America’s Debts 2021: Z1 Data from the Federal Reserve and Related Commentary

Last Thursday the Federal Reserve released its 2021 Z1 data on, among other things, America’s debts.  There is some good news.  Sort of.  For those who are not average workers, not paying rent, not hoping to buy a house, and not hoping to invest their savings for retirement and have it be worth more than what they put in years later when they retire, rather than less.  Total U.S. credit market debt, after having soared from 330.3% of total U.S. GDP in 2019 to 374.6% of U.S. GDP in 2020, a shocking increase, then plunged to 361.1% of GDP in 2021.  It is still higher by 30.8% compared with 2019, and by 192.6% of GDP compared with 1980, before the “buy now and hope someone else will be stuck paying later” era began.  But the 13.5% decrease in debt as a percent of GDP is still the largest since at least 1953.

How was this accomplished?  Did Americans, American businesses, and American governments suddenly start reducing their debts by a massive amount?  Uh – no.  In straight dollars total credit market debt increased 6.1%, financial debt increased 5.8%, non-financial debt increased 6.2%, household/non-profit debt increased 7.3%, corporate debt increased 5.2%, other business debt increased 3.6%, state and local government debt increased 1.9%, and U.S. government debt increased 7.2%.   But in straight dollars, nominal GDP increased by 10.1%, even more, in part due to an expected snap back from COVID-19 shutdowns, but also in part due to soaring inflation.  The Economist magazine said years (decades?) ago that Generation Greed had run up so much debt that the choice was to inflate it away, default it away, or face stagnation for decades as it is paid back.  That was back when total U.S. debts were far lower than today.

No one is prepared to admit that today the goal is inflate away debts (and the buying power of wages and ordinary people’s savings).  Then again, would anyone have predicted 10 years ago, or 20 years ago, or 40 years ago that the Federal Funds rate (controlled by the Federal Reserve) would be at 0.08% at a time when inflation has soared to its highest level since 1982?


This is the latest in a series of posts on America’s debts and their impact on the later-born.  Last year I chronicled the largest debt increase in U.S. history – larger with regard to federal debt than anything seen in the Great Depression and World War II.

And pointed out once again that rising debts are the real cause of rising inequality, falling real wages and the trade gap in the United States, something I discussed in more detail here.

The year before I had pointed out that a financial crisis for the U.S. had already hit, and the Federal Reserve had already been forced to retreat from interest rate normalization, in 2019, even before the COVID-19 pandemic.

And gave “real economy” reasons for a choice of inflation or stagnation – a population that is not only aging and producing less globally, but is also politically dominated in many countries (including ours) by those now of retirement age who are used to privileging themselves at the expense of those who came before and after.  Those seniors will still want to consume, but will no longer produce.  In some countries people and governments have saved and invested for this future.  Ours have not.  In fact, many countries have invested in the U.S., and expect Americans in total to be poorer in the future to pay them back as they age.

The Federal Reserve Z1 data may be found here.

Debts are in spreadsheet D3.  And the Bureau of Economic Analysis GDP data I divide them by may be found here.

The spreadsheet with the charts for this post may be downloaded here.

And here is the total debt as a percent of GDP chart.

As the data show, the good news for 2021 is not nearly enough, by itself, to offset the bad news for 2020 – and the four decades prior.  That is also true for real (inflation-adjusted) GDP.  It increased by 5.7% last year (the BEA uses an inflation measure that tends to be lower than the Consumer Price Index), the most since the 7.2% gain in 1984, back when it was “Morning Again in America” (and I was finally able to get a job after having graduated college in 1983). 

But if you average it with the 3.4% decrease in 2020 that is still just an increase of 1.1% per year for the two years combined.  The recent average, probably about the best we can do with debt burdened consumers and governments and retiring Baby Boomers, is twice that, about 2.2% per year.  And any idea that the U.S., its people and businesses could actually pay off their massive debts would require real GDP growth that is greater still.  I don’t see it.

So it is inflation that really allowed last year’s debt decrease, and some expect a repeat in 2022.

Governments will benefit from the biggest inflation-driven drop in debt ratios in over 20 years, credit rating firm Fitch said on Wednesday, estimating it will slice around 5 percentage points off U.S. debt-to-GDP and 2 percentage points globally…Developed market sovereigns, in which inflation is forecast to push government debt ratios much lower than the median, include the United States at 5 percentage points of GDP, Britain at 4.6 percentage points and Canada at 4.1 percentage points.

Of course there are some side effects.

The consumer price index for February rose 7.9% from a year ago, the highest level since January 1982…Worker paychecks fell further behind, as inflation-adjusted earnings dropped 0.8% in February, contributing to a 2.6% decline over the past year.

Even more than the average annual decrease in inflation adjusted worker pay checks in the past 40 years.  Tough luck. Housing prices, someone seems to have decided, must be kept high to benefit older sellers and those who hold their mortgages, other asset prices much be kept high to benefit $billionaires, and the over-indebted must not default to protect the financial sector.  So those who partied with debt must not be made to pay it back in money worth anything like what they borrowed.

Can debts be inflated away?  From one of The Economist articles…

The problem of creating inflation in economies where unemployment is high, and wages are not growing, should be obvious. Where there has been above-target inflation in recent years, notably in the UK, it has been the wrong kind; imported commodity prices which act as a tax and make it more difficult to pay down debt.   

Basically, to allow those who matter – today’s retired, public employees and contractors, and $billionaires – to continue to get richer in inflation-adjusted dollars everyone else has to get poorer, and be able to buy less.  Good thing for them the minimum wage isn’t adjusted for inflation.  But for “seniors on fixed incomes” Social Security payments are.

Some of the U.S. debt total is the debts that financial companies owe to each other. That is the kind of excess debt that caused the financial crisis that began in August 2007 and peaked in October 2008.

Government regulations have been pushing down financial sector leverage ever since, but it is still high compared with what it had been when Generation Greed took charge.  With losses from loans to Russia and commercial real estate, we may be about to find out if the financial sector has deleveraged enough to ride out a recession without yet another bailout.  The Federal Reserve has required that banks plan for a 40% decrease in commercial property values.

Of course, it might be better for the overleveraged if there is 40% inflation, and nominal property values stay the same.   They tried to normalize the economy over in China, and U.S. investors are already taking losses as a result.

China’s real estate industry used to be a goldmine, minting one billionaire after another. Today, it has become a debt trap for shareholders and investors. The industry’s billionaire founders are facing their day of reckoning.

They need to honor payments for a mountain of dollar bonds they have issued to international investors, which will come due in the next four years, with outstanding balances of $27.33 billion in 2022, $18.28 billion in 2023, $19.03 billion in 2024, and $ 17.99 billion in 2025, according to Chinese data provider Wind.

Hedge funds hope China will do to the Chinese people that the U.S. federal government did to Americans after 2008 – sacrifice them to bail out the rich in order to preserve “stability.”

Evergrande, the group with $300bn in liabilities, has been the biggest worry. It defaulted in December and has become one of the largest restructuring cases in history. Investors are tracking the case for reasons to be optimistic. The group is now thought to be under a high degree of government control. It has promised to deliver a restructuring plan by July. State involvement is good because it will help avoid a total collapse, says one person involved in the restructuring. It also means that stability will be the main priority, not speed or efficiency.

Total non-financial debts also fell significantly as a percent of GDP last year, for the first time.  The decrease was by 13.6% of GDP – but still left total U.S. debts higher than in 2019 by 28.9% of GDP.  

I had observed years ago that rising debts – being able to get things you don’t actually pay for – seem to correspond with a President’s popularity.  No wonder some liked Donald Trump’s economic policies.  Democrats apparently have decided they no longer want to be the responsible political party (at the federal level), with many now seeking to cash in what is left of American’s future (as the Democrats have always done in New York).  Senator Manchin, however, has stood up for only borrowing money to benefit seniors who won’t be around to pay it back, not to benefit children and their parents who will be.

Speaking of the national debt, it fell from 113.1% of GDP in 2020 to 110.1% of GDP in 2021.  

Of course it was 89.1% of GDP in 2019, and 39.9% of GDP in 2000.  Imagine a 5.0% average interest rate at the current level of debt.  That would mean federal tax payments equal to 5.1% of GDP would have to go to paying the debt.  The typical federal tax burden has been around 20.0% of GDP, and that is not close to enough to honor all those off the books debts – such as the promises to provide Medicare and Social Security to today’s seniors.  And much of that 5.1% of GDP would be paid to holders of U.S. Treasury bonds who are located outside the United States.

Could the debt be inflated away?  Some believe the answer is no.

If inflation may not pay for the U.S. public debt, then what will? Since market prices today put the probability of the United States defaulting at close to zero, the markets seem to be expecting budget surpluses, brought about either by increases in revenue or decreases in expenditures. Perhaps inflation itself, while not eroding the real value of government debt, will generate fiscal surpluses by decreasing the real value of nominally frozen public sector wages and pensions. Alternatively, perhaps market expectations are inconsistent or they are severely underestimating future inflation. What is sure and inescapable is that, one way or another, the budget constraint of the government will have to hold.

Except here in New York, where public employees, retirees and contractors will just order their state legislators to increase their pay and benefits by more than everyone else gets, and raise taxes on or cut services for everyone else to pay for it, while living in suburban areas with lower taxes and better services, before retiring early to low-tax Florida.

Some believe the Federal Reserve is trapped between rising inflation and the enormous level of public and private debt.

Given the explosive growth in both U.S. public debt and non-financial corporate debt, the Fed may be facing a serious debt trap. 

Economist Nouriel Roubini recently observed that “With such a massive build-up of private and public debt, markets may not be able to digest higher borrowing costs. If there is a tantrum, central banks would find themselves in a debt trap and probably would reverse course. That would make an upward shift in inflation expectations likely, with inflation becoming endemic.”

The Fed, as mentioned, has already tried once to normalize interest rates and been beaten back by crashing asset prices, the so-called “taper tantrum.”

But if people believe that inflation is endemic, the value of the dollar would fall and savers would demand higher interest rates. That’s a problem because most of the national debt is short-term.  But it clearly worked for just one year.  All kinds of U.S. debts fell last year, though all but bonded state and local government debt remain much higher as a percent of GDP than in 2019.

In the long run, however, there is a price to be paid for four decades of Americans (in total) consuming more than they produce, paying for imports with debt, and businesses selling average Americans more than they pay them.  Take housing costs, for example.  To prevent housing prices from falling after the 2000s housing bubble, something that would have hurt older sellers and financial companies, the federal government allowed a huge number of homes to be allowed to deteriorate and be abandoned, pushing up the price of others.  And today?

Sen. Sherrod Brown, (D-OH), chairman of the US Senate Committee on Banking, Housing and Urban Affairs, last week accused real estate investors and large asset management firms of cynically exploiting a “captive” housing market to increase the profit of large stakes they are acquiring in single-family rentals.  

“Private equity firms, corporate landlords and investors saw a shortage, and they saw a captive market. They see these [single-family houses] as nothing more than annual return on equity,” Brown said, in an opening statement at a committee hearing Thursday entitled “How Institutional Landlords are Changing the Housing Market.”

A perfect storm of higher home prices, tight inventory and rising mortgage interest rates continues to squeeze home buyers out of the housing market, validating the growth strategies of real estate investors who participated in a “land grab” for single-family houses in recent months, buying up existing single-family rental houses and tracts for construction of more built-to-rent houses.

Which investors are those?  Wall Street is an intermediary, and when it buys up U.S. housing it is doing so on behalf of someone else.  Who are the ultimate owners?  American $billionaires who captured a large share of the money the federal government has (in effect) printed since 2008?  Public employee pension funds?

House prices in the United States are being pushed up by pension funds that are outbidding middle class families and purchasing up to 24% of houses in some areas they then rent out, according to a new report.

John Burns Real Estate Consulting has said pensions and private-equity firms are competing with young homebuyers which will make home costs ‘permanently more expensive,’ The Wall Street Journal reported.

The outlet highlighted that investors, rather than young Americans, are benefitting most during an era of the cheapest mortgage financing ever while inflating home prices at alarming rates. Rents are also rising as home prices increase.

Could it be the foreign investors who are holding all those dollars from all those years of U.S. trade deficits?

Big foreign investment firms that buy office buildings, hotels and shopping centers around the world have a new favorite real-estate play: single-family homes in American suburbs.

These institutions are partnering with U.S. housing companies to buy or build rental homes by the thousands. In suburban neighborhoods near cities such as Atlanta, Las Vegas and Phoenix, blocks of families are sending monthly rent checks to ventures backed by Canadian pension funds, European insurers, and Asian or Middle Eastern government-run funds.

The overseas investors are following in the footsteps of many big U.S. investment firms and pension funds, which started buying single-family homes on a large scale in the aftermath of the financial crisis.

Foreign investors barely registered in these markets a few years ago. Now, they account for nearly a third of institutional investment in single family home rentals.

To pay for a 40-year national frat party, the U.S. has returned to becoming a de facto colony.  Consider the amount of U.S. assets that have been bought up by those in other countries, compared with U.S. investment abroad.  How much have those in charge of this country cared about the future?  About this much.  

Remember, this is data on credit market debt.  When you look at state and local government debt…

And think it looks OK, remember this.  It doesn’t include the off-the-books debt of public employee pensions than have been promised, and in some places (like New York) retroactively increased in political deals (repeatedly here), but not fully funded.  Or the debt implied by allowing the public infrastructure to deteriorate by failing to maintain it or replace parts of it as they wear out.  As I showed last year, these debts dwarf the on-the-books bonds captured by the Federal Reserve.

And that doesn’t even include the cost of public employee retiree health care, something I didn’t have the ability to estimate and that the Post Office is going to stop funding for its future retirees.

The bill, if passed, would be the first major piece of postal reform legislation to make it through Congress in more than 15 years, and would address issues that stem from the last reform effort in 2006.

The legislation, like many other similar bills introduced in recent years, would primarily eliminate the USPS requirement to pre-fund retiree health benefits well into the future.

The bill has bipartisan support in the House, and has 10 Democratic and 10 Republican co-sponsors in the Senate. It also has the backing of USPS management and its unions.

Private businesses did cut their total debts as a percent of GDP in 2021, but those debts remain far in excess of what they were in any year prior to 2020.  Already in 2019 non-financial business debt was flagged as the problem most likely to cause the next recession.  Much of that debt has been accumulated as private equity firms buy up companies, load them with debt, take cash out, and leave them to face bankruptcy or bailout.  Once the road to riches in the United States was to start a small business and build it into a fairly large one.  Now it is to gain control of an existing large business and asset-strip it into a small one.

Having Millennials be unable to purchase homes has at least spared them a huge increase in mortgage debt.  But federal, state and local governments have engineered soaring rent and housing prices by increasing loan limits to 45% of buyers’ income (down from 50%), and restrictions on housing supply.  That means they will end up paying more to older generations and rich asset holders even so.  If not, the buying panic that saw housing prices jump 16.9% last year…

Will leave those who bought at the peak holding the bag, as after 2008.

While that was bad news for would be buyers, it was a boon for those who already owned a home. A typical homeowner accumulated $50,200 in housing wealth, looking at the median price from 2020 to 2021.

“That is a sizable wealth gain for homeowners across the country,” said Lawrence Yun, NAR’s chief economist. “The housing market has seen a spectacular performance this last year with sales rising and prices rising. But inventory is at an all-time low.”

Meanwhile the soaring cost of new and used vehicles mean that people living in places where they have to drive everywhere — the way most of the United States has been built since 1980 — will have to borrow even more to replace their vehicles.

Credit monitoring service Experian says more than a third of all new vehicles bought in the fourth quarter were financed with loans with terms of six years or more.   Longer loan terms are one way auto buyers are trying to offset a spike in new and used vehicle prices sparked by the low inventory of new cars and trucks.  

Some of the ever-diminished economic status of latter born Americans is the product of circumstances.  The level of consumption in excess of production Generation Greed demanded for itself was never sustainable in any sense — environmentally, financially, or economically.  In fact, many members of that generation will be facing diminished circumstances themselves in old age as a result of their past choices, unless they can find a way to make it even worse for those to follow.

But choices — political choices made by both political parties, business choices made by companies, social choices made by individual adults — have made everything even worse for the future and the later born.

Is there any good news?   As a micro-economic kind of guy, I find the production-side challenge of finding new technologies, lifestyles and organizations to provide a decent life for younger and future Americans despite diminished resources easier to comprehend and solve.  Compared with the global crisis of demand, the macro-economic problem of a shrinking number of people, with more and more of them outside the United States, having a larger and larger share of total income, leaving everyone else with less unless ability to buy what is available absent ever-rising debts.   With labor force shrinkage, and competition for resources with a richer developing world, we may be shifting to the first problem after decades of the second.

There isn’t enough stuff, or enough people to produce services, to go around, so figure out a way to create more stuff or services given limited resources, or to live a decent live with less stuff and fewer services. That’s a challenge I can understand. For one thing, we might finally get some investment, and have employers re-engage with previously excluded populations, in order to expand our capacity to produce given a limited number of people, amount of energy, availability of money for new equipment.

For years after the global financial crisis the world economy was starved of investment. The aftermath of the covid-19 downturn has been drastically different. In America private non-residential investment is only about 5% below its pre-pandemic trend, compared with a shortfall of nearly 25% in mid-2010, the equivalent point in the previous economic cycle (see chart). The country has enjoyed the fastest rebound in business investment in any recovery since the 1940s, according to Morgan Stanley, a bank. In the rich world as a whole, predicts the World Bank, total investment will have overtaken its pre-pandemic trend by 2023.

The lacklustre investment of the 2010s was largely blamed on slow output growth and dismal prospects for the economy. By contrast, the vibrant recovery this time is part of a v-shaped rebound encompassing growth, employment and—less happily—inflation… 

Yet the investment rebound is not purely a cyclical bounceback. The changes wrought by the pandemic have necessitated more investment, too. The extent to which such investment continues will depend on whether those changes endure. One feature of the pandemic, for instance, has been soaring demand for everything digital. As a result, investment in computers in America is 17% above its pre-covid trend. Roughly a year ago the Taiwan Semiconductor Manufacturing Corporation announced that it would spend $100bn over three years to expand its chipmaking output. In mid-January 2022 it upped the stakes, saying it would spend $40bn-44bn this year alone. Days later Intel, another chipmaker, said it would invest more than $20bn in two factories in Ohio.

Blockages in the global supply chain for goods have also led to a splurge on new capacity. In 2021 shipping companies ordered the equivalent of 4.2m twenty-foot containers—a record, according to Drewry, a consultancy. Perhaps the archetypal business investment of the pandemic is being made by logistics companies testing whether autonomous cranes can increase throughput at ports and rail terminals.

The lifestyle and workplace changes that are required to deal with a supply crisis can be unpleasant, but necessary.  

In my own case, after the founders of the real estate research firm where I worked for 15 years retired, the new owners decided that the detailed reports I and others had written could be replaced by fewer, shorter reports that were mostly computer generated.  At the same time, once the pandemic improved, I found there was a shortage of commercial real estate appraisers.  So I have been forcibly shifted from something that has been found to be less necessary, to something that has been found to be more necessary.  And either is more necessary than my prior city planning career, where you end up promulgating regulations to prevent people who don’t make campaign contributions from adding housing or starting businesses.  (And yes, for those of you who aspire to that occupation in New York, that is what you will end up doing.  Ask any refugee).

Remember, large corporations make campaign contributions, but businesses that don’t exist yet do not.  Large scale real estate developers and the hedge funds buying up existing housing make campaign contributions; the empty nesters that want to add a second housing unit in their now unused space do not.  Neither do moderate income households that will require some rental income to buy a house.

But getting back to the macro-economic picture, if there is a series of 11 to 1 votes, guess which side I’m likely to agree with?

Tom Hoenig is, in fact, one of America’s least-understood dissidents.  In 2010, Hoenig was president of the Federal Reserve regional bank in Kansas City. As part of his job, Hoenig had a seat on the Fed’s most powerful policy committee, and that’s where he lodged one of the longest-running string of “no” votes in the bank’s history….Hoenig’s string of dissents shattered that appearance of unanimity at a critically important time, when the Fed was expanding its interventions in the American economy to an unprecedented degree. It was a hinge point in American history, and the economy has never been the same since.

Between 2008 and 2014, the Federal Reserve printed more than $3.5 trillion in new bills. To put that in perspective, it’s roughly triple the amount of money that the Fed created in its first 95 years of existence. Three centuries’ worth of growth in the money supply was crammed into a few short years. The money poured through the veins of the financial system and stoked demand for assets like stocks, corporate debt and commercial real estate bonds, driving up prices across markets…

While Hoenig was concerned about inflation, that isn’t what solely what drove him to lodge his string of dissents. The historical record shows that Hoenig was worried primarily that the Fed was taking a risky path that would deepen income inequality, stoke dangerous asset bubbles and enrich the biggest banks over everyone else. He also warned that it would suck the Fed into a money-printing quagmire that the central bank would not be able to escape without destabilizing the entire financial system.

On all of these points, Hoenig was correct. And on all of these points, he was ignored. We are now living in a world that Hoenig warned about.

The Fed is now in a vise. Inflation is rising faster than the Fed believed it would even a few months ago, with higher prices for gas, goods and automobiles being fueled by the Fed’s unprecedented money printing programs. This comes after years of the Fed steadily pumping up the price of assets like stocks and bonds through its zero-percent interest rates and quantitative easing during and after Hoenig’s time on the FOMC. To respond to rising inflation, the Fed has signaled that it will start hiking interest rates next year. But if that happens, there is every reason to expect that it will cause stock and bond markets to fall, perhaps precipitously, or even cause a recession.

Cut increase rates to pump up asset values for the better off, raise interest rates to prevent wage increases from causing “cost push” inflation.  What should be done now?  Beats the hell out of me.  

“There is no painless solution,” Hoenig said in a recent interview. “It’s going to be difficult. And the longer you wait the more painful it will end up being.”

To be clear, the kind of pain that Hoenig is talking about involves high unemployment, social instability and potentially years of economic malaise. 

Following a couple of decades of economic malaise, and rising social instability. 

I suggest reading that entire article.

And this one.  In 2019, I wondered if our future was Japan or Argentina.  Let’s just hope it isn’t Lebanon.

NISREEN SALTI: So, to understand the nature of the crisis, it’s perhaps useful to go back a little bit in time to see what setup led to the conditions that led to collapse. What we have is an economic system that was set up in the mid-1990s after the civil war and that instituted macroeconomic policies that put in place all sorts of economic ailments, almost structurally, in the system. So we ended up with an economy that is heavily reliant on imports for the bulk of its needs, for its consumption, and very low or discouraged local production. And this combination of two structural factors led to an unhealthy dependence on foreign currency inflows — in particular, dollar inflows. 

This setup privileged a very small class of business interests, namely import cartels and bank owners and real estate agents — sorry, real estate developers, and they were closely connected to a political class. And together, these two groups amassed enormous profits to the detriment of the local productive sector, of job creation, of diversification. And that gradually resulted in two things: growing inequality, income inequality, over almost two-and-a-half decades, which is one of the symptoms that was already heralding an impending collapse, and then also the conditions that today led to the crisis, which is that we became extremely dependent on these dollar inflows. And the minute the dollar inflows stopped, which is what happened in the fall of 2019 when the crisis started, the entire system crumbled.

There is no way it can be this bad here economically.  But something far less bad might be equivalent for Americans psychologically.  

So, what is the scope of this type of collapse? Well, as you described, the poverty rate has more than doubled in 18 months. We have seen rates of food insecurity that are unprecedented for the country. Unemployment has soared. The rate of migration of students from private to public schools, because they can no longer afford private schools, is ever growing. There’s been a shortage of basic life essentials, of fuel for electricity, for transport, but also medicines, baby formula. 

This is, after all, a crisis that the World Bank is describing now as one of the three worst in the last century and half. So, the economy has shrunk very, very rapidly. So the little that was left of the middle class before the crisis began is now being pushed into poverty, because there are very few jobs, very few economic opportunities, also because those that still have jobs have seen their incomes lose purchasing power daily because of the hyperinflation that the country is experiencing, and then, finally, because the banking crisis has meant that savings, for most of society, have been decimated, again because of the currency and banking crises. So, we have a middle class and poorer classes that are choked from all the standard sources of livelihood, all the standard sources of incomes. 

Meanwhile, the business and political class that benefited from the system was able to plunder the economy for 20-odd years, 20-plus years, and now has safely stowed its wealth abroad, outside of the country, so safe from the collapse. And many actually even continue to profiteer from the downfall through classic predatory tactics like hoarding or smuggling or extortion. So, yes, the crisis has made a very highly unequal society even more economically polarized today.

Ah, but debts don’t matter.  The Republicans had the Laffer Curve, and the Democrats have MMT.  Generation Greed had both.