The key chart
Long term trends in US GDP, public debt and private debt plotted on log scales (Source: FED; CMMP)
The key message
Further thoughts for those “seeking to create panic” over US public debt – (1) do not use log scales when presenting data graphically, and (2) do not include private sector debt in your analysis.
In my previous post, I illustrated how using linear scales (absolute levels) was better for creating panic than using log scales (rate of change). Recall that long time-series data that has low initial values and a constant growth rate (eg US public debt) lends itself very well to creating so-called “panic charts” (see chart below).
“Panic charts” in action (Source: CMMP)
The reason not to use log scales is simple. They emphasise instead, how the rate of growth has (1) been relatively constant over time, and (2) slower now than in early parts of the period.
Excluding private debt is a second key tactic. Since current macro thinking typically ignores private debt altogether while seeing public debt as a problem, this is relatively straightforward and uncontroversial.
What are the risks of ignoring this advice?
First, readers may compare its rate of growth (the green line in the key chart above) with the rates of growth in public debt (blue line) and nominal GDP (maroon line). They may note the extended period (1948-2007) when the rate of growth in private debt far outstripped the rate of growth in both GDP and public debt (the private debt ratio rose from 48% GDP to 165% of GDP).
Second, and from this, readers may explore the relationship between public and private debt growth rates (buying Amazon’s last copy of Wynne Godley’s, “Monetary Economics” in the process). They may note that during phase 1 (4Q1940 – 4Q1981) the public debt ratio fell from 86% GDP to 32% GDP. In other words, the net wealth of the non-government sector parked in a savings account marked “treasuries” grew at a much slower rate than GDP. They may realise that in response, the private sector borrowed more. A lot more. The private debt ratio increased from 48% GDP to 99% GDP.
From here, attention may shift naturally to the two periods of relatively high rates of growth in public debt – Phase 2 (3Q81 – Reaganomics – 3Q93) and the post–GFC Phase 4 (2Q07 – 1Q13). In phase 2, the public debt ratio rose from 32% GDP to 70% GDP. Private debt continued to grow but at a much slower place (to 118% GDP). In phase 4, the expansion of public debt reflected the government’s response to the GFC and the subsequent deleveraging of the private sector (the private debt ratio fell from 165% GDP to 149% GDP).
There are two risks here. First, attention may be drawn to the minority-held view (so far) that private debt typically causes crises while public debt typically limits their impact. Second, it may also be drawn to the fact that the US led the advanced world in the structural shift away from relatively high risk private debt to lower risk public debt in the post-GFC period.
To repeat and extent the message from the previous post – it is always worth considering how different parties chose to present their data to support their arguments and also to consider what they chose to include, or more importantly, exclude….