Saturday, December 2, 2006

A Wall of Woe

There is a brick wall of debt and we are approaching fast. And we will hit. No doubt about it.

Aha, you say.. This is nominal debt, meaningless... Right you are. So here is real debt, in constant 2000 dollars.

But you are not concerned yet because America has a big economy. Naturally you want to see debt as a percentage of GDP . Here it is, then.

Now,this picture is not very comforting at all. It is actually more troublesome than the others because it makes plain how steady debt/GDP was for decades up until 1980, when it just took off. Sudden Debt.

Don't quit reading yet. The debt is in two very broad categories: Debt of the non-financial sector (households, corporations, government) and the financial sector (banks, brokers, GSE's, etc).

Now, that doesn't really look so bad, though if you look closely you will notice that the scale starts at zero, so the move from 142% of GDP in 1980 to 214% in 2005 looks benign. Compared with what happened to financial sector debt, it is.

To make the comparison between financial and non-financial sector debt more visible, the next chart is relative, i.e. 1980=100. At some point we need to get scared. Being a debtor nation is one thing. Being broke is another.


  1. You show an interesting chart of debt/GDP with the debt explosion happening in 1980. Could that be a combination of the abandonment of the gold standard in 71 and the entry of the Reagan administration?

    It seems that something magically changed in 1980, I wonder what it was.

    Civil Engineer

  2. I think so anonymous. You may be on to something there...

  3. Debt explosion - i agree. I think it was W.Merlin that caused that debt explosion personally. What I don't understand is that for a man of his calibre - 9 years is a long time to crack it! Thanks for the debt chart.

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  6. Hi dear "Hellasious"...

    ...just wanted to thank you for your insightful analysis...

    Been following your blog for quite a while now, and must sincerely admit that you're really terribly smart...

    quite astonishing (at times) the resemblance between your blog and mine...(although mine by far not reaching your technically detailed depth except for the "sarcastic and ironic tones" that have practically the same function "y(t) = A*sin(W*t + ө)"...LOL...)

    Anyway, keep up that excellent job "Hell"...and wish you all best


    P.S.: Put you on my "links list" hope you don't bother...

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