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.
$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.
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:
- Last year's total debt of $40.1 Trillion was 9 times higher than the $4.6 Trillion debt in 1957 (both measured in inflation-adjusted 2004 dollars).
- Last year's total debt per person was $136,479 (up $7,900 over last year's $128,560); this compares to $27,084 in 1957 (both measured in inflation-adjusted 2004 dollars). That's a debt excess of $109,395 per man, woman and child.
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.
- Since 1990, 80% of today's domestic financial sector debt was created, as it increased 2.5 times faster than growth of the economy; household debt increased 50% faster. During the same period the federal government siphoned off $2.2 trillion of trust fund surpluses, creating new un-funded IOUs (the total IOUs now stand at $3.1 Trillion, with no budgeted pay-off).
- 2004 was a new, all-time record high in debt ratios of the household, business, and domestic financial sectors - also record debt ratios owed to trust funds.
- In the past year the debt record was even more scary: household debt increased 2 times faster than the economy - - and the federal government's bite out of trust funds set another record high.
- In 2003, the average credit-card debt of US households with at least one card was $9,205, up from $2,966 in 1990, according to the research firm CardWeb.com - - that's 310% higher.
- Even students are learning how to go into debt up to their necks. The federal General Accounting Office, according to AP's Martha Irvin in January 2002, says college students are graduating with an average of $19,400 in student loans. Additionally, average student credit card debt rose 46% from 1998 to 2000, according to the student loan agency Nellie Mae. Meanwhile, universities promote credit cards issued by agencies who kick-back to them.
- Since 1990 it is clear the economy was 'driven' almost entirely by the biggest injection of new debt in history, which produced a much diminished lower return in national income per dollar. Just as one hooked on drugs needs ever increasing amounts of drugs to 'survive', it appears America needs ever increasing amounts of new debt to eke out diminishing amounts of growth - - even with 2 wage earners per family.
- America's total private and government debt is at least 100% higher compared to debt ratios of the recent past.
- AND - America's debt position is such that foreign interests now own more and more of America - - as of 2003 about "$8 trillion of U.S. financial assets, including 13% of all stocks and 24% of corporate bonds", according to Bridgewater Associates. According to the Federal Government Debt Report, foreign investors & central banks also own 43% ($1.9 trillion) of U.S. government Treasury bonds & notes and 14% of U.S. government agency debt (such as household mortgages financed by Fannie Mae) up from 5% in 1995. The largest supplier of mortgage funds is Fannie Mae which borrows the money on the open market - - and,. according to Bloomberg Sept. 2002, "about a third of the Fannie Mae's benchmark debt is sold outside the U.S." - - (dangerous with a falling dollar exchange rate). Additionally, foreign interests own real estate and factories - - and, some would be surprised to learn that the well-known and respected California-based Pimco, the world's largest bond fund, that many believe is an American firm is in fact a unit of Allianz.AG, a German firm.
- We should not be mad at foreign interests. We are the ones consuming beyond our own production and savings by borrowing from others, creating unprecedented debts and trade deficits PLUS excessive government spending. Where America's debt used to be owed domestically, increasingly huge portions are now controlled by foreign interests. America, therefore, is less and less independently in control of its economy.
Debt in the past decade increased faster than ever in relation to national income and debt intensity last year increased even faster!
- America, already the world's largest international debtor with $5 trillion in cumulative trade deficits in goods since 1985, explodes international trade deficits to new records as it depends more and more on the production and savings of others than on itself (see International Trade Report); and,
- with citizens carrying on their backs more state & local government employees because the number again increased faster than population growth; and,
- personal savings plunged to record lows; and,
- real median family incomes (Family Income Report) ceased their solid increases after the period when debt ratios took off.
- with household debt at the highest ratios in history,
- whereas in previous times one bread winner per family was sufficient to provide for the family, build savings and reduce get-started debt loads - - the family now allocates the 2nd bread winner plus more debt with less savings and less time for the children - - to do the same.
- and - in previous times students graduated from college debt-free to themselves and their parents, because many worked their way via part-time jobs while minimizing consumptive spending. No longer
- The above debt ratio chart also adds evidence about the period of what some call the "financialization" of the economy by debt, including increasing domination by the nation's financial sector of the total capitalization based weight of the S&P index - - a topic discussed as a part of naming debt causes - - in page 2 of the full debt report (from link below).
- More families than ever before, with every possible adult in the work force, try to make-up the mounting pressure by turning to more debt with less savings - - while more business debt is accumulated despite paying out fewer dividends to shareholders, as well as a much smaller manufacturing base.
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
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.