A trend, not a surge

Previously:

Debt growth and NGDP growth were both on the increase. NGDP growth died out when Volcker started fiddling. Debt growth died out a few years later, perhaps because the slower-growing NGDP could no longer support the still rapidly-growing debt. But it was the fiddling -- and the decline of NGDP growth -- that caused the 1981-1986 increase in Debt-to-GDP.  There is no doubt.

This time:

I don't see a surge in the mid-1980s, nor a series of surges leading up to it. I see a trend, a trend of increasing inflation, interrupted repeatedly by recession. There was no "surge" of debt during the five years from 1982 to 1987. There was a trend of inflationary increase that goes back to the 1960s. 

It was not surging growth of debt, but rapid decline of inflation and of nominal GDP growth that caused the increase in the Debt-to-GDP ratio after 1981.

 
Look again at my "Annual Growth Rates, Debt and NGDP" graph:

Graph #1

The blue line (debt) rises far above the orange line (GDP) in three places: once, after the 1982 recession; again, after the 2001 recession; and a third time, in 2020. After 2001 we had the housing bubble. In 2020 we had the pandemic. Debt was surging both times: The rate of increase was extremely steep both times, more than in the run-up to the 1985 peak. And both times, before the surge, there was a decade or more when debt growth was unusually low. That was not the case in the years before the 1985 peak.

I have a good deal of trouble with the notion that the debt increase of the 1980s was a "surge". Here is the same graph again, with the orange line removed. Focus on the debt:

Graph #2

At the high point, 1985, debt reaches a 16.38% increase. I made the line thicker and the color brighter to emphasize the peak. 

This peak is the 1980s "debt surge" that people talk about. Richard Vague, for example, refers to

a simultaneous debt surge in both private and public debt that by 1987 had resulted in 19 percent private debt to GDP growth and 41 percent government debt to GDP growth in five years.

There was no "surge" during the five years from 1982 to 1987. After the 1982 recession, there was economic recovery -- "Morning in America" -- and there was a cyclical increase of debt, just as there was after the 1974 recession and the 1970 recession and the near-recession of 1966. To identify the biggest of the four as a "surge" is to mischaracterize the increase and understate the problem.

A surge is rapid, but brief. A trend develops gradually over an extended time period. The later stages of a trend-of-increase may be mistaken for a surge, especially if the business cycle moves from recession to recovery and expansion. That's what happened here. 

There was a trend of increase, an inflationary trend, interrupted repeatedly by recession. The recessions were created by policy in an effort to halt the trend of increasing inflation. Ironically, the recessions lead some people to ignore the inflationary trend and identify the increase as a surge.

Does it matter? Yes. If incorrect analysis of the problem leads to incorrect solutions, it matters a great deal.

The increase of debt after 1981 was a big one, certainly. But as the next graph shows, that increase came last in a series of increasingly larger steps. Notice also that the low points rise above the 5% level between 1965 and 1989:

Graph #3

Not only were the high points rising, as you would expect with a surge. But the low points were rising also. It wasn't a surge. It was a lift-off. Something caused increase not only in the 1985 debt peak, but a whole series of peaks -- and not only the peaks, but also the lows. That "something" was inflation.

Where other people might see three surges between 1970 and the late '80s, I see cyclical behavior and a trend of inflationary increase. Those three peaks do seem to be bigger than all the rest, except for the housing surge and the pandemic surge. But notice how wide these three peaks are, as compared to the surges of 2003-2004 and 2019-2020. Wide peaks take time to rise. The 1985 peak grew from a low in 1982, and it slowed near the top. Narrow peaks are fast-developing. Narrow peaks are surges.

Through the 1950s, debt growth ran lows of around 5% annual and highs between 7 and 8%. There is no particular reason to expect these early increases to be so small, except that we used little credit in those years. There is, however, a reason to expect bigger increases after the mid-60s: inflation. If higher prices are associated with a larger quantity of money, we should expect to see also a comparably larger quantity of credit being used. The graph shows that more credit was indeed being used during the great inflation.

And if inflation is driven not so much by "printing" money as by borrowing it, then in an inflationary time we might expect to see a more than comparably larger increase in credit use. I didn't do the math, but the graph probably shows this as well.

But in any case, I don't see a surge in the mid-1980s, and I don't see a series of surges leading up to it. I see a trend:

Graph #4

Call it an inflationary trend. I see a trend of increase that goes back to the mid-1960s.

I can take that trend and flatten it out. The red line minus itself gives me a red line at the zero level. The 1965-1986 blue, minus the red, moves the blue line down to fit the zero-level red:

Graph #5

I omitted the thin blue line that shows the early years and the late years. I want to add it back in now. But notice graph #3 in the 1950s: The changes in debt as a rule don't drop below the 5% level. The same again in the 1990s: not much activity below the 5% level. It's different after 2008, because times were so tough then. But as a rule, 5% is the bottom.

So I want to take graph #5 and slide the red and blue lines "up" until the low at the start of the 1970 recession just about touches the 5% level. This will bring the last low point on #5 up to the same level, and the low at 1980-81. The blue line in 1982 will drop a little below the 5% level, because the '82 recession was a tough one.

And then I'll put the thin blue line back on the graph:

Graph #6

There. We still have moderate activity in the 1950s. We still have low activity, along with two surges, in the 1990s and after. And we still have the inflationary era, but now without the inflation.

From start to finish now, we have a mostly-reliable "bottom" at the 5% level. And we have, perhaps surprisingly, a ceiling at the 10% level, broken only by the surges that came after the 1990s.

There was no debt surge in the 1980s. There was only an inflationary trend, which we "detrended" out of the data.

There was no debt surge in the 1980s.
There was no debt surge in the 1980s.
There was no debt surge in the 1980s.