This includes home owners and renters, and includes rent as a financial obligation.

And it’s gone down further since the June data point as the Federal budget deficit remains at around 9% of gdp.

The general drift higher over time is probably due fewer ‘no debt’ people rather than people with debt getting over extended, so I expect this to turn up well before it gets to the 16% level.

So looks to me like consumer batteries are very close to recharged which will be evidenced by this ratio moving sideways for a while before again turning up in the later stage of what will someday be later called the Obama boom, if they don’t do something stupid like a major deficit reduction program or a trade war. And just as interesting is what they then attribute the boom to. In the Clinton years it was the surplus (which actually ended the boom) and, of, course the Fed always gets most of the credit. But never the deficit that preceded all of our expansions.

42 Responses

  1. I see a devaluation of the dollar and subsequent inflation as a major potential roadblock to a recovery. If QE2 happens and is big enough to significantly impact the value of the dollar, we could see increases in the costs of raw inputs and the trade deficit.

  2. I still have difficulty seeing this roaring new credit boom that will take the US private sector to new, unprecedented heights of debt. Perhaps there really are tens of millions of consumers out there who – despite living through the worst, most devastating debt-fuelled collapse since 1929 – are champing frantically at the bit, just waiting to rush out and plunge into as much debt as possible. Dunno.

    I do know that unemployment appears to have recently risen again and house prices appear to be falling again.

    It’s clear that the deficit simply isn’t big enough or the spending well targetted enough to have lifted the US out of what is basically economic stagnation. Substantially increasing the size of the deficit could do it, but what are the chances of that happening?

    Why should credit growth resume and then push to new heights just because that is what has happened following every other post-WW2 recession? It’s obvious that there is a debt ceiling of some kind, which consumers struggle to push beyond. I’ve no doubt that credit growth can turn around, but will it happen any time soon? And how far can it go?

    Interesting questions that I doubt anyone can confidently answer in advance.

    1. Lefty,
      Consider that for a “credit boom” to occur, all that has to happen is that households form and buy a home to live in, and a car to put in the garage to drive to work.

      1 million new households (less than 1% growth) times 200k for a home and 25k for a car = 19B/mo. new credit creation, 225B annual (3.3% growth in current 6.8T L&L).

      But it is also not entirely clear to me at this point what flows will enable the household sector to proceed this way…


    2. At the end of the long financial cycle culminating in Ponzi finance, there is a lot of debt that cannot be repaid and must be extended, restructured, written down, or defaulted on. This is a painful process that results in either drastic liquidation and depression or else an extended period of stagnation while the necessary deleveraging and clearing out of excesses like malinvestment.

      It all depends on where one thinks that this scenario is right now. My guess is that we will look back on this and see that Great Depression II began in March 2008 with the demise of Bear Stearns and will last about ten years. Year wise, we are now around the first quarter of 1932 in GD I terms and Obama is Hoover.

      If this is correct, the present generation is going to have to take the medicine of debt-deflation for some time and this will impress a deep and unpleasant memory on the nation’s collective mind set. According to the theory of financial cycles, it takes a couple of generations for this deep cultural impression to wear off before another round of Ponzi finance sets in.

      This is the Minskian scenario. Ray Dalio summed this up for Barron’s in Feb, 2009 here. Bridgewater did pretty well following it.

      It is possible that the world is a lot smarter now and will mitigate this scenario, but the way things are going I am not encouraged. While there are admittedly some encouraging signs of life in the real economy (remember “green shoots”?), the financial indicators remain rotten.

      1. Tom,

        I don’t think it will get to the debt deflation stage. When the first depression hit in the 1930’s, the government was a lot smaller then and there was no corporate profits for two years until FDR came to power and ran deficits. Today, corporations are flush with cash which came from the government, so I don’t think it will ever get that bad again. They had no automatic stabilizers then. Around the world there doing everything to weaking them so maybe the next financial crisis will be worse than this one.

        I still find it hard to see where demand is going to come from, everybody is trying to export their way out of this mess by running austerity in their domestic markets but this can never succeed because to export your way out you are depending on the domestic incomes of foreigners. It’s a fallacy of composition problem again.

      2. BFG

        You make some very valid points and I have said much the same to many of my friends in our discussions. When they point to the fact that this isnt as bad as 1930s because we have no bread lines, we dont have massive runs on banks and we dont have the destitution many saw from photos (although I think we are hiding much of our destitution today) I counter with “Thats because much of the New Deal era programs like FDIC insurance and unemployment insurance keep a floor under which aggregate demand wont fall, these are the reasons we have not gotten so bad” They usually dismiss the New Deal programs as simply wasteful govt spending which “produce” nothing.

      3. Please see the recent post on the relationship between federal deficits and corporate profits Warren posted.

        Businesses make lots of money when deficits are high, less when they are medium, and little when they go negative.

    3. A deficit that is still 9% of gdp is continuously adding heaps of net financial assets and income to the non govt sectors,
      that savings is the financial equity that supports the credit structure.

      know one can know for sure, but my best guess is that with another year of this or less we could be facing accelerating credit expansion.

      unless of course, the new congress gets serious about ‘fiscal responsibility’ and kills it

      1. Warren,

        Have they expanded the pubic debt limit yet, it must be nearing the $14T limit? With the elections coming up it could be an unnecessary nuisance.

  3. If the debt to income ratio has lost its ability to forecast as it does not breakout wealth distribution. Has wealth distribution improved? What is the obligation/disposable income ratio of non-bankrupted middle class America?

    How does this graph predict next year’s borrowing of the bottom 25%, who just defaulted on their debts and have great ratios? They can’t even borrow for 4 to 7 years. Those that have defaulted on their mortgage and still live in their home, have great financial obligation ratios but no ability to borrow!

    How does this graph predict the borrowing of the top 10%, who have higher incomes and no need to borrow? They have great ratios and no reason to increase borrowing.

    How does this graph predict the borrowing of the middle 65% that will be lucky to pay their debts down faster than the prices fall on the assets that support their loans? Prices of houses are falling again.

    Depending upon when the write-offs occurred, maybe in 2 to 7 years, this graph will again have meaning.

    1. Winslow,

      Perhaps you cannot “take your automatic stabilizer to the bank”?


      PS Warren virtually top-ticked equities this cycle using this indicator back in late 2007 when I heard him on Mike Norman’s show. I think his exact words on Mike’s show were: “the financial burdens ratio is flashing red”, I think the equity highs were in Oct ’07 right about this same time.

      1. Yeah I remember that. I think it was going back into 06 when he made the “flashing red” proclamation. But in fairness he was kind of bullish just prior to the oil peak in 08 because of he bush stimulus.

      2. remember it reasonably well. q208 printed gdp of maybe 2.7%?

        karim said it seemed that with the stim was over q3 wasn’t looking so good.

        i said if there’s a slow down, they can just do another 170 billion, after seeing how well the last one worked. all we ever do is live from stim to stim.

        well, q3 did slow down, and a lot more, and congress did nothing, even after seeing how the last one worked, until maybe mar 09.

        guessing what those guys might do next is always high risk

    2. It is an aggregate, but works pretty well as the composition doesn’t change all that fast.

      It’s what helped me to call the turn in the cycle back in the middle of 06 on my bulletin board before I went to this blog format.

      Also, sellers give credit to get things sold. it’s not necessarily about banks.

      1. “It’s what helped me to call the turn in the cycle back in the middle of 06 on my bulletin board before I went to this blog format. ”

        ..and thanks for making that call!

        “It is an aggregate, but works pretty well as the composition doesn’t change all that fast.”

        Okay, but I know a lot more people in 2010 that won’t be borrowing or buying a house for many years, many in their 40’s or 50’s.

        Consider interest rates have been falling over the graph’s 30 year time span. From personal experience much of adjustment in the ratio came by the Fed/gov lowering interest rates. Given interest rates have already fallen close to zero, the adjustment in the ratio is now coming through default, rather than increasing incomes. It would be interesting to see this chart back to the early 20’s in order to see how the GD affected borrowing habits in the 40’s.

        Even if the 40’s borrowing was preceded by a similar number to that seen in the 20’s, borrowing was at least partly boosted because a large portion of the redistribution in wealth was complete.

        We still have no redistribution in 2010.

      2. Every 34th wage earner in America in 2008 went all of 2009 without earning a single dollar, new data from the Social Security Administration show. Total wages, median wages, and average wages all declined, but at the very top, salaries grew more than fivefold. …

        Measured in 2009 dollars, total wages fell to just above $5.9 trillion, down $215 billion from the previous year. Compared with 2007, when the economy peaked, total wages were down $313 billion or 5 percent in real terms.

      3. Winslow,
        “and average wages all declined, but at the very top, salaries grew more than fivefold.”

        ‘For to everyone who has shall be given, and he shall have a superfluity, yet from the one who has not, that also which he has shall be taken away from him;’ (Mat 25:29)

        Hang in there we are up against a lot. Resp,

      4. it’s worse, if anything.

        and we have 0 rates which are probably highly deflationary.

        hence we can run even larger deficits without inflation.

        but don’t

  4. Is there any way of figuring out if these figures include “black market” assets? I hear more and more anecdotal evidence of increasing off the books transactions with the implication being that assets are disguised while debts are easy to document so the ratio in the chart may already be lower than stated.

  5. Hi Matt.

    I think Tom and Winslow have it correct.

    The private sector has accrued a staggering level of debt, the recent peak before the fall has taken a human lifetime to achieve. 300% of GDP in the US easily beats the last peak of 240%, all those years ago in 1929, just before the crash. In those days, I believe that most of that debt was held by a few tens of thousands of individuals for speculating in the stock market but today it is much more broadly held by the public at large. That would be consumers at large. So the composition of the debt is obviously important.

    The system came down when it became apparent that large numbers of people could not service the amount of debt they had taken on. Which looks to me as though a “debt ceiling” had been reached by the private sector.

    To my way of thinking, there just seems to be so many things working against any strong reversal of the credit situation any time soon. Unemployment appears to have risen again, house prices appear to be falling again (which will put more and more people into negative equity for as long as it continues), much of the excessive debt being held is mortgage debt which cannot be paid down quickly, foreclosures destroy borrowing ability, the foreclosuregate legal mess itself – the winds are now blowing in reverse.

    We should consider possible shifts in mass phychology – which I think Tom has alluded to – after all that has transpired and is continuing to transpire, are there really large numbers of people out there who are just itching to borrow or borrow yet more? Are parents and grandparents telling their offspring that the way to get ahead is to dive as deeply into debt as possible, speculate in real estate etc – the normal run of things before the crash of 2008? I think not.

    I think people may have learned an important lesson about what is a sensible level of debt. A good thing in itself – but it raises it’s own problems. Modern economies have evolved to be heavily credit-driven. Without a high level of it, ongoing heavy unemployment and all it’s associated problems are likely to be the norm.

    We know that government sovereign in their own floating fiat currencies have the ability to attenuate this situation as there is technically no limit to their spending. Where we potentially run into problems is in the areas of politics and the culture it reflects. The US government could easily banish unemployment by becoming a much larger and more active part of the economy – but the chances of that look slim, for the moment at least. To many Americans, “big government” is a step on the road to communism. There is a culturally conditioned fear and hatred that politics must pander to, making the most effective approach politically very difficult to implement.

    So the government is hoping for recovery and growth through the resumption of the private credit cycle. I’m just not convinced that this is going to occur. Have we reached the end of an era? I don’t know – but I would not be at all surprised.

    1. Lefty, I think and hope that we have reached or are close to reaching the end of the neoliberal, neoconservative, neo-imperial, and neo-colonialist era. The economic thinking that is leading to its demise is so 19th and 20th century. It does not fit conditions unfolding in the 21st century, where the emerging nations are going to be power players, too, and will demand their due.

      The GFC has already shaken confidence in neoliberalism, and I suspect that the unfolding of its internal contradictions is going to deliver the coup de grace, or maybe the death of a thousand cuts. We have been fooling ourselves not only about unsustainable debt but also unsustainable economics based on unlimited growth assuming infinite resources. There are a number of game-changing factors that are converging.

      I suspect the ensuing period is going to be a time in which the players look at how to make the global economy work for everyone after financial capitalism has finished itself off and the neoliberals are ousted. What a new system would look like is still unclear. It will be the younger economists now coming of age that will determine it.

    2. The private sector has accrued a staggering level of debt, the recent peak before the fall has taken a human lifetime to achieve. 300% of GDP in the US easily beats the last peak of 240%, all those years ago in 1929, just before the crash

      Unless the United States ran a Medellin, Colombia-style trade surplus year after the year, how could both the govt sector and the private sector be in debt? Not only is private sector debt not staggering, in aggregate, it doesn’t exist. Household net worth is $53 trillion (“net” is, of course, assets – liabilities).

      The elephant in the room is income and wealth inequality. 10% of families control 73% of household net worth, the next decile controls 12% and a slightly larger percentage (15%) is share by the remaining 80% of US households. And that 15% is buoyed (at least in these 2007 numbers) by widespread home ownership. The bottom 80% owns only 7% of financial wealth.

      That’s the “stock” (i.e. wealth) issue, Tim Noah discusses the “flow” issue in a recent Slate series.

      The United States of Inequality
      Trying to understand income inequality, the most profound change in American society in your lifetime.

      1. I think I got the Medellin, Colombia trade numbers backwards and I’m too tired to come up with a converse metaphor. :o)

  6. Hi Tom.

    I hope you are right about the end days of neo-liberalism. What a blight on humanity it has been (and continues to be)!

    I too am hopeful that is the beginning of the end for the rotten system. But it’s clear that the old dog won’t just bow out gracefully – it’s going to fight to the death. I won’t be surprised if global economic and social instability continues to play out until nearly 2020.

    I sincerely wish Warren all the best in his quest to be elected to the US senate. If he can succeed in altering the mindset that currently dominates, all will be better off for it.

  7. Beowulf,

    there are examples of the government budget being in deficit, the current account balance being in deficit and private net savings being negative – all at the same time. This occurred in the US from the late 1990’s to the early 2000’s. As a non-economist, I did question Bill Mitchell about it but I can’t recall exactly what he said. But of course, deficit and debt are two different things.

    “Not only is private sector debt not staggering, in aggregate, it doesn’t exist.”

    Could you clarify that statement? The net wealth held as assets by the majority is surely not easily realisable in a monetary sense – if I sold my house and both cars, I would have hundreds of thousands of dollars in my pocket but nowhere to live and no way to get around in a place where public transport is lacking. The value of these assets is not set in stone – but the value of the debt I owe on them is.

    I agree with you regarding the gross mal-distribution of wealth.

    1. By “in aggregate”, I meant that the private sector as a whole, holds far more in assets than it does in liabilities. When you speak of assets “held by the majority”, we’re back to the distribution of wealth issue. Remember, 80% of US families divvy up 15% of household net worth. If you do have a positive net worth, well, its like Robert Kennedy pointed out: its the things in life that economic statistics don’t count that make life worthwhile*. Everything else is replaceable (or realizable). You can always hire a taxi to take you to a hotel. If you’re going to stick around, you can lease a car and rent a house.

      *“Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile. And it tells us everything about America except why we are proud that we are Americans.”

    2. Lefty, private savings are hardly ever negative. What could be the case is that personal savings rate has been negative due too equity withdrawals. But it does not mean private savings rate has been negative.

    3. those three can be negative. in the years you mentioned the govt deficit plus private domestic deficit = foreign accumulation which is the current account deficit for us.

      1. Right, a govt sector deficit plus private sector deficit must equal a ginormous foreign sector surplus (which typically is a mirror of the trade deficit).
        As for where the economy is today, we can rearrange the sectors:
        9% (Govt) – 3.8% (Foreign) = 5.2% private domestic savings

        In terms of cutting the federal budget deficit, the govt can tackle foreign sector (directly w/ tariffs or indirectly w/ cap and trade) or private sector (w/ taxes). Instead of raising taxes, private sector share could be reduced by cutting spending on net interest (1.5% of GDP, CBO projects this to more than double over the next couple of years). So stop selling debt longer than 3 months out. At today’s auction, 3 month Treasuries sold at .13% annualized. No point lobbying for a no-bond system when we could far more easily transition to a 95% cheaper bond system.

        To that end, let’s pretend Tsy and the FRB worked for the taxpayers (ha ha, thanks for the salary and benefits, suckers): If the federal funds and repo markets went through the Fed discount window (and since the Fed refunds net profits to Tsy), the interest charged would become a rather efficient reserve drain (i.e. “tax”) instead a Wall Street profit center. Taxes on the non-financial sectors of the economy could be correspondingly lower.

  8. “there are examples of the government budget being in deficit, the current account balance being in deficit and private net savings being negative – all at the same time. This occurred in the US from the late 1990’s to the early 2000’s”

    No, that can’t be right. I was confused by a chart put together I think by Scott Fullwiler. Bill Mitchell presented a chart of the sectoral balances for the Australian economy. The way Bill constructed it was to show the public deficit/surplus as the near-mirror image of the private sector surplus/deficit, the difference between the two being the current account balance. In Scott’s chart, he has constructed it differently, showing public and private sector balance tracking one another instead. I interpreted his chart as showing the US government budget being in surplus from pre-1970 until nearly 2000 but I know that didn’t happen. What looks to be a government deficit is in fact the Bill Clinton surplus. I have misread the data.

    However, I still see no reason why the private sector cannot accrue an ever-increasing amount of debt simply because the government budget balance is in deficit.

    1. Lefty,

      I’m with you on the clearest way to draw the chart. I think the mirror image is the way to go.

      In the post you are referring to of mine, I was simply showing the three balances individually that make up the accounting identity–private net saving, govt deficit, current account balance. The “mirror image,” while more visually pleasing, is a bit of a rearrangement of that, while summing up both sides of the equal sign in the identity instead of showing each of the three balances separately. Hope that makes sense.

      As noted, though, I decided after some discussion with Ed Harrison several months ago that the method you apparently prefer is the best way to present, for the reasons you’ve mentioned.

      1. Quick correction–the mirror-image graph is of each balance shown above the axis if surplus and below if negative, using the capital account for the int’l balance, rather than the current account. The accounting identity, on the other hand, is private balance = negative of govt balance + current account.

  9. It might be wiser to view that chart as a bubble about to mean-revert to the historical norm.

    The chart is rather mislabeled in the blog post, as it is not the ratio of debt to assets but the ratio of debt-service cost to “disposable” personal income. It’s also unfortunate that this plot doesn’t go back to the 1950s/60s or 1930s so we could look at other eras of low interest rates.

    The factors driving the FODSP ratio lower are:

    (1) Interest rates have fallen … so servicing costs are lower. They had better stay lower, because unless we want to perpetuate the Ponzi, the principal has to be paid down, defaulted, or inflated away. And the rates won’t stay low forever. Furthermore:

    (2) Government spending of printed money has provided a temporary unsustainable boost to disposable personal income. People know it is unsustainable. Those short on money will not (or will not be allowed to) go further) into debt until they feel secure in their incomes (or can demonstrate security to lenders).

    Finally – it’s entirely possible for the FODSP ratio to return to the 18-19 danger levels WITHOUT debt being increased, if disposable personal income is crushed.

    It could also drop from the current 17% level WITHOUT an improvement in disposable personal income, if capital asset prices mean-revert to historic valuations and force underwater borrowers to default.

    And as the commenters above pointed out, there are at least Two Americas here, and the 90%(?) who have only debt and little in the way of assets are having very different experiences from the other 10%.

    1. Good points points about paying attention to both the numerator and denominator of this ratio. I was also thinking the same thing with regards to the series going back only to 1980.

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