This Time Is Different: Federal Debt Didn’t Dive Before the Depression

Randall Wray made a fascinating observation a while back:

Since 1776 there have been six periods of substantial budget surpluses and significant reduction of the debt. … The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929.

And I confirmed it (graphs):

Every depression in U.S. history was preceded by a big drop in nominal Federal debt.

Except this one. (Assuming that it would have been a depression absent herculean efforts by the Fed et al.)

gross debt

There was that dip in the 90s, but if we want to posit that, based on history, it was an at-least-necessary cause of the crash, we have to ask: why, in this case, did it take almost a decade to have its effect?

A lot of things have changed since 1929.

• We have the FDIC and similar (explicit and implicit).
• The Fed is a much more active player in controlling government “debt” levels.
• The financial system is far more globalized. International flows of financial capital are much larger in proportion to the real economy.
• The stock of outstanding private debt is proportionally much bigger relative to government debt. Ditto the issuance and retirement of private debt relative to government issuance.
• In the 00s in particular, private debt issuance went crazy.

I think there might be a story about private debt carrying the economy for years after government debt got pulled, so we didn’t experience the effect right away.

But I’d love to hear other and better-articulated stories to explain what strikes me as a pretty big anomaly.

This brief conversation might provide a springboard:

rjs: as i’ve understood it, when it became clear to george bush that if clinton surpluses continued & our debt was paid down, the financial system would soon experience a dearth of safe assets & would freeze up; so his adminstrations tax cuts were initiated in order to keep levels of AAA assets high enough for the markets to operate…

David Beckworth: I remember some commentators making that point back in the early 2000s. It would have been interesting to have seen, though, what would have happened had the debt been paid down. Would structured finance made even more AAA-securities to compensate? Would interest rates been lower back then too?

rjs certainly gives George Bush far too much credit for monetary sagacity. But the general point remains.

Cross-posted at Asymptosis.