Regular readers of this blog will remember some interesting discussions here a few months ago of the dynamics of public debt. The point — which is taught in any graduate macro course, but seldom emphasized in public debates — is that the change in debt-GDP ratios over time depends not just on government deficits or surpluses, but also on growth, inflation and interest rates. In particular, for the US, the UK and many other countries [1], the decline in debt/GDP in the postwar decades is entirely due to growth rates in excess of interest rates, with primary surpluses contributing nothing or less than nothing.
An obvious extension of that discussion is the question, What about private debt? After all, the rise in private leverage over the past few decades is even more dramatic than the rise in public leverage:
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| Sectoral Debt as Share of GDP, 1929-2010. Click to embiggen. |
So what if you apply the same kind of decomposition to private debt that is done for public debt, and ask how much of the change in sector’s debt in a given period is due to changes in borrowing behavior, and how much is due to changes in interest rates, growth rates, and or inflation? Surprisingly, no one seems to have done this. So Arjun Jayadev and I decided to try it, for household debt specifically, with (IMO) some very interesting results. A preliminary draft of our paper is here.
I’ll have more on the content shortly, but if you’re interested please take a look at the paper. We’re in the process of revising it now, and any comments/questions/thoughts on making it better would be most welcome.
"embiggen"
🙂
Joshua it is, then. Sir: "growing out of debt" is not possible at this stage: not because the debt is too great, but because debt suppresses growth.
Further: We did not and could not "grow out of debt" even in the 1970s (with all that inflation) because the economy and the debt kept growing all the while. This is what makes depressions effective: that the growth of debt stops. And this is a guide to effective policy.
Gotta go, gotta go read a PDF now.
Very interesting. Thanks
Just had time to skim and read the conclusions. Fascinating. My only thought for the moment is not very substantive, just that I really, really hate that term "financial repression," those poor helpless creditors being crushed under the heels of…oh, wait…
This paper just reinforces that. Even when households are "responsibly" controlling their borrowing, high real interests rates keep them in debt, or in further debt…
Even when households are "responsibly" controlling their borrowing, high real interests rates keep them in debt, or in further debt…
Exactly. One thing I would like to bring out more is the parallel with the more familiar idea that sovereign borrowers that face exogenous interest rate increases can fall into debt traps.
Read your paper. I can't believe nobody did this already. I'm adding "but what about the denominator?" to my toolkit for confounding economists (the best is still "but isn't everything endogenous?")
Have you seen Steve Keen's stuff? You guys are both into Fisher, Schumpeter, and Marx.
Is it the case that there's only growth when debt (public+private) is increasing? I can't get my head around that.
Chris-
I couldn't believe it either, but Arjun and I have searched pretty exhaustively, and asked a lot of people who ought to know, and it seems to be the case.
Yes, Steve Keen is working some of the same territory. I think he may be onto something important, but I'm afraid I haven't quite been able to wrap my head around it either.
One of these days — maybe even tomorrow — I'll do a long post or two on the substance of the paper and hopefully we can get a good conversation going.
@Chrismealy: "Is it the case that there's only growth when debt (public+private) is increasing? I can't get my head around that."
@JW Mason "I couldn't believe it either, but Arjun and I have searched pretty exhaustively, and asked a lot of people who ought to know, and it seems to be the case."
Yes but the causation in somewhat uncertain. Is the new money causing growth, or does growth give private lenders the incentive to lend, and force public deficits (accommodation) to avoid downturns/getting voted out of office (or for the Fed, making it obvious that you really don't give a shit about the dual mandate)?
Steve — CAUSATION? To have growth you need more spending. People spend money, earned or borrowed. It all moves together, growth and money and debt. The trick is to get growth.
The excerpts you picked, those same two excerpts drew my eye as well. In reply to them I would say THIS IS WHAT WE DO. We think we need credit for growth. That is why there's only growth when debt is increasing. Policy makes it so.
The mmt people seem to understand that the quantity of money should be flexible. Yes, and the people knew it also, who created the Fed. But we need to find the optimum ratio between credit and money — between money that costs interest and money that doesn't. (This is what my Debt-per-Dollar graph is all about.)
And we have to understand that it's okay to have enough money in the economy to sustain the existing level of economic activity, and to use credit (in principle) ONLY for growth. And when the economy grows, policy has to do two things:
1. make sure the debt gets paid off, and
2. make sure the circulating money expands to accommodate the larger economy.
One way to do that is via tax policy, to encourage accelerated repayment of debt as our primary tool for fighting inflation.
It is the excessive cost of interest in the private sector that hinders private sector growth.