HEAD BEEN HURTING FOR THREE YEARS NOW

June 4, 2011 9:38 PM

People with some economics smarts: please look at this graph and help explain it to me.

For some extra background, this graph that is freaking me out is found at http://research.stlouisfed.org/fred2/graph/?g=Ed . It seems sooper-obvious that the red line goes Up while the blue line goes Down. Correlation? Perhaps not.

Looks like that while the outstanding debt from household markets was being reduced (paid off from some source), the amount of debt allocated to each citizen from govt debt increased. Likely due to the bailouts being used to help balance the books of failing financial instutions. I'm no economist, but it looks like this chart is being used as evidence in an argument that the bailout has left the average American in a worse position than they were before.

posted by shipbreaker to work & money (12 answers total)

I see the y-axis of "CHANGE FROM A YEAR AGO" would make it a ... derivative? Thus accentuating the change more dramatically?
posted by shipbreaker at 9:44 PM on June 4, 2011

What I immediately notice is that the graph is of year to year change in the amount of debt. I went to the page and changed the scale of both lines to be actual dollars, which for me makes it easier to read and interpret.

What this shows is that individual household debt stopped rising precipitously, and indeed started a very shallow descent. At the same time government debt , which was already rising, had an inflection to a steeper slope upwards.

In other words, people are trying to save a bit more, and the government has been spending a whole lot more. Not really news, and whether that leaves the average American better or worse off is open to a whole lot of interpretation. More relevant to that question would be how the government debt relates to current and future earnings/productivity.
posted by meinvt at 9:48 PM on June 4, 2011

(Link to graph in absolute dollars)
posted by floam at 10:14 PM on June 4, 2011

Gah... wrong link.
posted by floam at 10:15 PM on June 4, 2011

Looks pretty straightforward, private debt tied up in households has dropped (bc of foreclosures, more ppl renting, etc) while at the same time public debt has increased significantly. While visually they may be corrlated to you, you'd have to get the numbers behind that chart to run a true correlation to see if there was a relationship between the two datasets. Of course, as always, correlation does not imply causation, because even though they both may have the same cause (i.e. The recession as indicated in the grey bars) it's not that one causes the other to change. It's more likely, to me, that they were both independently affected by the recession in striking ways.
posted by jourman2 at 10:16 PM on June 4, 2011

Jiminy, I should just give up. I accidentally left one of the units in the relative setting, here is the really-truly-I-promise right link.
posted by floam at 10:17 PM on June 4, 2011

I see the y-axis of "CHANGE FROM A YEAR AGO" would make it a ... derivative?

Very good! Most people would not have realized that. The graph you linked to is measuring the acceleration of a value - not the value itself which floam so generously recalced and redrew for you. As you can see , by looking at floam's graph one would tend to draw very different conclusions regarding household credit vs federal credit.

When people create misleading graphs like the initial one - the effect is to generally intentionally mislead people into drawing incorrect conclusions . When you try to explain to someone why the first graph is misleading you inevitably have to mention derivative or delta or acceleration at which point the person you are talking to eyes glaze over and you've already lost the discussion.
posted by Poet_Lariat at 11:22 PM on June 4, 2011

I'm a little curious what exactly FYGFDPUB represents. Debt held by US citizens?

As for correlation, well, no shit there was a recession. Did you read the news? The Fed bought a bunch of commercial paper with TARP. Banks cut credit limits to people who were risky, and those were less risky stopped borrowing and started saving. Everyone sold their stocks and bought Treasuries, which makes it the perfect time for the US to issue more debt, if it must.

But even if there is a correlation and underlying causation, that doesn't mean you're better or worse off. Beyond the normal 'consider the alternative universe where we let the whole system fail', there's the question of what the government got in return -- this isn't a expensive dresses on a charge card! If TARP can be disposed of later at a profit, and if the stimulus leads to tax revenue in the future, we can effectively pay that down quickly.
posted by pwnguin at 11:56 PM on June 4, 2011

Gross Federal Debt Held by the Public refers to ownership of the Federal debt (i.e., when the Treasury sells bonds, who buys them?)--it is NOT the "amount of debt allocated to each citizen."

Here's the definition:

The Debt Held by the Public is all federal debt held by individuals, corporations, state or local governments, foreign governments, and other entities outside the United States Government less Federal Financing Bank securities.

So the rapid increase in Treasuries held by the public (which also includes private institutions, like banks) highlights the flight to safety that occured when the recession hit. Those funds, which otherwise could have been invested in the stock market, loans to companies, or other productive uses, instead were invested in Treasuries. It's sorta like stuffing money in the mattress.

The other graph is easier to interpret. Household debt started to decrease when the housing market hit the skids and the recession started. This is also a shift to less risky behavior. Instead of borrowing to augment their spending power, consumers are using a portion of their spending power to pay down debt (de-leverage). Cash that goes to deleveraging could have otherwised been spent on goods and services.

So I think this is the kind of chart that a Keynesian would point to as evidence that the government needs to take an active role in maintaining overall spending. When the economy starts looking shaky, the public freaks out and starts saving and paying off debt--which makes sense for each individual, but exacerabates the declining economy when everyone does it at the same time.

Also--showing these numbers as y/y change is very common. I'd say it's the default for most economic analyses.
posted by mullacc at 12:12 AM on June 5, 2011

Ugh, I'm an idiot. I assume that "Gross Federal Debt Held by the Public" referred to domestic ownership. But it includes foreign holders too. So the only thing it excludes is intra-governmental holdings.

But if you look at the details, I think my interpretation holds up. From Sept 07 through Sept 10, total federal debt held by the public increased by $3.9T. Of that total increase, $1.4T came from foreign holders and $2.5T was purchased by other sources. (Source: table B-89 of the Economic Report of the President.)
posted by mullacc at 12:54 AM on June 5, 2011

The graph you linked to is measuring the acceleration of a value - not the value itself

To be precise, the graph is measuring the velocity (first derivative) of the value. When this (velocity) line slopes upward, it indicates that the acceleration (second derivative) is positive (i.e., the rate at which the original value is getting bigger is increasing over time).
posted by dfan at 8:22 AM on June 5, 2011

I think mullacc pretty much has it; when things get shaky, in the stock market and around the world, Treasury securities start to look like the best option for investing because they've traditionally been the safest thing around. A recession also makes everyone look at their debt and think shit, I might be out of a job, the future is uncertain, better save and pay down my debt just in case.

Also, maybe I'm missing something, but why assign all the blame to TARP? The Recovery Act also involved government spending and cutting taxes, and selling Treasury bonds is one of the ways the government has to raise the cash it needs to fund a program like that.
posted by MadamM at 9:45 AM on June 5, 2011