Estimating Household Debt Service back to 1947

The other day I showed a graph of the components of household debt service, the interest and the principal:

Graph #1: Components of Household Debt Service: Principal (blue) and Interest (red) as % of DPI

The data on interest paid goes back to the 1940s. (Same for disposable income and household debt.) But the debt service data only goes back to 1980, so that's as far back as the blue line can go. I sure would like to see the behavior of that blue line in the earlier years.

I wonder if you could use interest cost and debt-to-income in a regression, to find an equation that simulates the debt service data since 1980, and then use that equation to estimate debt service back to the 1940s. I know: It's not as good as actually having the data would be. But it might be better than not having the data.

I must have been out the day they taught regression in school. The only thing I know about it is, it's way more complex and sophisticated than I am. So if you want to grab this idea and run with it, that would be great. Meanwhile, I do know how to find the "Data Analysis" window in Excel, click on "Regression", and plug numbers in. Let's see where that gets us.

At FRED I picked out some relevant data and saved it as my Early Years Debt Service Dataset #1.

When I think on TDSP, household debt service, I think it has to be related to the rate of interest and the level of debt. For the interest rate I'll figure the "effective" rate: household interest paid, as a percent of household debt. For the level of debt I'll go with household debt relative to disposable personal income, the same context used for TDSP.

From Jim Frost at Statistics by Jim:

Use regression analysis to describe the relationships between a set of independent variables and the dependent variable. Regression analysis produces a regression equation where the coefficients represent the relationship between each independent variable and the dependent variable. You can also use the equation to make predictions.

Sounds good. I'm thinkin I want to "predict" values for debt service:

• first, to see if my "independent variables" give me good estimates since 1980;
• then, to create estimates for the years before 1980.

Debt-to-income and the interest rate are my "independent" variables. They go in Excel's "X value" range as inputs for the regression. The FRED Debt Service data (which begins with 1980) goes in the "Y value" range. My "prediction" -- my calculated values based on the regression results -- should be a pretty good match to the Debt Service data. That's my plan so far.

//

Okay, I got results from Excel. The regression gave me coefficients I can multiply by the input values, giving me numbers I can compare to the original TDSP data. And since both the interest rate values and the debt-to-income values are available back to the 1940s, my estimate of debt service can be calculated back that far as well:

Graph #2: Regressing Household Debt and Interest to Approximate Debt Service

Not a bad match between red and blue. The biggest gap between red and blue is about a one percentage point difference near the value 12, so my numbers are off by less than one in 12, less than 10%. Excel's "Summary Output" gives me an R Squared of 0.844, if that's important for a regression. And my P-Values are suspiciously low (but I don't know what that means).

Let me be the first to say it: Past results are no guarantee of more remote past performance. But let me also say I'll use this estimate when I have a use for it, as a way to test whether it seems to make sense.

I did find an old article, "Recent Financial Behavior of Households" by Charles Luckett, from the Federal Reserve Bulletin of June 1980 (vol.66). Here's Luckett's Figure 6:

Graph #3: Luckett's 6th

His numbers are far higher than FRED's. The highest point in the FRED data is 13.22% of DPI in 2007. The low edge of Luckett's plot window is the 14% level!

I copied some of his gray background down (to duplicate his line spacing), down to the 6% level. Here (blue) is my result for 1973-1981, overlaid on Luckett' graph:

Graph #4: Comparison 1973-1980

The blue line going back to 1973  is from my calculation based on the regression. The short green line, down around the 10% level, shows FRED's Debt Service data for 1980 and '81. The black lines show Luckett's numbers. Mine are low. But so are FRED's.

Eh. I added 12 to all my numbers to bring them up near Luckett's. Adding 12 to the blue line gives me the double red line, which looks very much like a smoothed path for Luckett's numbers. Mine go a little low where his go low in 1974 and '75. Mine go a little high where his go high in 1978 and '79. The general trend of mine looks about right, assuming Luckett's numbers are right. That's at least a little bit interesting.

But why are my numbers so much lower than his?

//

Another old article: "Household debt burden: how heavy is it?" by Carl J Palash, from 1979. Here is Chart 1:

Graph #5: Carl Palash's First

I'll take the lower chart there, enlarge it, and overlay my numbers on it as before. But I can see already that these numbers also are far higher than mine. The overlay:

Graph #6: Comparison 1960-1979

Again, the blue line is my calculation. The red this time is twice the blue. Multiplication gives my red line more variation than the blue has, relative to Palash's, making the path of my data somewhat more similar in shape to the path of his black line: We both show flatness for a decade beginning in the mid-1960s; we both show increase before the flatness and after; and after 1975 our increases run parallel. But all of this is based on my calculated numbers being doubled.

Again I have to wonder why my numbers are so low. But so far, the only answer I have is that the numbers I was trying to duplicate are low, FRED's household debt service numbers.

Doesn't really answer the question.

//

Based on the two comparisons, I can say that my numbers show less variation than Luckett's or Palash's, and that mine and FRED's are a lot lower. I don't know why the old numbers are so high and the recent ones are so low. But in another article, "Recent Changes to a Measure of U.S. Household Debt Service" by Dynan, Johnson, and Pence, from 2003, I found this graph, showing the revised data lower than the older vintage:

Graph #7

The "Financial Obligations Ratio" they show here does go up above 18% of DPI, in the neighborhood of the older data. But the Financial Obligations Ratio includes other things in addition to Debt Service. And anyway in the FRED data today, the corresponding peak comes in at less than 18%. The numbers are still going down.

Factors presented in the article which would tend to lower the Debt Service Ratio include

• the "time to maturity" of loans, because "longer-maturity loans have lower payments"
• the failure to make payments: "According to the SCF, at any given time, payments are not being made on one-quarter to one-half of student loans. To account for the deferral of student loans, we adjusted the stock of loans to reflect only those loans on which payments are currently being made."
• mis-estimating interest rates: "we replaced the previously used proxies with [the average interest rate offered by banks on 48-month new car loans], which is 3 to 4 percentage points lower than the proxies we had been using."

One factor that would seem to raise the Debt service Ratio is

• broadening the measurement of debt: "Sallie Mae's student loans since 1977 were added to the Federal Reserve's G.19 consumer credit statistics beginning with the October 2003 release. Their inclusion did not materially change the growth rate of consumer credit, but it has raised the level an average of 2 1/2 percent since 1977."

"On net," they write, "changes to the source data led to a downward revision to the DSR of about 1½ percentage points from 1980 through 2002..." And "the lion's share of this revision [was due to] the lengthening of our assumptions about remaining maturity on these loans."

Even so, the Debt Service Ratio today is half or less than half what it was back when that data was still called the Debt Service Burden. That's a very large decrease, especially given the very large increase in outstanding debt which occurred during that same period.

Whatever. I got the result I got, and that's what I got. Do with it what you will.

by ArtS	EDSR47 dataset	Regression Result
Year	TDSP (% of DPI)	My Estimate
1947		5.696
1948		5.887
1949		6.118
1950		6.276
1951		6.337
1952		6.502
1953		6.739
1954		6.899
1955		7.071
1956		7.289
1957		7.429
1958		7.543
1959		7.688
1960		7.938
1961		8.023
1962		8.134
1963		8.333
1964		8.423
1965		8.519
1966		8.519
1967		8.449
1968		8.467
1969		8.582
1970		8.508
1971		8.521
1972		8.678
1973		8.796
1974		8.887
1975		8.750
1976		8.875
1977		9.152
1978		9.506
1979		9.921
1980	10.478	10.312
1981	10.348	10.559
1982	10.435	10.934
1983	10.383	11.021
1984	10.671	11.185
1985	11.463	11.483
1986	11.883	11.620
1987	11.936	11.522
1988	11.687	11.355
1989	11.709	11.510
1990	11.609	11.509
1991	11.362	11.400
1992	10.633	10.948
1993	10.387	10.668
1994	10.532	10.623
1995	11.095	10.963
1996	11.300	11.076
1997	11.321	11.179
1998	11.170	11.124
1999	11.455	11.255
2000	11.766	11.506
2001	12.373	11.612
2002	12.369	11.390
2003	12.246	11.436
2004	12.206	11.638
2005	12.583	12.424
2006	12.737	13.027
2007	13.033	13.495
2008	12.907	13.157
2009	12.331	12.663
2010	11.289	11.878
2011	10.622	11.076
2012	10.063	10.453
2013	10.113	10.362
2014	9.905	10.044
2015	9.927	9.896
2016	9.998	9.864
2017	9.934	9.827
2018	9.717	9.758

That old Sumner post again

Sumner's 2012 post at Money Illusion comes up again: Debt surges don’t cause recessions. This time, the comment by Woj:

The use of credit (debt) instead of money (income + savings) has an extra cost associated with the interest payments. As the aggregate amount of debt and interest rises, the percentage of income used to pay interest costs or pay down debt also rises, lowering the amount available for consumption/investment.

Sumner replied:

Woj, You said;

“As the aggregate amount of debt and interest rises, the percentage of income used to pay interest costs or pay down debt also rises, lowering the amount available for consumption/investment.”

This is simply factually wrong. Every debt payment is money received by someone else.

See what Sumner does here? He lets the "circular flow" run just long enough to make me think the money I pay against my debt is income to my creditor.^[1] Note that he doesn't count anything else that happens during that moment of time, the other lending and spending and earning and repayment of debt. And he doesn't call the payment "income" to the creditor (because it isn't income to the creditor. He's not stupid). But he wants me to think it is income.^[2][3]

That would be wrong. As PositiveMoney points out,

When you take out a loan, new money is created... When you pay down your debts, the money that leaves your bank account doesn’t go to anyone else – it just disappears. This is because loan repayments are just the opposite process to money creation...

Sumner says every debt payment is "money received by someone else." Well of course they receive it, but they can't spend it. They have to do their accounting.

They use the money to offset the money they created by lending it to you. The one cancels the other; the payment cancels the debt. Money created by fractional reserve lending is destroyed by repayment of debt. Not only do you not owe that money anymore; it doesn't exist anymore. Nobody gets to spend it. Nor is it income. Sumner is engaging in pure deceptive bullshit.


From Truthout: Government Debt and Deficits Are Not the Problem. Private Debt Is. By Michael Hudson, March 2013:

The problem is private debt... The problem is the carrying charges on this private debt, and the fact that debt service is eating into personal income – and also business income – to deflate the economy.

Michael Hudson says the same that Woj says, and PositiveMoney, and me. And so do Karen Dynan, Kathleen Johnson, and Karen Pence, of the Federal Reserve Board's Division of Research and Statistics, in "Recent Changes to a Measure of U.S. Household Debt Service" from 2003:

When a large share of household income is devoted to debt repayment, households have fewer funds available to purchase goods and services.

What was it Sumner said? "This is simply factually wrong."

I don't like to use the word liar but I think in Sumner's case it might be appropriate.


From The Private Debt Crisis by Richard Vague, at naked capitalism, September 2016:

When private debt is high, consumers and businesses have to divert an increased portion of their income to paying interest and principal on that debt—and they spend and invest less as a result. That’s a very real part of what’s weighing on economic growth. After private debt reaches these high levels, it suppresses demand.

Richard Vague says the same that Woj says, and Michael Hudson, and PositiveMoney, and Dynan and Johnson and Pence, and me.

If we're wrong, Sumner, convince me of it. Don't bullshit me. And hey, I don't jump to conclusions but you are slowing me down: I've been thinking about what you said for seven years, thinkin maybe you're right and I have things wrong. But you are the one who is wrong, Scott Sumner.

Stop wasting my time.


NOTES:
1. The time lag between making a payment and receiving it may be near zero today. This was not always so. During the historical period when the financial sector grew large enough to become a source of economic problems, computers were still only toys. See Float (money supply) at Wikipedia.

2. Sumner lets the "circular flow" run a little long, so that my most recent payment on my debt has time to be received by the lender and we can imagine it to be the lender's income. But Sumner doesn't count anything else that happens during that extra moment of time. If, for example, the overall trend is that debt grows faster than income (as from 1947 to 2008), then a preponderance of the annual data will show evidence of that trend. So will a preponderance of the quarterly data.

Now, you can take one of those quarters and extend it just long enough for your lender to receive your most recent payment on your debt, then immediately stop the clock; and this is just what Sumner has done. But what goes into the extended quarter must come out of the following quarter. So in the big picture, such manipulations change nothing.

If you take the whole history from 1947 to 2008 and break it down to a sequence of brief moments each just as long as Sumner's extension, in the preponderance of that data you will still find evidence of the same trend that is visible in the annual and quarterly data and in the data as a whole -- unless, like Sumner, you look at only one of those brief moments. Sumner's manipulation changes nothing.

This has been eating at my brain since 2012. I finally have an answer.

3. The interest portion of my payment is income to the lender; but the principal portion is not. However, the interest is income to the financial sector, not to the productive sector of the economy.

Mollifying America

I'm in the middle of something important here -- drinking coffee and making graphs -- but I have to interrupt myself because Old Mother Google is at it again. "It’s almost Drug Take Back Day":

They offer social insights like that, far too often. If they're gonna do that, they need a button on their search page so you can send them a message: WHAT ARE YOU, MY MOTHER? And if it's so damned important, why do we have to wait four days to take the stuff back? It's all nonsense and gibberish dressed up like little red riding hood.

They seem to want to play the Walter Cronkite role, mollifying America with their little one-liners.

I'm not mollified. I'm horrified. And I think it's creepy.

You'll probably focus on today's creepy message and say It's good they're concerned about drugs. Sure. Whatever. But shouldn't it be "It’s almost Drug Take-Back Day", with a hyphen in there? You know, a dash...?

I'm not complaining that they're concerned about drugs. I'm complaining that they are wearing it on their sleeve. Uh, excuse me a moment, I have to check something...

Yeah, that. "On the sleeve".

And yes, it was google I checked with, the one I'm complaining about, about the "on the sleeve" thing. That's part of the irony of what's going on here.

The other part of the irony is that the google search page DOES NOT HAVE beliefs, values, emotions, or sentiments. I'm just dealing with the search page, not with the people who work at google. Yes, I'm sure the people who work there have beliefs and values and emotions and all that shit. That's not the point.

I'm sure there is a whole department at google where it's their job to deal with Beliefs and Emotions and Values and Sentiments -- the BEVS department.  But what that means is, it's their job. The shit we see on our screen, those one-line BEVS, it's not from the heart. It's just their job.

Sure: Lots of those people care about lots of those issues. But not ALL of them care about ALL of those issues. So why do they expect ME to care about all of those issues? And why do you object so strongly when I happen to complain about one of their one-liners?

Me? I don't even use the word "issues". STOP PUTTING THAT SHIT ON MY SCREEN. Go to church and pray about it. Or donate money. Or volunteer your time. Do what the fuck you want, but stop putting that shit on my screen.

//

See? It wasn't about drugs, was it.

Establishing Parameters for Debt

Originally posted 18 November 2016 at NAE.

How much economic growth can we get by adding a dollar to Total Debt? Not much:

Graph #1: Change in GDP relative to Change in Debt, and the Hodrick-Prescott Trend Line

Not much, but it does vary. The high point was back in the 1960s and '70s. On average, we added 60 to 70 cents to GDP for every dollar we added to TCMDO debt. That's twice as good as we've done since the mid-80s, as the red line shows. (I'm only looking at the "old normal" economy, before the crisis.)

We can say the 1960s and '70s show the best performance, the highest level reached by the red line on Graph #1. But after about 1968, that line is already going downhill. Economic performance deteriorated in the 1970s. So let's just say the 1960s, then, and forget the 1970s.

But the "Great Inflation" started in 1965. So forget the second half of the 1960s. Let's say that the best performance on Graph #1 is from 1960 to 1964. In those years we gained 60 cents of GDP for every new dollar of debt. And the trend in those years is upward, not downward, and not turning downward.


Why does the ratio on Graph #1 vary? It varies because debt is a drag on growth. Having debt is a drag on growth. It's adding debt that boosts growth. But adding debt increases the debt we have. It's a conundrum.

We need to keep total accumulated debt at the level that gives the most GDP for each new dollar of debt.

Graph #2: Total (Public and Private) Debt as a Multiple of GDP

In the years of its best performance, 1960 to 1964, total debt was about one and a half times the size of GDP. In all of the 1960s and '70s, really, where the red line runs high on Graph #1, total debt was about one and a half times the size of GDP.

Together these graphs tell me that we had the best economic performance when total debt was about 1.5 times the size of GDP. Each new dollar of debt added the most to GDP in the years when total debt was half again the size of GDP.

That's not just the Federal debt, by the way. These graphs show the Federal debt and everyone else's debt added together.


There is something to be said about public versus private debt. But we can't see it on the above graphs. We have to separate public debt from private, and compare the one to the other. This next graph takes the debt we've been looking at (TCMDO at FRED) and separates the Federal debt from all the rest, from the debt other than Federal. Call this other debt "non-Federal". The graph shows non-Federal debt relative to Federal:

Graph #3: Non-Federal Debt as a Multiple of the Federal Debt

In the years 1960 to 1964, our years of best economic performance, non-Federal debt runs between two and three times the size of Federal debt. After 1964, there was never again so little non-Federal debt.


We get the most output from an increase in debt when we have about $1.50 of debt for every dollar of GDP. And the best distribution of that debt is to have non-Federal debt between two and three times the size of Federal debt. So, for one dollar of GDP we want 40 to 50 cents of Federal debt and $1.00 to $1.10 of debt other than Federal. These are ballpark targets for maximizing economic growth.

Graph #4: Targets for Federal and Non-Federal Debt-to-GDP Ratios

Debt Service = Interest + Principal

Red: the interest portion of Household Debt Service
Blue: the repayment-of-principal portion of Household Debt Service (since 1980)

Graph #1: Components of Household Debt Service: Principal (blue) and Interest (red) as % of DPI

Wow.

Just ask Fred

"The larger the debt, the larger the burden,
as households need to pay
more interest on a larger principal."

Too many people talk about interest rate increases. Too few talk about increases in the size of accumulated debt as a private-sector cost. Thanks, Fred.

To Jackie, Deanna, Will, Jan, Randall, Jon and Kevin

In Google, I asked why was the economy slow in the 1970s, to see what people think.

Other people asked...

Let me repeat that one

"The economy of the seventies was terrible. Dubbed with an oil embargo and a mix of other problems led the American nation to an almost depression state. The energy shortage was the start followed by high unemployment and inflation." - US History: Economics of the 1970's

OMG.

1. I never saw the word "dubbed" used that way and I don't think it's right.
2. "a mix of other problems" -- That's not an explanation.
3. "an almost depression state" What?? I was there. Yes, New York City almost went bankrupt. And yes, farmers were ploughing their crop into the soil to reduce their costs. But the main problem that policy was addressing was inflation, and policymakers addressed it by creating recessions, to reduce inflation by slowing the economy.
4. "The energy shortage was the start". No, it wasn't the start.
5. "The energy shortage was the start followed by high unemployment and inflation." No. The rising price of oil was a response to inflation. The high unemployment was a result of the anti-inflation policy.


Looks like the bit I quoted was part of a high school history project. Maybe I was too hard on them. For example, item 2: "a mix of other problems". I've used non-explanations like that, myself. And sometimes you have to look at them a long time (in my case, years) before you can see how empty they are.

So, to Jackie, Deanna, Will, Jan, Randall, Jon and Kevin, I say I'm glad you're interested in economics. Keep at it. Your explanations will improve. Oh, and don't take anybody's word for anything. That'll come back to bite you, every time.

But to their teacher I have to say What the hell! Don't teach people that the problem started with oil. And don't teach people that the economy was slow when, recessions aside, growth in the 1970s was as good as it was in the '60s -- and the recessions were created on purpose by policy as a way to reduce inflation.

And to Google: To the question What were the key economic problems of the 1970s?, you respond with "an oil embargo and a mix of other problems"? -- Really?

The key economic problem then, as now, was our failure to understand the economy.