America's Total Debt Report - Update 2007
$48 Trillion - and Soaring
~ household, business, financial and government sectors ~
by Michael W. Hodges, Author
Grandfather Economic Report
March 15, 2007

TWO GREAT QUESTIONS:
Can the production of debt forever replace the production of goods and savings?
Can Americans forever borrow their way to prosperity?
Easy Answer > NO WAY !!

I am concerned about the debt being passed to our younger generation. Who isn't?

BIG PICTURE - $48 TRILLION of DEBT in America and rising rapidly.
The economy is 2-3 times more debt-dependent with
$29 Trillion DEBT EXCESS compared to prior debt ratios

This is A SCARY CHART - showing trends of total debt in America (the red line, reaching $48 trillion in 2006 vs. growth of the economy as measured by national income (blue line). (adjusted for inflation). That debt increased $3.9 Trillion (9%) in the past year.

Which line goes up faster, the red debt line or the blue net national income line?

Answer: the debt line.

And, that debt line is going up faster and faster than national income! Right? (Maybe, like this chart, your own personal or business debt is also going up faster than your own income - - possible?)

As mentioned, debt is here defined as all U.S. debt (sum debt of federal and state & local governments, international, and private debt, incl. households, business and financial sector debts, and federal debt to trust funds).

This chart shows, for the period 1957 to mid 1970s, total debt (red line on chart) was increasing close to the growth rate of national income (blue line on chart), despite war debt for WW II, Korea and Vietnam.

But, in the last several decades total debt has zoomed up, up and away - - growing much faster than national income. It has now reached $48.4 Trillion ($37.7 trillion private household/business/financial sector debt PLUS $10.7 trillion federal, state and local government debt). Here are some highlights:

• Last year's total debt of $48.4 Trillion was 11 times higher than the $4.6 Trillion debt in 1957 (both measured in inflation-adjusted 2006 dollars).

• Last year's total debt increased $3.9 trillion (up 8.7%). Federal government debt (incl. added debt owed trust funds) increased $510 billion (6.2%), household debt increased $1 Trillion (up 8.6%), business debt increased $750 billion (9.1%), state & local government debt increased $152 billion (up 8.2%), domestic financial sector debt increased $1.2  trillion (9.3%). Each sector reached a new, all-time record high.

• As shown below, 26% ($1 Trillion) of the total debt increase of $3.9 Trillion was owed to foreign interests, up 11%.

• Last year's total debt per person was $161,287 (up $11,379 over prior year's $149,908); this compares to $28,905 in 1957 (both measured in inflation-adjusted 2006 dollars). Last year's debt per family of four increased $45.514 to $645,148.

While the above chart shows debt growth in inflation-adjusted dollars, here's another chart from the main report of this chapter - - showing debt as a percentage of net national income - - which I term the 'debt ratio'.

This chart shows < 2006 debt of $48 trillion was 460% of national income; the debt ratio in 1957 was 186%. If 2006 debt had been at the 1957 debt ratio then 2006's debt would have been $19 trillion, not $48 trillion - - indicating excess debt in America today of $29 trillion. (note - if this chart were plotted as debt % GDP, instead of  debt % national income, the curve would look nearly identical to this chart)

In this graphic, note how the debt ratio data plots are nearly flat during the first half of the years shown, indicating debt was growing at approximately the same rate as the economy - - not faster than the economy. This proves America's economy can grow without increasing debt at a faster pace (because it has in the past). But look what happened to that trend in the middle of this chart - debt ratio zooming upward, faster and faster, indicating debt growth way beyond general economic growth - with a new, record high debt ratio each year.

Remember, this is a ratio chart - - a plot of debt as a ratio to national income - - called the 'debt ratio.' If the economy performed with less debt each year per dollar of national income growth (meaning better debt productivity), then the chart trend line would be pointing downward. But, the line points up - - each year more and more rapidly upward it soars. This means the economy has been performing with less debt productivity each year, meaning it requires more and more debt each year to produce a dollar of national income than the year before. Like a drug junkie, the economy demands the generation of more and more debt each year to survive. The debt ratio has now reached 460% of national income - - an all-time high and shows no sign of even slowing its upward march.

The excess debt is even higher than the $29 trillion excess shown on this chart, if a nation's economy were structured to become more productive such that it could grow without increased debt. Why can America not grow by normal population and savings growth and labor and equipment productivity without growing debt ratios higher and higher?

By the way > a chapter of this series called the 'Family Income Report' shows the time period of the first half of this chart, when debt ratios were stable, was also one of the best periods ever of real median family income growth - most with one wage-earner per family.

Stated differently, 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. What kind of 'so called productivity' is that? Answer > Negative Productivity.

• Since 1990, 83% of today's domestic financial sector debt was created, as it increased by a factor of 6 times (2.5 times faster than the economy); household debt increased 60% faster.

• 2006 was a new, all-time record high in debt ratios of the household, business, and domestic financial sectors - also record debt ratios owed to trust funds.

• In FY 2006 the federal government's bite out of trust funds of $328 billion set another record, bringing total trust fund debt to $3.6 trillion, including $1.8 trillion siphoned from the social security trust fund.

• In 2004, the average credit-card debt of US households was $9,300, up from $2,966 in 1990, according to research firm CardWeb.com - - that's 214% more debt.

• Even students are learning how to go into debt up to their necks. The federal General Accounting Office, according to AP's Martha Irvin, says college students are graduating with an average of $19,400 in student loans - a 58% increase after adjustment for inflation since 1993. Additionally, average student credit card debt rose 46% from 1998 to 2000, according to the student loan agency Nellie Mae. Meanwhile, universities promote credit cards issued by agencies who kick-back to them.

• Since 1990 it is clear the economy was 'driven' almost entirely by the biggest injection of new debt in history, which produced a much diminished lower return in national income per dollar. Just as one hooked on drugs needs ever increasing amounts of drugs to 'survive', it appears America needs ever increasing amounts of new debt to eke out diminishing amounts of growth even with 2 wage earners per family.

• America's total private and government debt is at least 100% higher compared to debt ratios of the recent past.

• The total $48.4 Trillion debt shown at the top of this page can be broken down into two parts > $10.3 Trillion owed to foreign interests and $38.1 Trillion owed domestically.

• According to the Federal Government Debt Report that debt was $8.7 Trillion at the end of 2006, including $2.2 Trillion owed by the U.S. federal government  to foreign interests (which represents 46% of all Treasury bonds & notes).

• The total external debt of  USA (U.S. financial assets owned abroad) as of 9/30/06 was $10.3 trillion, representing 21% of America's Total Internal and External Debt of $48 Trillion shown at the top of this page. This external debt increased $1 Trillion (+11%) last year, representing 26% of the increase in total debt. Of that $10.3 debt owed internationally, the federal government and banks each owe more than $2 Trillion, and the rest of the financial and business sectors owe another $5.2 Trillion - excluding intercompany debts.

• As of 2004, according to Gillespie Research/Federal Reserve, those U.S. financial assets owned abroad included 13% of all stocks and 27% of corporate bonds, and foreign investors & central banks also owned 13% of U.S. government agency debt (such as household mortgages financed by Fannie Mae) up from 5% in 1995. The largest supplier of mortgage funds is Fannie Mae which borrows the money on the open market - - and, according to Bloomberg Sept. 2002, "about a third of the Fannie Mae's benchmark debt is sold outside the U.S." - - (dangerous with a long-term falling dollar exchange rate).

• Additionally, foreign interests own real estate and factories - - and some would be surprised to learn that the well-known and respected California-based Pimco, the world's largest bond fund that many believe is an American firm is in fact a unit of Allianz.AG, a German firm.

• We should not be mad at foreign interests. We are the ones borrowing from others so we can consume beyond our own production and savings, thereby creating unprecedented debts and trade deficits PLUS excessive government spending. While America's debt used to be nearly all owed domestically, increasingly huge portions are now controlled by foreign interests.

America, therefore, is less and less independently in control of its economy
- - not a nice bequest we are creating for our children and grandchildren.

While facing this accelerating debt challenge:

• America, already the world's largest international debtor with $10.3 Trillion external debt owed foreign interests. $6.6 trillion in cumulative trade deficits in goods have occurred since 1985, as international trade deficits explode to new records and America depends more and more on the production and savings of others than on itself (see International Trade Report); and

• with each citizen carrying on his/her back more state & local government employees than ever before, because their headcounts again increased faster than general population growth; and

• personal savings plunged to record lows; and

• real median family incomes (Family Income Report) ceased their solid increases after debt ratios took off.

• with household debt at the highest ratios in history,

• whereas in previous times one bread winner per family was sufficient to provide for the family, build savings and reduce get-started debt loads - - the family now allocates the 2nd bread winner plus more debt and zero savings and less time for the children - - to do the same.

• and - in previous times students graduated from college debt-free to themselves and their parents, because many worked their way via part-time jobs while minimizing consumptive spending. No longer.

• The above debt ratio chart also adds evidence about the period of what some call the "financialization" of the economy by debt, including increasing domination by the nation's financial sector of the total capitalization based weight of the S&P index - - a topic discussed as a part of naming debt causes - - in page 2 of the full debt report (from link below).

• More families than ever before, with every possible adult member in the work force, try to make-up the mounting pressure by turning to more debt and negative savings - - while more business debt is accumulated despite paying out fewer dividends to shareholders, as well as a much smaller manufacturing base.

A Few Hard Questions > With the lowest personal savings rate on record, with the federal government relying more and more on foreign entities to lend it funds to operate and prop up its currency, and with run-away trade deficits, where will this debt monster lead? Does America simply borrow savings of non-Americans until either they stop lending or until America has mortgaged or sold-off all its assets to others?

How can this direction be changed - - or am I the only one who does not believe individuals and a nation can, forever, borrow their way to guaranteed continual prosperity and security? Also, am I the only one who believes these trends represent major negatives regarding the future of our children and grandchildren - - in many, many ways?

The End Game of Debt Expansion ??

Esteemed Economist Ludwig von Mises stated the endgame brought on by reckless expansion of credit (debt): "There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved."

Two Questions:
1. Does anyone wish to offer guarantees that Dr. von Mises is wrong?
2. Does anyone believe these debt trends can continue forever - without dire consequences?

Is this a way to run an economy for my children and grandchildren
- - debt, debt and more debt?

Idea > > There can be little doubt that the only way energy (for example) will be better conserved with reduced dependence on foreign interests is with significantly higher economic (prices) costs and lower consumption. The same goes for debt > > a free market (without central-planning via the Federal Reserve to manipulate interest rates) setting significantly higher economic costs (higher interest rates, elimination of tax subsidies on debt, higher bank reserve ratios, etc.) to debtors, until debt ratios fall back more in line with America's past. Perhaps payroll taxes for social security and Medicare should be eliminated with its revenue loss (plus the gap missing for the future) transferred to the equivalent tax on energy and on debt.

What's your idea to get these debt ratios down significantly toward ratios of the past,
including reduced dependence on foreigners?

Most can agree >
The U.S. is more debt-dependent than ever.
That is not a nice bequest to our young generation - - on our watch !!

"We hear sad complaints sometimes of merciless creditors;
whilst the acts of merciless debtors are passed over in silence." - William Frend, 1817

"I place economy among the first and most important virtues,
and debt as the greatest of dangers to be feared." - Thomas Jefferson"

"The decline of great powers is caused by simple economic over extension."
The Rise and Fall of the Great Powers, by Paul Kennedy

"There is no means of avoiding the final collapse
of a boom brought about by credit (debt) expansion.
The alternative is only whether the crisis should come sooner
as the result of a voluntary abandonment of further credit (debt) expansion,
or later as a final and total catastrophe of the currency system involved." - Ludwig von Mises

No generation has a right to contract debts
greater than can be paid off during the course of its own existence."
- George Washington to James Madison 1789

"Growing domestic and international debt
has created the conditions for global economic and financial crises.”
Bank for International Settlements June 2005

America, that used to derive strong family values and incomes with savings and paying 'as you go', has moved to a more consumptive society financed by ever increasing liens on future income - - with debt ratios reaching new records.

America has become less a family-based, frugal society of strong real savings and small government. It has become a more consumptive, more debt-dependent with nil private savings, and more a government spending-dependent society - - depending more on the production and savings of others (including foreigners), and on debt, than ever before - - quite different from that envisioned by its founding forefathers. In the long-term there are consequences to be paid for excess debt reliance, in addition to sucking more mothers into the work force and away from their children.

The purpose of the Grandfather Economic Reports is to increase public awareness
of difficult trends facing today's families and youth - compared to prior generations.

KNOWLEDGE IS POWER - IF YOU HAVE IT

You have just viewed a summary with 2 of the trend charts of  "America's Total Debt Report", a chapter of the Grandfather Economic Report series.