Federal Reserve Z1 Data for 2019: The Debt-Driven Party Had to End Eventually, Coronavirus or No Coronavirus

“If something cannot go on forever, it will stop,” Herbert Stein

“Markets can stay irrational longer than you can stay solvent,” John Maynard Keynes

Federal Reserve Z1 data for 2019 was released on March 12, and it shows a continuation of the post-1980 trend.


For the past four decades businesses have paid most Americans less and less, working its way up the income and education scale.  With progressively lower pay and benefits by generation, and Millennials paid 25 percent less, on average, than Baby Boomers had been at the same point in life.  But for most of that period Americans still spent more and more, with the difference between lower labor costs and higher sales showing up as higher profits, converted to higher executive and financial sector pay, and inflated asset values.  That difference was bridged by more household members in the labor force, then by reduced retirement savings, then by soaring personal debt, then by soaring government debt. The result has been a global crisis of demand, and an unsustainable debt-driven economy.

It would have collapsed in 2008 without massive government intervention. That intervention meant the fundamental problems were never solved. Instead, asset prices were re-inflated, to the benefit of older asset holders and the rich, and to the detriment of younger people saving for retirement or seeking to buy a home. Even as most people became worse off, and U.S. life expectancy began to fall.  The global economy has been poised at a precipice ever since, with only interest rates near zero and soaring public debts deferring collapse, even as aging populations seemed sure to cause the whole thing to deteriorate eventually.  In 2019, total non-financial U.S debt increased 4.8%, and federal debt soared 6.7%, but nominal GDP increased just 4.1%, and inflation-adjusted GDP increased just 2.3%.  Not the 3.0% to 8.0% real growth The Donald has claimed yet another tax cut for the rich and corporations would produce.  The question for 2020 is whether the coronavirus will change eventually to immediately.


This is the latest in a series of annual posts on the long-term trend in U.S. debts, based on Z1 data from the Federal Reserve and GDP data from the Bureau of Economic Analysis.  Along with summaries of articles on the subject.  A spreadsheet with the data and charts is here.

Total Credit Market Debt Outstanding z1-2019

And the Z1 data as downloaded is here.


For those who are new to my blog and this discussion, it is my view that the increase in U.S. inequality, and the perpetual U.S. trade deficit, were caused by (or at least could not take place without) these soaring debts, as discussed here.


In order to get Millennial buyers to bid up the price of housing to benefit older sellers, the federal government, via Fannie and Freddie, increased the share of the buyer’s income that could go to debt service to 50 percent, as I showed here.


If later-born generations are expected to pay 50 percent of their incomes for debt, and pay higher taxes due to all the public debt that has been run up, and save much of their income because they won’t be getting the same old age benefits today’s seniors got, where is the money for consumer spending? The idea that higher housing (and stock) prices are “good” is false.  Higher prices are “good” for some, older and richer sellers, and bad for others, younger and poorer buyers.  So the fact that federal government has acted to keep asset prices inflated is income and wealth redistribution on a grand scale.


As I’ve been saying for a long time: There is zero evidence that markets can make or sustain new highs without some sort of intervention on the side of central banks. None. Zero. Zilch…In March 2009 markets bottomed on the expansion of QE1 (quantitative easing, part one), which was introduced following the initial announcement in November 2008. Every major correction since then has been met with major central-bank interventions: QE2, Twist, QE3 and so on…

What’s the larger message here? Free-market price discovery would require a full accounting of market bubbles and the realities of structural problems, which remain unresolved. Central banks exist to prevent the consequences of excess to come to fruition and give license to politicians to avoid addressing structural problems. And by preventing these market forces from playing out at each sign of trouble, the can gets kicked further and further down the road. Each successive recovery keeps the illusion alive, but “accommodation” requires ever-lower rates before the monsters return. In the meantime, debt keeps expanding, while each recovery produces less and less organically driven growth, and ever-higher wealth inequality. This is what this system produces.

But let’s look at the latest charts.

From 1952 to 1981, total U.S. credit market debt was generally stable as a share of GDP, the income of everyone and everything in the country, at around 140% to 160% of it.  During those years labor’s share of national income was thought to be naturally stable, since what businesses paid out on the labor market side determined business income on the sales side.  From 161.3% in 1981, however, total U.S. credit market debt soared to a peak of over 350 percent of GDP in 2008 and 2009.  The result was a long, debt-driven national party, with some getting to party far more than others.

These years also corresponded with favorable demographics for the U.S. economy, as the large and relatively highly-educated Baby Boom generation was in its peak working and earning years, and women joined men in the paid labor force in greater numbers.  Labor force participation soared to record highs.

Since then, total debt has fallen to 312.1% of GDP, but only because regulations have forced the financial sector to de-leverage.

Excluding the debts financial companies owe to each other, total U.S. debts never actually fell.  After remaining stable at around 130% to 140% of GDP from 1952 to 1981, a time when imports and consumer spending were paid for with actual exports and actual household income, total U.S. non-financial debt soared to 238.8% in 2008.  It then increased to 251.1% of GDP in 2018 and to 253.6% of GDP in 2019.


Zombie companies in China. Crippling student bills in America. Sky-high mortgages in Australia. Another default scare in Argentina.  A decade of easy money has left the world with a record $250 trillion of government, corporate and household debt. That’s almost three times global economic output and equates to about $32,500 for every man, woman and child on earth.

Much of that legacy stems from policy makers’ deliberate efforts to use borrowing to keep the global economy afloat in the wake of the financial crisis. Rock bottom interest rates in the years since has kept the burden manageable for most, allowing the debt mountain to keep growing.

Now, as policy makers grapple with the slowest growth since that era, a suite of options on how to revive their economies share a common denominator: yet more debt. From Green New Deals to Modern Monetary Theory, proponents of deficit spending argue central banks are exhausted and that massive fiscal spending is needed to yank companies and households out of their funk.

It is fair to say that the only reason GDP has slowly increased, rather than collapsed, is because the ratio of debt to GDP kept increasing, and zero percent interest rates kept the interest on that debt from crushing the borrowers. But the increase in GDP has been at a slow, “new normal” rate.  From 2010, after the Great Recession ended, to 2017, the year with President Obama’s last budget in effect, real U.S. GDP increased by an average of just 2.2% per year.  President Trump claimed his tax cuts for the rich and corporations would lift GDP growth to 3.0% or more.  Instead, after a “sugar high” increase to 2.8% in 2018, associated in a 1.7% increase in the ratio of federal debt to GDP, GDP slowed back to the “new normal” rate of 2.3% in 2019, despite an even greater increase of 2.1% in the ratio of federal debt to GDP.


This was not the way it was supposed to go. “Four, five and maybe even six percent” growth was what President Donald Trump promised in December 2017. Even within the relatively sober pages of the budget proposal released by the administration in March this year, Mr Trump’s team forecast economic growth rates of 3% or more right through to 2024—which would be the last full year of a second Trump term, were one to occur. Instead, the American economy, which just missed the 3% growth target in 2018 despite the boost from the president’s budget-busting tax bill, continues to lose steam.

Consumers have been the ones driving the economy forward. They continue to spend, but with less gusto than before. Personal consumption spending grew at a 2.9% annual pace in the third quarter: not bad, but down from 4.6% in the second. Retail sales in September dropped by 0.3%, suggesting that the quarter ended on a weak note. Measures of consumer confidence—a guide to how spending may evolve in future—have slipped.

Actually, the issue for years has been consumer borrowing capacity, not consumer confidence.  They spend until they max out the credit cards, and then stop.

Firms, too, are behaving cautiously. Measures of business confidence have been softening. Anxiety among bosses is affecting investment: the boost to third-quarter gdp from investment in housing was more than offset by a hefty drop in investment in non-residential building and equipment. Weak investment figures are particularly irksome to economists in the Trump administration, who argued that the president’s tax reform would encourage a boom in business spending.

Nah, he was just lying. The real goal was to redistribute income upward, again. Why should businesses invest when U.S. consumers will almost certainly have less to spend in the future than in the past?


Had the federal government not intervened by vastly inflating its own debts and contingent liabilities (by backing student loans and mortgages that are too inflated, relative to income, to be repaid without permanent impoverishment), the whole house of cards might have collapsed in 2008, wiping out the paper wealth of the old and rich in a bonfire of bankruptcy.  As in the early 1930s, which ended in a global depression but also with more equality in the U.S. than has been seen since. Basically, a whole lotta debt was shifted from the financial sector to the federal government.

From 2007 to 2019 the federal debt increased by 46.9% of GDP. And financial sector debt decreased by 41.7% of GDP.

This massive increase in debt occurred while the Baby Boomers were working, in part because they insisted on voting themselves lower taxes and greater benefits.  Three rounds of tax cuts, with the benefits concentrated at the top, prevented total federal debt from falling in economic upturns, and led to debt explosions in downturns.  The richest generations in U.S. history benefitted from lower taxes, relative to public spending, for most of its working years.

Total federal debt held by the public was at 26.2% of GDP in 1981, during the last budget of President Carter, despite a recession.   It was at 88.9% of GDP in 2019, despite a boom, on the way to 100 percent of GDP and perhaps more, very soon.  Given that more than half of that debt is held by people outside the United States, an average national debt interest rate of even 4.0% would cause more than 2.0% of everything earned by American households and businesses to be paid out of the country, gutting the local demand for goods and services.

And this doesn’t include contingent liabilities, like all the benefits older generations have promised themselves but refused to pay for, those present in Fannie, Freddie, and FHA loans, the federal flood insurance program, at the Pension Benefit Guarantee Corporation.  According to a successful hedge fund manager, writing before the coronavirus…


Large government deficits exist and will almost certainly increase substantially, which will require huge amounts of more debt to be sold by governments—amounts that cannot naturally be absorbed without driving up interest rates at a time when an interest rate rise would be devastating for markets and economies because the world is so leveraged long.

But what if interest rates say close to zero?  In that case, state and local governments, private pension funds and insurance companies will go under.

State and local debts soared from 11.9% of GDP in 1981 to peak of 21.6% in 2009, even as infrastructure investment fell.   Money was borrowed for business subsidies, and to get through recurrent fiscal crises, instead.


It has since fallen back to 14.4% in 2019, but that is only the bonded debt we can see.  The deterioration of the infrastructure is a hidden debt.  Debt has also been run up by retroactively increasing public employee pension benefits in political deals, or failing to fully fund the pensions the employees were promised to begin with, to keep state and local taxes low for the older generations who actually got pensions.


If you don’t want to believe my compilation of Census Bureau state and local government finance data, here is hedge fund manager Ray Dalio again.

At the same time, pension and healthcare liability payments will increasingly be coming due while many of those who are obligated to pay them don’t have enough money to meet their obligations. Right now many pension funds that have investments that are intended to meet their pension obligations use assumed returns that are agreed to with their regulators. They are typically much higher (around 7%) than the market returns that are built into the pricing and that are likely to be produced.

As noted, a 7% rate of return overall would require a much higher “safe” rate on U.S. Treasury bonds.   If low rates don’t bankrupt state and local government, high rates will bankrupt the federal government.

As a result, many of those who have the obligations to deliver the money to pay these pensions are unlikely to have enough money to meet their obligations. Those who are recipients of these benefits and expecting these commitments to be adhered to are typically teachers and other government employees who are also being squeezed by budget cuts. They are unlikely to quietly accept having their benefits cut. While pension obligations at least have some funding, most healthcare obligations are funded on a pay-as-you-go basis, and because of the shifting demographics in which fewer earners are having to support a larger population of baby boomers needing healthcare, there isn’t enough money to fund these obligations either.



All of these public costs have been shifted to generations whose income is, once again, 25 percent lower than that of Baby Boomers had been at the same age.


With the situation so bad that the life expectancy of those now under the age of 62 has been falling, with rising suicide as one of the reasons.


Household (and non-profit) debt had soared from 48.2% of GDP in 1981 to 98.5% of GDP in 2007, as lower-paid generations continued to spend and saved less for retirement.  It has since fallen back to 75.4% of GDP in 2009, but only because large numbers of Americans have defaulted on their mortgages, and been evicted from their homes.  And later-born Americans have not purchased houses, in part because the cost of owner-occupied housing has soared relative to their lower incomes.


Unadjusted for inflation, home prices rose 188% from 1987 to 2017, average tuition at public four-year colleges rose 549% and health-care expenditures rose 276% from 1990 to 2017…Meanwhile, household income from 1987 to 2017, not adjusted for inflation, rose 135%.

So they paying more and more in rent instead.

Strategic Acquisitions was but one of several companies in Los Angeles County, and one of dozens in the United States, that hit on the same idea after the financial crisis: load up on foreclosed properties at a discount of 30 to 50 percent and rent them out. Rather than protecting communities and making it easy for homeowners to restructure bad mortgages or repair their credit after succumbing to predatory loans, the government facilitated the transfer of wealth from people to private-equity firms.

By 2016, 95 percent of the distressed mortgages on Fannie Mae and Freddie Mac’s books were auctioned off to Wall Street investors without any meaningful stipulations, and private-equity firms had acquired more than 200,000 homes in desirable cities and middle-class suburban neighborhoods, creating a tantalizing new asset class: the single-family-rental home. The companies would make money on rising home values while tenants covered the mortgages.

But these firms don’t have typical landlord responsibilities. Those are shifted to tenants as if they themselves were the owners.

The leases grew in length from four pages to 18 to 43 as the companies doubled down on strictures and transferred more responsibilities — mold remediation, landscaping, carbon-monoxide detectors — onto the renter.

Wall Street’s latest real estate grab has ballooned to roughly $60 billion, representing hundreds of thousands of properties. In some communities, it has fundamentally altered housing ecosystems in ways we’re only now beginning to understand, fueling a housing recovery without a homeowner recovery.“That’s the big downside,” says Daniel Immergluck, a professor of urban studies at Georgia State University. “During one of the greatest recoveries of land value in the history of the country, from 2010 and 2011 at the bottom of the crisis to now, we’ve seen huge gains in property values, especially in suburbs, and instead of that accruing to many moderate-income and middle-income homeowners, many of whom were pushed out of the homeownership market during the crisis, that land value has accrued to these big companies and their shareholders.”

Of course the reverse may be true going forward, unless these rich and powerful players are bailed out again.   Because ownership of these homes has been securitized.

With the securitized homes, the rental income now needed to cover not only the mortgage but also the interest payments distributed to bondholders — creating an incentive to keep occupancy and rents as high as possible. In fact, Invitation Homes’ securitized bond model assumed a 94 percent paying-occupancy rate, putting pressure on the company to evict nonpaying tenants right away.  The growth imperative became even more urgent as the REITs began to go public. Since a rebound in the real estate market made acquiring new properties more expensive, companies looked for growth from their tenants: i.e., by raising rents, cutting down operating costs and maximizing efficiencies…

“What is really dangerous to tenants and communities is the full integration of housing within financial markets,” says Maya Abood, who wrote her graduate thesis at the Massachusetts Institute of Technology on the single-family-rental industry. “Because of the way our financial markets are structured, stockholders expect ever-increasing returns. All of this creates so much pressure on the companies that even if they wanted to do the right thing, which there’s no evidence that they do, all of the entanglements lead to an incentive of not investing in maintenance, transferring all the costs onto tenants, constantly raising rents. Even little, tiny nickel-and-diming, if it’s done across your entire portfolio, like little fees here and there — you can model those, you can predict those. And then that can be a huge revenue source.”

And thanks to the pieces of paper piled up abroad by four decades of U.S. trade and current account deficits, the ultimate owners may not be American.  So that money is also paid out of the country, as interest on the multi-decade party held to benefit the richest generations in U.S. history.

For the rest, excluding mortgages total U.S. household debt never actually fell much.  After rising from 16.3% of GDP in 1981 to 25.0% in 2007, it fell only slightly and then increased to 26.1% of GDP in 2019.  That was the basis of our “economic recovery.”


Household debt surged in 2019, marking the biggest annual increase since just before the financial crisis, according to the New York Federal Reserve.  Total household debt balances rose by $601 billion last year, topping $14 trillion for the first time, according to a new report by the Fed branch. The last time the growth was that large was 2007, when household debt rose by just over $1 trillion.

Along with other types of household debt, mortgage balance also increased.

Housing debt now accounts for $9.95 billion of the total balance. Balances for auto loans and credit cards both increased by $57 billion for the year, according to the Fed.

The economists said in the blog post that credit cards have again surpassed student loans as the most common form of initial credit history among young borrowers, following several years after the crisis when student loans were higher. “The data also show that transitions into delinquency among credit card borrowers have steadily risen since 2016, notably among younger borrowers,” Wilbert Van Der Klaauw, senior vice president at the New York Fed, said in a statement.

However, even as the total amount of household debt has risen, the level of household debt service as a percentage of disposable personal income is at all-time lows going back to 1980.

Only due to the same rock bottom interest rates that are wrecking pension funds.

Later born generations aren’t going deeper into debt to “live large,” as earlier generations had. They are merely trying to maintain a middle class way of life that, given the need for one car per adult, was never really affordable to begin with.


The American middle class is falling deeper into debt to maintain a middle-class lifestyle.  Cars, college, houses and medical care have become steadily more costly, but incomes have been largely stagnant for two decades, despite a recent uptick. Filling the gap between earning and spending is an explosion of finance into nearly every corner of the consumer economy.

Consumer debt, not counting mortgages, has climbed to $4 trillion—higher than it has ever been even after adjusting for inflation. Mortgage debt slid after the financial crisis a decade ago but is rebounding.  Student debt totaled about $1.5 trillion last year, exceeding all other forms of consumer debt except mortgages. Auto debt is up nearly 40% adjusting for inflation in the last decade to $1.3 trillion. And the average loan for new cars is up an inflation-adjusted 11% in a decade, to $32,187, according to an analysis of data from credit-reporting firm Experian. Unsecured personal loans are back in vogue, the result of competition between technology-savvy lenders and big banks for borrowers and loan volume.

The debt surge is partly by design, a byproduct of low borrowing costs the Federal Reserve engineered after the financial crisis to get the economy moving. It has reshaped both borrowers and lenders. Consumers increasingly need it, companies increasingly can’t sell their goods without it, and the economy, which counts on consumer spending for more than two-thirds of GDP, would struggle without a plentiful supply of credit…

Nowhere is the struggle to maintain a middle-class lifestyle more apparent than in cars. The average new-car price in the U.S. was $37,285 in June, according to Kelley Blue Book. It didn’t deter buyers. The industry sold or leased at least 17 million cars each year from 2015 to 2018, its best four-year stretch ever. Partly because of demand satisfied by that run, sales are projected to be off modestly this year.

How households earning $61,000 can acquire cars costing half their gross income is a story of the financialization of the economy. Some 85% of new cars in the first quarter of this year were financed, including leases, according to Experian. That is up from 76% in the first quarter of 2009.

And 32% of new-car loans were for six to seven years. A decade ago, only 12% were that long. The shorter-term loans of the past gave many owners several years of driving without car payments.

Now, a third of new car buyers roll debt from their old loans into a new one. That’s up from roughly 25% in the years before the financial crisis. The average amount rolled into the new loan is just over $5,000, according to Edmunds, an auto-industry research firm.

Although the Millennials are even worse off, the first generation to be worse off than the one before were the late Boomers, born after 1957 or so.


Workers who start looking for a job during a recession earn significantly less than their timelier counterparts. This wage penalty can last for years—a phenomenon economists call wage “scarring”.

Using data on the roughly 4m Americans who entered the workforce shortly before, during and after the 1982 recession—when unemployment reached almost 11%—the authors measured how the downturn affected those people’s health and mortality many years later. On joining the labour force, they faced a national unemployment rate 3.9 percentage points higher than that before the onset of recession. That was associated, the authors found, with a cut in their life expectancy of six to nine months. The additional deaths were from causes linked to unhealthy behaviour, including heart disease, lung cancer, liver disease and drug poisoning.

Starting work during the recession also damaged marriages. People who entered the labour force around 1982 were more likely to get divorced (their split-up rates were about 3.5% above the average). By middle age, they were also roughly 3-4% less likely to have children.

That recession brought with it the first multi-tier labor contracts and arrangements with drastically lower pay and benefits for newly hired workers, compared with those who came before.  Those new workers should have drastically cut their consumption to save more for retirement, leading to a big and permanent decrease in consumer demand at the time.  But most failed to do so and borrowed instead, leading to an even greater decrease in future demand as these generations face their diminished old age.  At this point it is inevitable.


Baby boomers have a lot more debt than their parents did.   By all accounts, the parents were in pretty good shape for retirement because they held their debt levels down to a mere 4 percent of their total assets in the years immediately before retiring – ages 56 to 61 – according to a new study.  At those same ages, the typical baby boomers’ debt has ranged from 19 percent to 23 percent of their assets, thanks in large part to the 2008 drop in stock portfolios and in the housing market…

The analysis also uncovered another troubling trend for the baby boomers born in the middle of the demographic wave: about 10 percent of them had more debt during their late 50s than their assets were worth. When their parents were that age, some of the most indebted of them still had more assets than debts.

Prior generations had their short-term consumption curtailed by “forced savings” in mortgages that were paid off, employer-provided pensions, and whole life insurance policies.  This has been replaced by easy access to high-interest debt, gambling, and addictive substances as part of what I call the “just enough rope to hang themselves” economy.


There was a time when banks would never allow consumers to put second liens on their home without very good reason.  In 2019, however, mortgage debt increased again due to yet another round of cash-out refis, leading to another round of foreclosures and more losses for the federal government.  The proceeds were blown on short-term consumption.


Lenders extended $2.4 trillion in home loans last year, the most since 2006, according to industry research group Inside Mortgage Finance. That was also a 46% increase from 2018…The Mortgage Bankers Association estimates that refinancings made up 38% of mortgage originations last year.

Tim Lindsey, an originating branch manager at CrossCountry Mortgage in Greenwood Village, Colo., said the number of mortgages he processed grew more than 25% last year. Mr. Lindsey said he hasn’t had a day off since New Year’s Day.

“There was an incredibly large amount of origination from previous years,” Mr. Lindsey said. “Everyone I know had their best year ever.”



Despite the problems of personal and public debt, many believe that the next financial crisis will actually be led by business debt.  As noted, the financial sector, whose debts inflated the prior financial crisis, has de-leveraged since.

Financial sector debt had equaled 25.6% of GDP in 1981, but soared to 122.4% of GDP in 2008.   It fell to 83.9% of GDP in 2016, in part due to Dodd Frank regulations.  And despite Trump administration efforts to allow the financial sector re-leverage to pump up asset prices in the short term, it fell further to 77.9% of GDP in 2019.  While lower, it is still triple what it was as President Reagan took office.

But the big surge is in non-financial business debt, with leveraged loans and junk bonds prominent.  And money borrowed not for actual investment, but rather for stock buybacks to inflate stock prices and executive pay.

Business debt, like federal debt, is at a post-1951 high as percent of GDP.  It equaled 53.2% of GDP in 1981, but was at 72.5% of GDP in 2008, during the (prior) financial crisis.  Noting that Wall Street got bailed out and its high paid executives got to keep all their past and future bonuses, other sectors levered up to 74.9% of GDP in 2019. Business debt increased 4.8% from 2018 to 2019.


“Not only has there been a surge in corporate debt, but the quality of the debt is the weakest it’s ever been,” said David Rosenberg, chief economist at Rosenberg Research, an investment consulting firm. “The last cycle was about the household sector and commercial banks. This is about the business sector and the holders of the spurious debt are mutual funds, insurance companies and hedge funds.”

Some features of today’s debt binge look a lot like the last one: before the virus hit, rising stock and bond prices had fed a complacent belief among investors that asset prices could only go up, much like during the residential housing boom that preceded the 2008 crisis. This complacency has resulted in an increased appetite for risk among hedge funds, mutual funds and insurance companies seeking gains in their portfolios.

 “Debt has been completely ignored — it’s like the addictive drug that everybody thinks is okay, until it’s not,” Bryan told NBC News. Coming into focus now, she added, is the problem of what the companies that issued loads of debt did with the proceeds. Rather than using it to invest in their operations or bolster their financial positions, many chose to buy back their shares or pay dividends to investors.

In a speech last May, Jerome Powell, the chairman of the Federal Reserve Board, noted that business debt issuance has recently been concentrated in the riskiest segments and layoffs may be a result. “Some businesses may come under severe financial strain if the economy deteriorates,” he said in the speech. “A highly leveraged business sector could amplify any economic downturn as companies are forced to lay off workers and cut back on investments.”…

It’s a long-term trend, but the Trump Administration deserves to get some short-term blame.

Deregulation, a favored policy of the Trump administration, has also fed the debt binge. In 2018, regulators and Congress loosened rules governing corporate borrowing, allowing for greater amounts of leverage in the system and increasing the risks associated with these borrowers.

One change took place in the spring of 2018, when Congress passed legislation allowing business development companies, closed-end investment firms that make loans to small and mid-sized entities, to double their maximum allowable leverage. Business development companies with publicly traded shares are popular among investors seeking high yields.

Then, in September 2018, the nation’s top banking regulators made a big shift that involved leveraged borrowers. For years, the three top banking regulators, the Fed, the FDIC and the Comptroller of the Currency, made a practice of identifying so-called “bright-line” thresholds in their supervisory guidance for banks to follow. One such threshold had to do with leveraged lending, with regulators warning banks against lending money to companies that already carried borrowings of more than six times an earnings measure.

But in the fall of 2018, the three regulating agencies said previous thresholds should not, in fact, be viewed as binding by the banks they oversee. That freed up the institutions to lend money to already heavily indebted institutions. 

After almost 10 years of economic growth and rising business indebtedness, this was the wrong thing to do at the wrong time, said Rosner of Graham-Fisher & Co. “Regulators have been complicit in supporting leverage in the system to keep the economy growing when they should have been concerned about safety and soundness.”


Companies came out of the 2007-09 financial crisis in a relatively sober mood, but since then have let rip. Global corporate debt (excluding financial firms) has risen from 84% of gdp in 2009 to 92% in 2019, reckons the Institute of International Finance. The ratio has risen in 33 of the 52 countries it tracks. In America non-financial corporate debt has climbed to 47% of gdp from 43% a decade ago, according to the Federal Reserve.

Underwriting standards have slipped. Two-thirds of non-financial corporate bonds in America are rated “junk” or “bbb”, the category just above junk. Outside America the figure is 39%. Firms that you might think have rock-solid balance-sheets—at&t—have seen their ratings slip, while others have been saddled with debts from buyouts. Naughty habits have crept in: for example, using flattering measures of profit to calculate firms’ leverage…

A majority of American bonds are owned by pension funds, insurers and mutual funds that can cope with losses. But some will be reluctant to buy more. And 10-20% of all American corporate debt (bonds and loans) is owned by more esoteric vehicles such as collateralised-loan obligations and exchange-traded funds. Such exposures have yet to be fully tested in an extended period of severe market stress.

Already there are calls to bail out indebted companies – to keep stock prices inflated, and executive pay inflated – or else they’ll make it worse for the rest of us.  Blackmail for the serfs, just as happened in 2008.  After that bailout for the better off, millions fell out of the middle class and U.S. life expectancy fell.  The losers were branded as “takers” and the bailed out winners as “makers” just a few years after the bailouts went down.

Those who called for a Wall Street bailout then want a business bailout now.  After all, businesses are deep in debt, and have already blown all the money they got out of us through corporate tax cuts, so we have “no choice” but to subsidize them or they will go under.  Just as we have “no choice” but for workers in poorer, later-born generations who don’t get pensions to become poorer still to pay for bailouts of public employee and multi-employer pension funds, funds that are in the hole because they retroactively increased pension benefits for older beneficiaries and claimed this would cost nothing a decade or more ago.

If the bailouts are pre-bankruptcy, as on Wall Street, then those who had companies borrow money and grabbed the proceeds for themselves get to keep all they have taken, and sneer a the rest of us.  But if the bailouts are post-bankruptcy, as in GM and Chrysler, shareholders and executive pay – and perhaps bondholders, in part – can be wiped out, and some of the future benefits shifted to taxpayers. There is no need to preserve the value of paper assets to preserve the U.S. economy.  Reorganization under Chapter 11 bankruptcy works too.

Either way, the man handing out vast swaths of our economy is likely to be – crony capitalist Donald Trump.


So where does this end?  I had speculated the next recession might deflate New York’s housing bubble and the stock market bubble, allowing my children to purchase places to live and shift their retirement savings to stocks. One view is that rock bottom interest rates are permanent, as in Japan, and this will keep asset values inflated forever.  We are going the full Japan, with zero interest rates inflating asset values far into the future.

Prominent hedge fund manager Ray Dalio agrees.  With regard to public debt…

There will likely be an ugly battle to determine how much of the gap will be bridged by 1) cutting benefits, 2) raising taxes, and 3) printing money (which would have to be done at the federal level and pass to those at the state level who need it). This will exacerbate the wealth gap battle. While none of these three paths are good, printing money is the easiest path because it isthe most hidden way of creating a wealth transfer and it tends to make asset prices rise. After all, debt and other financial obligations that are denominated in the amount of money owed only require the debtors to deliver money; because there are no limitations made on the amounts of money that can be printed or the value of that money, it is the easiest path.

Before the cornoavirus crisis, Modern Monetary Theory, financing a huge increase in federal spending by printing money, was derided as left-wing lunacy akin to what the Maduro Administration has done in Venezuela. Now, however, Wall Street, the Chamber of Commerce, and the rich are practically crying out for it, but with the proceeds of printed money going to bail out themselves.

But when we think of the full Japan, consider what that really means for incomes and asset prices, based on what has happened in that country.

Since the peak of Japan’s bubble economy in 1989 to today, that country’s national debt has escalated from about 50 percent of GDP – where the U.S. national debt was in 2008 – to about 200 percent of GDP.  Did that cause asset prices to rise?

Without adjusting for inflation, of which there hasn’t been much in Japan in any event, the Nikkei 225 fell 80.6%from the 1989 peak to its 2009.  It is still down 39.2% from the peak. That is down 40 percent after 30 years.


Adjusted for inflation, Japan’s housing prices are still down about 40 percent after three decades.  That decrease also hit bottom around 2009.

And Japan’s Millennials are even worse off, compared with their parents, than those of the U.S. and Europe.


In the US, UK, and Japan, the generation of citizens aged 19-35 are the first in modern memory on course to be worse off than their parents. To take perhaps the most striking example, roughly half of Japanese Millennials aged 20 to 29 in 2015 reported still living with their parents.

Japanese Millennials face likely the most dire economic circumstances of this trio. The country’s GDP growth has been largely stagnant for nearly two decades and Millennials face an inflexible labor market. Nearly 30 percent of those aged 25-34 in 2014 said that they settled for temporary work because they couldn’t find permanent employment. This economic hardship is reflected in Millennial attitudinal surveys. While global Millennials are generally optimistic about their future careers, fewer than 40 percent of Japanese Millennials are, and more than a third expect to have to work until they die, largely to support Japan’s outsized elderly population (the inverted demographic pyramid).


Japan once offered a cautionary tale of how macroeconomic mismanagement could transform a juggernaut into a laggard. As weak growth and low interest rates have spread to the rest of the world, however, it looks more like a window into the future.

Japan earned its reputation as an economy adrift in the 1990s, when a popped financial bubble was followed by slow growth, deflation and low interest rates. As the government struggled to pry the economy from its rut, it pioneered policies like quantitative easing (qe; printing money to buy assets such as government bonds) that were used around the world after the global financial crisis. Economists debated how much Japan’s slump owed to weak demand rather than economic rigidities, for example an insufficiently limber corporate sector. Some doubted that, after years of easy money and bulging deficits, there was room left for stimulus to boost growth. Others reckoned that Japan could escape its rut if only its leaders were bold enough…

It has become clear, however, that Japan’s demand woes are not simply an after-effect of financial crisis. Rather they are chronic, reflecting a profound demographic shift which depresses both demand and supply—and which is creeping its way across the rich world. Over the past 20 years Japan’s working-age population declined by more than 10m workers, or about 14%. It is projected to fall by even more over the next 20. Having fewer workers means lower growth and less need of investment. Although Abenomics reversed a long decline in investment, spending has been too low to prevent a steady increase in corporate hoarding: idle cash, draining demand from the economy. With unemployment so low, you might expect cash to flow to workers, whose spending could then energise growth. But incomes have risen surprisingly slowly—partly, the government reckons, because firms are choosing to automate rather than compete for ever scarcer workers by raising wages. When firms do invest, some spend on robots.

Limp private-sector spending has in turn kept the government from cutting its debt. Were the state to begin saving in earnest, demand in the economy would collapse.


So what about those demographics, and their impact on economic activity and asset prices?   In contrast with the financial executive and hedge fund manager cited above, this former city planner wonders if they will drive things in the end.

For the past 25 years, the world has had a global savings glut, due to the same rise in inequality that necessitated the huge increase in global debt, and the high savings rate of people in developing countries, notably in East Asia.


Why is the United States, with the world’s largest economy, borrowing heavily on international capital markets–rather than lending, as would seem more natural? What implications do the U.S. current account deficit and our consequent reliance on foreign credit have for economic performance in the United States and in our trading partners? What policies, if any, should be used to address this situation?…I will argue that a satisfying explanation of the recent upward climb of the U.S. current account deficit requires a global perspective that more fully takes into account events outside the United States.

To be more specific, I will argue that over the past decade a combination of diverse forces has created a significant increase in the global supply of saving–a global saving glut–which helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today. The prospect of dramatic increases in the ratio of retirees to workers in a number of major industrial economies is one important reason for the high level of global saving. However, as I will discuss, a particularly interesting aspect of the global saving glut has been a remarkable reversal in the flows of credit to developing and emerging-market economies, a shift that has transformed those economies from borrowers on international capital markets to large net lenders.

If U.S. companies had been forced to pay U.S. workers enough to actually pay for what they were sold, and/or if Chinese companies (and companies in other developing countries) had been forced to sell products at a price low enough for Chinese  and other developing country workers to buy them, there would be far fewer $billionaries today.  Instead U.S. companies and Chinese companies could take products made by low-wage developing country workers and sell them at developed country prices.  This imbalance should have caused the dollar to fall until it disappeared, but somehow it didn’t.

But even ordinary Chinese, Japanese, and South Koreans saved. The rapid development of their countries meant they could live a lifestyle beyond their wildest dreams, and still save a large share of their incomes.  That savings had to go somewhere, and much of it went to finance consumption in excess of income and production in the United States.

The U.S. once had a high savings rate.  The generations that lived through the Great Depression and WWII also benefitted from a huge increase in their incomes, and saved a substantial share of it.  These are the generations that built the United States.  Those born 1930 to 1957 inherited the world’s wealthiest country, saved little, borrowed much, and cashed it in.  When these generations dominated the economy the U.S. savings rate plunged, as they “lived for today.”  And now their children are much poorer, and don’t have the income to save.

Now the generations that built Japan, China, South Korea and the “Asian Tigers” of Southeast Asia are getting older themselves.  And their offspring, born into affluence, apparently have the same attitude toward them that the 1960s “Generation Gap” generation had toward its parents here in the U.S.


Even in a China filled with the shiny and the new, the southern city of Guangzhou stands out. A generation ago it was a smoggy, sweltering sprawl of factories and workshops, a bit embarrassed by its history as a semi-colony of Western powers, who knew it as Canton. Now Guangzhou aspires to be a hub of global commerce. It boasts the 600-metre tall Canton Tower, an opera house designed by Zaha Hadid and high-speed trains that can reach Beijing, 2,300km to the north, in just eight hours.

Yet Guangzhou’s rise had human costs. The province of Guangdong, of which it is the capital, is a hotbed of worker unrest, with 129 strikes and protests logged this year by China Labour Bulletin (clb), a Hong Kong-based monitor of workers’ rights. A growing number involve workers reaching retirement age, who discover that—because they fall through gaps in the welfare safety-net, or because employers skimped on pension contributions—a meagre future awaits.

There are 288m migrant workers in China, of whom 173m work far from their home towns. In theory, they should enjoy the same social protections as urban Chinese with permanent residence permits who live in big cities like Guangzhou. They do not. Today’s 40- and 50-something Chinese migrants are a “lost generation.”…

Many of the hardships described around that table in Guangdong would cost only small sums to resolve. Alas, it would also involve those who wield power deferring to the rights of individual workers. Instead, those workers must navigate a ruthless system in which they must plead and bargain for what they have earned. A remarkable generation of migrants built the new China. They are still paying the costs, in broken hands, backs and hearts.

All of the countries that contributed to the global savings glut have rapidly aging populations.  To pay for all their non-working seniors, they will be expecting Americans to live on less than they earn and send them the difference, reversing the flow of money for past 40 years.   Net, they may have no additional savings to contribute to the world. Just demand for whatever level of goods and services the world produces.

In the U.S., meanwhile, the generations now age 62 and over are not only relatively large, but also far richer than the generations to follow. And yet they will be looking to sell their stocks and houses to the less well off generations coming after at high prices. But can they?


Jefferies analysts on Monday resurfaced an old economic theory that an impending wave of baby boomer retirements could trigger a unified move to liquidate equity holdings.

Such a mass exodus, so the theory goes, could entrench the stock market in a “dark period” for years until younger generations save enough to start repurchasing the assets their grandparents sold.

But Jefferies Global Equity Strategist Sean Darby said that the generational shift doesn’t necessarily mean stocks are set for a decade of lackluster performance because foreign investors will fill the void.

So they’ll just sell American business out from under Millennials so they can get the price they want to live the life they have promised themselves. To foreigners who accumulated dollars during the long period when the generations born 1930 to 1957, and after, spent more than they earned.

“One of the main reasons that investors should not be gloomy about forced selling of retirement plans is that foreign ownership of the US equity market is climbing,” Darby wrote in a note to clients on Tuesday. “The growth of assets under Sovereign Wealth Funds has caused a marked shift towards global equities as capital controls have been relaxed.”

I’ll ask again – what if those in developing countries, as a result of their aging populations, stop being net savers and start trying to sell assets to pay for their needs in retirement instead?

And what about houses?  Quoting the Boston Globe


Basically, we have mismatch, with an epic number of Baby Boomers, numerically the largest generation in history, heading into retirement and looking to sell their homes. But there is a dearth of 30-to 45-year-old buyers available or even interested in moving on up into these big Boomer suburban palaces. The numbers, as Lucy lays them out, are startling. There are now five homeowners 55 and older for each potential first-time buyer between 30 and 44. That’s a 5-to-1 ratio today, compared to 3.5-to-1 in 2000 and 3-to-1 in 1990.

And the younger sellers are much poorer, on average, than the older sellers were back when they were young buyers themselves. As a result of what the older sellers, on average, have done.

The Globe doesn’t’ think suburban housing prices will collapse.

Aging Boomer homeowners hold the trump card here – they don’t necessarily have to sell and won’t unless they get a price they like. Instead, Lucy sees a future where the housing market is far less fluid than it has been in years past. Hence his prediction we were entering the ‘Fix-Up, Remodel, Expand and Condominium Era.’ Instead of settling for long commutes to bigger homes in the outer suburbs, the up-and-coming generation of buyers in their 30s and 40s is more likely to prefer the convenience of the inner suburbs, even if that means fixing up an older home or buying a condo.

So it has been since the article was written.  Eventually, however, the owners of these homes will die, and the properties will have to be sold.

About the same time I cited an expert in the economic implications of demographic trends who predicted a “Great Unwinding” due to an aging population, with the probability of much lower housing prices and the possibility of a sovereign debt default in the U.K.


The new normal is based on the fact which, personally, I think everybody watching this interview will welcome that life expectancy has grown by 20 to 25 years over the last century and as a result we now have nearly one in two of adult population over the age of 55.

The corollary of that, as you and I have discussed many times, is that people over the age of 55 already have everything they need and they’re moving, therefore, into a world where their needs are lowering and also their incomes are going down, so you cannot possibly get growth. It’s a very simple argument; it seems to be very obvious to me. Therefore, that is the new normal…

We’ve seen price falls in the housing market in the past in the early 90s and they went down 50%, and I think that we’re at the start of that kind of decline now as I think, indeed, fairly soon we will be at the start of that in the stock market as well. As I say, I’m not depressed about this, because it’s just something that we have to go through to get to reality….

The cost of a house is relative to earnings…You were mentioning Minsky and the thing that Minsky highlighted was that you have to be able to repay the capital. It’s all very well repaying the interest, keeping going all that, interest-only mortgages and so on, but can you actually afford, if you’re in London, a £300,000 or £400,000 flat, a one-bedroom flat lots of them around at that kind of price when the average earnings in London are about £30,000?…Yes, it’s all very well saying, “They can afford the interest.” They could, but they can’t afford the capital repayment, so for their good, for the good of this younger generation, I’m afraid us older generation have to say, “We did pretty well out of this. We’ve got to hand something back.”

“Final question: is it possible for a deflationary environment to persist when central banks can print as much money as they like and shovel it into the economy in a variety of different ways?”

The central banks, the economists, work on this theory, which was fine at the time, Modigliani’s theory which said that we all know how long we’re going to live and therefore we consciously make a decision to hold back on consumption today so that we have something left for the future.

That was fine if we were all dying at 50 because you weren’t holding back very much, you were just getting more money as you got.  But if you’re living to 80 or 90, say, how long are we you and I going to live? We don’t know, so probably, if we’re sensible, we’re going to err on the side of caution.

Sixty per cent of our economy is personal consumption, so if people are not wanting to spend in that way What the central banks could do, and I do worry about this: they could create hyperinflation.

That would be 70 percent consumption in the U.S.  But the U.K. is the country most like the U.S., with sky-high debts and a perpetual trade and current account deficit, perhaps related to these countries’ role in the global financial system.  Hodges views made sense to me in 2015, and more sense now.  I recommend watching or reading the entire interview.

Asset prices are like a ball at the top of glass tube.  The governments have had to blow harder and harder from below to keep it up, as it increased from a ping-pong ball to a golf ball to a baseball to a basketball to a bowling ball to a cannonball.  At some point keeping it up requires so much pressure that one wonders how much force the glass tube can take.

The era of the “global saving glut” is all that most people now remember.  But a world of near zero percent interest rates with all the money anyone can want, a global surplus of goods, and a global crisis of demand, such as we have had for 25 years, was inconceivable prior to 1995.

Isn’t it possible that the reversal of all of this, due to an aging population in much of the world, will lead to economic conditions in the future that are inconceivable today?  Instead of the full Japan, the U.S. may eventually end up with the full Argentina.



Everything I have written to this point I would have written had there never been a coronavirus.   That virus might accelerate an unwinding that was always in the cards, and I’m apparently not the only person who thinks so.

To my surprise, the fact that the coming economic crisis is largely a result of debts and inequality and imbalances that built up over the decades prior to the coronavirus, and not due primarily to the impact of the virus itself, is all over the internet, on every mainstream site, all across the political spectrum.   I had expected it to be only found only on a few blogs written by outsiders such as myself.

One example…











Coronavirus Is Going To Be Expensive. Too Bad the Government Is Already in Massive Debt.





Preach Dean Baker.  Same as I said above, on the same day.


For more on how dire the situation was before the virus even hit, you can read what I wrote when the Federal Reserve Z1 data came out last year…


Or the year before


Or the year before.


4 thoughts on “Federal Reserve Z1 Data for 2019: The Debt-Driven Party Had to End Eventually, Coronavirus or No Coronavirus

  1. larrylittlefield Post author

    Another example.


    Can asset values be re-inflated to extreme highs even as millions of people become even worse off? They’ve done it before, but now there are doubts it can happen again.

    In the 1970s new high school dropouts became worse off than prior generation of dropouts had been.
    In the 1980s high school graduates become worse off than prior generations of high school graduates.
    In the 1990s, after the first recession to really affect them, college graduates became worse off than prior generations of college graduate.
    In the 2000s, after the dot.com bubble burst, even those leaving school with graduate degrees were worse off than those before, and only the 1 percent got ahead.
    But after 2008 most of the 1 percent became worse off than they had been too, leaving only the .01 percent getting richer.
    And now? Unless $trillions in borrowed government money, to be paid back by those who are already less well off in the future, is handed to them, the .01 percent will see their income and wealth plunge too.

    Still another example.


  2. larrylittlefield Post author

    There is apparently a muni-bond meltdown going on.


    I haven’t been willing to put my savings in those for decades, since the increase in state and local debt and the retroactive pension increases got rolling in the late 1990s. That was a long time ago.

    “Markets can stay irrational longer than you can stay solvent,” John Maynard Keynes

    Then again…

    “If something cannot go on forever, it will stop,” Herbert Stein

  3. larrylittlefield Post author

    Quoting a commenter on Wirepoints Blog.

    People can’t have nice things for very long because of the Good People/DirtBag cycle of society. Good People build things up and then because they take goodness for granted they raise up generations of DirtBags who destroy that which was built.

    Hard times create good men

    Good men create good times

    Good times create bad men

    Bad men create hard times

    It’s like an iron law, or something.

Comments are closed.