This is a guest post by Bud Conrad, Editor of The Casey Report:
I’ve seen this chart on more blogs and pointed to by more people than any chart I can think of. It is given the name of THE Most Important Chart of the CENTURY, complete with capital letters to add to the hype.
I get frustrated with economists bashing each other, as none of them really know the future, and the sport is rather pointless. But this chart has gotten too much hype, so I just have to let a little air out of its balloon.
As presented, the chart makes the point that the economy is way off and things are much worse than ever. While I generally agree that we have serious economic problems, and the increase in debt is not helping, the chart is flawed in ways that mislead – it is definitely not the “chart of the century.”
The chart presents a fairly straightforward calculation that divides the increase in GDP by the increase in debt. The point it looks to make is that we have been getting a smaller and smaller increase in economic activity (GDP) for the amount of debt we are adding. At that level, the point is valid.
But the big spike to negative territory, what is that supposed to mean? At first blush, a viewer might guess that adding more debt actually made the economy worse. But that isn’t what’s going on here, because the growth in debt has been decreasing. And despite appearances to the contrary, GDP has ceased to decline and is up slightly.
What’s going on? Simply that the improvement in GDP and debt, small as they are, skew the ratios so that the line drops like a rock. In other words, the small differences in numbers around changes in the economic inputs cause spurious graphs in ratios like the one used here. The supposed big spike downward is actually reporting on a slight improvement in the economy.
I don’t like just tearing apart work I generally agree with, but the hubris of calling it the chart of the century got my dander up. If you really do look at the numbers, there is no justifying the hype around this chart.
As one more view, I developed a chart that overlays the same ratio but only including the private debt growth. It also shows the declining benefit of more debt, but then gets into the small numbers and negative growth that make the lines go screwy. The only point of the next chart is to show that the indicator is not reliable.
Having just trashed someone else’s work, I’d like to give you something to hang your hat on as to what’s up with the economy. Here’s my view of the same numbers, not as a ratio but rather a straight-up look at how much they are growing. It tells the story that things fell off a cliff in this crisis like they have never done before.
The chart shows total debt, private debt, and GDP. As you can see, they all collapsed in recent years. While you can see some recovery in the GDP, the picture remains weak. I think this a reasonable reflection of reality.
So I offer some process lessons: really look at the data to see what is actually behind a chart. And when someone claims to have the chart to end all charts, pull out your skepticism meter. But more important, I think, is to use the simplest presentation of data.
Speaking of simple presentations, the chart below from the St. Louis Fed emphasizes how the long-term effect of the crisis has piled up in the important area of unemployment. The number of long-term unemployed – those jobless for 27 weeks and over – increased by 414,000 in March to 6.5 million. In total, 44.1 percent of unemployed persons have been jobless for 27 weeks or more.
You can read more of Bud Conrad’s analysis at The Casey Report.
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