Enlightened Economics

Economics for an Enlightened Age

Archive for January, 2008

• Is the Amazing US Debt Productivity Decline Coming to a Bad End?

Posted by Ron Robins on January 23, 2008

For decades, each dollar of new debt has created increasingly less and less national income and economic activity. With this ‘debt productivity decline,’ new evidence suggests we could be near the end-game in this economic cycle. American collective consciousness will need to change to accept the new reality.

Getting less and less economic benefit from each dollar of new debt is becoming an enormous and onerous problem for the US. Quoting Michael Hodges in his Total America Debt Report, “In 1957 there was $1.86 in debt for each dollar of net national income, but in 2006 there was $4.60 of debt for each dollar of national income – up 147%. It also means this extra $2.74 of debt per dollar of national income produced zilch extra national income. In 2006 alone it took $6.32 of new debt to produce one dollar of national income.” (Underlining added.) See his chart below.


Source: Michael Hodges America’s Total Debt Report/financialsense.com

According to Dr. Kurt Richebacher, writing for The Daily Reckoning, US credit expansion in 2005 was $3,335.9 billion and matched by nominal GDP growth of $752.8 billion, equalling $4.43 in new debt for each dollar of GDP growth. In 2006 total credit market debt increased $3.9 trillion while nominal GDP (seasonally adjusted) grew by $686.8 billion showing that it took $5.68 of new debt for each dollar increase in GDP. What must be noted is that for the thirty years prior to the late 1970s the credit-to-GDP ratio held steady around 1:1.4.

Exponential debt growth in relation to income and GDP growth stops at some point. I believe we could be there now. The following chart illustrates that US household debt service costs as a percentage of disposable income seems to have reached a plateau at around 14.4%.

hds.png Source: www.contraryinvestor.com

And this chart shows US savings rates at around zero as a percentage of personal income.


Source: Michael Hodges America’s Total Debt Report/financialsense.com

These three charts together indicate that US households may already have hit a ‘debt wall.’ That is, with no savings additional new expenditures require additional debt.

It is no wonder that mortgage foreclosures, auto and credit delinquencies, etc., are rising dramatically. Americans have gotten to this point as they sought fulfillment almost exclusively in the material world around them.

It is possible that the US Federal Reserve and the financial system will continue to produce ever increasing amounts of debt relative to national income and GDP. This would only further exacerbate the decline in debt productivity. However, should this happen, watch out for much higher inflation.

In the years ahead many Americans will need to look more within themselves, rather than to material goods, to find personal fulfillment.

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© Ron Robins, 2008.

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