by David Stockman, DailyReckoning:
If old Ben were still around he would surely add “debt” to his famous saying. Indeed, a recent Experian study of its 220 million consumer files actually proves the case.
It turns out that 73% of consumers who died last year had debts which averaged nearly $62,000. In addition to the kind of debt that apparently always stays with you — credit cards and car loans — it also happened that 37% of the newly deceased had unpaid mortgages and 6% still had student loans with an average unpaid balance of $25,391!
Once upon a time people used to have mortgage burning ceremonies when later in their working years the balance on the one-time loan they took out in their 30s to buy their castle was finally reduced to zero.
And there was no such thing as student loans, and not only because students are inherently not credit worthy. College was paid for with family savings, summer jobs, work study and an austere life of four to a dorm room.
No more. The essence of debt in the present era is that it is perpetually increased and rolled-over. It’s never reduced and paid-off.
To be sure, much of mainstream opinion considers that reality unremarkable — even evidence of economic progress and enlightenment. Keynesians, Washington politicians and Wall Street gamblers would have it no other way because their entire modus operandi is based not just on ever more debt, but more importantly, on ever higher leverage.
The chart below not only proves the latter point, but documents that over the last four decades rising leverage has been insinuated into every nook and cranny of the U.S. economy.
Nominal GDP (dark blue) grew by 6X from $3 trillion to $18 trillion, whereas total credit outstanding (light blue) soared by 13X from $5 trillion to $64 trillion.
Consequently, the national leverage ratio rose from 1.5X in 1980 to 3.5X today.
My point today is not to moralize, but to discuss the practical implications of the nation’s debt-topia for Ben Franklin’s other two certainties — death and (especially) taxes.
There’s no doubt that the modus operandi of the American economy has been transformed by the trends displayed in the below chart.
It so happened that the 1.5X ratio of total debt-to-income (GDP) at the beginning of the chart was not an aberration. It had actually been a constant for 100 years — except for a couple of unusual years during the Great Depression.
It was also linked with the greatest period of capitalist prosperity, economic growth and rising living standards in recorded history.
By contrast, today’s 3.5X debt-to-income ratio has two clear implications.
First, the nation effectively performed a leveraged buyout (LBO) on itself during the last forty years. And that did temporarily add to the appearance of prosperity.
But it also means that the U.S. economy is now lugging two turns of extra debt compared to the historic norm. Mainstream opinion, of course, says “so what?”
The U.S. economy is lugging $35 trillion of extra debt, that’s what.
That’s right. In the absence of the 40-year leverage aberration since the late 1970s, the chart below would show about $29 trillion of credit market debt (public and private) outstanding, not $64 trillion.
Make no mistake, $35 trillion of extra debt make a very practical and very large difference.
The soaring leverage ratio of recent years came at a heavy price — and one which Keynesians and their camp followers simply refuse to acknowledge:
America’s 40-year LBO didn’t create permanent incremental growth. It just stole it from the future.
Today’s added leverage and the incremental spending it currently finances eventually become tomorrow’s higher debt service cost and reduced spending. In fact, the latter is already occurring. And that’s the reason I call the chart below “The Great Inverse.”
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