Monday, May 18, 2009

Low Wages + High Consumption = Massive Debt

Today, a continuation of the previous post's theme on the loss of earned income, its substitution with debt as an enabler of continued consumption, and what it all means for today's "Great Transition".

The reasons why the current "crisis" is not going to pass quickly and painlessly can be traced back several decades.
  • Real earned income per worker in the private sector, i.e. wages and salaries adjusted for inflation, collapsed after 1972. Average wages are still 16% lower than in 1972, when Nixon was two years away from resigning as President.
Real Average Weekly Earnings Per Person
Employed In The Private Sector (1982 dollars) Chart: BLS
  • Despite the massive drop in real compensation, which produced a brief flattening-out period in consumer spending between 1973-1982, Americans quickly resumed spending with gusto. Real personal consumption expenditures (PCE) per person working in the private sector kept rising ever higher.
Real Personal Consumption Expenditures Per Person
Employed In The Private Sector
(2000 dollars)

  • In the face of dropping real earnings, how was this ever-higher consumption possible?
In two ways:
  • First, the saving rate was drastically reduced all the way down to zero; it even went negative for a short while at the height of the real estate and credit bubble. People spent more and more of what they earned instead of saving some of it.
Personal Saving Rate Chart: FRB St. Louis
  • Second, American families went into massive debt. Household debt exploded upwards from 42% of GDP in 1972 to 98% today.
Household Debt as Percentage of GDP

  • Further, when we look at real household debt per person employed, the picture is even more troublesome. Real debt per working person tripled between 1970 and 2008, despite the fact that many previously non-working people entered the workforce - e.g. women.
Real Household Debt Per Person Employed (2000 dollars) Data: BLS, FRB

What does this mean for today's credit-challenged economy? It means that it cannot bounce back as fast as it did in previous recoveries (a.k.a. V-shaped), because debt can no longer act as the potent catalyst for consumption (70% of GDP).

Therefore, the signals now flashing from the financial markets are very likely too optimistic. The stock market, in particular, is discounting a future for private consumption and corporate earnings that would have been possible, even probable, twenty or even ten years ago but cannot happen now.


  1. Dear Hel,
    The house of Rothschild was behind the Balfour Declaration, one can't discuss debt and banking thoroughly without examining how they have been used to further the interests of some groups to the detriment of others. After all, where did all the money go? It was used to achieve certain objectives (military bases, of which Israel is one, circling the globe) and not others (health care, education, renewable energy). JMO

    BTW, did you have a chance to take a look at the piece on the IMF. I can't see the rationale for what they are doing unless they are hiding something.

  2. Well, you know Thai mentioned in one of his comments on the last post that "a rose by any other name..." etc etc, you get the point...
    The idea is, just WHAT IS THE DIFFERENCE between financing all that consumption with consumer debt, or financing it with consumer wages and savings ?
    There is a BIG difference, as one of my friends who has done his homework on France's postwar (WW2) situation and the new society that was born after, ie, socialized medecine, a new deal, WHEN POSTWAR ECONOMIES WERE JUST A HEAP OF ASHES, AND POSTWAR SOCIETIES WERE IN TATTERS.
    If you finance your consumption by consumer DEBT then you have the citizenry AT YOUR MERCY, don't you ?
    You have all those people slaving away to make the next payment, and well, they're not going to be mobilizing, or in the streets, or organizing, BECAUSE THEY DON'T HAVE THE TIME TO DO IT, they're too busy sweating away to make the next payment, right ? And they're too worried about not being able to make that next payment, and losing everything to see just how much the whole system stinks, and that they are being reduced to REAL SLAVERY, right ?
    Careful, I'm not saying there's a conspiracy involved.
    Voluntary servitude takes the wind out of conspiracy theories, you know. It's just SO effective, voluntary servitude...

  3. Hell, a question?

    Are your debt figures offset by American foreign investments, e.g. the money that foreigners owe Americans?

    Is it possible that we Americans sometimes borrow "here" to invest "over there"?

    Or are your numbers already "scrubbed" for this?


  4. Re: net debt figures

    Debt of US households is almost entirely composed of housing (most of it), consumer, auto and education loans. In other words, it's not of the "borrow here - invest there" type.


  5. Re: IMF

    They just want more lending authority, particularly for bailing out Eastern European countries where lending was incredibly frothy and awesomely irresponsible.

    Look into how many western banks lent there and connect the dots...


  6. The way I understood the article, all of the potential (acknowledged) applicants combined would never be allowed to borrow more than a small fraction of the funding being requested. The Fund seems to be lining up financing for an unstated objective.

  7. Two realities in the 1970's that disappeared: Strong unions and a top income tax bracket of 70%.

    Not the answer to all problems but time to bring back decent wages at the lower levels and Haves bail out the Have Nots,after the Banksters' bailout. Oh and make the medical industry a social service organization.

  8. The other biggie was the US hit domestic Peak Oil in 1970. With this dwindling revenue source along with the Vietnam War we started to bleed like never before.

    Then Nixon converted the USD to full-fiat in 1971 and it has been downhill every since.

    In fact, I believe this whole global crisis is actually a dollar crisis as it moves closer to its intrinsic value of zero.

  9. We finally have a discussion about disillusioned capitalists.

    I ran into my friend Alexi on the street, at "City Place", a chi-chi shopping paradise, in West Palm Beach, FL, he's a Russian ex-pat.

    Alexi was for all intents and purposes as "Russian Mobster", that is, until he got involved in the business of mortgage origination, at which point he suddenly became a respected and upstanding "American Businessman". Because of his background, he was somewhat officially restricted in terms of licensing, but not to worry, he managed to set up an organization through a network of "foreign corporations" that alowed him to participate as a principal in the great realestate boom of the 21st century. He lived a lavish lifestyle. A mansion in Palm Beach and another in South Hampton, a penthouse apartment in NYC, a pedigreed trophy wife with just the right swelling of the lips, a horsefly bite, not the garish Hollywood wasp sting that you see in all the gossip rags, that
    appear soooo pedestrian. Lavish parties and charity galas. Yachting out of Palma and hob-nobbing about with the likes of and ex-president who's name I'll withhold. You get the picture.... "Livin the American Dream"

    Well, all I can say is that fortune has taken a turn in the wrong direction for Alexi. Let's just say that there are certain government institutions that are currently acting as proctologists in their examination of his financial wherewith, his assets have been frozen, his pretty wife has left him, or better said forced him out of the house (rumor has it that she has formed a liaison with one of the handsome hispanic landscapers). Let's just say that things are not going well for Alexi.

    However having said that, Alexi has not lost his affectionate charm and great sense of humor. As he was walking toward me on the sidewalk, arms up and spread out to hug me, with a smile from ear to ear and a twinkle in his eye, he shouted in his heavy Russian accent.....


    Best regards,


  10. Looks like Jimmy Carter bonds just might make a comeback however reluctantly.

    There is also now much more talk of establishing an Asian Monetary Fund to sidestep the IMF and US penetration of Asian economies. Less free gravy for the skimming.

  11. Can I point out that this is about the time that the Boomers were starting out in the work force? It's been a long downhill slide ever since.

  12. Well put H. The disparity in wealth distribution would further the nefarious outcome of the American Decline. This has been a horrific period of materialism and the worship of luxury/celebrity.

    As with any aftermath of drunken excess, in this case involving debt, the throbbing head makes us promise 'never again'. Thus, the consumer will not lever up again and spur growth. Sadly though, the government seems ready to quaff astonishing levels of debt to get the party started again.


  13. Math is hard, but I'll try anyway.
    population income per capita
    US 300 37610
    Euro 300 26260
    China 1300 4990

    weighted average = 13500

    That's probably the long term equilibirium for which we are headed over the next 20 years or so. Good for China, bad for US.

  14. In robert reichs "Supercapitalism" there is a graph you should look at. It plots wage growth verses corporate profits over the past 50 or so years.

    Up until 1980 the rate of profit increase and the rate of wage growth tracked each other, but there after wage growth fell behind the growth of profit.

    In my opinion this is what lies at the heart of the credit crunch. Real wages declined while profits increased, the accumulated profit were then lent back to the workers.

    The primary message for me is that this crisis did not occur due to a failure in capitalism but due to its success. The success in driving down workers wage can only be maintained through credit expansion, other wise who will by the product made by the workers.

    You might want to check this out:

  15. My long ago reading of Galbraith taught me that the financial establishment, to whom INFLATION is a big bogeyman word, has obsessively and small mindedly assumed that increased wages = inflation.
    Point, as we say in France.
    No analyzing to understand why this MUST be an equation. It simply amounts to reciting religious economic dogma as though it were a new liturgy, right ?
    Am I wrong about this ? If I am, please explain to me in terms that I can understand...

  16. Hell,
    Thanks for continuing to beat the debt drum. I am finishing up a post on related topic at TOD showing disconnect between remaining oil/primary energy relative to debt (i.e. the times in past when we were this much in debt as % of GDP, we had much more cheap energy to bail us out). It is my hypothesis that to keep up positional goods consumption after oil peaked and wages peaked in 1974, we embarked on 'false energy gain' via credit/debt.

    I can't find much debt data other than Government prior to 1970s - do you know of any household debt numbers back to 1900 or even earlier?

  17. This comment has been removed by the author.

  18. This post backs up my oft-repeated postulate that our inability to continue with debt-fueled consumer spending fueling 70% of GDP will force a structural economic change upon us.
    Give fx credit to the admittedly amazing financial alchemy of those 2 sorcerers, Bennie & Timmie: $15 Trillion in fresh obligations, guarantees, asset purchases, and bailouts in a mere 15 months! Wow...who coulda thunk it back in February 2008 b4 the Bear Stearns debacle?
    Nonetheless, special effects (i.e. fx) aside, the unloved, unwanted (by TPTB) and yet irrepressible structural economic changes continue, perhaps slower thx to the 2 sorcerers, while we kick-n-scream along the way.

    The big question: Upon what uncharted economic landscape will this Debt Unwind-driven Structural Economic Change deposit us...and when?

  19. SS, I refer your response to my comment that there is a world of difference between seeing the economy, and economic growth as a (finite) pie that has to be divided up into equal parts, and seeing it as a phenomenon where wealth (careful I didn't say what kind of wealth...) produces more wealth.
    This is a little bit like the glass half full and the glass half empty. Actually, Thai, just like your rose statement, the glass half full and the glass half empty are NOT THE SAME THING AT ALL, are they ?
    We have been blinded by our objective reality mantras for too long now...
    Thai, for what I can understand of your short expo of fractals on Hell's most recent post, they look a lot like a structuralist theory to me. (Mea culpa, Thai, I am a lazy lout, and as a lit major, I kind of stupidly decided that I didn't like the word "fractals", it just doesn't sound...mellifluous to my ears. This is real and totally irrational prejudice on my part, I admit it...)
    I have been swimming in structuralist holes for quite some time now. They are very very useful. As an ANALYTICAL tool, they are priceless, and they can take us far. But, you might want to check out someone like Daniel Arasse, as I have said here before (you too, SS, and you can read him in French while you're at it..) Too much concentration on the analytical aspects of human experience (i.e. what structuralism encourages) tends to dull our capacity to globalize and generalize, and these capacities are equally important to thinking.
    But I can tell that you are catching on to this, as you now seek to apply your fractals theories to economics, to see where they will take you. By all means.
    But.... in my book, Thai, REAL THINKING means confronting theories with PERSONAL observation of the world AT ALL TIMES. (What REAL clinical medicine is about, what my daddy did, while we're at it...) That means that you MUST change your THEORIES to fit your observations, not the other way around, as the banksters and intellectually wimpy economisters have been doing for quite some time now.
    How do you like that, Hell ? I copied you. Economisters. Except that the word seems to give them a kind of legitimacy that I DON'T want to give them...