Some Revealing Charts

Courtesy Doug Noland at Prudent Bear, these charts illustrate a fundamental problem: debt creation well in excess of economic growth:

Now in fairness, rapid growth in debt isn’t necessarily a bad thing, provided it is funding productive investments. But much of the rise in US indebtedness is the result of overinvestment in housing, borrowing to fund consumption, and funding a costly and unnecessary war. And it isn’t as if the US was shy about using debt in the 1990s.

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  1. CrocodileChuck


    This is an issue I have long wondered about: here in Australia our economy has grown by 4-4.5% pa for the last five years.

    Credit growth (of the banks) has averaged about 15% pa during this time.

    I have always read (eg, McKinsey) that the rate of growth of financial assets exceeds that of the ‘real economy’.

    In your view, what is the ‘normal’ multiplier for this relativity?

    Thanks for your fine blog, as usual


  2. puravidavid

    The difference between wise growth (non-military, non-financialized speculative asset price increases) and the creation of credit can be seen as a misallocation of resources.

    This exponential increase in credit did not produce a similar increase in real wealth, i.e., the reation of assets & infrastructure that enable the production of essential necessities.

    It will revert, and probably overshoot; it is the cause of the longer cycle ala Shumpeter’s Kondratieff, Strauss/Howe’s fourth turning crisis theory, Cicero’s seculum, etc.
    It may be cliche, but the bigger the boom, the bigger the bust. The depth and length of the depression we are now entering will be known only in hindsight.

    I suspect it will be unlike any that civilization has ever know… despite the infrastructure and technology we have developed in the past two hundred years. Why? Because we have grown thoroughly reliant upon it, but will lack the resources to maintain it. Witness, the collapsing bridges, levies, and bursting water/sewer pipes in older areas of the US that seem to be regular occurances.

    These are only the beginning of the unraveling.

  3. Yves Smith


    My comment above was a tad simplistic, and I’ll go and tweak it.

    The issue with America is that the country was already reasonably geared (high consumer debt, reasonable use of corporate debt, not so terrible by historic standards Federal debt) before the debt growth ballooned. If the US was underleveraged in some fashion, the growth in debt might not be so bad and the growth might merely bring the US to a higher level within a range of acceptable outcomes.

    However, the proof of the pudding of debt overextension is that we are seeing a lot of borrowers that are having trouble servicing debt: credit cards, mortgages, commercial real restate, home equity loans.

    As for Australia, the growth in bank debt in and of itself isn’t damning. First, in Australia, credit intermediation takes place mainly (almost entirely) through banks. There isn’t much in the way of a bond market. And there is no Federal debt. And even though banks have been way too generous with mortgage debt (I recall you could get a mortgage up to where debt service consumed 50% of income. 40% is considered the max if you are doing proper credit procedures most other places in the world. But the powers that be have tried to discourage the use of credit cards, so that may net out).

    So the issue for Australia is whether the debt is going to productive investments. Even a high level of debt can be OK if it is invested in assets that will fuel future growth. The big faves in the US, housing and consumption (oh, and a dumb and costly war), don’t qualify. So the worrisome thing about Australia, similarly, is the extent to which the growth in debt is related to the property market.

    So that’s a long winded way of saying even if you looked at norms, I think you need to drill one level deeper and look at why the debt was incurred.

  4. James

    “Nominal GDP would “pay it bills” today only in the context of monetizing additional debt – or inflating the quantity of Credit to inflate “purchasing power” to inflate incomes and earnings – all in order to service previous borrowing” Doug Noland

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