Friday, August 28, 2009

Household Debt, GDP and Mr. Obama

Back to the main focus of this blog: debt and the economy.

A comparison of nominal GDP (i.e. in current dollars, not adjusted for inflation) and household debt clearly shows a rapidly rising debt burden for America's families. The ratio of such debt to GDP has been rising for a long time; the chart below is familiar to most of us and has been displayed in this blog several times. Notice the leap from 65% to near 100% beginning in 2000.

Household Debt As A Percentage of GDP (Data: St. Louis Fed)

We can further analyze the annual growth rates of the two elements of the ratio, i.e. nominal GDP and household debt, to produce the chart below. We can immediately identify two time periods during which debt grew much faster than GDP: 1984-1987 and 2000-2007 (grey boxes).

Annual Growth Rates In GDP and Household Debt

There are two major differences between the two periods:
  1. The most recent period lasted twice as long as the first one and ultimately resulted in the onerous debt burden of 100% of GDP for American families.
  2. During 2000-07 conventional mortgage rates were less than half than those that prevailed in the 1980's (more so when we consider the recent popularity of adjustable-rate mortgages which peg off much lower short-term rates).
In other words, we can conclude that today's debt burden was not created by a temporary spike in interest rates which added to the principal amount owed by Americans during an economic slowdown, but came about by taking out more and more loans against inflated assets, principally real estate. During 2000-07 GDP (and earned incomes) grew slowly, and even this anaemic growth came about from mostly from borrowing and spending instead of investing and producing. The bursting of this credit/asset/consumption bubble was a foregone conclusion long before the collapse of 2008.

Looking forward, what can we say about the prospects for a rebound? First of all, it is obvious that this downturn is completely different from every other post-WWII recession. Its causes are so entirely different (e.g. they have little to do with excess inventory build-ups) as to make comparisons and predictions based on past cycle analysis misleading, if not worthless.

From this follows that the current focus on bailing out the financial industry is akin to sheltering the flu virus instead of containing and eradicating it. It means that Mr. Obama is either (a) mostly ignorant of (somewhat sophisticated) economics and has thus allowed Messrs. Bernanke, Geithner, Summers and their Wall Street brethren to bamboozle and/or scare the daylights out of him or, (b) is completely in bed with them. From my sizing up of the man I opt for (a) in combination with a realistic assessment of Democratic Party internal power plays (e.g. Mrs. Clinton at State).

Therefore, I come up with both an explanation for what has been happening thus far in financial markets (don't worry boys, the guy is essentially clueless and can't/won't stand up against us) and a prediction of the future (the mutated virus will come back with a vengeance).

What should Mr. Obama be doing instead of listening to the Wall Street harpies? Immediately shift focus to the real economy, where real jobs and earned incomes are generated, preferably by overhauling the energy and transportation infrastructure of the United States. There are millions of highly skilled jobs waiting to be created right there, not to mention the tremendous added benefits of shifting away from petroleum (slashing the defence budget, geopolitical gains, environmental and health improvements).
___________________________________________________________


Addendum: August 31, 2009

A reader asked for a longer chart of the Household Debt/GDP ratio. I don't have one, but I can provide a Total Debt/GDP chart going back 100 years.



31 comments:

But What do I Know? said...

***What should Mr. Obama be doing instead of listening to the Wall Street harpies? Immediately shift focus to the real economy, where real jobs and earned incomes are generated, preferably by overhauling the energy and transportation infrastructure of the United States. There are millions of highly skilled jobs waiting to be created right there, not to mention the tremendous added benefits of shifting away from petroleum (slashing the defence budget, geopolitical gains, environmental and health improvements).***

Amen. Testify, brother.

The simple idea of spending borrowed/created money on something useful and forward-looking seemingly gets lost in the minutia of self-referential economic data. I guess the sunk-cost infrastructure interests are still too powerful to make any major changes, and things will have to get far worse before they get better.

I remember Obama's reply to a woman who asked him about installing single-payer health insurance, something on the order of "If we were starting from scratch, we'd do it that way, but we're not starting from scratch."

This country is acting like we have too much to lose from change, when in reality, we will lose it anyway if we don't change.

Debra said...

The country is acting like the rich young man when Jesus tells him to give it all up to follow him...
If you're constantly reasoning along the lines of what you have to lose, then you end up... losing everything anyway.
I've already said everything I think about Obama. I'm not going to continue repeating myself.
Lots of opportunities out there, I definitely agree. Just have to stop trying to constantly measure all we have to lose by implementing change.

Hellasious said...

In Bob Reich's book about his experience as Bill Clinton's first Labor Secretary (Stuck In The Cabinet) there is a passage about his visit to the Fed and his meeting with Greenspan. Creeeeepy.

There is also a passage about how the Clintons' initally idealistic views on social reform, health insurance, etc. were completely emasculated by the same Wall Street harpies operating on Obama today. "You can't do THAT! The "market" won't like it."

I DO hope Obama is smarter and more self-confident that the Clintons.. but I haven't seen any hard evidence yet.

Joe said...

I would say by allowing his managers to run things Obama is in bed with them. Summers is real big on the Behavorial Science Model where perception trumps reality or green shoots.

Personally, I think the whole political landscape is a circus. The one unique aspect of this circus is that it is entirely populated with clowns.

Joe M.

Arnould said...

Arnould from France:

So you still hope in Obama?
.

Oregon Guy said...

Arnould,

I donated money to Obama, my family donated time to his campaign, and my wife and I voted for him. It pains me greatly to say I have lost all hope that he will be an agent for real change.

I have heard it said that Europeans see U.S. presidential candidates as a choice of the far right wing and the slightly less far right wing. I used to think this was funny; now I think it is true.

Debra said...

Hey, Oregon Man, don't feel too guilty or manipulated. Over here in eurozone country nobody, absolutely nobody should be pointing fingers, because...
Wall Street, or CACA rente, or whatever are in bed with the politicos, left and right, ALL OVER THE PLANET.
Ya know, that's what... globalization of CAPITAL is all about, right ?
Nothing looks more like a Wall Street trader than...
a CITY trader, or a Frankfurt trader, right ?

Anonymous said...

What should Mr. Obama be doing instead of listening to the Wall Street harpies?

Well, *I* would like him to send Tanks at the FED - Boris Yeltsin style. Acknowledge what Is:

The USA today is exactly like the USSR was except that the US intelligence services are bloated and incompetent ;-)

Anonymous said...

It all comes back to: You can save the oligarchy or you can save the nation.....

Pick one Mr. Obama, you can't have it both ways.

Best regards,

Econolicious

OkieLawyer said...

In Bob Reich's book about his experience as Bill Clinton's first Labor Secretary (Stuck In The Cabinet) there is a passage about his visit to the Fed and his meeting with Greenspan. Creeeeepy.

Could you please flesh this out a little bit, H?

Anonymous said...

Leper's not viruse. No acountability as they are prepared to fundamentally finish us off. Bottom line people. Novote can fix this only competance which is NOT going to happen as I write thei there blathering on party this party that.
It's over for the long haul. The pork chop in your face on health care is a ruse. Wake up

Anonymous said...

Let me see if I get this right,

The naive, well-intended president is being fooled by clown bankers who present him with bad data and distorted ideas.

Puhlease...

Hellasious said...

Re: Bob Reich's book

I do recommend you read his book. He writes in a humorous and acerbic style and the information on how things are actually done in DC is quite valuable. By the way, this is also true (minus the writing style) of O'Neil's book - he being Bush II Sec Treas.

Best,
H.

Sideways said...

I don’t see anything unusual in the behaviour of people like Messrs. Bernanke, Geithner, Summers and their Wall Street brethren. I would expect nothing less. The same idiots who started out by pointing us up the wrong road are going to be precisely the same people who keep on pointing us up the wrong road. The whole thing’s got to be played out to the better end when everything goes tumbling off a precipice and down on to the rocks of complete financial collapse. There’s no failsafe option in this.

Anonymous said...

i guess mr obama is smart an may be way smart othwe wise why would he want to build a civilian national army( strong as national army ) . hmmm fishy fishy fishy all who works in his campaign gonna be in dat army . get ready pplzz

Anonymous said...

I used to think it was '(a) mostly ignorant of (somewhat sophisticated) economics", and perhaps it was. Now I'm pretty sure it's "(b) is completely in bed with them". You know what they say, "if you can't beat them, join them...".....

Let's face it, what's the downside for Obama.....?

Best regards,

Econolicious

Get Real! said...

You identified the problem, that the US is under a debt problem, and you partially identified the cause, Obama's ignorance. I say partially, since it was not Obama's fault for the entire Federal debt, you can thank, G.W. Bush, B. Clinton, G. Bush and R. Reagan too, for the present Federal debt.

But you missed the obvious, the US public are largely to be blamed. They borrowed money without thinking what they can afford. This mess is largely the ordinary man in street's responsibility. Yes Wall Street helped things along. Yes Main Street encouraged things. But Your Street bought it hook line and sinker, what is it they say about about a fool and his money? Damn lot of fools in the US if you ask me.

And for your solution, "...referably by overhauling the energy and transportation infrastructure of the United States.", you have got to be kidding!

First of all, YOU CAN'T AFFORD IT!
Secondly, that's not the problem.

The problem is this... GROWTH. You can't afford this anymore. The entire economic system is a Ponzi scheme (N.B. I personally think Madoff should be released from jail since he is innocent, he hasn't done anything that the Federal Reserve or the US Government been doing for decades). You use incoming immigrants, to generate revenue to pay for present bills. The US government uses uses future revenues to pay for present bills. This is a Ponzi Scheme.

If you want to do anything. STOP GROWTH. You don't have enough water in many states, you don't have enough oil for your energy needs. It's time the US started living within its means.

You can solve many of the problems today just by stopping growth. In fact you should start shrinking your population, that will start all sort of positive things. House prices will start to come down. Pressures on health care will start going down. Your need for new infrastructures will not be needed, so taxes can go else where, like health care, and schools.

YOUR PROBLEM IS SIMPLY THIS:

YOUR HOOKED ON GROWTH, LIKE A JUNKIE ON DRUGS.

SOLUTION: STOP GROWING, YOU CAN'T AFFORD IT ANYMORE. IT'S TIME TO SHRINK.

Debra said...

Gulp, as someone who often uses those BIG CAPITAL LETTERS, I must say that, Get Real, YOU are really rather irritating.
What is it with this YOU ?
I suppose that YOU are NOT YOU ???
Are YOU from a NOT YOU country ?
Where are YOU from ?
Wise up a little bit, and check out one of Okie's links in a previous comment about what is currently fueling consumer debt in the U.S. these days before you come back here strutting like a rooster again...
I can't be bothered to give you the link, you'll have to look, unless some kind hearted soul feels like pulling it out of the magician's hat for you.

Anonymous said...

Question, does anyone know what that graph looks like going back to the 1920's? Interested in seeing where that debt stood before and during great depression. Thanks.

Hellasious said...

Re: Longer chart

Please see Addendum on the body of the post.

Mark said...

The Debt to GDP ratio has been my favorite chart since 2002 after the tech bubble crash. I think I first saw it in Prechter's Conquer the Crash book. At the time it was 299% of GDP, yet the moon shot continued to a current ~370% of GDP....extraordinary!!! This, while realizing that GDP is inflated through hedonics and other government falsehoods.

Since I first saw the chart I have been waiting for the debt collapse like the we experienced in the 30's, but the ration just kept growing. Who is to say it can't go to 500%? It seems like we are at or very near the "peak" and it is time for a major turn. We'll see

Anonymous said...

Does that total debt include, Federal, state, local plus household debt? Is that everything added together?

Also, the chart years are hard to read can you post a more clear one, or reference the source so I can take a good look at it if possible. Thank you so much for posting it, very helpful.

Anonymous said...

Hell,

I've got a Morgan Stanley chart with debt broken out by sector going back to the '20s. Is there an e-mail I can send it to?

Hellasious said...

email contact for Morgan Stanley chart

hellasious(at)windowslive(dot)com

Many thanks in advance,
H.

Thai said...

If history is any guide to the future- we all know the answer to that modeling dilemma- at least we might expect some good news on the health improvement front as boom times are as bad for our health as recessions are good.

Whoocadanode?

Anonymous said...

Спасибо давно это искал. Спасибо

Bobby said...

While I think shifting resources toward infrastructure (transportation/energy) as a means for generating jobs is a great idea, the political winds just aren't blowing that way on the heels of what should now be apparent is a debacle regarding healthcare. Unless the White House learns how to better sell its proposals to John/Jane Q. Public, then they're doomed in selling such a stimulus package. The anti-gubbermint folks are all riled up at the moment.

Anonymous said...

Re: selling the national health plan

The vested interests of the current system (insurance cos., hospital cos., pharma, lawyers, et al) have a HUGE "advertising" budget operating against Obama's plan.

Thai said...

Amen, they are VERY entrenched.

But understand, the basic Obama plan- paraphrased in the words of Ezra Klein as "the theory behind health care reform. Costs will jump in the short-term as we expand coverage, but contract in the long-term as we make changes to the system"- is also very legitimately criticized on moral grounds.

I understand most people want universal coverage (without much clue as to what such a concept truly means), but is it really right to kill more people than you save in order to achieve such a goal? (as some data on US health care spending suggests, such as this Congressional Research Service report which compares US health care spending with other OECD countries (look at page CRS-50, which may be page 56 in your .pdf reader).

Data like this suggests that every additional dollar we spend on health care might REDUCE median national longevity if low value health care spending crowded out higher value spending such as safer roads or better primary education.

It is quite a trade to make in order to achieve a goal: kill even more people to save fewer in the name of universal coverage without rationing.

Anonymous said...

Just an aside - you might want to consider using "President" Obama instead of "Mister." If you're going to use an honorific, use the proper one. I consider just "Obama" perfectly acceptable, too.

It's just that the wingnuts use Mister (when they're being nice) and it makes you look like you're on their side.

Suecris

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