FSO Editorials

America's Total Debt Report - Update 2005
$40 Trillion - and Soaring ~ household, business, financial and government sectors ~
by Michael W. Hodges, Author, Grandfather Economic Report. March 13, 2005

America has become more a debt 'junkie' than ever before with total debt of $40 trillion, or $136,479 per man, woman and child.

66% ($27 trillion) of this debt was created since 1990, a period primarily driven by debt instead of by productive activity.

BIG PICTURE

$40 TRILLION of DEBT in America, and rising rapidly. The economy is 2-3 times more debt-dependent - - with $23 Trillion DEBT EXCESS compared to prior debt ratios.

Trend national debt vs national income Here's one graphic of many shown in the main Total Debt Report linked below.

This is A SCARY CHART - showing 4 decade trends of total debt in America (the red line, reaching $40 trillion in 2004 vs. growth of the economy as measured by national income (blue line). (adjusted for inflation). That debt increased $3 Trillion (8.6% more) in the past year.

Which line goes up faster, the red debt line or the blue net national income line?

Answer: the debt line.

And that debt line is going up faster and faster than national income! Right?

(Maybe, like this chart, your own personal or business debt is also going up faster than your own income - - possible?)

As mentioned, debt is here defined as all U.S. debt (sum debt of federal and state & local governments, international, and private debt, incl. households, business and financial sector debts, and federal debt to trust funds).

The chart shows in the period 1957 to mid 1970s total debt (red line on chart) was increasing close to the growth rate of national income (blue line on chart), despite paying war debt for WW II, Korea and Vietnam.

But, in the last 20 years total, debt ratios have zoomed up, up and away - - growing much faster than national income. It has now reached $37 Trillion ($28.5 trillion private household/business/financial sector debt PLUS $8.5 trillion federal, state and local government debt).

Here's some highlights:

While the above chart shows debt growth in inflation-adjusted dollars, here's another chart from the main report of this chapter - - showing debt as a percentage of net national income - - which I term the 'debt ratio'.

This chart shows < 2004 debt of $40 trillion was 437% of national income; the debt ratio in 1957 was 186%. If 2004 debt had been at the 1957 ratio 2004's debt would have been $17 trillion, not $40 trillion - - indicating excess debt in America today of $23 trillion.

In this graphic, note how the debt ratio data plots are nearly flat during the first half of the years shown, indicating debt was growing at approximately the same rate as the economy - - not faster than the economy. This proves America's economy can grow without increasing debt at a faster pace (because it has in the past). But look what happened to that trend in the middle of this chart - - debt ratio zooming upward, faster and faster, indicating debt growth way beyond general economic growth - with a new, record high debt ratio each year.

The excess debt is even higher than the $23 trillion excess shown on this chart, if a nation's economy were structured to become more productive such that it could grow without increased debt. Why can America not grow by normal population growth and labor and equipment productivity - - without growing debt ratios higher and higher?

By the way > a chapter of this series called the 'Family Income Report' shows the time period of the first half of this chart, when debt ratios were stable, was also one of the best periods ever of real median family income growth - most with one wage-earner per family.

Stated differently, in 1957 there was $1.86 in debt for each dollar of net national income, but in 2004 there was $4.37 of debt for each dollar of national income. It also means this extra $2.51 of debt produces zilch national income.

Debt in the past decade increased faster than ever in relation to national income and debt intensity last year increased even faster!


While facing this accelerating internal debt Challenge:

AND - a few hard questions > With the lowest personal savings rate on record, with the federal government relying more and more on foreign. entities to lend it funds to operate and prop up its currency, and with run-away trade deficits, where will this debt monster lead? Does America simply borrow savings of non-Americans until either they stop lending or until America has mortgaged or sold-off all its assets to others? How can this direction be changed - - or am I the only one who does not believe individuals and a nation can, forever, borrow the way to prosperity and security?

Is this a way to run an economy for my children and grandchildren - - debt, debt and more debt?

Idea > > There can be little doubt the only way that, for example, energy will be better conserved with reduced dependence on foreign interests is with significantly higher economic (prices) costs. The same goes for debt > > a free market (without Federal Reserve manipulation of rates) setting significantly higher economic costs (higher interest rates, elimination of tax subsidies on debt, etc.) to debtors, until debt ratios fall back more in line with the past. Perhaps payroll taxes for social security and medicare should be eliminated with its revenue loss (plus the gap missing for the future) transferred to the equivalent tax on energy and on debt. What's your idea to get these debt ratios down significantly toward ratios of the past, including reduced dependence on foreigners?

Most can agree > The U.S. is more debt-dependent than ever. That is not a nice bequest to our young generation - on our watch!

"We hear sad complaints sometimes of merciless creditors; whilst the acts of merciless debtors are passed over in silence." - William Frend, 1817
"I place economy among the first and most important virtues, and debt as the greatest of dangers to be feared." - Thomas Jefferson"
"The decline of great powers is caused by simple economic over extension." The Rise and Fall of the Great Powers, by Paul Kennedy
"There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved." – Ludwig von Mises

© 2005 Michael W. Hodges
Editorial Archive

Web note: The above editorial is a recent summary of an updated chapter from Michael Hodges series, Grandfather Economic Report. Read the full article: America's Total Debt Report on G.E.R.

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Michael W. Hodges | Grandfather Economic Report | Email

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