Chart of the Day: Sectoral Contribution to Debt

Now that Robert Higgs and David Cay Johnston have both brought up personal and business lending as an indicator that credit isn't frozen after all, I'm feeling a meme coming on. And this chart, from Martin Wolf in the FT, does a good job at showing the bigger picture.

Wolf explains:

The aggregate stock of US debt rose from a mere 163 per cent of gross domestic product in 1980 to 346 per cent in 2007. Just two sectors of the economy were responsible for this massive rise in leverage: households, whose indebtedness jumped from 50 per cent of GDP in 1980 to 71 per cent in 2000 and 100 per cent in 2007; and the financial sector, whose indebtedness jumped from just 21 per cent of GDP in 1980 to 83 per cent in 2000 and 116 per cent in 2007 (see charts). The balance sheets of the financial sector exploded, as did the sector's notional profitability. But leverage, alas, works both ways.

To put it another way, in the chart, the red area at the bottom (mortgages, mainly) has been rising fast. The grey area at the top (financial-sector debt) has been rising even faster. The orange area in the middle (non-financial businesses) has been holding steady, and never really took part in the credit bubble. So if you look at the orange area in the middle, determine that it's healthy, and conclude that the debt markets are fine, then you're basically deliberately ignoring the entire problem.

Comments

[MarvinMBA:]

When excess liquidity is created visa visa the housing bubble sooner or later the excess liquidity disappears by devaluation or loss of buying power. We are experiancing both. The bailout will just create more excess liquidity as it trys to start the bubble process all over again. Trying to solve our problem by throwing money at the losers is sure to create more losers. In this case we are creating new losers(the taxpayer that can ill afford this) and going to be losing more and more. At this stage there is nothing this administration can do and there certainly is nothing the average guy in the street can do except go bankrupt.

2008 Sep 25 12:23 PM