Testing my DSR estimate

Last time, I put my "Estimated Debt Service Ratio (back to 1947)" data into an HTML table so it's accessible. Now I want to access it: copy it, paste it into a worksheet, and try to evaluate it. Are my results obviously ridiculous? Could be. I mean, suppose I subtract "household interest paid" from the debt service numbers. That leaves me with principal repayment. Maybe I can look at the principal repayment numbers in comparison to household income, or in comparison to household debt, and see if the numbers look reasonable or not.

If they look reasonable, that doesn't mean they're right. But if they don't look reasonable, it could mean they are wrong. So I want to do that kind of looking.

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Graph #1

The red line in Graph #1 is the FRED data in the form FRED offers it: as a percent of Disposable Personal Income. The blue line is my approximation of the FRED data, based only on the ratio of household debt to DPI, and the effective interest rate on that debt, in an Excel regression. The main advantage of the blue data is that it goes back to 1947. The main disadvantage is we don't know if it is even close to right.

Graph #2

Graph #2: Same data as the first graph, but shown as billions of dollars. Here it appears that the differences between red and blue are small at first, for 15 or 20 years after 1980 (where the red line starts), and bigger in later years. So it appears. But by the end of the graph, Debt Service has climbed to 1600 billion; by the year 2000 it is only half as high. So a comparable difference would look only half as big before the year 2000.

And again, by the mid '80s is only around 400 billion, so again the same difference would look only half as big in 1985 as in 2000. And by 1980, only 200 billion, so the difference would look half as big in 1980 as in 1985 on this graph.

To get a better view of the differences between the red and blue, I looked at the difference between red and blue as a percent of the red data:

Graph #3

I was hoping this graph would look familiar. If I recognized something in it, like the growth rate of debt, I would want to add that data to the regression to see if it would make the discrepancies smaller.

No such luck. But what I do see in this graph is that before the year 2000, the discrepancies get bigger and bigger as you go back in time. None of the differences shown on the graph are more than six or eight percent, and I'd say that's not so much as to be objectionable. But if there's a discrepancy in every decade, and as you go back in time each earlier one is two or three percentage points bigger than the one before you're up around a 20% error in the 1940s. That's a lot.

The error seems to get worse as you go back in time. That makes sense to me. And even if a 6% difference is not a problem, it does seem to be a problem that the error grows with every decade.

But I'm looking at the big recent discrepancy on the graph, too, in the years after 2000. Maybe that discrepancy tilted the playing field, and the trend of discrepancies in the years before 2000 is not really a trend so much as the tilt introduced by the large late discrepancy. I'm thinking I might run the regression again some time, but stop the Y-values, FRED's Debt Service data, at the year 2000. Maybe the playing field will tilt back to normal and the discrepancies will all go away.

One can always hope.

Graph #4

Graph #4: I separate household debt service (in billions) into its two components: principal and interest. For the interest portion I use "Monetary Interest Paid: Households" from FRED. Nobody ever told me that this measure of interest is the interest that's included in household debt service. But what else could it be?

Famous last words, right?

Graph #5

Graph #5: Having split debt service into its principal and interest portions, here I convert them to "percent of DPI", same as FRED's Debt Service data.

You know what? Here again my red line looks almost like the smoothed trend for the green (FRED) data, at least in the 1980s and '90s. Except my data goes up when FRED's goes down, and down when theirs goes up. Hm.

Interesting in the early years where the principal (red) stays in the neighborhood of 4% while the interest (blue) drops to near 1% by the late 1940s. Makes sense, because interest rates were lower in the early years, and accumulated debt was smaller.

Graph #6

Graph #6: The components of Debt Service shown as "percent of Household Debt".

The blue line (interest) shows the same rise-to-early-80s-peak (and decline thereafter) that generally appear in US interest rates. My calculation of the "effective" interest rate ("monetary interest paid: households" as a percent of "household debt") seems to hold up okay.

Interesting that the blue line starts with much less of an increase here than on Graph #5, and that the red line starts with much more of a decrease here than on #5. Makes sense: When interest is the small component of Debt Service, principal must be the large component.

Nonetheless I am fascinated by the red line here, principal as a percent of debt. It starts extremely high, then falls very rapidly. But the fall tapers off by 1965 and the line runs flat for the first ten years of the Great Inflation. Red drops in the latter '70s -- an adjustment, I suppose -- then runs flat again to the end of the Great Inflation, at which time the original decline apparently resumes.

First impressions.