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More on debt and net worth

Posted by: Michael Mandel on March 20

By request, here are two charts.

The first chart is the ratio of household debt to GDP, starting with the end of 1959. You can see that the post-2000 jump has no historic parallel in the past 45 years, at least. Between 59IV and 99IV, the debt/GDP ratio rose from .39 to .67. From 99IV to 07IV, the debt/GDP rose from .67 to .98.

To put it another way, the rise over the past eight years is as big as the previous 40. I’m really not sure why I didn’t see this before. Partly it’s because there were some upward revisions in the debt numbers, but boy, this is a big jump


Now for the second chart, real adjusted net worth per capita.


This is calculated as household net worth minus state and federal debt, divided by population size, and adjusted for inflation using the gdp deflator.

This chart doesn't really tell me anything yet. We still seem to be on the long run growth path, but the Fed's numbers don't account for a big decline in home values yet.

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Reader Comments


March 20, 2008 09:09 PM


Thanks for turning this around quickly.

Was it also true that right before the Great Depression, debt also hit a multi-decade high? Should we be drawing this parallel at all? Will people with little or no debt of any sort be able to escape lightly?

On the bright side, the net worth chart seems to mirror the S&P500 almost exactly.

Which means that that the decline in home values may already be accounted for, since the stock market is 'real-time'. Most net-worth is concentrate among a small elite that did not take out subprime mortgages.

Brandon W

March 20, 2008 10:45 PM

As Kartik points out, most positive net-worth is concentrated among a small elite. So big asset growth doesn't help a substantial majority of Americans who have only kept up by squandering savings and racking up the credit cards. Well, the savings are gone, the cards are maxed, and the bill is coming due. It won't take long for the contraction in spending by 90% of Americans to contract the livelihoods of the elite who own the corporations. I'm more of a "calculations on the back of my hand" type, but my gut says a 20-25% contraction in spending by the "non-elite" is about right, over the next 3-5 years.

Joe Cushing

March 21, 2008 08:38 AM

You see that little down-tick at the top--where the line goes down on a 50 degree angle for a quarter inch? I'm sure you can just project that line out for about a year or two.

Joe Cushing

March 21, 2008 09:15 AM

I just noticed something. People are pointing out that the wealth is located in the elite. This implies that the losses are there also. The reality is you don't have to have net worth to suffer capital losses. You only need assets. There are millions of Americans with assets in the hundreds of thousands but have little or no net worth. These people are in store for a potentially detrimental capital loss that exceeds their net worth.

If the people can shoulder the losses there is still an effect on the economy. Take me for example. I might need to move to find work in the next 18 months. For the last 5 months I have been making payments that equal 3 1/2 times interest on my mortgage. If I don't do this I will never be able to move. This means I am not spending any disposable income on anything but principle payments. Other people in my town have a different strategy. They are buying homes in other states with their good credit scores, then letting their Michigan homes go into foreclosure. Neither strategy is good for the economy.


March 21, 2008 01:38 PM

Again, the wealth chart does appear to follow the S&P500 very closely, with all the ups and downs mirrored quite tightly.

This means that as soon as the S&P500 recovers, wealth will recover. The two have never decoupled in the last 50 years, and I see no reason for it now.

Declining housing prices hurt recent buyers, but actually increase the purchasing power of first-time buyers and others who were previously priced out.

Wealth is concentrated among the top few percent, but that was true in boom times as well, and is true in other OECD countries as well, so that is not the cause of any new problems.

Brandon W

March 21, 2008 03:27 PM

Something that has changed:
"Americans' percentage of equity in their homes has fallen below 50% for the first time on record since 1945, the Federal Reserve said Thursday."

2 cents worth

March 22, 2008 06:41 PM

Kartik has a logical interpretation that there is a correlation between the S&P500 and “small elite’s” net assets. But cash flows, not just assets, drive the economy.

To a value investor like me, Michael M’s key graph of Household Debt strikes the fear that those living “on the edge” will curtail spending or go broke; i.e., consumer spending may decrease significantly as Brandon W. notes.

The decline in the S&P already denotes a lack of confidence in the amount and direction cash flows. Much of the “small elite’s” money, as well as foreign investor’s money, is sitting elsewhere and will not return until confidence is restored.

While I am concerned about 1) low confidence in future consumer spending and 2) low confidence reflected via the “credit crisis” generated from high risk, unregulated investments, I am also concerned about a lack of confidence in the U.S. economy as reflected (I believe) in the decline of the U.S. dollar.

Here’s my question: If we are so concerned about the run up in debt per capita as Michael has clearly documented, why wouldn’t global investors be worried about the "networth" of our federal government? The future networth over the next decade doesn't look good.

Consider: a slumping economy, lower tax revenues as the economy slumps, a projected increasing debt (Iraq, Social Security, Medicare), long term rising commodity prices, low Treasury yields, and, the threat of inflation with diminished Fed Reserve weapons to fight it. Who wants to bet on that currency or those Notes? Do we have a problem for those who are supposed to be “in authority”, or is this just paranoid thinking?


March 25, 2008 02:22 PM

I'd like to see the graph of median income and median household debt on the same graph, on the same scale.

I bet that you'd see people supplementing their never-increasing income with increased debt over the last 10 years...


March 26, 2008 09:27 AM

Good morning Michael: I was at your speaking event in Savannah last night and enjoyed listening to your talk. I have one question: You mentioned that the past growth has been driven by consumer spending which has slowdown, how does consumer spending relate to the RE market? aside from the obvious related spending for furniture, appliances, improvements. Specifically: buying and sellign single family homes. Thank you!


March 26, 2008 06:35 PM

This post focuses on debt as compared to GDP, which in the corporate world would be comparable to revenues, and net worth, which is comparable to book value. What's missing is perhaps the most watched figure for corporations, earnings. According to this Bloomberg article (, corporate margins hit a 52-year high in 2006 at 7.6% and one would expect households to have done similarly. Now, it is difficult to designate an analogue for earnings in household terms but perhaps you could look at the household income numbers and try to tease out what percentage of household income went into the household assets that are used for the net worth calculations. This might give some idea of how much of the asset increases were driven by increased profitability and how much was caused by cheap debt.

Mike Mandel

March 28, 2008 01:57 PM


Without doing the calculations, I happen to know that real wages fell for many people over this stretch, especially if you didn't have an advanced degree.


March 28, 2008 06:58 PM

I think the skill-level of the US workforce is maxed out. Most opportunities are being created at a skill/education level far higher than the median worker's skill/education level.

That is why only advanced degree salaries are rising, while the rest are not.

Those that have the drive to upgrade their skills/education will advance, those that do not will not. This is classis creative destruction.

I have an advanced degree, and my base salary (post-degree) rose 100% from 2002 to 2008. So did it for most of my peers. People with only a Bachelor's Degree can't qualify for the jobs that we have, but anyone who pursues the necessary advanced degree can.

Brandon W

March 28, 2008 11:05 PM

Historically, we've been told that we ought to save 10%. A look at the savings rate up until the early 1980's says we did, roughly. And then savings plummeted.

Two questions:
1) What would the economy have done if we'd maintained a 10% savings rate?
2) What would happen to the economy NOW if Americans suddenly started saving at a 10% rate?


March 29, 2008 12:19 PM

The point of this blog is to understand "what happened" to trend lines which might explain and help solve the current financial mess.

I agree that things need to be looked at as ratios.

I think you will find household income to house price ratio is out of whack.

Maybe you could also chart Pension + 401K to GDP ratio
Here is very up to date and interesting cash flow and balance sheet on USA
Page 66 totals who owes how much to who
Then page 67 shows totals for residential mortgages around $12 Trillion
Page 68 shows pension fund and mutual fund reserves total around $20 Trillion along with a misc of $15 Trillion. I figure the mutual funds are mostly 401K - so $20 Trillion in retirement funds.

Here is my take. Based on "follow the money" --- These are all very round numbers - but it is the concept which is important here.

All homes in USA were over valued at their peak by about double based on historical wage to purchase price ratio of 2.5 years wages = house price. Some markets went far higher than that - over ten to one in many places in California for example. Since houses can no longer be used to "pay for themselves" by selling or refinancing then wages must now actually pay for houses (what a concept). That means the total value of all houses in US is closer to $12T than $25 Trillion (peak). Based on market dynamics - when big swings like that occur - markets will overshoot so the valley could be far less (ouch). That would either wipe out all home owner equity or all mortgages or more likely some of each.

When you peel back the layers I think you find Pension and 401K holding most of the mortgages or holding stocks and bonds mostly backed by mortgages.

I think the problem is the banks sort of guaranteed those mortgages as part of the deal in selling the mortgages to the pension funds. So the banks sort of put these mortgages off balance sheet but not really. The problem is the total market cap of all US banks is under $1 Trillion. The $12 Trillion in mortgages could not have been issued directly by banks and stayed within reserve requirements.

If I were in charge, I would write down all mortgages in the US to 80% of realistic market values and make the pension funds take the hit. Bottom line a mortgage is not that hard to understand and no doubt the pension fund managers knew as well as everyone that the mortgages were dicey and underwriting standards were being ignored.

How much are we talking - at least $6 Trillion - probably more.

Another way to look at it - the pension and 401K were the source of funds which made all this possible in the first place.

I also think it may not be possible to transfer that much wealth and value across time particularly including expected returns of 15% or so.

Do we really need pools of capital that big? How does that money affect, distort, influence, corrupt.

Could that money be pointed at important problems - energy problem, 3rd world economies, medical bio tech etc etc

The hedge funds and brokers don't want to break the news to the pension funds because that is the source of most of their deal flow.

I run my own small business and have no pension fund or 401K so I have no dog in this fight - other than I would rather avoid Depression II.

So I am doing the Hedge Funds and Brokers a favor and breaking the news for them.

One last argument in favor of this solution. Much of this debt is circular in that "we owe it to ourselves". The same people who own pensions also carry mortgages or their immediate families. The net effect is relatively small. Making the banks take the hit is impossible because they do not have the assets. Making tax payer take the hit would set dangerous precedent and could trigger hyperinflation.


March 30, 2008 12:21 AM

It's funny that "Real" adjusted net worth of recent years during the credit bubble is of course going to eventually be understood to have been illusionary in part (temporarily inflated). That's a Real Illusion.

Mike Mandel

March 30, 2008 05:33 PM

To HB,

I can't argue with the irony here.

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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