With one eye closed

I've been looking at an old PDF lately: The real effects of debt, the 2011 paper by Cecchetti, Mohanty and Zampolli (CMZ). They show this graph:

They write:

As Graph 2 shows, the US non-financial debt-to-GDP ratio was steady at around 150% from the early 1950s until the mid-1980s. In some periods, public debt was high, but then private debt was low; while in others it was the reverse.

Their remarks are footnoted:

See Friedman (1981 and 1986) for a discussion.

I wondered if they meant Milton Friedman because, far as I know, debt wasn't really his thing. So I checked their list of references, and found this item:

Friedman, M (1981): “Debt and economic activity in the United States”, in M Friedman (ed), The changing roles of debt and equity in financing US capital formation, University of Chicago Press.

Friedman, M, they say. But I think they mean Benjamin M. Friedman, whose 1981 paper Debt and Economic Activity in the United States is available from NBER. The paper "documents a long-standing stability in the relationship between outstanding debt and economic activity in the United States". Must be it.

So now I'm looking at an even older PDF.

From a page dated March, 1981, here are the opening sentences of Friedman's paper:

Businesses and individuals, in an economy like that of the United States, can finance their activities in a rich variety of ways. Businesses investing in new plant and equipment can rely on internally generated funds, or they can raise external funds from the financial markets. When they do turn to external sources of funds, they can issue either debt obligations or new equity shares in the enterprise. Individuals can likewise use their own or borrowed funds to make major purchases like automobiles, and many individuals can also borrow to finance ordinary consumer spending apart from major hardgoods. Even in arranging home purchases, transactions that are almost always partly debt financed, individuals usually can choose what fraction of the purchase price initially represents their own equity. In principle, businesses and individuals are continually making these and other financing choices on the basis of yield comparisons, credit availability, and other considerations, so that the total amount of debt financing does not necessarily have to bear any close relationship to the underlying economic activity.

In fact, however, the relationship between outstanding debt and economic activity in the United States is remarkably steady — indeed, just as steady as the more widely recognized and better understood relationship between economic activity and money. The aggregate outstanding indebtedness of all nonfinancial borrowers in the United States has been approximately $1.40 for each $1.00 of the economy's gross national product, ever since World War II. Throughout the postwar period the overall debt—to—income ratio has displayed neither trend nor cyclical variation.

And again, the sentence on which I focus:

The aggregate outstanding indebtedness of all nonfinancial borrowers in the United States has been approximately $1.40 for each $1.00 of the economy's gross national product

Friedman in 1981 considers nonfinancial debt only. His paragraphs are engorged with detail, but he offers no justification for the exclusion of financial debt.

Cecchetti, Mohanty and Zampolli, like Benjamin Friedman, consider only non-financial debt. The funding of borrowers is the focus. The funding of lenders merits no consideration.

As if our problems with debt can be reduced by failing to count the half of it.