This post is a quick summary, with pictures, of some the data that convinces me. Later posts will elaborate.
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Figure 2 Annual Dollar Growth of US GDP and Annual Debt Addition with 4 year moving averages
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Figure 1 above shows the % YOY GDP growth rate, total debt growth rate, and the four year moving average for each of them. The bubble formations are clear. The "dot com" crash occurs in 2000, the much more serious "credit crash" in 2008.
Figure 2 above is almost the same picture as Figure 1. This time I show the added debt (new borrowing) every year, and the added GDP every year, in dollars. Again I have shown the four year moving average. Note that in 2007 we borrowed $4.5 Trillion and increased our consumption (GDP) by only about $0.6 Trillion.
Figure 3 Ratio of Total US Annual Debt Increase ($s) to US GDP Annual Increase ($s) with 4 year ma's
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In Figure 3 I have taken the increase in debt every year in dollars (new borrowing), and divided it by the increase in GDP every year, also in dollars. I have also charted the average of the four preceding years (4yr moving average) to smooth out some of the peaks.
In Figure 4 below, I have used a new chart of data you have seen before, to show the Debt/GDP ratio in a slightly different way. I will be discussing the details of Figure 4 and variations of it in many subsequent posts.
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So what does all this mean?
From Figure 4 which charts the ratio of outstanding debt dollars ($debt) to GDP dollars ($GDP):
- We see that for three decades between WW2 and the mid 1970s, the ratio of total $debt to total $GDP remained at about 150%. With the implementation of the Reagan "deficits don't matter" expenditures in the 1980s, the $debt to $GDP ratio began rising. After stabilizing during the Clinton years this ratio again began rising during the Bush years. The ratio is now (in 2009) at about 3.75 (375%). This is the highest US debt/GDP ratio during the 20th century.
- The fact that total debt to GDP remained approximately constant during most of the the 1970s, is confirmed in Figure 3, where the ratio of $debt increase/$GDP increase remains relatively constant during the 1970s. Figure 3 says that in the 1970s, for every $1 increase in GDP, we had to increase our borrowing by about $1.5 every year.
- Figure 3 also says that at "peak debt" in 2001-2003, for every dollar we grew GDP each year, we needed to borrow an extra $7 or so every year.
- During the last few years we Americans needed to borrow an average of about $6 in new debt every year, to increase our GDP (our consumption) by about $1 every year. Since the 1980s, our US GDP growth has been sustained solely by massive borrowing by middle class Americans to maintain their life style, and by American banks to create the vehicles to fuel those loans..
- In the 1980s (Reagan years) the average debt growth/GDP growth ratio roughly doubled. We started the 1980s needing about a $2 increase in debt every year for every GDP dollar increase, to needing about $4 increase in debt every year for every $1 increase in GDP at the end of the 1980s.
- In the 1990s (Clinton years) the ratio dropped to needing $3 in new debt every year for every $1 increase in GDP every year. Although the debt growth rate increased in this period, so did the GDP growth rate, causing a relatively flat debt growth/GDP growth ratio during the Clinton Administration.
- In the 2000s (Bush years) the ratio doubled again. This was the worst of all possible worlds. Despite the massive increases in debt and debt growth rate, GDP growth rate fell. We now need about $6 in increased debt every year for every $1 increase in GDP.
- And then we hit the "credit/debt" wall in 2007, leading to a slight reduction in total debt in 2009 and less consumption (lower GDP) in 2009 than in 2008.
- A slowing average real GDP growth rate (%) despite an increase in the rate of debt accumulation (%) (Figure 1)
- Figure 2 puts the percentage numbers in dollar terms. We see a sluggish increase in GDP dollars despite a sharp increase in the amount and rate of dollars borrowed every year.
Which leads me to a key question. If we have needed to borrow massive amounts of new money every year ($4.5 trillion in 2007 alone, see Figure 2) for many decades to maintain our life style, how could we sustain our lifestyle (GDP) in 2009 when debt actually shrank? And how much longer can we continue borrowing? The simple answer is of course that GDP also shrank in 2009. Below is a longer answer:
- The disappearance of credit (obvious in Figs 1 and 2 in 2008) panicked the Bush administration, and the Federal Reserve (the Fed). With the agreement of the incoming Obama administration, the Bush administration, Congress and the Fed created massive multi trillion dollar government ad hoc programs of grants, loans, tax forgiveness, financial guarantees and "bad debt" purchases which were were put in place in late 2008, primarily to rescue the shadow banking industry, and to a much lesser extent "Main Stream" America. It is these programs and others which were implemented under the Obama administration which rescued 2009 consumption.
- The full extent and a detailed accounting of these government programs are still quite murky, but the broad outlines are available. The total amount available (according to the NY Times) appears to be in the region of $12.5 Trillion. Through September 2009 about $2 Trillion had been disbursed. An earlier accounting from Barry Ritholz blog says that excluding the $5 Trillion Fanny and Freddie guarantees for which tax payers are now responsible, the total bailout amount is about $8.5 Trillion of which $3 Trillion were "currently available" in December 2008. (I have copied the Ritholz data below. The NYT piece is worth reading)
- Because much of these trillions of dollars in aid are buried in the Fed's balance sheet, or are in the form of guarantees, or equity or some other not easily quantifiable form (tax breaks for instance) the effects of these gargantuan numbers will be spread out over a few years, as will our understanding of them, and their impact on the Federal debt.
- By far the majority (80%?) of the $12 Trillion or so is aid to banks and Home Loan agencies, so that they can resume lending again.
- Which brings us full circle: The Obama administration plan as described in his 2011 budget appears to be to bail out the banks, leave the system as undisturbed as possible, go back to BAU in late 2010, and then grow our way out of our debt problems. I do not believe the plan is feasible for a whole bunch of reasons, many of which I will explore by analyzing our debt picture and by examining our major resource (energy) limitations.
- I will end this post with another chart which I consider a "Reductio ad Absurdam" argument against the current FY 2011 budget plans. Figure 5 below shows the history of total debt, GDP, the current budgeted/projected GDP through 2015, and the trended total debt line. The Obama FY 2011 budget (green line) projects GDP at about $20 Trillion in 2015. With BAU, the total debt trend line would forecast a total debt in 2015 of $100 Trillion, to support a GDP of close to $20 Trillion, or about 500% of GDP. And that is absurd. It cannot happen. Something will have to change and my bet is that this level of debt will not happen, which means that GDP growth must slow. Slowing GDP growth will force a national reexamination of our fundamental priorities. Such a process may be highly beneficial, or it may not!
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From Barry Ritholz Bailout Costs
| maximum amount | current amount | ||
| Federal Reserve - $5.255 trillion - 62% | |||
| Commercial Paper Funding Facility LLC (CPFF) | 1,800,000,000,000 | 270,879,000,000 | |
| Term Auction Facility (TAF) | 900,000,000,000 | 415,302,000,000 | |
| Other Assets | 601,963,000,000 | 601,963,000,000 | |
| Money Market Investor Funding Facility (MMIFF) | 540,000,000,000 | 0 | |
| Unnamed MBS Program announced 11/25/08 | 500,000,000,000 | 0 | |
| Term Securities Lending Facility (TSLF) | 250,000,000,000 | 190,200,000,000 | |
| Term Asset Backed Securities Loan Facility (TALF) | 200,000,000,000 | 0 | |
| Other Credit Extensions (AIG) | 122,800,000,000 | 122,800,000,000 | |
| Unnamed GSE Program announced 11/25/08 | 100,000,000,000 | ||
| Primary Credit Discount | 92,600,000,000 | 92,600,000,000 | |
| ABCP Money Market Fund Liquidity Facility (AMLF) | 61,900,000,000 | 61,900,000,000 | |
| Primary Dealer and Others (PDCF) | 46,611,000,000 | 46,611,000,000 | |
| Net Portfolio Maiden Lane LLC (Bear Sterns) | 28,800,000,000 | 26,900,000,000 | |
| Securities Lending Overnight | 10,300,000,000 | 10,300,000,000 | |
| Secondary Credit | 118,000,000 | 118,000,000 | |
| Federal Deposit Insurance Corporation - $1.788 trillion - 21% | |||
| FDIC Liquidity Guarantees | 1,400,000,000,000 | 0 | |
| Loan Guarantee to Citigroup* | 249,300,000,000 | 249,300,000,000 | |
| Loan Guarantee to Lending arm of General Electric | 139,000,000,000 | 139,000,000,000 | |
| Treasury Department - $1.15 trillion - 13.5% | |||
| Troubled Asset Relief Program (TARP) | 700,000,000,000 | 350,000,000,000 | |
| Fannie Mae / Freddie Mac Bailout | 200,000,000,000 | 0 | |
| Stimulus Package | 168,000,000,000 | 168,000,000,000 | |
| Treasury Exchange Stabilization Fund (ESF) | 50,000,000,000 | 50,000,000,000 | |
| Tax breaks for banks | 29,000,000,000 | 29,000,000,000 | |
| Federal Housing Administration - $300 billion - 3.5% | |||
| Hope For Homeowners | 300,000,000,000 | 300,000,000,000 | |
| Total - 100% | 8,490,392,000,000 | 3,124,873,000,000 | |
| * $306 billion in guarantees, with C absorbing the first $29 billion in losses. Additional losses are split 90% US Gvt, 10% C. The math is 306 - 29 = 277 * .90 = 249.3 | |||
Note: This Ritholz blog posting was datelined December 2008
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