Enlightened Economics

Economics for an Enlightened Age

• 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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2 Responses to “• Is the Amazing US Debt Productivity Decline Coming to a Bad End?”

  1. Anyone who says the U.S. government debt is not a problem because it is within historical norms as a percentage of Gross Domestic Product (GDP) is ignoring the additional debt owed by households and corporations. It is the credit worthiness of the entire U.S. economy that is being called into question.

    Banks will generally limit the size of a loan to a customer so that loan payments do not exceed about a third of the customer’s income. Using this rule of thumb, U.S. $14 trillion annual GDP could finance at most about $5 trillion in loan payments (principal and interest). With $50 trillion of debt, this $5 trillion payment will be entirely consumed by interest payments at a 10% interest rate. If the economy contracts, then the ability to pay is reduced proportionately.

    However, given that interest rates are still relatively low and the total debt is increasing by 9% annually, it seems the United States is already unable to pay even the interest on its debt.

    The amount of debt the United States can finance has reached a limit. The next step includes “monetizing” the debt by printing money thereby inflating the currency, and defaults at various levels of the economy.

    The most benign way out of America’s predicament is for there to be such a surge of creativity and growth in the U.S. economy that the ability to pay off its debts is vastly increased.

    It is the creativity and intelligence of the people that makes an economy grow. Scientific research (see http://www.mum.edu/tm_research/bibliography.html) on the Transcendental Meditation (TM) technique clearly shows that practice of TM increases creativity and intelligence. Social and economic applications of TM and its related programs can uplift the mental functioning of an entire population virtually overnight as evidenced by lower unemployment and other measures. We cannot afford to ignore a program like this that has good evidence of its effectiveness and costs a fraction of what is being wasted on bailouts. Here is a way to stimulate the economy that does not involve monetary and fiscal policy.

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  2. […] the worst thing that we could possibly do.  In 2008 it was bad enough when it took $5 dollars in debt to increase productivity by $1.  Bush’s TARP sent us over the edge as we took out debt to cover debt basically kiting […]

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