Crash Course confirmation – 1 Personal debt
Topic: Personal debt – A basic principle of the Crash Course is that we have been on a debt binge since the 1980s. This couldn’t be sustained, and is causing massive disruptions and losses. So let’s focus on personal debt in the USA.
Introduction — However you feel about ideas presented in the Crash Course, it is good to test them against independent data. If other sources confirm important points from the Crash Course, you can have confidence in what it says. This may even help you persuade someone else. A lot of economic data is available from the Federal Reserve Bank, which they compile themselves, or get primarily from US Government agencies. Their graphs with the blue borders are generally accepted as “official”. Other good sources are available online too. So let’s look at some data.
1 Personal debt total, and mortgage debt, divided by disposable personal income – Above
These ratios compare debt to the income to support it.
Blue line = Personal debt total divided by disposable personal income.
Red line = Mortgage debt divided by disposable personal income.
Disposable personal income = What is available to spend after taxes.
Personal debt total (blue) We see a steep rise in the mid 80s, with a steady climb through the 90s.
It skyrocketed from the year 2000, peaking at 130%.
This ratio doubled compared to the 60%-70% range before 1983.
Mortgage debt (red) This comprises 77%* of all personal debt so the pattern is the same.
The housing bubble of 2000 is clearly shown.
It peaked at 100%, and is still much higher than the last sustained level of 60% in the 1990s.
Before 1983 the average was around 40%.
Analysis Personal debt compared to income soared to new highs, primarily driven by home mortgages. The peak of 130% is twice the historical average. Low interest rates will not stimulate increased personal borrowing until the ratio of debt to income is more balanced. Mortgage debt may fall much further to reach a sustainable level, which would further depress housing prices. The total balance is $12.9 trillion.** That is 83% of GDP.***
2 Personal debt total, and mortgage debt, and disposable personal income, as indexes – Above
Data are shown as indexes with 1983 at 100. An index tracks the percent change over time.
These are the same data as the previous graph, but displayed in a different format.
Blue line = Personal debt total.
Red line = Mortgage debt.
Green line = Disposable personal income, what is available to spend after taxes.
Mortgage debt (red) Grew to a peak of over 900%.
Total debt (blue) Peaked at 775%.
Income (green) Income to support these debts increased just over 300%.
Analysis The dollar amount for mortgage debt is less than total debt, but it grew at a faster rate so the red mortgage line is on top here. The growth rate of personal debt greatly exceeded the growth rate of income to support it. Total debt grew 2.6 times faster, and mortgage debt 3 times faster. At the same time more income was consumed by much higher costs for medical care, transportation, education, daycare, and to a lesser extent taxes.****
3 Personal debt payments, divided by disposable personal income – Above
This is a ratio of total debt payments to total income after taxes.
The decline started from a very high level and is still dropping rapidly.
It is ½% above the low of the very severe recession of 1982.
Analysis A decline this rapid and this deep indicates a lot of mortgage defaults. Currently 31% of mortgages are underwater***** and can’t be refinanced, or sold without loss. This slows the decline, but leaves a lot of potential for further downward movement.
Conclusions – Graphs 1 and 2 clearly show a very large rise in personal debt starting about 1983. This was primarily driven by mortgage debt, and far outstripped the growth of income to support it. Low interest rates will not stimulate increased personal borrowing until the ratio of debt to income is more balanced. Graph 3 shows that drastic reduction of personal debt payments is still underway. This is driven by a lot of mortgage defaults. We clearly see reduced capacity and demand for debt. Expect continued price pressure on anything purchased with credit. Overall Consumer spending is generally cited as contributing 70% to GDP. It is hard to see how the economy can turn around until personal debt levels are lowered much further. The peak for debt to income was 130%. Debt grew 2.6 times faster than income. The total balance is $12.9 trillion. That is 83% of GDP. Personal debt was clearly excessive, and remains in dangerous territory.
Please tell me your thoughts about this. I want to be accurate, so poke holes in it if you can. Do you see problems with the data, or disagree with my conclusions? I welcome discussion, and I’ll be happy to answer questions. Look for corrections and additions in the posts below.
Notes – The Federal Reserve graphs with the blue borders have live links that update automatically, so my commentary will become dated, but the data should stay current.
* 77% http://www.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q42011.pdf
See graph on page 4. 72% mortgage, 5% HELOC, 6% auto, 6% credit card, 8% student, 3% other.
Student loans are the second largest category at $920 billion, and cannot be discharged by bankruptcy.
** See the latest debt balance here http://research.stlouisfed.org/fred2/series/CMDEBT
*** See the latest GDP here http://research.stlouisfed.org/fred2/series/GDP
**** Higher costs http://harvardmagazine.com/2006/01/the-middle-class-on-the-html
***** 31% underwater http://www.zillow.com/blog/research/2012/08/22/negative-equity-declines-slightly-on-the-back-of-modest-home-value-gains/
The graphs with blue borders are from the Federal Reserve Bank of St. Louis. Their FRED Graphs allow anyone easy access to over 55,000 data sets that can be downloaded or displayed as graphs. Graphs can also be customized to combine data, apply formulas, and select how they are displayed. Customizing graphs does not change the underlying data. The interface to customize is clunky, but simple and powerful with a little practice. You can find original graphs here. http://research.stlouisfed.org/fred2/categories Set up your free account to create personalized lists, receive email updates, and save graphs here. http://research.stlouisfed.org/useraccount/register/step1
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