Duncan’s Economic Blog

Guess the Graphs

Posted in Uncategorized by duncanseconomicblog on August 13, 2010

Two graphs below, on a related topic.

(i) What do they show? 

(ii) What point am I making?


28 Responses

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  1. Tom said, on August 13, 2010 at 9:02 am

    The first one is clearly UK national debt as a percentage of GDP – a very distinctive shape. The second one is trickier, as the broad trend is one that probably applies to all sorts of things, but I’m guessing nominal UK national debt. So making the point that the suggestion (based on nominal figures) that we’re in some unprecedented debt situation is nonsense, and that in the post-war years when there truly was unprecendented levels of national debt, the government achieved a very rapid reduction in debt through growth while also developing the welfare state, rather than by austerity and deep cuts?

    And if you’re not making that argument, then I certainly am.

    • duncanseconomicblog said, on August 13, 2010 at 9:04 am


      It’s no fun when you win the quizz within moments of me posting it.



  2. hopisen said, on August 13, 2010 at 9:04 am

    The first one looks like UK Debt as proportion of GDP (but it could be most western countries, I guess)

    The second one looks trickier. It’s not inflation adjusted, clearly.

    I wonder if it’s something like Private sector lending/investment. In which case the point would be that the boom was not caused by reckless government expenditure but by over excitability in financial markets.

  3. Tyler said, on August 13, 2010 at 10:19 am

    Try normalising the charts to take out wartime spending and the last 10 years looks like the horror show it really is. Typical lefty argument when talking about the national debt is to compare to world war spending and then say Labour’s profligacy isn’t too bad in comparison.

    The interest payments on the national debt are going to increase by about 30bn in by 2014/5 using Darling’s last figures (which involved cutting the deficit in half, as you may remember). Given tax tax revenues run at about 35% of GDP, GDP will have to increase approx 100bn simply to pay off the extra compound interest on UK nationall debt.

    That translates to a rough nominal GDP growth (by 2014/15) of about 7% just to stand still. That is already a fairly large number. Can’t you people see that you simply can’t grow your way our of excessive debt and spending (as has been proven in Japan, and is fast being shown in the US).

    Keynes’ ideas relied on low debt, low taxation and low government spending, allowing governments who had built surpluses in times of growth to step in and boost demand in times of recession. This distorted Neo-Keynesian view where governmental spending already accounting for >50% of GDP should step in, after years of aggressive deficit spending, yet with little space to raise taxes and national debts are already high is frankly farcical – even with near zero interest rates the power of compound interest leads into a debt/demographics trap.

    • duncanseconomicblog said, on August 13, 2010 at 10:31 am


      Should I show chart that is interest payments as a % of GDP? I’m very happy to.

      Also, out of interest which Keynes have you read?

      • Ian said, on August 13, 2010 at 2:56 pm

        I’d second that graph request – I can’t seem to find decent figures on debt repayments (or I’d have done it myself already :))

        • duncanseconomicblog said, on August 13, 2010 at 2:58 pm



          The tab – “All -%of GDP” is the most useful for long run purposes.

          Take a look at interest payments as % of GDP. Currently lower than in 1997. And indeed lower than at any point in the 1950s/60s/70s or 80s.

          • Ian said, on August 13, 2010 at 3:15 pm

            Duncan, thanks! I had a suspicion that was the case…

            • Tyler said, on August 16, 2010 at 9:20 am

              Interest payments are so low because rates have been cut to effectively zero. 10y rates have dropped approx 4% since then. I’m sure you’ll say this is a good thing, but in reality all this extra debt has created massive problems in the pensions industry (just check out the funding gap in both public and private pensions) and a debt timebomb.

              This is called the Keynesian endpoint….we’ll probably manage to emulate Japan and have low growth as debt piles up and suffocates it.

              • Tyler said, on August 16, 2010 at 9:30 am

                Debt repayments as a % of GDP is also a pretty meaningless statistic. Try charting them as a % or tax revenues, which is a measure of real affordability….

                • duncanseconomicblog said, on August 16, 2010 at 9:37 am

                  Fine. 8% this year. (With depressed tax revenues!).

                  As opposed to 12-14% in the 1980s. And 10-12% in the 1960s and 1970s.

                  Lower than the 9.7% in 1997.

                  This is getting boring.

                  We don’t have a problem financing the debt.

              • duncanseconomicblog said, on August 16, 2010 at 9:32 am

                Yes, Tyler – I’m aware that short term interest rates are near zero and 10yr gilts are yielding sub 4% (as I’ve long argued they would – others have been keenly predicting a sell off for the past two years (and presumabily losing their clients lots of cash)). This makes the debt very affordable.

                Could you please explain to be the links between the government debt issuance the funding gaps in pension funds?

                I can see the link between low long term interest rates and funding gaps. That said the 30yr is still offering a decent 4.1%.

                We might manage to emulate Japan – this is what happens when govts cut fiscal policy support too early.

                And whilst we’re on Japan, do remind me what JGBs are yeilding? And bear that in might before forecasting a sell off in gilts.

                And actually whilst we are on Japan… You do know that per capita GDP growth there has been roughly the same as in Europe and the US, and through the lost two decades, unemployment never got much above 6%? Has it occured to you that GDP growth might have stalled becasue fo demographics? (I don’t entirely buy this myself, but worth thinking about).

                • Tyler said, on August 16, 2010 at 11:25 am

                  Gordon Brown forced most UK pension funds to hold a certain amount of Gilts. Gilt yields are very low, so real returns from pension funds have collapsed. That is on top of the tax on dividend payments. This has left a demogrpahic timebomb of more pensioners with inadequate savings.

                  30y at 4.1%? Decent? That is barely 1% real yield.

                  Japan never cut fiscal policy too early. In fact, they never cut it at all. I’ll try and dig out the paper for you, but in short, they have an aging population, collapsing savings rates and a debt burden which, even with ultra low interest rates is becoming a massive problem for government finances. The end result will likely be Japan having to use it’s USD reserves to pay off debt, which will send the Yen even stronger, causing yet more pain to Japan’s export driven economy.

                  Japan has had sub-par growth since 1989. Employment has been artficially kept high through demographic and cultural reasons, though this is changing rapidly now.

                  I am not at the moment forecasting a selloff in Gilts. I *am* forecasting that without cuts taking the bulk of the work to deal with the deficit, the debt burden will place a long term cap on GDP growth, and lead us into the Keynesian endgame I mentioned above.

                  • duncanseconomicblog said, on August 16, 2010 at 11:32 am


                    Yes – I said that low yeilds weren’t great for pension funds. I asked for the connection between “massive debt issuance” and pension gaps.

                    4.1% over thirty years, is decent. Especially if one forecasts deflation at some point in the next two years (as seems likely to me).

                    I find this Posen paper very good on Japan:


                    Sorry, I read the gilt sell off forecast from your blog in April.

                    I also think this, from today, is important:


                    I’m quite clear on where I stand. I’m a huge fan of the macro policy ran between 1997 and 2008. (Although it was bettet than that of the preceeding 18 years).

                    We should not have run a deficit in 2003-2007. But were right to launch a stimulus in 2008.

                    It should have been bigger.

                    The real fault though is monetary policy and financial policy – which the BOE made a complete hash of. Then again, they have historical form on that.

                    My post on fiscal policy from last week – might interest you.

                    • Tyler said, on August 16, 2010 at 12:02 pm

                      From memory we were talking last year Octoberish (with 10y Gilts at 3.70%) when I bet yields at the end of March 2010 would be higher. You offered me a 1:1 bet that they would be higher than 4.00%…..I preferred to take the 1:1 bet offered by the market that they would be higher than 3.70%…and took profiit at Xmas. Had a very nice one, thank you very much.

                      That said, since April when I wrote on my blog Gilts have rallied. in fairness though, my view has changed as global growth forecasts have been continuously revised lower, and the double dip/depression becomes more apparent. That also said, I wouldn’t buy Gilts even now, given they offer basically zero real yields. Buy corp/EM paper instead – safer and with real returns.

                      Massive debt issuance (for stimulus) leads to higher debt servicing costs leads to lower long term growth leads to lower interest rates leads to pension funding gaps.

  4. Liam Murray said, on August 13, 2010 at 11:42 am

    Instructive as ever so thanks.

    Quick thought though on whether this helps in anyway with Labour’s economic line of attack. Whatever the numbers actually show there’s no electoral mileage in:

    “Debt was much worse in the 20s & 50s and we actually addressed that while growing welfare so new benefits anyone?”

    I know that’s a crude parody of the argument but I can’t imagine a more subtle version being anymore appealing to the public. If I understand the thrust of Hopi’s recent posts Labour just need to run with the ‘OMG, debt is awful so let’s cut back’ narrative but talk up the coalition extremes and the need to promote growth as well. As a life-long Labour voter who switched in May that’s the only line of attack I’d lend any credibility to…..

    • duncanseconomicblog said, on August 13, 2010 at 11:53 am


      Yeah – the point of the point of the graphs was really to illustrate that it’s GDP growth that matters if one is trying to reduce Debt/GDP. Indeed, the spreadsheet I linked to above (in response to Hopi) shows that between 1948/49 and 2010/11 debt/GDP fell from over 200% to around 60% – but during those 62 years, Public sector borrowing was only negative (a repayment) 12 times (and eight of those under Labour Chancellors).

      My point, which is economic, not political – is that debt at 60-80% of GDP is not a major problem. We don’t face a debt crisis (even the recent work of hawkish Rogoff, which Krugman is disputing, suggests debt/GDP isn’t a problem until it hits 90%, which the UK is not predicted to hit).

      Plus, despite Tyler’s concerns, the gilt market seems relaxed and even if the gilt market panics (which I don’t expect) the average maturity of UK govt debt is 14 years. It would take a long time for higher new borrowing costs to feed into higher interest payments by the government. DEbt payments as a % of GDP remain below, and will remain below, the levels of the 1980s and much of the 1990s.

      Politically I accept it is harder, in the current climate, to sell this. On the other hand, as the cuts stop being abstract concepts and start affecting people and as unemployment rises as a result, that may change.

      I am relatively content to stick to the line “we’ll half the deficit in 4 years, once the recovery is entrenched”. In the meantime though I think Labour’s political focus should be on jobs.

      • Liam Murray said, on August 13, 2010 at 12:32 pm

        Cheers. Forgive me exploiting you as a gratis economics lecturer but a quick question!

        Surely the fact that growth has dug us out of far bigger holes in the past (c.200% debt/GDP ratios) has to be put in economic context? The growth opportunities afforded by two world wars, new welfare spending and technological development in general were huge and aren’t likely to be replicated in the next 20/30 years (and if they are it’ll be in Asia not Europe) so isn’t there something to Tyler’s point – that growth was once enough to address a bigger problem doesn’t mean growth will address this one?

        • duncanseconomicblog said, on August 13, 2010 at 12:37 pm

          No probs Liam.

          I’d like to think there are new technologies we can exploit – pharma, renewable energy, communications, etc. The aging society might throw up interesting new trends in care, drugs, etc too.

          Growth alone will not close the budget gap. I accept that, but I think of the three ways to close it (spending cuts, tax rises and growth) it is the most important.

          • Liam Murray said, on August 13, 2010 at 1:17 pm

            “Growth alone will not close the budget gap. I accept that, but I think of the three ways to close it (spending cuts, tax rises and growth) it is the most important.”

            Mmmm – the thing is that’s subjective again, mixing the political & economic. ‘Most important’ is a political judgement and not the same thing as ‘most effective’. Arguably the graphs only demonstrate that post-war boom type growth is sufficient so the coalition at least have a credible retort that now, in 2010, we can’t expect growth to shoulder the same burden.

            Thanks for the discussion though…. helps me avoid making too much of a fool of myself elsewhere!

            • Dan Sutton said, on August 27, 2010 at 2:37 pm

              I’m confident we will enjoy decent growth over the decades to come. I don’t think we’ve pulled all the meat off the bones of IT and there are many technologies which are nearly ready for economic deployment. Fuel cell spring to mind.

              This is before we allow for any new breakthrough technologies.

              Then there are all the opportunities presented by the growth of developing economies. Recently, this has been a mixed blessing to us. Low skilled jobs have been lost to people whose alternative is subsistence farming but we’ve enjoyed the lower cost of manufactured goods along the way.

              As Asians and Latin Americans become richer they will want to buy things from us. These things will typically be high value, high skill, high value added products. Instead of a market of a billion people for the best that we can do, we have a market of 3 billion.

              What’s been painful and will be painful is what happens to those people who are priced out of semi-skilled work by the Chinese but who struggle to find new roles in higher value added organisations.

  5. Philip Martin said, on August 15, 2010 at 12:20 pm

    Politically, Labour needs to do something around tax evasion/avoidance and point up the Tory ‘not nasty any more but ugly’ party’s war on the poor. Cue PPB showing Cameron seeming sad and weary about Brown trying to reignite the class war and then some Osborne rhetoric from the budget with IFS graphs showing Osborne’s lies. Finish off with the New Class War on the Poor slogan with final message being join The Labour Party if you care about others, join the coalition if you care only for your self (and good luck with that..)
    You see, you watch 3 series of Mad Men and you think you can do anything!

  6. Tyler said, on August 16, 2010 at 9:28 am


    The above says what I am trying to explain with much better clarity, with links to various papers you might want to have a look at.

    As Liam aboves notes, Keynesianism is as much, if not more political than economic in its reasoning and implementation. Policy makers are rarely willing to wear the pain now when they can print money and defer the payback to a future government.

    • duncanseconomicblog said, on August 16, 2010 at 9:40 am


      Saw that. I do think it misunderstands Keynesianism. Seems to associate it with fiscal policy rather than monetary – whihc is a strange reading of old Maynard…

      Still, I did like this bit:

      “Keynesian stimulus can’t be blamed for all our problems, but it would have been nice if our politicians hadn’t relied on it so blindly.”

      I agree.

  7. duncanseconomicblog said, on August 16, 2010 at 9:50 am


    Government bonds are trading at near record lows (whether Treasuries, Gilts, Bunds or JGBs) right on the curve to the 30 years mark.

    It would seem that one of two things must be true.

    Either governments do not have funding problem and are not likely to in the next 30 years… or…

    The most liquid and deepest capital markets in the world are massively mispricing risk. Again.

    So, either we don’t have a problem and or we have a major problem caused by non-functioning financial markets.

    Which side do you come down on?

  8. Tyler said, on August 16, 2010 at 11:49 am

    Not one answer to that question. Several things at work here.

    QE buying has driven bonds lower. People are currently pricing in QE2.

    Liquid asset requirements are much hiigher, and there is a large shift from non-core European (eg PIGS) and MBS type assets via the ECB and FED. Only certain governments can really issue – Greece for example cannot issue past it’s 3y European gaurantee.

    Mortgage and corporate issuance has collapsed, allowing more space for certain government issuance.

    (Certain) governments don’t currently have a funding problem, and aren’t finding it difficult to issue debt. This is certianly helped by their ability to print their own currencies.

    This DOES NOT mean that the same governments are going to have no trouble funding their debts going forwards.

    I would argue that capital markets are probably not mispricing risk at all – they are pricing a significant chance of a double dip recession or a depression, and real money investors are holding what is likely to still be the safest or most liquid assets. At best peopel are expecting a long drawn out period of low growth. This also explains why high grade corporate and EM debt is massively outperforming (extra yield yet arguably lower risk) and also why things like gold (typically and inflation hedge) are outperforming fiat currencies despite being in a low inflation/deflationary environment.

    Cutting to the chase, the markets are more worried about Keynesian stimulus stifling long term growth that lack of stimulus hurting it in the short term.

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