 167 in 1980 to 314 today or by an average of more than 5 percentage points of gdp per year over the last three decades when debt ratios rise beyond a certain level financial crises become both more likely and more severe reinhart and rogoff 2009 this strongly suggests that there is a sense in which debt can become excessive but when we take an empirical approach to this question using a new dataset on debt levels in 18 oecd countries from 1980 to 2010 based primarily on flow of funds data we examine the impact of debt on economic growth our data allow us to look at the impact of household non financial corporate and government debt separately in this section we briefly review trends in household non financial corporate and government debt in what follows we will refer to the total combined debt of these three...
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