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Sunday, February 23, 2014

A Look at Debt and Inflation

Here's a scatter of the YoY change in CPI inflation vs the YoY Change in the debt of households and nonprofits.  [FRED Custom Chart]  If debt drives inflation, we should see an upward slope in Graph 1.

Graph 1 - CPI Change vs Debt Growth

Clearly, there is no upward slope - at least not any simple or easily discernible way.   To try to make some sense of this, I color coded the points for different time periods.  That is shown in Graph 2.

Graph 2 - CPI Change vs Debt Growth, Color Coded

Once the light blue points are segregated, it's pretty easy to see that the remaining points reside mostly in a horizontal band.

Here is the arrangement.

1952 -60     Yellow - Eisenhower
1961 -68     Dark Purple  - Kennedy-Johnson
1969 -71     Green - Preamble to the Great Inflation
1972 - 82    Light Blue - The Great Inflation
1983- 92     Dark Blue - Beginning of the Great Stagnation
1993 - 00    Red - The Clinton Stability
2001-08      Dark Blue - Culmination of the Great Stagnation
2009 on       Pink - The Great Recession to now

As it turns out, the Red and Dark Purple points are hard to differentiate.  [if you right click on the graph and select "Open link in new window," you can blow up the graph by clicking "Control" and the "+" sign several times.]  The red points are more closely clustered and surrounded by the purple. There are the hearts of your two little moderations.

Originally I had the entire 1983 - 08 period in dark blue, then decided to highlight the Clinton years in red to see if anything stood out.  What we find is a short period of the greatest stability in the record, regarding both of these two variables.

So, the data tells that for the post 1952 period, there is no robust relationship between debt growth and inflation.  In fact, except for the Great Inflation period, the relationship might even be slightly negative.  The 1969-71 period, just prior to the Great Inflation, has the unique combination of lower debt growth and higher inflation than any other time in the data set.

Also, the Great Recession and it's aftermath are unlike anything else we've seen in recent decades.

Bottom line, though, is that a rate of CPI inflation of 3 +/- 1% is associated with the entire range of debt growth in the modern era.  And, if debt growth is a serious factor in health of the economy, inflation targeting is close to meaningless as a policy tool.

1 comment:

The Arthurian said...


Suppose we attribute the Great Inflation to baby boomers, as Steve Waldman did, and consider the time since the crisis as an anomaly. Set aside inflation above 6% -- basically the Great Inflation and Preamble -- and set aside debt growth below 3% -- basically, since the crisis -- and look at what remains.

The fastest debt growth occurs at the lowest inflation in the yellow area, under Eisenhower.

The next lowest inflation occurs during mid-range debt growth in the Kenedy-Johnson years.

Chronologically after that are the remaining green and the dark blue; inflation here was mostly in the 3% to 6% range.

But in the midst of the dark blue we have the Red of the Clinton Stability, in very much the same area on the graph as the Kennedy-Johnson low-but-not-lowest-inflation dots.

Now... Given that debt growth is basically all over the place, let me summarize the inflation I have just described. Chronologically, we have
1. 0%-1% inflation (Ike)
2. 1%-3% inflation (JFK&LBJ)
3. 3%-6% inflation (Dark Blue)
4. 2%-3% inflation (Clinton)
5. 3%-6% inflation again

One could describe this summary as: Starting from a low level, the data show a general pattern of increase, the exception being an unusual low in the Clinton era.

I apply that same description to the graph of accumulated debt relative to the quantity of money available for the settlement of debt.