The Federal Reserve credit market debt data (Z1) was released for 2012, and I checked to see how the deleveraging was going. Back in 1952 the total of America’s debts, business and personal, federal, state and local, and financial was the equivalent of 135% of U.S. GDP. Despite the blandishments of the growing credit card industry and the “guns and butter” policies of the Great Society in the 1960s, that figure was just 168% of GDP in 1981, the year Ronald Reagan took over and the great national party began. The torch was passed to a new generation, as the “Greatest Generation” that had faced the depression and World War II was gradually replaced by the richest generations, those born between 1930 and 1955 or so, in control of our institutions. By 2009, as Barack Obama took office, total U.S. credit market debt had soared to 381% of GDP.
All the economic pain of the Great Recession, all the mortgage and credit card defaults, all the bankruptcies, all the diminished lives and expectations, only reduced total U.S. credit market debt to 359% of GDP in 2012, still more than double what it had been back in 1981. At that pace, it will take 38 more years for America’s debts to get back to where they were in 1981. But believe it or not, that’s the good news. If one were to exclude financial debt, the debt financial companies owe each other through instruments such as swaps and derivatives, the deleveraging has not yet begun. Total non-financial debts, public and private, were 253.9% of GDP in 2009 and 253.8% of GDP in 2011. In 2012, debt by this figure rose to 255.7% of GDP, which is perhaps the only reason our so-called economy more or less improved. An economy of people and governments spending money they don’t have, because businesses aren’t paying people as much as they want to sell to them. The spreadsheet and more commentary can be found below.
The spreadsheet and associated charts, initially downloaded from the Statistical Abstract of the United States and later updated with data direct from the Federal Reserve, is here. I suggest you download it and look at the charts.
Just looking at the non-financial debts, the two national parties stand out. From 1981 to 1989, the Reagan-era party, total U.S. debts soared from 140% of GDP to 185% of GDP. And from 2001 to 2009, the Bush II party, total U.S. debts soared from 188% to 254% of GDP. I’m not sure what economic policy Mitt Romney, with all his something-for-nothing promises, was actually proposing, but I think it was yet another national party. Elect me and everyone will be able to borrow and spend more and worry about it later again. But I’m not sure he could have thrown another party even if he wanted to, because the sold out future has arrived.
Look at the chart identified on the tabs along the bottom as the “Debt Chart,” with U.S. debts divided by type. The past 30 years of squeezing most American workers on the labor side but selling more and more to them on the consumer side has left most Americans broke. Worse, in addition to all the debts they have taken on, they haven’t saved for a retirement that is fast approaching for millions of them. Those not yet poor will be poor. And after soaring, U.S. household and non-profit debts are plunging as a percent of GDP. Congratulations, one percent! You paid each other richly for this achievement. Now, whom are you going to sell to?
Most Americans have gone in debt and failed to secure their futures in order to, depending on your politics, live large in McMansions and SUVs, or live the same way the richer generations that preceded them had lived, but with less in pay. But that is now over. Our consumer economy would have collapsed entirely had not the federal government stepped in to borrow and spend. Creditors such as the Arabs, Chinese and Russians – and plutocrats with five houses in five countries who still count as Americans – now know that individual Americans won’t be able to pay them back. But they’ll lend to a government with the power to compel younger generations to pay for what older generations promised themselves so the spending can continue.
The federal government is selling our children’s future so Americans can spend more than what they earn today. Look at that federal debt going up like a rocket, as what had been private debt is shifted on to our collective backs. And suddenly there is talk of a much worse old age, with lost federal benefits. Not for the generations that threw and enjoyed the national parties of course. For those coming after, who have already had less during their younger years, and are thus “able to adjust.” All the so-called partisan conflict masks this consensus among the members of Generation Greed. They aren’t willing to give up anything!
In olden times, governments, people and businesses borrowed to secure or produce real assets that would save money or produce income in the future. Those savings or that income could be used to pay the money back. I’m talking about infrastructure. Plant and equipment. Owned homes with mortgages and operating costs that were cheaper than rent. College and other training that was inexpensive relative to the extra income earned. Research and development that led to patented innovations that produced enormous well-being.
We still do some of those things in America, but not nearly as much as in the past. We want it now! And thus our economy is overwhelmingly driven by consumption, rather than investment. In fact, the investment of many developing countries had been driven by our consumption, until we went broke.
As a result, those pieces of paper held by the rich, by ordinary Americans in their savings accounts and their 401Ks, and by its public employee pension funds, don’t mean what they used to. They used to be backed by income-producing assets. Now they are backed by promises by people to live much poorer in the future, to make up for having lived richer in the past. Or promises by past politicians that future politicians will force people to be much worse off in the future, to make for all the pandering giveaways to interest groups they used to get power in the past. The kind of giveaways to interest groups you hear New York’s candidates for Mayor promising now. The kind of future selling that made men like Pataki, Bruno, Silver, Giuliani, and all the venal non-entities that have populated all our legislatures over the years.
Note that the chart of state and local debts as a percent of GDP doesn’t look that bad. But it also doesn’t include the de facto debt of all the retroactively enhanced and underfunded pensions of the past two decades. I recently downloaded the latest Comprehensive Annual Financial Report of the New York City Teacher’s Retirement Fund. According to that report, page 2.31, the percent funded for that pension fund – the money set aside to pay benefits compared with the benefits NYC teachers have already earned (by working or by doing deals with the state legislature) was 100% in 2005. And in 2006, 2007, 2008, and 2009. But in 2010, the latest year reported, the pension fund was suddenly just 58.9% funded, and city residents were found to owe an extra $25 billion or perhaps $8,300 for every household in New York City. Just for the teachers! How did that happen? Perhaps Mayor Bloomberg, on his way out of office, decided to tell (some of) the truth for his pandering successors to deal with.
Moreover, the state and local debts as a percent of GDP do not account for the extent and quality of the assets that used to funded by debts. The collapsing bridges, for example.
What you are looking at is a disaster. The likely outcomes?
Spiraling mass bankruptcy and default, as in the Great Depression, which would have happened again in the Great Recession if the federal government had not stopped it. The debts for some, and the paper “assets” of the better off others, would be wiped away in the bonfire of bankruptcy.
Mass inflation, which would reduce the real value of those debts (and assets and pensions) by devaluing the money they were paid in. The huge 1970s inflation is the only thing that more or less saved New York City in that decade. If you call a few generations of school children not educated, crime allowed to run wild, garbage and dying bag ladies in the streets, a million people and a million jobs fleeing, being “saved.”
Or you can have a slow grinding period stagnation as the debts are paid off. That period has just gotten started.
The debt built up over 30 years. Inflate it away, default it away, or face stagnation. I’m not the only one who sees it that way.
People say the economy is bad right now, but this may be about as good as it gets for a while, given a diminished labor force, impoverished consumers, and indebted goverments. It could be much worse. Ask the people in Greece and Spain, Iceland and Ireland and Italy. People without power to exploit others, those not in the executive/financial class or the political/union class, have been left with less, and are going to have less still. The later you were born, the less well off, on average, you are likely to be, your information technology aside.
Which is why I get so frustrated with all the people who keep claiming they are entitled to more, and more, and more. You know how most people got more for the past 30 years? By selling off the future, their own and/or someone else’s. Just look at that chart. Consider what the economy has felt like over the past five years, as those massive debts were either paid off/defaulted away slightly, or just stopped going up for a few years. And just think about what we are facing, given how high the debts still are. Who did this, and why? Who benefitted? Probably the same people still whining “what about my needs?”