The World's Scariest Chart

Posted by: Michael Mandel on March 19

This chart, which plots the ratio of U.S. household debt to GDP, gets my vote for the scariest chart.

fed13_22734_image001.gif

This chart shows something surprising…an enormous acceleration of borrowing starting in 2000, which didn’t let up until very recently. The solid line is the actual ratio, and the dotted line is where debt would have been if people had kept borrowing at roughly the same as in the 1990s. The difference between the two…roughly 25% of GDP in 2007…is the amount of extra debt.

So by this calculation, there is $3 trillion of extra debt that are weighing down households. That’s why the financial crisis has prove so hard to solve. The real scope of the problem is not subprime mortgages, but rather this $3 trillion extra debt.

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Reader Comments

Kartik

March 19, 2008 01:48 PM

This is not that scary - it will work itself through. $3T is still only 22% of GDP, and in a couple of years of belt-tightening will be back to manageable levels.

If people with a lot of debt have to tighten their belts and get a second job for a bit, so be it. No biggie.

Now, if you want to talk about scary charts, consider this :

http://en.wikipedia.org/wiki/Image:US_Oil_Production_and_Imports_1920_to_2005.png

Perhaps this (depending on your personality) :

http://en.wikipedia.org/wiki/Image:ParadigmShiftsFrr15Events.jpg

Or THIS :

http://en.wikipedia.org/wiki/Image:Nuclear_weapon_programs_worldwide_oct2006.png

Or this (humor) :
http://futurist.typepad.com/my_weblog/2006/12/a-picture-is-wo.html

Brandon W

March 19, 2008 02:00 PM

And now we're going to have to throw spending into reverse to try and get back to healthy levels, while paying down $3 trillion in debt... plus interest. All the while Baby Boomers start retiring and drawing on SS and Medicare, military spending balloons as we police the world, gas/oil prices shoot to record highs, housing assets collapse...I could go on, but you know the rest. Another and another and another and.... et tu Brute? Then...

Kartik

March 19, 2008 03:02 PM

Again, I don't think it is scary to force people to reign in their profligacy and live below their means.

They had many years to control their habits and learn the easy way. They didn't while they had the chance, and so they deserve to learn the hard way. A two-year corrective recession will happen, but that is it - hardly the worst fate in the world.

It will build character among the American people - something that has eroded over the decades.

Lord

March 19, 2008 03:35 PM

Is most of this mortgage debt, soon to be repudiated? No problem at all.

Dominic

March 19, 2008 04:29 PM

...As i commented in the previous post, we are running out of furniture to burn....

Kartik

Many people already work 3 jobs, never mind getting a second one....

As our economy is so unbalanced toward consumer spending, if a mindset of "work hard and save" settles in (and I hope it does) GDP could decline well more than 22% unless other sectors pick up the tab fast and rebalance our output.

Well said by Brandon, combine that with Baby Boomers retiring (even if many of them cannot simply afford it..) runaway military spending, a disastrous war started by the Idiot son of the establishment...we are in a nice fix...

Maybe at some point we can tell to our foreign creditors to take a hike, after all we have the strongest military in the world right??
What about engineerng a nice war with the Chinese?? So they will forgo our financial obligations towards them as war reparations...

Humor aside, it is a scary situation when the most indebted country in the world is the one with the strongest military, Germany pre-WWII docet.

Ajay

March 19, 2008 04:33 PM

Household assets during that same period increased from $49 trillion to $72 trillion, according to the Fed's balance sheet tables:

http://www.federalreserve.gov/releases/z1/Current/

It is laughable of you to worry about that $3 trillion increase in debt when household assets increased by $23 trillion over the same timespan, almost a 50% increase. Now, I do believe that asset values have been inflated over this period because of a river of cheap credit that flowed into the US economy but I can't see that being more than a 5-15% effect. I can only assume that you are politically motivated, presumably like many of the journalists trying to scare people nowadays, and want to paint as bad a picture as you can of the economy in order to get a Democrat elected. This reminds me of a recent WSJ article (http://online.wsj.com/article/SB120485071664018195.html?mod=hpp_us_whats_news) that pointed out a drop in home ownership from 58% to 48% over the same period you talk about but conspicuously failed to point out the doubling of house prices during the same period. Let's see, would you rather own 58% of a $100k house or 48% of a $200k house?!

Craig

March 19, 2008 05:36 PM

Just out of curiosity, why track from 1990? Can you go back to, say, 1900? Absolute truth, I agree that this is a scary graph, but the choice seems contrived to make this look as bad as possible. If I remember from college macroeconomics (quite a long time ago), things have been MUCH worse at some times in our history.

Jason Wolfe

March 19, 2008 06:43 PM

You guys are laughing off economic belt tightening too much. Lets say belt tightening is a 20% reduction in discretionary spending. What happens to the service and consumer goods market? You know anyone who makes money by other people spending stuff? Belt tightening is VERY scary. We are all Keynsians now.

Paolo

March 19, 2008 08:25 PM

No problem... consumer debt of over a fifth of the gross domestic product. All people have to do is "tighten their belts," get second jobs in a contracting economy, and never again engage in the type of spending that's kept the economy going for a decade. Fiddle dee dee.

Perhaps when you're done wanking you'll give a bit of thought to the actual consequences of your offhand comments. Jesus.

Dominic

March 19, 2008 09:49 PM

Ajay

Do you really believe that the asset values have been inflated only by 5-15%??
If you do you are seriously in denial or you have less than basic notions of how the US economy worked in the last 2 decades...

About being Keynesians...well a good dose of it, like investing in our crumbling infrastructure, dismal educational system and scientific R&D in few words creating value for once, beats hands down the continuous depreciation of our currency and the idiotic (IMHO) tax rebate check devised in Washington.

Tim

March 20, 2008 07:49 AM

Ajay,

58% of a $100k house, or 48% of a $200k house? If it's the same house, probably 58%.

Mike Mandel

March 20, 2008 07:55 AM

Kartik,

Actually, when I sat down and did a back of the envelope calculation, it looked more like a 3-4 year period to work off the debt. That's why it's scary

a

March 20, 2008 10:36 AM

Um, why should the dotted line trend upward? It makes no sense to suppose that debt/GDP ratio should tend to infinity. (Increases in debt/GDP are not normal.) So there is more than 25% of GDP which may fall.

a

March 20, 2008 10:41 AM

Um, why should the dotted line trend upward? It makes no sense to suppose that debt/GDP ratio should tend to infinity. (Increases in debt/GDP are not normal.) So there is more than 25% of GDP which may fall.

Mike Mandel

March 20, 2008 10:59 AM

A

Pragmatically, the line trends upward because I was projecting the trend of the 1990s. That's justifiable because we can assume that improvements in the financial markets make it possible to hold more debt.

It's going to be hard for us even to get back to the dotted line, though.

Jim Griffin

March 20, 2008 11:38 AM

Housing, childcare, healthcare, transportation, education and taxes are the primary sources of increased consumer debt in the U.S. Mortgage expenses have increased 69% over the last decade. Over the last 35 years, we are spending far less on clothes, food, and entertainment. Our consumer debt is not a by-product of overconsumption, it is a result of higher costs of middle class essentials - housing, healthcare, and education.

The average credit card debt is actually $2,200 per household, not the $9,000 figure that the Federal Reserve reports. Furthermore, 40% of Americans pay their credit card debt off each month.

Certainly we have people who are overleveraged with consumer debt. We can not sit around and judge them - what we should be doing is encouraging these individuals to seek credit counselling from a reputable non-profit agency.

We all need to make building an emergency fund our top priority, including myself. I lost my job two years ago and know firsthand the anxiety of being jobless.

(Yes, I study these issues for a living!)

Ajay

March 20, 2008 01:05 PM

Dominic and Tim, I probably shouldn't bother responding to economic illiterates like yourselves but then Mike probably thinks the same of me so here goes.

Tim, your house is only worth what others are willing to pay for it. A going price of $200k means that others are willing to pay much more than $100k. If you want to sell it to them for $100k, you are always free to do so and roll in your own stupidity. I don't think that is actually what you would do however so your argument is meaningless.

Dominic, do you actually have an argument or do you always just huff in moronic indignation? There are a handful of reasons that US asset values have risen. First and foremost is that productivity and profit gains are greatest here, whether because of innovation or outsourcing. Tying into this is the stable financial and legal system, with freer and better capital markets than anywhere else and better legal processes to deal with inevitable situations like ownership disputes and bankruptcy. Why do you think the rest of the world is putting their savings into the US, partially because of the gains to be found, but perhaps mainly because they consider it the safest place to do so, far better than the crony economies they find themselves in? So the river of cheap credit which stems from gains to using good institutions like free markets is another reason. Another one is probably that some are betting on the huge upside of another tech boom in the US. Everybody knows that the next innovation-driven boom will come from the US. If the world is really flat, why don't engineers in China or India start the next tech boom? For a variety of reasons, that will never happen and everybody knows it. Many technologists in the US know that tech is a racehorse bridling at the starting gate and that another boom is coming soon (of course, people have been saying that for 6-7 years now). When it happens, it will happen here and everybody in the world knows it, even if only implicitly. So yes, cheap credit led to unneeded speculation for 3 years or so but I am skeptical that asset values will fall much or for long.

Kartik

March 20, 2008 02:52 PM

Mike Mandel said :

"Actually, when I sat down and did a back of the envelope calculation, it looked more like a 3-4 year period to work off the debt. That's why it's scary "

Still not bad. If that is the only way for Americans to re-aquaint themselves with the notions of frugality and personal responsibility, so be it.

Plus, US Household net worth has continued to rise, as per charts you have posted on this blog in the past. Isn't that the true measure?

Can you do an update on US net worth? I think it has been over 18 months.

Statman

March 20, 2008 03:19 PM

3-4 years is an eternity in the Internet Age. This sort of data shows how vulnerable the Yanks are to a VERY serious recession. As per usual, we've been undone by our own greed and gratuitous consumption.

Galbraith was right all along.

Kartik

March 20, 2008 03:35 PM

Dominic suffers from 'Bush Derangement Syndrome' and thinks that everything and anything negative that has happened in the world in the last seven years is the result of Bush. He simultaneously believes Bush is a genius and an idiot.

This YouTube video shows that the first person to expose Saddam's WMD programs and ties to terrorism was... Al Gore in 1992!!!

The YouTube era shuts up leftists who want to believe that world history began in March 2003.

At any rate, NET worth, not debt, is what matters. US HH Debt increased $3T in this period, but assets increased $20T, so Net Worth increased $17T. Quite good.

Kartik

March 20, 2008 03:37 PM

I second Craig's request for a chart that goes back at least to 1960, and if available, to 1920 (to judge the buildup to the GD).

Mike Mandel

March 20, 2008 03:51 PM

Two charts coming up.
One: household debt/GDP, going back as far as reasonable.
Two: Real net worth per person.

I'll have them by early evening.

ned

March 20, 2008 03:59 PM

It is normal for debt to be eliminated through repudiation as well as payoff.

As for debt to asset values, I will adapt what John Chambers of Cisco said frequently about cash be fact and earnings being opinion: Debt is real, asset values are an opinion. Aside from repudiation, debt requires cash. Asset values do not necessarily provide cash.

Kurt Brouwer

March 20, 2008 04:31 PM

Just as a point of reference, household net worth did go down in from just over $58 trillion in Q3 to just under $58 trillion in Q4 (that's after all debt).
The actual amount of the debt is modest in comparison to the assets.

One other point is that while debt has gone up, the cost of servicing that debt has generally gone down over the time period shown in the chart. For many people the issue is not the absolute amount of a given debt, but their ability to pay it off. With lower interest rates over the past 18 years, the cost of servicing debt is well below what it used to be.

www.fundmasteryblog.com

Dominic

March 20, 2008 05:53 PM

Ajay and Kartik

You should read carefully what I post if you want to comment on it..did I ever said that Bush is responsible for the situation we face?? Certainly his presidency didn't help (I'm entitled to my opinion) but this soup is cooking since very long long time....

Ajay

Read a revealing paper prepared in 2000 by professor Robert J. Gordon for the Congressional Budget Office about the mirage of our productivity "miracle"; learn about the recommendations made in the 90's by the Boskin Commission and implemented in the "butcher job" made at the Bureau of Labor Statistics....where you get your economic knowledge from Fox News??

Asset values rise in presence of a bubble, Economy 101...house prices rising way faster than income growth are unsustainable...we have residential pockets here in Seattle (the city in theory that is weathering the storm in better shape than others) were home values dropped already to pre-2000 levels..

Yes the US was (and somewhat still is partially) the place to be investment wise, low labour regulations, legal and financial infrastructure, centers of R&D and university excellence and so on, last but not least the the enviable position of our currency as world reserve status that allowed us to do as we please with our finances, a privilege no other country could have.
But things can change, institutions degrade, maybe we "overshot" our advantages.
Don't you think the current value of our dollar is a clear indication of a crisis of confidence in the US?? What happen if we lose our reserve status even partially?
We will see who will lead the next boom..we still have good chances...let's wait and see...

Mike cannot comment on everyone's post I suspect he is busy doing other things and not only mantaining his blog...if he thinks a message in his blog would be a total nonsense he would not even bother to publish it.

Kartik

March 20, 2008 06:25 PM

Yet another set of factors in the debt chart :

1) 1999-2000 was a stock market bubble, thus inflating GDP and assets, thus making the ratio of debt temporarily lower. Thus, it is 1999-2000 that is the anomaly, while 2002-07 is merely a return to the trendline.

2) This decade is an era where the baby boomers are at the stage of their lives where mortgage obligations are going to be the highest. They are at their peak house-buying power and peak income, thus moving debt higher.

Diligent Dave

March 24, 2008 10:05 AM

Some have argued that the Fed through its monetary policy has created many mini-bubbles (like froth on top of a beverage). Alan Greenspan has even used the froth analogy.

The borrowing was made possible, in part, by the Feds "smoothing" policies, that lowered interest rates when the economy was going down. People have been borrowing, in part, because financial institutions have encouraged them to do so. When the value of assets always seems to go up, it seemed to lenders as a no lose situation.

The borrowing raised the amount of money Americans have had to spend for quite a while. This itself has caused a lot of inflation. The 'birth dearth' of the last 25 years or more has been leading us to a labor shortage. This in turn, has encouraged bringing in illegal aliens, since the "legal" limit on immigration is far too low for the situation.

Prosperity has allowed and encouraged increased socialism. The drug bill passed by Congress and signed a few years ago by George W. Bush has (once again) greatly expanded "entitlements". We are borrowing in government against our future.

People in their 50's, 60's and older have been buying new homes and refinancing older ones, with debt (mortgage) payments continuing past their likely time of death.

We have, collectively and individually "sown the wind", and we are/will "reap the whirlwind".

Debt debt debt

March 25, 2008 06:22 AM

US Debt has climbed by trillions under the spendthrift Republicans, consumer debt is actually encouraged by Republicans, and gambles with ARMS were actually encouraged by Libertarian/Republican Greenspan who subsequently went to work for the banks that first profited by the ARMs and consumer debt and are now first in line for a government bailout.

Now the Republican solution to the economic problems are to print money even while prices increase, "belt tightening" indeed.

Apparently the Enron accountants are in charge of public discourse because true conservatives would be screaming that the REPUBLICAN ARE RESPONSIBLE FOR THE US DEBT http://Havenworks.com/us/debt

Dan in Savannah

March 25, 2008 09:18 PM

We listened to Michael speak in Savannah tonite. He was great. Consumers have to spend less and adjust their lifestyles to a new economics of surviving this economic crisis. This is reality in this economy.

Brandon W

March 26, 2008 04:40 PM

I've always said:
Democrats = tax & spend
Republicans = print & spend

Though... the Republicans are taking it to a whole new level. More like "print & spend, & spend, & spend more."

Mike Mandel

March 28, 2008 01:58 PM

Dan,

glad you enjoyed the talk..it was great fun!

J6Pak

March 31, 2008 03:48 AM

Ajay!
" This reminds me of a recent WSJ article (http://online.wsj.com/article/SB120485071664018195.html?mod=hpp_us_whats_news) that pointed out a drop in home ownership from 58% to 48% over the same period you talk about but conspicuously failed to point out the doubling of house prices during the same period."

Where does this acticle actually say anything like "58% to 48%" as you stated? Not that it matters. You're mixing apples and oranges. 58% "ownership" vs. 48% "ownership" in this case has nothing to do with the price on any given price paid for a particular house. what matters is if your 100% increase in price will hold...
Time's telling me... ummm... Not!

andrew

March 31, 2008 12:11 PM

Fight the war on terrorism ..
spend at the mall & use your credit cards!
W

Lorne Joel

April 3, 2008 03:57 PM

In my years in business and finance, I have never seen the level of hubris and greed that has permiated our corporate structures beginning from our Vice Preseident "Dick" who says "So" when asked about main streets pain because of extraordinarily high oil prices to support his oil patch friends (Hey, they're still getting $18 billion in subsidies), the killing of American soldiers and civilians to maintain a war that doesn't exist and I can go on of course. However, all of the realities that we as Americans are dealing with because of our executive and congressional hubris pales in comparison when speaking with a friend of mine in Taiwan who is in the real estate business that is now booming in Asia (still). When he told me that even the 19 year old WHORES won't accept US dollars anymore, rather taking their own currency, I knew we had, as America, reached an all time low.

SamW

April 10, 2008 05:54 PM

I like that: The Hooker Index; need a Bling Index and a Lottery/American Idol Index too.
I think that it was on this roll that a poster wrote "Debt is real; asset values are opinion." That should be posted on the entrance to all schools...and malls.

charles baxter

April 28, 2008 12:52 PM

Are we headed for a DOOMSDAY SCENARIO

Every Civilization throughtout Mankind has eventually Collapsed.

The Romans,Greeks,Aztecs flourished for thousands of years and then KA BOOM.

Why? Probably we as a people are near a tipping point or Bubble of Greed and Lust.

No reason to think that we may be next!

B.

April 14, 2010 05:01 PM

Think outside the box and look to a different solution.

www.thevenusproject.com

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

 

About

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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