How economists think of debt

Benjamin Friedman, "Debt and Economic Activity in the United States", 1981. Yeah, I haven't yet set this 20-page paper aside.

Footnote 3:

The debt ratio peak during 1918-78 occurred in 1933, the trough year of the depression.

So how come, in 1981, we could look at debt as far back as 1918 but now, today, at FRED, data on US debt goes back only to the latter 1940s?

Why? Because data is available, but definitions have changed and the old-definition numbers don't match the new-definition numbers. That's the story, anyway.

Really? I'd rather see a graph that goes back to 1918 and needs two lines to show the debt, two lines that run close but don't match, rather than a graph with only one line where debt only goes back to 1946. FRED is justifiably proud of the 816,000 US and international time series they offer. But can't they add one series for older debt? What, is 816,001 an unlucky number?

"In addition," Friedman adds in the footnote -- and here is where we discover how an economist sees debt:

much of the household and business debt nominally outstanding during the depression was of questionable value.

The debt was "of questionable value".

Assets have value. Friedman sees debt as an asset: a source of income to the lender. Economists don't think of debt as a cost. This is the reason "nobody saw it coming" -- it being the financial crisis of 2008.

The debt was of questionable "value" because it had become unpayable. The moment it becomes unpayable is the moment the crisis arises. But no one sees a problem until they're not receiving the payments, because no one is looking at debt as a liability. This is willful blindness. 

Oh, they'll say over and over again that one person's liability is another person's asset, and that it all nets out to zero and debt is not a problem. But as long as the asset earnings arrive on schedule, no one stops to consider the liability side. And even when they do stop, as in 2007-08 when earnings became worrisome, it was not the liabilities that got attention, but the "toxic assets".

If they were considering debt as a cost, they could have seen the problem developing since the 1960s, just as Minsky did.