-When is a recession?


An alternative to popular faith

        Readers of this blog and of the summary are familiar with the fact that all six depressions in U.S. history immediately were preceded by extreme reductions in federal deficits (aka “surpluses”):

1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.

        You also are familiar with the following graph showing that the last nine recessions began with reductions in federal debt growth and were cured with increases in federal debt growth.
Fed debt private investors 50-09

Note how debt growth declines before recessions and increases to cure recessions

In 1996, the prelude to Free Money, titled “The Ultimate America” predicted future recessions would follow decreases in debt growth. Since then it happened again, twice.

        Six depressions and nine recessions — a total of fifteen out of fifteen times at which federal debt growth declined and the economy fell — is an amazing, almost unheard of, correlation in a complex science like economics.
        Even more startling, the first edition of Free Money was published in 1996, and it predicted future recessions would be precipitated by decreases in debt growth. This would be akin to finding it has rained all day in Chicago every June 1st, following sunshine all day every May 30th, for the past fifteen years, and accurately predicting it would happen, again — twice more.
        A sharp-eyed reader, who may be associated with the Concord Coalition, (the group claiming federal debt must be reduced, but which never provides evidence) pointed out two recessions, in 1981 and in 1991, where federal debt growth seemed to move up in advance.
        While even thirteen out of fifteen is a remarkable correlation in a science that seldom sees such correlations, the reader’s concern was understandable.
        As you can see on close inspection, federal debt growth did decline in advance of the 1981 recession – not terribly significant, but a decline nonetheless. (The 1981 recession should be considered a continuation of the recession twelve months earlier — caused by the Iranian Revolution which took place in 1979, with its increased oil prices — from which we didn’t fully recover.)

Debt growth declines in advance of 1981 recession

        With regard to the 1991 recession, we come up against the definition of the word “recession.” The media arbitrarily say a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters, which means you can’t identify a recession until it is more than six months along . Look at the following graph:

        GDP growth (blue line) turned down in 1989, while debt growth was falling. Why did the government say the recession began in 1991? Hard to say. Perhaps it was due to the very slight bump at the end of 1989.
        This graph indicates the increase in federal debt growth was beginning to cure the 1989 recession, and the momentum of continuing increased debt growth finally cured the recession in 1991.
        A strong correlation between federal debt growth and GDP growth seems to exist.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com
P.S. You might try this experiment. Ask Diane Lim Rogers (drogers@concordcoalition.org), the Concord Coalition economist, for evidence to support her claim the debt is too large. I predict she either will not answer you, or she will tell you the debt is too large and “everyone knows” it should be reduced. “Everyone knows” is what passes for evidence at Concord.

13 thoughts on “-When is a recession?

  1. Rodger,

    I did address the six periods of debt reduction that you list above in comment number 24 following Diane Lim Rogers’ September 26th post on her blog and in the October 4th post on my blog. The basic point is that nearly all of those debt reductions were just partial reductions in huge debts that had just been run up in prior war years. Do you concede this point? In any event, you can reply to this on either or both blogs. Thanks.

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  2. Mr. Davis,
    If you go to http://en.wikipedia.org/wiki/Timeline_of_United_States_military_operations#1810-1819, you will see a list of all the U.S. armed conflicts from 1770 to 2009. You will find there rarely was a time when the U.S. was not in some sort of military action. So pick any year, and I guess you’re correct. We were at war.

    However, I’m not sure I understand your point. The only way there can be a surplus is if there was a previous debt. Sometimes the debt reductions have been large (99%, 59% and 57%); sometimes they have been smaller. The last nine recessions followed reductions in debt growth, meaning the debt actually grew, but too slowly.
    My point is this: A large economy has more money than does a small economy. Therefore, to grow, an economy requires a growing supply of money. QED.
    Where will the money come from to grow our economy? The safest, most controllable source is federal deficit spending.
    For the economy to grow, the deficit must at least be large enough to overcome inflation, population growth and a negative balance of payments — in short, the per capita, real money supply must grow.
    As for Diane, she refuses to see any disagreement with the fundamental Concord theory, so she prevents my comments from appearing on her blog.
    Have you ever written to her, asking for data supporting her belief that deficits have had a negative effect on our economy? Try it for your own amusement and let me know what happens.

    Rodger Malcolm Mitchell

    Rodger Malcolm Mitchell

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  3. Rodger,

    I don’t know the details of any comments that you may have posted on Diane’s blog that were removed but I do see four comments from you following her September 26th post. Comments 7 and 8 are very critical of Diane (comments 14 and 19 are more general) but they were not removed. I suspect that she would not remove any reply to my comment (number 24). In any event, you can post your above comment on my blog and I will answer it both there and here. If you wish, you can also answer my comment number 24 on my blog if you are unable to answer it on Diane’s blog. I’ll reply to it, wherever you answer it.

    Thanks,
    R. Davis

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  4. Mr. Davis,
    Diane does post comments from a person named Brooks, who believes name calling is a suitable substitute for facts (see his post #9 dated September 27.)

    Just as deficit spending adds money to the economy, surpluses subtract money from the economy. All the depressions came when the government was subtracting money; none came when the government was adding money. This seems to refute Concord’s and other debt hawk’s contention that deficits harm the economy.

    In my book FREE MONEY, on my site http://www.rodgermitchell.com and on many posts in this blog, I’ve provided data supporting the hypothesis that economic growth requires continuing increases in deficit spending. The debt hawks make many general statements about how large the debt is, but never provide evidence showing how this harms the economy.

    That is why I suggested you contact Diane directly and see if you can pull any data out of her. The very fact that Concord has no supporting data on its web site, together with Diane’s refusal to supply supporting evidence should at the very least, cause suspicion.

    In direct answer to your question, the six depressions that followed debt reduction also followed deficit growth reduction, obviously. However, I switched from debt reduction to deficit growth reduction, because as you said, recessions (rather than depressions) do not correlate with debt reduction, but rather with deficit growth reduction.

    In science, one looks for correlations.

    Even this correlation is not perfect, so I began to look for additional correlations. See the post on this site: “Predicting Recessions and depressions.”

    My 15 year experience is this: Debt hawks pick at my data, trying to find holes. But they never supply their own data to substantiate the notion that deficits are harmful. Will you, at long last, provide such data so I can end this lonely journey?

    Rodger Malcolm Mitchell

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  5. Mr. Davis,
    I see from your post on Diane’s site, I did not answer your question: “. . . do you simply believe that we can run up any level of debt for an emergency with no intention of ever paying that level down?”

    Actually, it’s a two-part question: “any level of debt” and “paying it down.”

    I do not believe we can add unlimited amounts of money to the economy. In other posts I have discussed what I consider to be a suitable amount. Briefly, total debt rose 1400% in the past 30 years, with good results. I suggest it could rise 1400% in the next 30 years, with equally good results.

    Regarding “paying it down,” we never need to pay debt down. Moreover, we never need to have any debt at all. The notion of federal debt is an obsolete fiction. [See my post on this site, “How to Eliminate All Federal Debt, Deficits and Interest Payments.”]

    Rodger Malcolm Mitchell

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  6. If you go to http://en.wikipedia.org/wiki/Timeline_of_United_States_military_operations#1810-1819, you will see a list of all the U.S. armed conflicts from 1770 to 2009. You will find there rarely was a time when the U.S. was not in some sort of military action. So pick any year, and I guess you’re correct. We were at war.

    Of course, a military action is very different than a war. If you look at the graph at http://home.att.net/~rdavis2/debtwar.html, you’ll see the growth in the public debt during the four major wars that I mention here, plus during World War II. The growth during the Mexican-American War and the War of 1812 was relatively modest but the paydown in debt immediately following those wars was even less. In any event, the debt increase during the Civil War, World War I, and World War II was tremendous. These cannot be seriously compared with mere “military actions”.

    As for Diane, she refuses to see any disagreement with the fundamental Concord theory, so she prevents my comments from appearing on her blog.
    Have you ever written to her, asking for data supporting her belief that deficits have had a negative effect on our economy? Try it for your own amusement and let me know what happens.

    As I said, I don’t know the details of any comments that you may have posted on Diane’s blog that were removed but I do see four comments from you following her September 26th post. In any case, I don’t plan on writing her requesting data for two reasons. First of all, I know that she is very busy and I’m not going to badger her to do private research for the sake of this discussion. Secondly, I don’t rely on hers or Concord’s data for any of my thinking. Reading posts from her or Concord may prompt me to investigate one issue or another but, as you can see from my web page and blog, I do my own analysis.

    One of the pieces of data that most concerns me about the level of our federal debt is the long-run projections that our government has been issuing for years in its annual budget. You can see the latest projections from the budget and the CBO in my blog post at this link. As you can see, even the U.S. Budget states that “Before the debt reaches the levels shown in the table, there would likely be a financial crisis that would force budgetary changes…”. That is not surprising since both the U.S. Budget and the CBO are projecting that, by the 2080, the debt will be more than double the prior high that it reached at the end of World War II.

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  7. “. . . the debt increase during the Civil War, World War I, and World War II was tremendous.”

    We still are left with the fact that every depression occurred immediately during or after a series of surpluses. No matter the prelude, you’ll have to find an alternative explanation for this remarkable coincidence.

    We also are left with the fact that the recessions for the past 50 years have come immediately after years of reduced debt growth — another coincidence needing an alternative explanation.

    Most people with lung cancer were smokers. Not all people with lung cancer were smokers and not all smokers get lung cancer. Yet, there is substantial agreement smoking is a prime cause of lung cancer, even though the exact mechanism is unknown.

    Substitute “recession” for lung cancer and “reduced debt growth” for smoking, and you get the same correspondence.

    Unless you can offer an alternative explanation for the remarkable correspondence between reduced debt growth and recession/depression — one of the best correlations I ever have seen in economics — perhaps you consider the possibility my explanation is correct, even though it disagrees with your intuition.

    “I’m not going to badger her (Diane) to do private research for the sake of this discussion.” Why would she have to do any research? She should have the data at her fingertips. If she doesn’t, why is she making claims?

    I offer substantiation. She does not, (nor does any debt hawk). Why do you prefer her unsubstantiated claims over mine? If you do your own analysis, why do you follow the crowd that offers no substantiation?

    “. . . even the U.S. Budget states that “Before the debt reaches the levels shown in the table, there would likely be a financial crisis . . .” You’ve just stated the problem. Greenspan, Bernanke (the people who have brought us nine recessions in 50 years) and most other experts believe this. If they didn’t I wouldn’t be writing about it.

    But merely saying how big the debt will be doesn’t prove anything. In 1979, total debt was $800 billion. If I had predicted then that the total debt would be $12 trillion only 30 years later — an astounding 1,400% increase — the “experts” would have made exactly the same prediction. Yet here we are, in a crisis I predicted (because debt grew too slowly), and to save ourselves, we must increase the debt.

    If I predict another 1,400% increase, bringing the total debt to $168 trillion by 2039, will the same “experts” come to the same wrong conclusions?

    The following statement is illogical: “At some time in the future, the debt will be much larger, so this is bad.” Yet, that is all the debt hawks ever say.

    Always keep this in mind: The government does not even need to create debt. It can create money directly. That would end all the hand-wringing about the word “debt.” Fundamentally, it’s a semantic problem. Call it “money-created” rather than debt, and everyone will be happy.

    Rodger Malcolm Mitchell

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  8. We still are left with the fact that every depression occurred immediately during or after a series of surpluses. No matter the prelude, you’ll have to find an alternative explanation for this remarkable coincidence.

    From what I can tell, the years of those depressions are not as agreed upon as you suggest. The start years that you give are 1819, 1837, 1857, 1873, 1893, and 1929. The list of recessions on wikipedia lists these as Panics (1873 is also listed as a Depression) but lists a number of other Panics and Depressions. On the other hand, this article states the following:

    Three major depressions, so defined because of the depth and duration of the collapse have occurred in American history: 1837, 1893, and 1929. Some historians add to the list the downturns in 1857, 1873, and 1907. There is a lot of dispute among economic historians and economists as to the causes of economic depressions.

    I have seen 1907 mentioned in other places as well. Why was this year left out? Could it be because the debt was rising all through this period? In any event, the National Bureau of Economic Research lists all of the business contractions since 1857 at this link. Can you supply an authoritative source that backs up your claim that the six years you give are the accepted beginnings of the only six U.S. depressions?

    We also are left with the fact that the recessions for the past 50 years have come immediately after years of reduced debt growth — another coincidence needing an alternative explanation.

    I still amazes me that you shift from “reduced debt” to “reduced debt growth” without batting an eyelash. If that doesn’t work, perhaps you can shift to “reduced debt growth growth”! Seriously, the latest U.S. Budget projects that the deficit for 2009 is going to be 12.3% of GDP (see here). Are you suggesting that we now must run deficits of at least 12.3% of GDP forever more?

    I offer substantiation. She does not, (nor does any debt hawk). Why do you prefer her unsubstantiated claims over mine? If you do your own analysis, why do you follow the crowd that offers no substantiation?

    Because I have studied the subject enough to be convinced that there are not a simple set of six cherry-picked numbers that will prove the claims on one side or another. However, I do find the simple math associated with large debts to be compelling. If you look at the second graph at this link, you’ll see that net interest becomes the fastest growing cost when the debt reaches a certain percentage of GDP. And that graph corresponds to the more conservative budget projections (the purple line in the first graph). Unless you believe that we can simply borrow the money to pay the interest, this cost would become unsustainable. Do you believe that there is any limit in the debt to GDP ratio? As an extreme example, could the debt reach 10,000% of GDP requiring interest payments of several hundred percent of GDP?

    By the way, since we’re not duplicating any of this discussion on my blog, I reserve the right to excerpt any of this discussion there. If I excerpt anything you say, I’ll supply a link to this page to provide full context. Let me know if you have any problem with that. Thanks.

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  9. Mr. Davis

    “Can you supply an authoritative source that backs up your claim that the six years you give are the accepted beginnings of the only six U.S. depressions?”

    I don’t care whether you call them recessions or depressions. I don’t even know if what we have today is a recession or a depression. The point is this: The vast majority of recessions / depressions began with reductions in debt growth and ended with increases in debt growth. Surpluses merely are extreme examples of reductions in debt growth.

    If you find some exceptions to that, no problem. Economics is too complex for perfect correlations. It’s as complex as meteorology. If I said that sunlight makes for warmth, would you tell me I’m wrong because last February 1 was warmer than last March 1? Try to see the bigger picture and not get lost in the minutia.

    In science one looks for correlations. That’s how we know smoking causes lung cancer. Not everyone who gets lung cancer was a smoker and not all smokers get lung cancer. But the correlation is high. I’ve found an even higher correlation: Reduced debt growth correlates both with recessions and with depressions, and increased debt growth correlates with recoveries. Don’t you find that exciting? You almost never see that degree of correlation in economics.

    “Are you suggesting that we now must run deficits of at least 12.3% of GDP forever more?”
    and
    “I (am) convinced that there are not a simple set of six cherry-picked numbers that will prove the claims on one side or another.”

    The other side supplies no evidence, so it really is a case of evidence vs. no evidence. What you call “cherry picked” numbers actually is a correlation. Simply stated: Reduced debt growth has a high correlation to recessions and increased debt growth has a high correlation to recoveries. That’s meaningful, don’t you think? Work with me. You’re a researcher. I could use your help.

    Please read https://rodgermmitchell.wordpress.com/2009/10/01/causes-of-recessions-and-depressions where I carry the hypothesis one step further.

    I can find no economic significance to the oft-quoted debt/GDP ratio. Do you have data to indicate a low ratio is better than a high ratio? My personal feeling is it’s a bogus, meaningless ratio — the classic apples / oranges.

    As I’ve said before, the government does not even need to borrow, i.e. to create T-bills and sell them. It could and should create money, directly. Calling money-creation “debt” merely scares people, while borrowing and paying interest on dollars we alone have the power to create is foolish. See: https://rodgermmitchell.wordpress.com/2009/09/07/how-to-eliminate-federal-debt-deficits-and-interest-payments

    Yes, you can use anything on your blog.

    Rodger Malcolm Mitchell

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  10. I’ve found an even higher correlation: Reduced debt growth correlates both with recessions and with depressions, and increased debt growth correlates with recoveries. Don’t you find that exciting?

    No, I find it seriously flawed. Look again at the graph at this link. The debt follows a very clear pattern from 1790 to 1970. It increases rapidly during a war (or the Great Depression) and then decreases gradually (at least as a percentage of GDP) until the next crisis. Since the debt spends much more time going down than going up, it’s no wonder that most panics/depressions occurred during debt reduction. And once the panic/depression occurred, the increase in spending and drop in revenues naturally dropped the budget into deficit until a recovery occurred. Nothing surprising there.

    The other side supplies no evidence, so it really is a case of evidence vs. no evidence.

    No, it is the usual case of two sides both convinced of their own evidence. Read the article by economist Laurence Reed at this link. He certainly sounds as convinced of his evidence as you are of yours. Can you point to me to any well-known economists (other than Frederick C. Thayer) who support your views?

    As I’ve said before, the government does not even need to borrow, i.e. to create T-bills and sell them. It could and should create money, directly. Calling money-creation “debt” merely scares people, and paying interest on the money we create is foolish. See: https://rodgermmitchell.wordpress.com/2009/09/07/how-to-eliminate-federal-debt-deficits-and-interest-payments

    I believe that that would very likely lead to inflation and a further debasement of our currency. Look at the graph at this link. I compared the change in the CPI and M2 money supply (over 10-year spans in order to smooth the data). There certainly seems to be a positive correlation between the two. I also found it interesting that the peaks in the CPI occurred around the time of our five friends from the prior graph (the War of 1812, the Mexican-American War, the Civil War, World War I, and World War II). It’s a little less clear but the peak around 1980 is likely related to the Vietnam War.

    There can certainly be an honest debate on when and how quickly debt should be paid down and what level of debt is healthy and/or sustainable over the long run. However, I have to strongly disagree with any notion that there is no limit or downside to debt or that we can simply create as much money as we want with no ill effects. In any event, I hope that we can agree that we would be much better off if we could find ways to prevent wars and their resulting cost in lives and treasure.

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  11. Since the debt spends much more time going down than going up, it’s no wonder that most panics/depressions occurred during debt reduction.

    “Time going down” does not explain why the recessions happened. Also, you ignore what that has happened in the last 50 years. See the graph at https://rodgermmitchell.wordpress.com/2009/09/07/introduction/.

    Read the article by economist Laurence Reed

    It’s difficult to know where to begin, he is so far afield. He too ignores the past 50 years, which are the most important years, especially the past 35, because we were off the gold standard, which changed the world.
    Mr. Reed believes federal deficit spending does not add money to the economy. Then goes through a torturous explanation, which omits one fact. The government borrows by creating T-bills from thin air, then trading them for the money it already has created. Those T-bills are money, identical in every way to other forms of currency. Ask him why the money supply goes up during wars, and why the government is printing money now, to cure this recession.
    Anyway, I give him credit for trying to supply evidence, albeit bogus.

    I believe that that (creating money rather than creating T-bills) would very likely lead to inflation” Since both increase the money supply identically, why would one cause inflation and the other not?

    I compared the change in the CPI and M2 money supply (over 10-year spans in order to smooth the data).

    Your “smoothing” ruined the data. Here’s what the chart really looks like. http://rodgermitchell.com/M2vsCPI-50-09.png I see no positive correlation, do you?

    Can you point to me to any well-known economists (other than Frederick C. Thayer) who support your views?

    Yes, dozens, although being alone would be no crime. However, I would be glad to match the credentials of Professor L. Randall Wray, Professor Hyman Minsky and all the other chartalists (look up “chartalist”) with those of Laurence Reed. See: http://ideas.repec.org/p/wpa/wuwpma/9802020.html

    I have to strongly disagree with any notion that there is no limit or downside to debt or that we can simply create as much money as we want with no ill effects.

    For some reason, despite my repeated explanations, the debt hawks insist on mischaracterizing my position. I do not subscribe to “printing as much money as we want.” In fact, I have given a very specific explanation of how much money I feel we safely could create.

    If the chartalists and I are correct, think of the positive outcomes. We could eliminate FICA (See: https://rodgermmitchell.wordpress.com/2009/09/08/ten-reasons-to-eliminate-fica/ ) and pay for health care. If you and the debt hawks are correct, we are doomed to repeated recessions. So, wouldn’t it be worthwhile at least to evaluate the evidence with an open mind, rather than intuitively following the herd?

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  12. Your “smoothing” ruined the data. Here’s what the chart really looks like. http://rodgermitchell.com/M2vsCPI-50-09.png I see no positive correlation, do you?

    So looking at the annual change in monthly figures treats the data right but looking at the ten-year change in annual data “ruins it”? I could just as well have accused you of “ruining the data” by looking at the annual change rather than the monthly change. Go back and select “Percent Change” rather than “Percent Change from a Year Ago” and you’ll see that you get a much more ragged graph. Hence, by selecting “Percent Change from a Year Ago” as you did, you committed the unspeakable crime of smoothing the data! You ruined it!

    Of course, the truth is that all of the above approaches are valid. Looking at the change over longer time spans misses the detail of a shorter time span but can catch long-term trends that using the shorter time spans does not. It can help one not to miss the forest for the trees, so to speak. Your data also has a problem of just going back to 1959 (I know that’s as far back as the Fed data goes) whereas mine goes back to 1800. That did motivate me to update my data and generate graphs for times spans of 1, 5, and 10 years. You can see them at http://home.att.net/~rdavis2/cpi_m2.html. The positive correlation is obvious for the 5 and 10 year spans. Even for the 1 year span, one can see a positive correlation in the war years and the years of the Great Depression.

    If the chartalists and I are correct, think of the positive outcomes. We could eliminate FICA (See: https://rodgermmitchell.wordpress.com/2009/09/08/ten-reasons-to-eliminate-fica/ ) and pay for health care. If you and the debt hawks are correct, we are doomed to repeated recessions. So, wouldn’t it be worthwhile at least to evaluate the evidence with an open mind, rather than intuitively following the herd?

    These are not the only two possible outcomes, of course. The chartalists being wrong might mean that we destroy this country’s finances or at least cause it to become less than it could have been. In fact, I look at these issues not from a point of view of known outcomes but from the point of view of risk. I believe that the policies that you promote are much riskier than those promoted by the Concord Coalition. In any event, I believe that I have evaluated the evidence with an open mind as much as you seem to think that you have. Hence, I would suggest that we just agree to disagree on this.

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