Wednesday, September 29, 2021

In a time of debt ceiling talks...

From JW Mason, number 12, from 2019:

Financial markets depend on Treasury debt as a safe, liquid asset. Federal government debt offers an absolutely safe asset that can always be sold quickly and at a predictable price – something that is extremely valuable for banks and other financial institutions. There is a strong argument that the growth of the mortgage-backed security market in the 2000s was fundamentally driven by a scarcity of government debt – many financial institutions wanted (or were compelled by regulation) to hold a substantial amount of ultrasafe, liquid debt, and there was not enough government debt in circulation to meet this demand. So financial markets came up with mortgage-backed securities as a supposed alternative – with disastrous results. Similarly, after the recession, one argument for why the recovery was so slow was a “safe asset shortage” – financial institutions were unwilling to make risky loans without  holdings of ultrasafe assets to balance them. While these concerns have receded today, there is still good reason to expect a “flight to safety” toward Treasury debt in the event of a new crisis, and government debt remains important for settling many financial contracts and pricing other assets. So strange as it may sound, there is a serious argument – made by, among others, Nobel prize winner Jean Tirole in his book on financial liquidity — that increased government borrowing would make the financial system more stable and increase access to credit for other borrowers.

Ngram: Debt-to-GDP

See Ngram Viewer

After the initial burst of interest in credit and economic growth in the 1950s (see previous post) there was apparently little concern about the debt that results from the use of credit, until the 1980s.

The US changed from using GNP to using GDP in 1991.  Perhaps this accounts for the orange and green peaks rising a little before the red and blue; and also for the orange and green dying out early, as red and blue rose a good deal higher.

Another detail: The two versions of GNP usage peak at about the same time. And people preferred to use "debt to GNP" without dashes, about twice as much.

With the two versions of GDP usage, the increase got much higher as time went on because the relation between debt and GDP was thought more and more important as time went on.

But "debt to GDP" (no dashes) peaked in 2004 and fell rapidly while "debt-to-GDP" (with dashes) continued to rise, if slowly. It looks like there was a sudden preference for dashes!

Tuesday, September 28, 2021

Ngram: Credit and Economic Growth

See Ngram Viewer

Not really anything on the relation between credit and economic growth until after the second World War.

Seems odd to me, because credit is such a big part of life today.

But it's not like there's 200 years of economic thought behind the notion that credit is good for growth.

Monday, September 27, 2021

The Harry and Gail Show

The men are grotesque. The women have men's roles. (Gaal Dornick is now Gail Dornick, apparently.) And the universe is made entirely of crystal. The show has the feel of one of those creepy Apple commercials. It's what Danny Glover's character said in Lethal Weapon: I'm too old for this shit. 

Oh -- I have the option to "follow" Foundation on Apple Podcasts. Yeah, that's what I want to do, become an Apple Zombie. I'm definitely too old for this shit.

Apple has made it the Harry and Gail Show. Asimov must be turning in the grave. 

I know I am.

Sunday, September 26, 2021

Looks fishy to me

I have to stop messing with The Components of Household Debt for a while. Every time I try to get into it, I get stuck. It's to the point where I get a headache just thinking about it.

It's not that complicated, I know. It's a mental block. I'll come back to it again later. Time for some fun.

It's now called the noncyclical rate of unemployment. So they took the cycles out:

Detail View, from ALFRED: Blue shows the current data. Red, before the change

They changed the series title from "natural" to "noncyclical" rate of unemployment. They must have changed the theory, too, or (as they might say) "refined" it. There can't be cycles in the natural rate! That's not natural!

I dunno what they were thinking. But clearly we are supposed to think that the cycles are separate from the underlying trend. Yeah right -- because the trend exists on its own, independent of and apart from the data. Yeah, right. You know they're too deep in the muck of their own theory when.

You wouldn't know by the Detail View above, that the name has been changed. But you can click the graph to bring up the Full View image, which here includes the text above the graph and shows the "Noncyclical" series title, bold as can be. Or click the link in the caption below the graph to open the ALFRED page.

At FRED, the series title has already been changed. I must have caught them in the act!

From the Notes at ALFRED:

The CBO is doing econ theory now? That's a scary thought. It you've got that much control over policy you ought to leave theory to others and avoid conflict of interest.

Me? There's nothing in it for me except to understand the economy. I don't get paid for this.

Friday, September 24, 2021

It just got worse

This one is no doubt out of sequence. It should have come before mine of 22 and 23 September. But it was unfinished and I kinda skipped over it, hoping for the best.

Now I've changed my mind. The thing is still unfinished, and it seems unfinishable. So I'm saying as much, and getting that out of the way, and then I'm gonna take another look. We'll see what happens.

At FRED, Table D3 (Debt Outstanding by Sector) shows the components of domestic nonfinancial debt. My thought is to add up the components in order to verify that I'm using the right data.

However, I want to go with the FRED Blog and their On household debt of 12 Jan 2015. They assemble household debt from components:

The red line is more complex because it has to be constructed: We need the two components of household debt (consumer credit and mortgages) ...
I looked at the FRED Blog post on my old blog, in a post called "No good answers":

In On household debt at the FRED Blog, for household debt they use "consumer credit" plus "home mortgages" as a measure of household debt. I always use CMDEBT. What's the difference?

Graph #1: Blue is CMDEBT. Red is what the FRED Blog used.

Ooh, that's a fair amount. I was expecting to say "not much" but it is more than I thought. It varies, but my number is in the neighborhood of 9 or 10 percent higher than their number...

That's an unacceptible discrepancy, and one I never did resolve. It resurfaced the other day when I ran across the old FRED Blog post again. But this time I'm prepared: I have Table D3 at the ready.

Using the links in Table D3, I selected the total for domestic nonfinancial debt (line 1). I want him to be a wide blue line, first on the graph. The components I will total up and show as a narrow red line. If the red line runs down the middle of the wide blue line, I'll be happy and say red and blue are equal








14 November 2021

I can finally finish this post. This morning I found the missing dataset:

Households and Nonprofit Organizations; Debt Securities and Loans Excluding One-to-Four-Family Residential Mortgages and Consumer Credit; Liability, Level (BOGZ1FL154104905Q)

Link to the dataset:

Link to updated Graph #1:

Thursday, September 23, 2021

"Another day older and deeper in debt"

So I was looking for the missing $1.6 trillion of household debt -- searching the components of household debt at Google Scholar -- and this text turned up in the search results:

… Figures 11–13 break out the average and median levels of various components of household debt. They show that, while mortgage debt may not drive the proportion of older households with debt, it does drive the level of indebtedness of Boomers. Page 12 …

The various components of household debt, in three graphs. Three components of household debt, maybe, in The impact of rising household debt among older Americans by Z Ebrahimi of the Employee Benefit Research Institute.

Son of a gun. The PDF has graphs of the debt owed each year by people age 50 and over, comparing two cohorts: birth years 1931-1945, and birth years 1946-1964. (The latter group is baby-boomers.) Figures 11-13 show the comparison for these three components of household debt: 

  • Mortgage Debt,
  • Other Home Loans, and
  • Consumer Debt.

Hm...  Zahra Ebrahimi may have solved my problem. Let me do a quick search at FRED.

Son of a bitch! Thank you! (I didn't check it yet, but that's gotta be it.) That's gotta be it. Wow.

The PDF is just full of charts and graphs about debt, so you know I love it. Plus it identifies the missing piece of household debt that I was looking for, so I love-love-love this PDF. In addition to that, it presents evidence that supports and adds to everything I know about our economic problem. For example:

  • A increasing percentage of us old people are in debt. Things are getting worse.
  • We are also deeper in debt. Things are getting worse.
  • Younger old folk are more in debt than older old folk. Things are getting worse.

However, in the conclusion of the paper I ran into a problem. The last sentence just doesn't do it for me:

...these findings point to the importance of financial education and support when it comes to maintaining reasonable debt levels going into retirement and throughout retirement.

I don't need somebody to teach me that debt can get me into trouble. I already know that. Most of us already know it. What I need -- what we need -- is better economic policy.

We need to rely more on cash and less on credit: more on debit cards, for example, and less on credit cards. More on income (and rising pay) and less on borrowing to get by. And businesses need to rely more on equity (and profit) and less on borrowed capital. The arithmetic is simple: When less business revenue goes to pay interest on business loans, more business revenue is available for payroll.


When the Federal Reserve would set their targets for money growth, decades back, they would make the credit-growth target higher than the money-growth target. By design, policy encouraged credit and debt to grow faster than the quantity of money. This sort of policy is the root of the problem.

By design, policy increased the cost of using money by encouraging the reliance on credit rather than income. We don't usually look at it this way, but it's not just interest rates that create financial cost: The greater the amount of debt we owe, the greater the cost of finance. 

And the greater the cost of finance, the less we can do with the money that remains. 

That's the monetary side of policy. The fiscal side is no better. People used to say that debt gets better tax treatment than equity. They still say it. It's still true.

It's convoluted, but business interest expense remains at least partly deductible. Mostly deductible, I want to say. According to the IRS 2020 Publication 535:

For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can generally deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is generally not deductible. See chapter 4 ...

In other words, you can generally deduct all business interest expense. Hey! -- I didn't say it. The IRS did.

Under the heading "Interest Expense Limitation", Publication 535 says

The business interest expense deduction allowed for a tax year is generally limited to the sum of:

  1. Business interest income,
  2. 30% of the adjustable taxable income, and
  3. Floor plan financing interest.

As I wrote in my 2019 evaluation of the interest deduction since the Tax Cuts and Jobs Act of 2017:

... all of the interest on floor plan financing is deductible, plus all but the highest reaches of annual business interest expenditure. If you still have more interest expenses you want to deduct, you can turn to a third option: the limit set by your business interest income.

Remember, you get to add the three limits together to find your maximum interest deduction.

The Thompson Greenspon page explains this third option:

you can use an unlimited amount of business interest expense to offset business interest income

By this one limitation alone, if your business interest expenses are less than or equal to your business interest income, all of those expenses are deductible. This so-called "limitation" is extremely favorable to income from finance. It is just one more example of how policy encourages the growth of finance.

It is just one more example of how policy leads to the growth of debt in the private sector. 


No one says this anymore, but people used to say we have all this debt because consumers were enjoying life too much. We were spending too much, supposedly. It sounds ridiculous, given today's economic situation, but I did hear it said more than once since the 1990s. 

Even back then, it was ridiculous. It's not too much spending that created all the debt. It's too much policy encouraging the growth of finance. The size of our debt is otherwise inexplicable. 

By the way, this same narrative explains the massive Federal debt: Not spending, but the policies that promote private-sector finance and the cost of it.


Finance is great, if you only consider one side of it. But for every dollar of financial income, there is a dollar of financial cost. 

To make matters worse, for every dollar of financial cost there is less than a dollar of financial output. 

The single most important thing we can do to improve our economy is limit the size of finance. This does not mean you borrowed too much. It means we have to change the policies that cause people to end up so deep in debt.

Oh, by the way, the unlimited deduction for corporate interest payments originated in 1918 as a temporary measure.


And that's the kind of "financial education" I think we need, to solve the debt problem and the cascade of economic troubles that flow from it.

Wednesday, September 22, 2021

I wonder what that is, and why

Table D3: Debt Outstanding by Sector at FRED provides a breakdown of the domestic nonfinancial sectors, with links to the datasets. 

Before I get to the point, I have to look at something. Here's a detail from Table D3:

The numbers don't add up. 11 plus 4 is 15, in this case fifteen point two something. Not 16.9. And yet we are told that household debt "includes consumer debt and mortgage loans." We are told "the two components of household debt" are  consumer credit and mortgages -- "the two", as if there is no other. We are told:

about 70% of household debt in our economy was made up of housing-related debt (i.e., mortgage loans and home equity lines of credit). Remaining household debt was made up of student loans, auto loans, credit cards and other consumer debt.

So it's not like they left something out.

But they did leave out $1,616.806 billion dollars from the recent data. And it's not a glitch, not a typo, not a one-time thing. Since 1946, there is always 9 (plus or minus three) percent of  "Total" Household debt (CMDEBT) that is not counted in the Home Mortgage and Consumer Credit components listed in Table D3.

I wonder what it is, and why.

Okay. Now, back to the point I wanted to make...

Tuesday, September 21, 2021

What -- It only works with Federal Debt?


"In 1946, the debt ratio was 108.6 percent. Inflation reduced this ratio about 40 percent within a decade." 
"The model predicts that a moderate inflation of 6 percent could reduce the debt/GDP ratio by 20 percent within 4 years."


In the above quotes, Aizenman and Marion refer to the ratio of Federal debt to GDP.

The excerpt below begins on page 8. I have shortened the quote by omitting their parenthetical data; and again, they refer exclusively to the Federal debt:

A few observations are worth noting.  Inflation yielded the most dramatic reduction in the debt/GDP ratio—and the real value of the debt—in the immediate post-World War II period.  A five-percent inflation increase starting in 1946, for example, would have reduced the debt/GDP ratio from 108.6 percent to 59.3 percent, a decline in the debt ratio of 45 percent.  The sizeable inflation impact is not that surprising.  Not only was there a large debt overhang when the war ended, but inflation was low and debt maturity was high.  Thus there was room to let inflation rise... 

In contrast, inflation would have had little impact on reducing the debt burden in the mid-1970s after the initial oil price shocks.  That period was characterized by a lower debt overhang, inflation was higher, and debt maturities were shorter.  As a result, in 1975 a 5 percent inflation increase would have reduced the debt/GDP ratio from 25.3 percent to 21.9 percent, less than 15 percent.  

The factors they mention do seem important. Note in particular that in 1946 "inflation was low (2.3%)" and that in the mid-1970s "inflation was higher (11 percent in 1974)". So the crux of the matter is not entirely that "inflation would have had little impact on reducing the debt burden in the mid-1970s". In good part, it is that inflation actually did reduce the debt-to-GDP ratio in the 1970s. Not so much the Federal debt, which was then low, but private sector debt, and so that of the whole nonfinancial sector.

Note that the title of Aizenman and Marion's paper is "Using Inflation to Erode the U.S. Public Debt". Their focus is on the use of higher inflation as a tool for the reduction of the debt-to-GDP ratio in our time. This is one reason they point out that it works better when inflation is low than when it is high: because then there is "room to let inflation rise".

As for myself, I wouldn't be caught dead thinking of inflation as a potential tool to reduce the burden of debt. I see inflation not as a tool but as a problem. My focus is not on the use of increased inflation as a tool for the reduction of the debt-to-GDP ratio, but on the actual result of the actual inflation during the years of the Great Inflation, when inflation was high. 

The debt-to-GDP ratio remained low in those years, because of the inflation.

Sunday, September 19, 2021

The Debt-to-GDP Ratio

The ratio of nominals is the better measure of the cost of debt.

The ratio of reals is the better measure of the growth of debt.

Note that the calculation of real debt is not the same as the calculation of real GDP, because debt is a stock and GDP is a flow.

Saturday, September 18, 2021

Quick check

What I said on the 17th, #1:

Nonfinancial Debt increased from $2895.4B to $3290.0B during 1978. The inflation of 1978 inflated the difference, the $394.6B that was added to the accumulation during 1978. The 7.0% inflation makes the $394.6B 107% of what the increase would have been if there had been no inflation. With no inflation that year, the increase in debt would have been $368.8B. Add this to the starting value ($2895.4B) to get a number for what domestic nonfinancial debt would have been if there was no inflation in 1978. The number I get: $3264.2B.

Using FRED's source data as a place to start, I get debt-to-GDP ratios of 1.391 for 1977 and 1.399 for 1978. We could round them both to 1.4.

Using my numbers, figuring zero inflation in 1978, I get 1.391 for 1977 (same as above) and I get a ratio of 1.485 for 1978.

With seven percent inflation in 1978, FRED's number, we got a debt-to-GDP ratio of 1.399. With zero inflation in 1978, we would have got a debt-to-GDP ratio of 1.485.

Rounded to two decimal places, 1.40 versus 1.49. Rounded to one decimal place, 1.4 versus 1.5. The difference: one tenth of a percentage point.


What I said on the 17th, #2:

But putting it down in words, and being specific about the start-of-year accumulation and the during-the-year increase, I realized: At no point do I allow for debt that is being paid down!


What I have to say now: Let's suppose that during 1978, people paid off 10% of the $2895.4 billion starting balance of debt. So then the "low-point" of that balance would have been $2605.86 billion.

But the end-of-year balance was unchanged, at $3290.0 billion. To bring debt up to that number, during 1978 people must have borrowed (3290.0 - 2605.86) or $684.14 billion -- much more than the $394.6 billion I said on the 17th.

I assume all of this new borrowing was done so that the money could be spent: a fair assumption, I think. And I say that all of this spending would have occurred during 1978, at 1978 prices. So the amount of debt that was affected by the inflation of 1978 was $684.14 billion.

Because of the 7.0% inflation in 1978, this $684.14 billion was 107.0% of the debt that would have been required to make the same purchases if there was no inflation during 1978.

$684.14 billion is 107% of $639.38 billion.

If there was no inflation during 1978, and our low-point balance that year was 2605.86 billion, we would have ended the year with a debt accumulation of (2605.86 + 639.38) or $3245.24 billion dollars.

For GDP, as figured in the previous post, the number would have been not $2351.6 billion, but $2197.8 billion.

My corrected real-to-real debt-to-GDP ratio is (3245.24 / 2197.8) or 1.477 rather than the erroneous 1.485 reported in mine of the 17th.

This new debt-to-GDP ratio of reals stands in comparison to the 1.399 ratio of nominals arising from the FRED data for 1978. 

The ratio of reals remains higher than the ratio of nominals.

I don't know how much existing debt was actually paid down during 1978. I said 10%, but I think that's on the high side. I'll be looking into this again.

Friday, September 17, 2021

Simple stock-flow consistency and the debt-to-GDP ratio



Ideally, we would prefer to measure either a stock relative to a stock or a flow divided by a flow.



Going by this annual GDP Deflator, the inflation rate for 1978 was 7.0%, a nice round number. I want to look at that year.

The GDP for 1977 was 2,081.826 billion dollars. The debt, domestic nonfinancial debt for 1977, was 2,895.413 billion. For 1978 GDP was 2,351.599 and debt was 3,290.005.

For debt, I can subtract the 1977 number from the 1978 number to find the amount of debt that was added to the debt accumulation during 1978. For GDP I don't have to do that, because GDP starts every year at zero. Why are they different? It's a "stock vs flow" thing. Debt is a "stock". GDP is a "flow".

In terms of annual data, inflation is a "current-year" phenomenon. It affects current-year transactions, not transactions of prior years. Inflation changes stocks and flows in different ways because flows measure only "current-year" transactions, while stocks measure both current-year and prior-year transactions.

The GDP for 1978 was entirely sold (and mostly produced) in 1978, so the inflation of 1978 inflated all of GDP. But it is different for debt. Only the 1978 increase in debt was inflated by the inflation of 1978. The debt that was existing before the start of 1978 was already existing when the ball dropped at midnight, and the 1978 inflation could not change it. But the inflation of 1977 did inflate the 1977 addition to accumulated debt, and the inflation of 1976 inflated the 1976 addition, and like that for prior years going back to the oldest debt in the accumulation.

For debt, each year's increase -- and only the increase -- is inflated by that same year's inflation. It works for the increase just like it works for GDP, because the increase in debt is a flow, just like GDP is a flow. But the accumulation of debt is a stock, an accumulation created over many years. And the inflation in any one of those years inflated only that one year's contribution to the total. If you have to read this paragraph 20 times before it sticks in your head, do it.

We will look today only at 1978, the debt and GDP for 1978. We have the end-of-year values for 1978. But we also have the start-of-year values. For debt, the start-of-year 1978 value is equal to the end-of-year 1977 value (because debt is a stock). For GDP, the start-of-year 1978 value is zero (because GDP is a flow).

Don't worry about what the numbers are, when you read this. Just look at what I'm doing with them. Pretty soon maybe you will be figuring it the way I do.

GDP went from zero to $2351.6B during 1978. Economists figure inflation affected the whole thing, our nice round 7.0% inflation. So I would say that the $2351.6 B number is 107.0% of what GDP would have been if there was no inflation in 1978. With no inflation that year, GDP would have been 2351.6 divided by 1.07, or $2197.8 B.

Nonfinancial Debt increased from $2895.4B to $3290.0B during 1978. The inflation of 1978 inflated the difference, the $394.6B that was added to the accumulation during 1978. The 7.0% inflation makes the $394.6B 107% of what the increase would have been if there had been no inflation. With no inflation that year, the increase in debt would have been $368.8B. Add this to the starting value ($2895.4B) to get a number for what domestic nonfinancial debt would have been if there was no inflation in 1978. The number I get: $3264.2B.

Using FRED's source data as a place to start, I get debt-to-GDP ratios of 1.391 for 1977 and 1.399 for 1978. We could round them both to 1.4.

Using my numbers, figuring zero inflation in 1978, I get 1.391 for 1977 (same as above) and I get a ratio of 1.485 for 1978.

With seven percent inflation in 1978, FRED's number, we got a debt-to-GDP ratio of 1.399. With zero inflation in 1978, we would have got a debt-to-GDP ratio of 1.485.

Rounded to two decimal places, 1.40 versus 1.49. Rounded to one decimal place, 1.4 versus 1.5. The difference: one tenth of a percentage point. In ten years, it could amount to a whole percentage point increase in the debt-to-GDP ratio. In the 20 years of the Great Inflation, perhaps a 2-point increase in the ratio. In other words, from a so-called stable 1.4 at the beginning of the Great Inflation, the debt-to-GDP ratio might have increased to 2.4 -- a ratio not seen in reality until 2008!

I'm not saying my estimated debt-to-GDP ratio is realistic. Far from it; we only looked at 1978. What I'm saying is: Inflation makes a big difference in the numbers. It looks like what I did -- taking the inflation out of the numbers -- is what made the difference. In the real world, inflation going into the numbers is what made the difference. Inflation was the intruder. Inflation came along, inflation so severe that economists started calling it "great", and it started changing the numbers. In particular, as we have seen here, the inflation changed the debt-to-GDP ratio and changed it severely.

Inflation invalidates the simple debt-to-GDP calculation because debt is a stock and GDP is a flow, and inflation changes stocks and flows in different ways.

Let me make my point clear. I took inflation out of the GDP for one year only: 1978. And I took inflation out of one year's increase in debt for the same year, 1978. But I did not change the number for debt accumulated before 1978. This is the only thing I did that is unique: I assumed that the inflation of 1978 affected only the addition to debt in 1978. Not to the whole of that debt.

The way debt-to-GDP is usually figured, nominal values are used for both debt and GDP. Inflation is in both the numerator and the denominator of the ratio. Therefore, inflation divides itself out of the calculation: out of GDP, and out of the year's increase in debt, and out of the starting balance of debt. With my calculation, I made sure the 1978 starting balance was not adjusted for the 1978 inflation. That's the only difference.

It makes a world of difference.

Tuesday, September 14, 2021

Did I forget to tell you about the Great Inflation?

Many economists say debt was "stable" before the 1980s. If you show them a graph of debt increasing rapidly since the early 1950s, they show you a graph of debt-to-GDP and point out that from the early 1950s to the early 1980s, the graph runs flat at 1.3-to-1 or 1.4-to-1 or maybe 1.5-to-1, but always flat and stable.

What agenda drives this nonsense?

Economists like to use "domestic nonfinancial debt" in their calculations, TCMDODNS at FRED. TCMDODNS includes the debt of governments, consumers, and nonfinancial businesses. It leaves out only the debt of financial business, the fastest growing debt of all. 

No problem. We can do it their way.

Lately I've been changing the "frequency" of the data from quarterly to annual, which gets me back to a 1946 start date, instead of to 1951 -- or back to 1945 if I go fetch the data item myself.

Anyway, here is TCMDODNS since 1946 and during the so-called "stable" era:

Graph #1: Domestic Nonfinancial Debt, 1946-1980

It reminds me of the covid graphs from early 2020: No problem, no problem, it's going up slowly, what's the worry?


We handled covid and debt the same way, pretending they were not problems. And our economy still has not recovered from either.

Take the debt from Graph #1 and show it in a Debt-to-GDP ratio:

Graph #2: Domestic Nonfinancial Debt relative to GDP, 1946-1980

I see first a lightening-bolt of downtrend, hitting bottom at 1.25 in 1951. Then, a persistent and rather rapid increase to 1.41 in 1963 and 1964. After that, it's flaccid -- or "stable", as they say. 

It is still 1.41 at the end there, in 1980, 1.41794. It rounds up to 1.42 this time, but I guess this is why economists say debt was "stable" before 1980, you get almost the same debt-to-GDP in 1980 as in 1963 and 1964.

I can see setting aside the lightening-bolt, because it happened before 1951 and because we can't see what happened before 1946. Myself, I would prefer not to say much about it except "there it is." But from 1951 to 1963 there was a pretty high-powered uptrend. I can see where it starts, and I can see where it ends.

Economists ignore this uptrend and say debt was "stable". I say 1951-1963 was the start of the problem of increasing debt. 

If the economists are right, there was no increase in debt before the 1980s. 

Did I forget to show you Graph #1?


If the economists are right, the 1964-1980 stability of debt was normal and natural. If I am right, it was abnormal and unnatural.

Did I forget to tell you about the Great Inflation?

Friday, September 10, 2021

Debt growth during the Great Inflation

The data is FRED's TCMDODNS (domestic nonfinancial debt) at annual frequency and end-of-period aggregation. FRED's data runs from 1946 to 2020.

I looked at five-year periods. The first runs from 1946 to 1951 (six years, but only five changes in debt. That's why economists call the first year T0, methinks: so that when they get to the sixth year it can be T5.) ... The first period runs from 1946-1951 and shows about a 26% increase in debt over 5 years. That data point marks the left end of the blue line, at 1951:

Graph #1: There is essentially no rapid debt growth after 1990!

"Debt increase" increases from around 30% in 1958, to around 40% in 1970, to around 75% in 1979. That is a helluva lot of increase. And by the way, it is the increase of debt: We're talking about the increase of debt here, in the 1960s and 1970s -- a time, economists tell us, that debt was stable.

The high point (84% in 1986) includes the years 1981 to 1986 and, of course, includes President Reagan's "Morning in America". The sharp downtrend after 1986 is related to the Savings and Loan crisis, which occurred during that time.

The high point just before the Great Recession (2007: 55% increase in 5 years) would be the housing bubble I suppose.

But what I want you to notice is the years before 1980, and the seriously massive increase in debt. These are the years when Debt-to-GDP graphs show two decades or more of no increase. The flat spot on those graphs, and the long increase on Graph #1, both occur during the so-called "Great Inflation". Nominal GDP was going up like crazy because of that inflation. Debt was going up like crazy too, as Graph #1 shows (though not so much because of inflation). And the debt-to-GDP ratio ran flat flat flat:

Graph #2

Those years were great. We could afford our debt. We could afford our debt because inflation was driving income up just about as fast as debt was going up. Just about as fast. That is also the reason we don't see increase from the 1960s to 1980 on the second graph.

Don't let anybody tell you debt wasn't increasing in those years!

Graph #3: Debt-to-GDP was stable while Debt went through the roof, because of the Inflation.

During the Great Inflation, nominal GDP increased as fast as debt. But that does not mean debt was "stable". It is also no coincidence that the so-called stability of Debt-to-GDP occurred during the Great Inflation. The "stability" was a result of the inflation!


Some time back I caught Scott Sumner talking about a household-debt-to-GDP graph. Sumner said:

What do you see? I suppose it’s in the eye of the beholder, but I see three big debt surges: 1952-64, 1984-91, and 2000-08.

Here's some of what I had to say about that:

Sumner sees one debt surge ending in 1964 and another beginning in 1984. Between those dates was the "Great Inflation". The inflation is the reason for what appears to be a flat spot on the graph. The inflation "eroded" debt.

The growth of debt continued apace.

I worked out compound annual growth rates for debt during Sumner's three "surge" periods:

  • 1952-1964: 10.7%
  • 1984-1991: 10.25%
  • 2000-2008: 9.33%

and reported that:

During the famous flat spot of 1965-1983, the comparable rate of debt growth was 9.36%. That's near 90% of the growth rate for the 1952-1964 "debt surge" and it is higher than the growth rate for the third debt surge Sumner identifies.

There was no remission. Debt did not stop growing. It barely slowed.

Prices increased at a compound annual growth rate of 6.6% per year between 1965 and 1983, more than tripling during those years. There was no remission of debt. There was only erosion of debt because of the inflation.


If we think debt grew slowly before 1980 and fast after, it will influence the way policy is designed. If we design policy based on conditions that never existed, it means we don't understand our economy, and our policy will probably not work.

If we fail to understand what actually happened back in those years when the economy was good but then turned bad, we will not understand how to make the economy good again.

I guess we can always just get mad at the government. Kinda fun, isn't it, being "mad as hell". Just like the crazy guy in the movie.

Maybe they'll put that on our gravestone.

Sunday, September 5, 2021

The mirage: Thomas Palley's "Financialization revisited", part two


Key points:

  • People say debt was low and stable until the 1980s when financialization arose and suddenly increased the debt-to-GDP ratio.
  • But inflation affects debt and GDP in ways that reduce the debt-to-GDP ratio. The great inflation severely reduced debt-to-GDP between the mid-1960s and the early 1980s. Paul Volcker and the disinflation of the early 1980s are the true sources of the sudden increase in the ratio after 1980.
  • Financialization did not arise in the 1980s. It has been with us at least since the 1960s. To de-financialize the economy it will be necessary to reverse, revise, or eliminate not only policies created since 1980, but also many policies created before 1980.


"Financialization revisited: the economics and political economy of the vampire squid economy" by Thomas Palley.


This is my one complaint: Thomas Palley cannot see anything before 1980. He refuses to look. For example, he refers to the "era of neoliberalism (1980 – today)". Financialization also began in 1980, he says:

The first stage corresponds to the period 1980 – 2008. The second stage corresponds to 2009 – today.

His definition:

“financialization corresponds to financial neoliberalism which is characterized by the domination of the macro economy and economic policy by financial sector interests.”

This definition, he says,

identifies financialization with the period 1980 – today, which distances it from the history of financial deepening and increased financial sophistication.

Palley expands on that thought in footnote 1:

Graebner (2005) has shown civilization is marked by the increased use and presence of finance. Prompted by that, Sawyer (2013, p.6 cited in Epstein 2015, p.5) asks whether financialization has been on-going throughout most of the history of civilization. This paper would definitively answer “No” to that question.

Definitively: "with absolute certainty."

Palley rejects the idea that financialization may have existed before 1980. With absolute certainty and the shortest of answers, he dismisses the possibility. For Thomas Palley, financialization began in 1980 by definition. End of story.


I can see that Palley defines financialization as having started in 1980. I can see that he is obligated therefore to provide an unequivocal "No" to the question in the footnote.

What I don't see is evidence. I see only insistence.


Palley offers unsatisfactory evidence. "Prior to 1980," he says on page 31, "the domestic non-financial debt-to-GDP ratio was stable" -- and after 1980, it was not. But that is only more or less true:

Graph #1

His statement ties in with the idea that the rising level of debt is evidence of financialization. As he says in the Abstract: "financialization rotates through the economy loading sector balance sheets with debt."

For Palley, rising debt is evidence of financialization. From this, it follows that a low level of debt indicates the absence of financialization. And that, perhaps, is how Palley arrives at the idea that financialization began in 1980. And yet, the FRED graph shows rising debt all through the 1950s.

Palley doesn't consider the 1950s. The number sequence 195 does not even exist in the PDF. Nor does the PDF show a graph of domestic non-financial debt to GDP. Instead, Palley writes:

Table 1 shows sector debt-to-GDP ratios for selected years and provides evidence ...

Table 1 shows seven years of data: 1960, 1969, 1980, 1990, 2001, 2007, and 2019. Seven years scattered across six decades. Palley presents data for seven years out of 60, and calls it evidence. 


Palley's seven data points take us back only to 1960. He provides no evidence regarding the 1950s -- evidence, such as it is. Palley ignores the decade-long increase of debt-to-GDP in the 1950s, and insists that financialization -- rising debt -- did not exist before 1980. 

It just doesn't make sense. The ramping-up of debt in the 1950s contradicts any claim of stability before the 1960s; therefore it contradicts Palley's claim of stability before 1980. 

But was the increase of the 1950s significant, really? 

Yes. Graph #1 has debt-to-GDP at 1.25 in 1951 and 1.4 in 1961. That's a 12% increase in 10 years. If we got a 12% increase every time 10 years went by, in 2021 our debt-to-GDP ratio would have been 2.76, about halfway up the covid increase of 2020, upper right on the graph. You have a calculator. Check my numbers.

The debt-to-GDP increase of the 1950s was most significant. If the 1950s rate of increase had continued, debt today would be little different from the debt we ended up with.


If an increase in domestic non-financial debt-to-GDP is evidence of financialization, then the evidence shows financialization in the 1950s. This definitively contradicts Thomas Palley.

And not only Thomas Palley. In the 2011 paper The real effects of debt, Cecchetti, Mohanty and Zampolli (page 6) write:

It is sufficient, however, to look back at the history of the United States (for which long back data are easily available) to understand how extraordinary the developments over the last 30 years [1980-2010] have been. 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.
The authors generously allow the reader to make an eyeball estimate to confirm that the graph shows debt-to-GDP steady in the 1950s, based on this disproportionately wide graph:

The wider and squatter you make the graph, the more flat, steady, and stable the red line will appear. If you make the graph squat enough, there is zero increase of debt. This does not work with numbers, of course, but you can probably create in readers' minds the impression you want to create, by making your graph more wide and less tall.

Cecchetti's glaringly wide graph provides airquotes-evidence for the assertion that the debt-to-GDP ratio was "steady" from the early 1950s to the mid-1980s. But that doesn't make the assertion true.

Hey, I'm not saying the slope of the line in the 1950s is as steep as the slope after 1980 or the one after 2000. But the red line is not as flat in the 1950s as it is from the mid-1960s to the early 1980s. Around the 1950s it slopes up for a decade and more. Debt-to-GDP was rising. And if increasing debt implies financialization, then there was financialization in the 1950s.

It's not just Palley's paper and Cecchetti's. It's everywhere you look. Some years back in Finance is Not the Economy, Dirk Bezemer & Michael Hudson wrote:

Growth in credit to the real sector [the "non-financial" sector] paralleled growth in nominal U.S. GDP from the 1950s to the mid-1980s — that is, until financialization became pervasive.

It's the same story Palley tells: the same non-financial sector debt; the same debt-to-GDP ratio;  the same three decades; and the same stability before 1980 and financialization after.

Bezemer and Hudson also quote Richard Werner (2005) and Godley and Zezza (2006) making similar observations.


Graph #3 below is another look at the same debt we saw on graph #1 above. But just the debt this time, not debt-to-GDP. And this time I show the debt on a log scale.

On a log scale graph, a straight line at any angle is a constant rate of change. For any two straight lines, the steeper one is increasing faster; the flatter one is increasing more slowly.

On graph #3, the slope of the line -- the steepness of it -- indicates how fast domestic non-financial debt is growing. The steeper the line, the faster the growth of debt. The flatter the line, the slower.

In the 1950s, the line goes up. In the 1960s the slope is almost the same but it goes up a little faster than in the 1950s. In the 1970s the line definitely goes up faster than in the 1960s. So does the debt. 

We didn't see increase in the 1960s and '70s on the first graph. And yet, here it is:

Graph #3: The graph shows accelerating debt growth from
1951 to the mid-80s, and slowing debt growth since.

After the 1980 and 1982 recessions the line runs faster uphill for a few years, but slows in the mid-80s and goes uphill at this slower pace until after the year 2000. These are the years that debt is imagined to be growing very fast according to Palley, according to Bezemer and Hudson, and according to Cecchetti, Mohanty and Zampolli. All of them.

Don't get me wrong. I think they are good economists. I love reading their stuff, and I agree with most everything they say. But they have picked up the idea that debt was "stable" before 1980, when in fact it was not. And they build that error into their arguments and their theories, creating an unsound foundation for their work. As a result they tell us silly things, like financialization started in 1980.

This is only a minor point. Or rather, it would be a minor point, if it wasn't wrong. But it is wrong. And it is a most dangerous thing, to let wrong ideas become embedded in economic thought.


Convince yourself

The level of non-financial debt accelerates upward through the 1950s, '60s, and '70s. It wiggles and writhes in the 1980s. By 1990, the acceleration of debt is a thing of the past, and the level of debt is rising only about as fast as it did in the 1950s. This is not the story economists tell. It is, however, the story the numbers tell.

Click on graph #3 to see it bigger. Print it out, put a straightedge on it, and see for yourself when debt growth was fast, when it was slow, and when the changes occur. Eyeballing this stuff is better than taking somebody's word for it. And, frankly, it is fun.

Again, #3 shows just the debt, not debt-to-GDP. But the underlying perception is that debt grew slowly before 1980, and fast after. And graph #3 is the one that shows how fast debt is growing. Graph #1 doesn't show debt. It shows a ratio.

Notice that graph #3 shows increase from 1951 to 2021. It is uphill all the way. Here is what I find with my straightedge:

  • Domestic non-financial debt shows a straight run in the 1950s, then turns up a bit more just after the 1958 recession
  • A straight run in the 1960s, with an upturn just after the 1970 recession. 
  • A short, straight run, slightly humped, and an upturn after the 1974 recession.
  • A slightly humped run, and an upturn after the 1982 recession.
  • This is the fastest increase in debt so far, after the 1982 recession, but it starts curving down almost immediately. Then there is a straight run from 1990 to 2000 or say to about 2003. Then there is a small up-jog.
  • The straight run of the 1990s is less steep than that of the 1960s. It is about the same as that of the 1950s but to my eye the 1990s increase is slightly slower: Debt growth was slower in the 1990s than in the 1950s and '60s and '70s!
  • Note that when debt is fairly small (as in the 1950s) a significant increase may pass unnoticed. But when debt is already uncomfortably large (as in the 1990s) the same rate of increase seems massive because the numbers are so big and debt is already problematic.
  • Finally, the straight run between the 2009 recession and the covid year runs uphill at the slowest rate on the graph.

Don't take my word for it. To convince yourself, do it yourself. It's important, because everybody says debt was "stable" before 1980, but it wasn't. Before 1980, debt was growing more rapidly with each new decade. It slowed in the mid-80s, and after the 1980s debt increased at a slower rate.

Granted, we're not looking at debt-to-GDP here. We're just looking at debt. But the growth of debt was faster in the 1960s than in the '50s, and faster in the 1970s than in the '60s. After that was there the rapid increase of the 1980s, for a very short time. Debt growth slowed with the Savings and Loan crisis, beginning in the mid-80s. And then, in the 1990s debt growth was slower than debt growth in the 1950s and '60s.

The "debt was stable before 1980" story must be taken with a grain of salt.


The inflation complication

Who tells the story that I tell? Nobody I know. When other people tell the story, it is always non-financial debt relative to GDP. And no matter who tells the story, the story is that debt growth was stable and steady, relative to GDP, until the 1980s -- even though in the 1950s it was not -- and that after 1980 debt growth accelerated:

  • Palley, p.31: "Prior to 1980, the domestic non-financial debt-to-GDP ratio was stable."
  • Mason and Jayadev, p.2: "Between 1950 and 1980, the ratio of total nonfinancial debt to GDP was quite stable around 1.3 ..."
  • Benjamin Friedman, 1981, p.1: "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."
  • Cecchetti, Mohanty and Zampolli, p.6: "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."
  • Bezemer and Hudson: "Growth in credit to the real sector paralleled growth in nominal U.S. GDP from the 1950s to the mid-1980s — that is, until financialization became pervasive."

But no matter who is telling the story, I never find them saying something like this: It might be that debt grew slowly before the 1980s and fast after. But it might be that GDP grew fast before the 1980s and slowly after.

But GDP growth is not the topic of the moment. The topic is the complication that GDP brings into the ratio: The inflation complication: Inflation changes GDP much more than it changes debt. Inflation increases the whole GDP number. But inflation increases only about one-tenth of the debt number, maybe less.

Here is the complication, in two bullet points. Bear with me:

  • Inflation changes prices and values for the current year's transactions. It affects all of GDP because the current year's GDP counts the current year's "final" spending, but does not count the final spending of other years. (Last year's final spending was counted in last year's GDP and was inflated by last year's inflation.)

  • Inflation changes all of GDP, but it changes only a small part of debt. Inflation only affects the current year's purchases on credit. Debt includes the credit purchases from previous years (unless they've been paid off) but inflation doesn't change them. Inflation doesn't change existing debt. (Additions to debt from prior years were inflated when those years were current.)

Here is the important point: Inflation affects all of GDP but only a small part of debt. Therefore, inflation increases the debt number a lot less than it increases the GDP number. This lowers the debt-to-GDP ratio.

Inflation reduces the debt-to-GDP ratio. 

Inflation reduces the debt-to-GDP ratio

The big inflation that I remember is the one called "the Great Inflation" of 1965-1984. If we never had those years of high inflation, the debt-to-GDP ratio for those years would not have been reduced, and graph #1 would have turned out more like this:

Graph #4: Inflation messes with the debt-to-GDP ratio

The debt-to-GDP ratio ran low in the 1960s and '70s because of the long period of severe inflation. Somebody laid an egg.

Graph #5: I want you to picture this whenever you see a graph like #1

Inflation increases the GDP number more than it increases the debt number. Therefore, inflation lowers the debt-to-GDP ratio. This is what we see on Graph #5: not that "debt was stable" in those years, and not that the growth of debt was low, but that the ratio was reduced by inflation.

Can it be that economists are unaware of this? I doubt it. But somehow, they can't even seem to find the increase of the 1950s on their debt-to-GDP graphs. Maybe they should make their graphs taller and not so wide.

Why it looks like debt growth was low before 1980

Graph #3 shows debt rising in the 1950s, rising faster in the 1960s, and rising faster yet in the 1970s. Graph #1 tells a different story.

The increase of the 1950s can be seen in the debt-to-GDP ratio on graph #1, yes. But no comparable increase shows up on that graph in the 1960s and '70s. How can this be?

The answer? Inflation. Inflation reduces the debt-to-GDP ratio. In the 1960s and '70s there was a "Great Inflation" that kept the debt-to-GDP ratio low, and made the ratio look "stable" in the years before 1980.

Funny thing. Everybody knows about the horrific inflation of the 1960s and '70s. But those years of inflation never gets mentioned when people are talking about how wonderfully low and stable debt was in those years.

1980 as a turning point

A big part of Thomas Palley's attention in the PDF is directed to the 1980 start-date of financialization. For Bezemer and Hudson, it is the mid-1980s and "pervasive" financialization. Cecchetti doesn't use the term "financialization", but the data he studies begins in 1980. Mason and Jayadev's paper is a study "in explaining rising debt levels, especially between 1980 and 2000." And Benjamin Friedman followed up on his 1981 paper in 1986, saying "The U.S. economy's nonfinancial debt ratio has risen since 1980 to a level that is extraordinary in comparison with prior historical experience."

Why is 1980 such an important turning point?

Back before 1980, our growing debt wasn't very troubling because inflation was driving income up. But then a wonderful thing happened: Paul Volcker conquered inflation. 

As a result, debt started growing faster than income; faster than GDP. And on the debt-to-GDP graph, you see debt shooting up because of Volcker's success.


The mirage

Thomas Palley attributes the sudden rapid growth of debt after 1980 to financialization. But there was no sudden rapid growth of debt after 1980. The sudden growth of debt is an illusion created by the ending of the Great Inflation.

Wednesday, September 1, 2021

A Great Moderation in the Margin of Safety

So I'm making use of FRED's L.1 Credit Market Debt Outstanding page that I found yesterday.

In its default proportions:

Graph #1: DFS, Debt Securities and Loans, Assets relative to Liabilities.
Talk about a Great Moderation!

The domestic financial sector moderated its reliance on debt as a financial asset (relative to debt as a liability) until it was down almost to zero.

If you look real close, you can see increase since 2008. Apparently we did learn something after all from the disruption of 2007-2010. (You can click the graph to see it bigger if you want. But that won't make the blue line rise more sharply after 2008.)

 Debt securities and loans, apparently not a popular financial asset in the nonfinancial sector either:

Graph #2: DNS, Debt Securities and Loans: Assets relative to Liabilities
This one surprised me. It's not going up.

Interesting, the long and persistent decline that corresponds to the Golden Age. Perhaps that was a time when income from real assets was about as good as income from financial assets. Financialization was on the rise no doubt, but it hadn't yet tipped the scales.

It would seem so:

Graph #3
Blue: NCB, "Debt Security & Loan" Assets as a percent of Total Assets
Red: NCB, "Total Financial Assets" as a percent of Total Assets

Debt securities and loans, one type of financial asset held by Nonfinancial Corporate Business, shows persistent decline (blue) except during the 1979-1994 period.

However, total financial assets held by Nonfinancial Corporate Business (red) shows persistent increase from the late 1940s to the year 2000. (Financialization was occurring all through that time, though indeed faster after 1982. But financialization did not suddenly stop in 2000 when the red line stopped going up. No. Financialization kept on going. The red line stopped going up because financialization is unsustainable, as Thomas Palley says.)

The decline of the blue line and rise of the red suggests that since the late 1950s, possibly before, financial innovation was actively inventing new financial assets that were more appealing than debt securities and loans.

The fact that the red line actually turned downward and did not resume increase after the 2001 recession was a warning of impending doom. The earliest warning I've seen of it.

Okay. Given that "debt security and loan" assets have been shrinking while "total financial assets" have been rising (as graph #3 shows) for nonfinancial corporate business, maybe something similar has been happening in the domestic financial sector (graph #1) so that their total financial assets are not shrinking relative to their financial liabilities. I need one more graph:

Graph #4: DFS, Total Financial Assets relative to "Debt Security and Loan" Liabilities

Hey, I'm no economist. But it sure looks to me like the boys in finance reduced the margin of safety, lowering their assets per dollar of liability to gain -- I dunno what -- additional flexibility in their wheelings and dealings, maybe. I dunno why they did it, but I can certainly see that they did it. They reduced the margin of safety, looked at the result, said "so far, so good," and reduced the margin of safety some more. They started in 1947 and they kept at it until one day, 60 years later, when they looked at the result and said "uh-oh."

And then we had a financial crisis.


Oh, I'm sorry: The boys and girls in finance reduced the margin of safety, yadda yadda.