Crash Course Chapter 13: Debt

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With the background you’ve received to this point covering money creation, exponential growth, and the immensity of trillions, we are now ready to go into the first big “E”: the Economy, in greater depth

It’s the data in these next few chapters that leads me to conclude that the next twenty years are going to be completely unlike the last twenty years.  So we begin our economic inquiry with “debt”.

Our debt-based money system has a fundamental shortcoming: it requires infinite growth to remain functional and infinite growth forever is simply not possible.

So studying debt gives us clues to the size of the predicament in which we are in, and perhaps hints at the timing of when things might unfold.

Let’s begin with a few definitions.  A financial debt is a contractual obligation to repay a specified amount of money at some point in the future.

The concept of debt is thoroughly characterized within the legal system so we can say that a debt is a legal contract providing money today in exchange for repayment in the future….with interest, of course.

Debts come in many forms:  auto loans and mortgage debt are known as “secured” debts because there is a recoverable asset attached to the debt.  Credit Card debt is known as ‘unsecured’ because no specific asset can be directly seized in the event of a default.

For you and I there are only two ways to settle a debt. Pay it off or default on it.  But if you have a printing press like the government does, a third option exists; printing money to pay for the debt.

This method is a poorly disguised form of taxation since it forcefully removes value from all existing money and transfers that value to the debt holders.  I view it as a form of default but one that preferentially punishes savers and those least able to bear the impact of inflation.

The pure debt obligations of the US government as of December 2013 stand at more than $17 trillion, dollars.  This is only the debt.  Once we add in the liabilities of the US government, chiefly Medicare and Social Security, we get a number 5 to 8 times larger than this.  We’ll be discussing these liabilities in the next chapter so that’s all I’m going to say about them now.  Right now we are focused simply on debt and it’s enough to know that debt is only part of the whole story.

OK. Next, this is a chart of total US debt – that’s federal, state, municipal, corporate and private debts in the red line, compared against total national income in the yellow line.  The total debt in the US at the end of 2013 stood at over $57 trillion.  That’s 57 stacks of thousand dollar bills each of which is 67.9 miles high.

If we adjust these debt levels for both population and inflation over time so we’re comparing apples to apples, we find that in 1952 there was the equivalent of $76,000 of total debt per person and that today the number is $183,000.  At $183,000 per head, this means that today the average family of four in America is associated with roughly $735,000 of debt.

This is now more than twice as high as back when a single income was sufficient to sustain an average family.

This is a useful way to look at debt because it doesn’t really matter if the debt is owed by a government agency a corporation or an individual because these are really the debts of our country and all debts get paid through the actions of people.

So examining the debts on a per capita, or household basis, gives us a sense of the situation.

Can debts forever grow faster than the incomes that service them?  Can the average household earning a bit more than $50,000 realistically pay back nearly three quarters of a million dollars in debt?

The answer to both of these questions is no, and almost certainly not, respectively.

Am I saying that all debt is “bad”?  No, not at all.  Time for another definition.

Debt that can best be described as ‘investment debt’ provides the opportunity to pay itself back.  An example would be a college loan offering the opportunity to earn a higher wage in the future.

Another would be a loan to expand the seating at a successful restaurant.  In the parlance of bankers, these are examples of  “self-liquidating debt”, meaning that the loans boost future revenues and have a means of paying themselves back.

But what about loans that are merely consumptive in nature such as those taken out for a fancier car, or for vacations, or for more war materiel?

These are called  “non-self-liquidating debts” because they do not generate any additional future revenue.  So not ALL debts are bad, only too much unproductive borrowing is bad.

Between 2000 and 2010 total credit market debt in the US full doubled from $26 trillion to over $53 trillion. And a very large proportion of that has been of the non-self-liquidating variety.

This has profound implications for the future.

So what is debt really?  Well, debt provides us money to spend today.   Perhaps we buy a nicer car and we enjoy that car today.

But in the future the loan payments represent money that we do not have then to spend on other items or to save.

So we can say that debt represents future consumption taken today.  As long as it is my decision to go into debt and the repayment is my responsibility, then everything is cool.

However, once we consider that our current levels of debt will require the efforts and incomes of future generations to pay them back, we start to trend into the moral aspect of this story.

Is it really proper for one generation to consume well beyond its means and expect the following generations to forego their consumption to pay it all back?  That is precisely our current situation and these charts say as much.

This is our legacy moment – we are piling up debts that we ourselves cannot pay back, and much of that borrowed money is simply being used to support consumption, not grand infrastructure investments that future taxpayers will benefit from.

Is this fair?  Is it moral?

Now, we learned earlier in the Crash Course that money can be viewed as a claim on human labor, and we just learned that debt is really just a claim on future money, so we can put these statements together and arrive at a new Key Concept:  Debt is a claim on future human labor.

When we get to the section on baby boomers and the demographic challenge our country faces, I’ll be recalling this important concept.

When viewed historically, and compared to gross domestic product, the current levels of debt are without precedent, and the chart even suggests that we are living in the mother of all credit bubbles.  Current total credit market debt stands at more than 350% of total Gross Domestic Product.

As we can see on this chart, the last time debts got even remotely close to current levels was back in the 1930’s and that bears a bit of explanation   The easy credit policies of the Fed gave us the “roaring twenties” and then a burst credit bubble which was followed by 11 years of economic contraction and hardship which we now refer to the Great Depression.

Note that the debt to GDP ratio didn’t start to climb until after 1929.  What’s the explanation for this?  Were more loans being made?  No, the chart climbs here because the while the debts remained the economy fell away from under them creating this spike.

In the absence of the Great Depression anomaly our country always held less than 180% of our GDP in debt.  It is only since the mid -1980’s that that relationship was violated so we can say that our current experiment with these levels of debt is only three decades in the making and therefore an historically brief phenomenon.

And it is THIS chart, more than any other, that leads me to conclude that the next twenty years are going to be completely unlike the last twenty years.  I just cannot see how we can pull off another twenty just like the one highlighted here.

But what if we did?  What would be required if we wanted – or expected or even required – debts to grow at the same pace between 2014 and 2044 as they did between 1984 and 2014?

Because debt grew by an average of 8% per year over the prior thirty years, it means that debt was doubling every 9 years.

If we somehow managed to continue that 8% rate of growth over the next thirty years we discover that total US credit market debt would stand at more than 570 trillion dollars, or 520 trillion dollars higher than today.

What would we borrow that much money for?  Total student borrowing is only a trillion.  All credit cards 2 to 3 trillion.

The entire residential real estate mortgage market is in the vicinity of ten trillion.   Put those all together and you don’t even come up with the twenty in the number 520.

Okay, back to this chart (debt to GDP). Based on the shape of this chart, our entire financial universe has made a rather substantial and collective assumption about the future.

Because a debt is a claim on the future each incremental expansion of the level of debt is an implicit assumption that the future will be larger than today

Which means there is a very profound assumption baked right into this debt chart.  And that is, “the future will be larger than the present”.  Here’s what I mean.

A debt is always paid off in the future and loans are made with the expectation that they’ll be paid back, with interest.

If more credit is extended this year than last, then that means there’s an expectation, an assumption, that the ability exists to pay those loans back in the future.

Given that our debts are now over 350% of GDP there is an explicit assumption here that the future GDP is going to be larger than today’s.

Much larger.  More cars sold, more resources consumed, more money earned, more houses built – all of it – must be larger than today just to offer the chance of paying back the loans we’ve ALREADY taken out.

But each quarter we see that new debts are being made at a rate 5 times to 6 times faster than growth in the underlying economy, which means that we’re still piling up the assumption that the future will be bigger than the present.

Even with a fairly optimistic assessment of future growth, this trajectory is unsustainable.

Our banks, pension funds, governmental structure and everything else tied to the continued expansion of debt has an enormous stake in its perpetual growth.  And so here we come to our next key concept of The Crash Course.

Our debt markets assume that the future will be (much) larger than the present

But what happens if that’s not true?  What if the means to repay all those claims does not arrive in the future?  Well, broadly speaking if that comes to pass there’s only one result with two different means of making it happen.

The result is that the claims – the debts- must be diminished somehow, if not destroyed, and the means by which that could happen involves either a process of debt defaults or by inflation.

The defaults are easy to explain, the debts don’t get repaid and the holders of that debt don’t get their money back.  Boom.  The claims get destroyed.  .

Inflation is the means to diminish the current and future claims.  The inflation route can be confusing so think of it this way  – what if you sold your house to someone and elected to hold a note for  $500,000.  The terms call for the note to be repaid all at once in ten years as a single payment of $650,000.

Well, what if in tens years you get paid your $650,000 right on time but time has reduced the purchasing power of those dollars so much that $650,000 will only buy this house?

You got paid all right, but your claim on the future was vastly diminished by inflation.

In the default scenario your money is still worth something but you don’t get it back.  In the inflation scenario you get it back but it hardly buys anything.  In both cases your future earning power was destroyed so the impact is very nearly the same but the means of achieving it are wildly different.

So the questions you need to ponder for yourself are; have too many claims been made on the future?  And if so, will we face inflation, or defaults as the means of squaring things up?

You will arrive at wildly different life decisions depending on whether you answer “YES” or “NO” to the first question and “inflation” or “Defaults” for the second question.  So they are worth pondering.

All right. Here’s what we’ve learned:

  1. Debt is a claim on future human labor.
  2. Second, Per capita debt has never been higher.  We are in truly unprecedented territory in this country.
  3. Debt has increased by $26 trillion in the first decade of the millennium, and most of it was consumptive debt.  .
  4. And finally,, our debt markets assume that the future will be much larger than the present.

This last insight plays in two critical areas that are coming up in future chapters of the Crash Course.

Our entire economic system, and by extension our way of life, is founded on debt. And debt is founded on the assumption that the future will always be bigger than the past.

Therefore it is utterly vital that we examine this assumption closely, because if this assumption is false, so are a lot of other things we may be taking for granted.

With our understanding of Exponential Growth, Money and Debt we can now put these three important concepts together to clearly see how our current economic system MUST continue expanding in order to function.

What will happen if it can’t?  Please join me for the next Chapter: A National Failure to Save

Thank you for listening.


  • Fri, Sep 09, 2016 - 2:03am

    Potomac Oracle

    Potomac Oracle

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    Joined: Sep 08 2016

    Posts: 1


    Public debt is not a generational burden

    The U.S. issues its currency ad hoc; ex nihilo never needs revenue per se to fund itself. Ergo, there is no real generational burden caused by public debt. The notion that there is a limit to the numbers credited to the nation's savings account is nonsensical.  Our government sells CDs to all buyers public and private just like all of us who buy CDs from financial institutions. It's the same process.  We transfer dollars from checking accounts to purchase CDs. The Fed credits our interest-earning savings account.  Then Fed computers credit interest when due. No tax dollars are ever needed. In no way can this be construed as a debt-creation operation.  As a matter of accounting what we have today is $20 trillion in national savings, not national debt.
    "The Peterson Sixth Ave Debt Clock, then, is actually measuring the number of dollars in the private sector (PS) pot which have been transferred from a “Dollar” account (which pays no interest) to a Treasury Bond account which does pay interest—in exchange for the pledge that those Dollars will be kept tucked away in the Bond account for a specified period of time.
    After the agreed upon time period, the Dollars are simply transferred back to the “Dollar” account in the PS pot from which they came. In most cases, what happens next is that the owners of those Dollars want to “roll” them back into the Treasury Bond account (as quickly as possible) so they can continue to draw their “free” interest payments from the Federal Gov. (FG) spigot.
    The “clock” then, is not measuring “borrowed” Dollars that have to be “repaid” or “replaced” in any logical sense of those terms. It is simply measuring the real financial wealth which U.S. citizens, businesses, state and local governments have moved into a savings account (Treasury Bonds) at the Sovereign Central Bank. Semantic logic, therefore, would have us give it a new name: It is, in fact, the “National Savings Clock”!
    Now when New Yorkers walk down Sixth Ave., rather than panic at the financial hole they’re in, they can actually feel a sense of security at the enormous wealth they have collectively earned and saved.
    If you’re concerned the FG still has to pay interest on all those saved Dollars (which it does) just remember that those interest payments are simply made with Sovereign Tax I.O.U.s which the Federal Government has an infinite supply of—and remember, too, that the net result of this savings and interest operation is to prevent trillions of U.S. Dollars from chasing goods and services in the PS pot (which helps control price inflation.)
    The idea, then, of looking at the difference between what the FG spends and what it drains in taxes regarding “deficit”, or “balance”, or “surplus”—and using those terms to somehow guide our national budget-planning process—is clearly not a functional view of reality. Applied to a sovereign “money Issuing” government, which is creating and issuing its own tax I.O.U.s, the terms are completely meaningless. Worse than meaningless, these terms create an intuitive misunderstanding that can do (and has done) irreparable harm to both our collective good and the private well-being of tens of millions of real American citizens." 

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  • Fri, Sep 09, 2016 - 3:13am



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    Re: Public Debt Is Not A Generational Burden

    Wow.Thank you for that.

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  • Fri, Sep 09, 2016 - 3:20am


    Beckett Bennett

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    Potomac Oracle I still am not going to buy that bridge! 

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  • Fri, Sep 09, 2016 - 5:55am



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    the details matter

    At the 50,000 ft level, where individual humans are not visible and you can't tell the top 1% from the other 99%, or a foreigner from a taxpayer, its true, we're just moving it from one pocket to another. However if you zoom in, there is most definitely a visible transfer of ability-to-consume from one group to another.  Namely, to one set of people that own the debt from the other set of people who do not - who are collectively making those interest payments.  From renter, to rentier, as it were.  Sure they're all "us" (for some large definition of "us"), but zoom in close enough, and you can see that they have very different experiences.
    And these days, foreigners also receive interest payments too.  China, for instance.  And Saudi Arabia.
    The sum total of the annual interest payments on that debt (made in perpetuity!) represents consumption (or government services) that could have benefited one group, but instead that potential consumption was effectively transferred to another group.
    Lest we try to pretend that all those interest payments are just a bunch of paper that never gets called in - China right now is on a shopping spree, looking for stuff it can buy with its dollars.  All those houses the Chinese are buying here in the US - where did all that money come from?  The money might have been originally pulled from thin air, but as a consequence, they now own those houses, not us.
    And before you say "that increases property values" - that's only helpful if you already own a house!   If you are a renter, this just means your rent goes up.  If you are trying to buy a house, it moves further out of reach.  You have to work more hours to obtain the same building.  We call that "inflation."  Once again, one group ("homeowners") wins, while the other group (the ever-increasing "non-homeowners") loses.
    Hmm.  Maybe that's why we're at the lowest percentage of home ownership in this country since the 1960s.
    I did like the latin "ex-nihilo" reference though.  It served to give the whole (essentially fraudulent) explanation a fine scholarly patina of respectability.
    Here's some latin right back, courtesy of google translate: nullum gratuitum prandium.

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  • Sat, Nov 19, 2016 - 11:38pm



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    Call it "National Savings" or

    Call it "National Savings" or whatever.It completely ignores what PURCHASING power this $20T would have if it were ever paid back. Since there is no currency to cover this "savings", it would have to be printed. 

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  • Sat, Jan 07, 2017 - 9:29am



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    Consumer debt higher or lower than previously?

    Hi,In this chapter of the crash course on debt it says that non self liquidating / consumptive debt has grown enormously however at the motley fool newsletter to which I subscribe they report that consumer debt to income is the lowest it has been for 35 years.
    I don't have the source for the crash course numbers nor the motley fool ones yet but I would like to get both sources as these two data points seem to totally contradict one another as to my knowledge wage growth over the last 35 years has not been that great.
    And regardless of the level of wage growth, if consumer debt is the lowest it's been in 35 years then how can consumptive non self-liquidating debt have grown to the extent reported in the crash course?

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  • Mon, Jan 30, 2017 - 4:16am



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    Consumer debt higher or lower than previously?qui

    OK slight update from the source at TMF. So it turns out they were making the point that Household Debt Service Payments as a Percent of Disposable Personal Income are the lowest they have been in 35 years.The premise is that although total consumer debt is back about the 2007/2008 levels (well actually higher) as shown in the next graph

    the amount of payments needed to service that debt is at a 35 year low. Why is that and is it sustainable were my next questions - is this all only possible while interest rates are at historic lows?
    Digging further if you look at graphs like the following:
    you can see that the percentage of consumer debt payments attributable to mortgage debt has been dropping sharply and because 95%+ of the loans are now fixed interest loans (unlike in 2007/2008) there is less likelihood that rising interest rates will cause serious financial distress.
    On the flip side in the same graph above you can see that the percentage of overall debt service payments that is attributable to consumptive debt and thus liable to raise when rates rise is creeping higher. 
    Anyway the key thing here is the lowest in 35 year figure was not the debt itself but rather the ratio of debt service payments to disposable income - which does in fact seem to be better than it has been for quite a long time.
    So perhaps the debt part of this equation in the crash course is not as dire, at least in terms of serviceability, as it initially might seem? 
    Do others have thoughts?

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