Chart: The Household Debt Bubble?

Economist Paul Krugman says that fragile banks are no longer what’s holding back economic recovery, it’s housing and household debt. We already saw that housing prices are dropping again, and yesterday he pointed out another chart of household debt as a percentage of disposable personal income over time:

CMDEBT stands for household credit market debt outstanding, and from what I can tell includes mortgages. DPI is disposable personal income.

Comments

  1. Graham Lutz says:

    Ours has gone the other way! We’re part of the solution!

  2. hawks5999 says:

    @Graham,

    If you follow Krugman for awhile, you’ll hear that you are part of the problem too. If you cut spending to reduce debt then you are reducing aggregate demand and that is what is _really_ wrong with our economy. If everyone did what you are doing we’d be Japan. :)

    Krugman is funny. Seems that fiscal stimulus and money printing are his answers for everything.

  3. I’ve never like macroeconomics, it never really made sense to me. It’s as if we all started to live within our means, the world would end. I say we try and see what happens!

  4. Paul Krugman is a political hack who masquerades as an economist.

    That being said, household debt is part of what’s holding back a recovery. The other side of that coin is personal incomes and job growth. If incomes were growing (or taxes were shrinking) then the debt would be more manageable.

  5. joelkton says:

    Growing incomes is code for inflating our way out of debt. And I believe that’s in the offing…

  6. Jeff Porter says:

    This reminds me of a chart from a couple of years back outlining household debt vs. personal savings. Not a pretty picture http://creditwritedowns.files.wordpress.com/2008/10/household-debt-vs-savings.png

    Hard to see how incomes will grow with current levels of high unemployment. Employers have the upper hand and no incentive to increase pay. This will make it difficult for people who got in over their head in debt. And from the looks of these charts, that’s a lot of people.

  7. Krugman is an economist (nobel laureat at that) and professor. He also has strong political opinions, and uses his prominent-economist-derived stature to voice those opinions. Whether or not you like the political filter through which he feeds his sound economics, they are still sound economics.

    @graham and jonathan:

    What’s hurting the economy is, in fact, de-leveraging by consumers. People striving to live within their means is pushing down spending (that’s kind of the point), which slows down the economy. However, the reason they need to de-leverage is because they leveraged themselves so highly in the first place. It’s just like housing. Valuations were way too high, and now they’re falling to reasonable levels. That falling hurts, but is necessary. Consumer de-leveraging hurts the economy… but is necessary. It’s the problem and the solution.

    In an ideal world, we would have been living within our means all along. It’s not living sensibly that hurts the economy. It’s the move from unsensible living to sensible living that shrinks the economy by definition. Arguably, though, once we’re at the reasonable level, we can grow along a more sustainable path.

  8. Looks like Krugman is captain obvious. People are spending more on gas & food because their prices have gone up massively in the last year (because of ‘printing’ money or speculators–chose what you want to believe).

  9. hawks5999 says:

    @GregK

    I read krugman daily and have developed a good filter for his political views. The trick is that you (and at some core level, he) are actually right. The economy is going to have to be hurt and hurt really really badly. The invisible hand tried to hurt the economy really really badly in 2008 and the Fed/Govt stepped in to stop that hurting. The result is that the economy has been hurt only badly. And because of that rescue (for political and personal benefits) the hurt went from needing to be really bad to really really bad. And QEx is just continuing that pattern. The world of hurt that our economy IS going to experience just keeps getting bigger as it gets kicked down the road. Eventually we’ll run out of road (no matter how many shovel ready jobs are there to build more road) and then we have our day of reckoning.
    One big question now is will that hurt land on Boomers, GenX or GenY? Likely it will land on all of the above.

  10. @GregK @hawks5999 – I think I agree with what you guys are saying. The fact that we are delaying the “reckoning”, or shifting the reckoning onto future generations. I also feel like this is the result of politicians being elected in 4-year cycles and the resulting inability to make long-term solutions.

  11. J @ Your Own Retirement says:

    These numbers are scary to see but they are a reality. For those who have been clobbered over the head from the recent recession have had to go to extensive lengths to keeps things somewhat flowing and some of that comes down to acquiring more debt than they might want.

  12. @jonathan – the 4 year term doesn’t mean a politician can’t think long term. Rather the lack of projects that extend is a reflection of the right-now attitude in our society. People are not patient. They do not consider tomorrow. They want the answer today or before the next election cycle.

  13. LargeTalons says:

    @Jonathan, I think a lot of people have a problem with macroeconomics because it is basically the opposite of how private actors in the economy should behave. This is because, by definition, the government has to be the supplier of the money supply, not the consumer of it.

    The problem was indeed that people borrowed too much, which grew the money suppy (through fractional reserve banking), which in turn inflates sectors of the economy (in this latest case, housing). This probably could have been mostly avoided if the government bothered to include housing prices in the inflation number. CPI would have been high, and the Fed would have acted to raise rates which would have slowed the housing growth way down. The problem is that the government doesn’t want housing growth to be inflation, when it clearly is. They actually rigged the system so that home prices would rise because people tend to feel better about the economy when they have more value in their home. Unfortunately, we’ve seen the dire consequences of mismanaging the money supply in order to suit political motivations.

    Though, I have to disagree with most of the comments here. Government spending is always the answer to recession because it is the only possible answer. I’m not talking about taxes here either, it is in fact only deficit spending that can have any impact on demand. The only way for demand to grow is to grow the money supply. If this sounds like the solution is also problem, that’s because it is. A growing money supply was responsible for the growth of the economy, but it was allowed to grow too much because the real inflation rate was not being considered. In order to fix unemployment now, you have to replace the shrinking private money supply with government spending, its the only way, and its because the federal government is the supplier of the currency. When private debt goes up, public debt goes down, when public debt goes up, private debt goes down, that is by definition how it works when not tied to a money supply limit like the gold standard. People tend to reason as if we were still on a gold standard. If you were to pay off the national debt today, there wouldn’t be any dollars left in existence. The deficit & the debt are not obligations, they are the money supply. Trying to balance the budget now and pay down the federal debt can only result in another recession.

    The real concern is that people, and the government, still think its a good idea to see housing outside of inflation. When the economy eventually does recover, the housing bubble will just happen again. We have done nothing to fix the structural problem that caused the malinvestment in the first place.

    The article at the following link is a good explanation of modern macroeconomic theory.

    http://pragcap.com/resources/understanding-modern-monetary-system

  14. LargeTalons says:

    Sorry, to add clarification about public vs. private debt… What I should have said is when public debt goes up, private reserves go up, which should cause private debt to go down, and vice versa. Though, when both public debt and private debt are increasing faster than productivity as we saw in the last decade, there is no other place for the money to go other than inflating prices or investments.

  15. @ LargeTalons
    Good post. On principle I agree with your arguement although I think that you make a mistake in assuming that people are aginst government spending. The problem is how government spends its money. If Government spending was used to build the infrastructure of the Nation your argument could work, but the money is being used to prop up money pits in local/federal governments and socialist programs. Our country ran deficits in non-reciession years to pay for this stuff now that we are in a recession we are feeling the full weight of these expenses. I wish the money was being used to build infrastructure becuase then we would see job growth.

  16. LargeTalons says:

    @Matt

    Thanks, I absolutely agree with you, and that’s a good point. I wouldn’t claim that all government spending is good for a recession. I was against the bank bailouts, and paying people to do nothing doesn’t help the economy. You’re right, spending on actual productivity is the thing that helps out in a recession. I think the proposal to replace unemployment insurance with a “job guarantee” is an interesting one. Basically, the federal government would stop paying people to be idle, and instead offer a minimum wage (the wage offered by the program would essentially become the de facto min. wage) for public service. That sort of program would be a self adjusting control on government spending as well, since spending would automatically go up when the private sector is laying off, and go down when they start hiring. Not saying it would be perfect, or that it couldn’t be taken advantage of, but so can the current unemployment system, and at least we would be getting some sort of production out of the deal.

  17. Kate Jacobson says:

    A year on from when this article was written, it seems the States is so much further down the road to recovery than Europe and the UK. Incredible really.

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