ChartingTheEconomy.Com

I had a couple of good comments from readers yesterday.  I think it is worth posting these comments and my replies because not everyone goes back to read the comments.  I hope this post is helpful in clarifying the past series of charts on outstanding debt.

Question #1 from Brspiral:

I’m struggling a little bit with this series on financial sector debt. Financial sector debt clearly has grown dramatically since 1980, but what exactly is financial sector debt, and what does this growth mean for our economy going forward? Per your previous posts, non-financial sector debt includes “Household debt, business debt, state & local government debt, and the portion of the federal government’s debt hold by the public”. If business and household debt are excluded from financial debt, what’s left?

When a bank makes a loan, it becomes an asset on its balance sheet and deposits are the liabilities. What’s an example financial sector debt? I’m guessing it will be comprised (partially) of the debt held by hedge funds, private equity, etc., but I’m not sure how that’s differentiated from the business debt calculation in the non-financial sector.

I’m just not sure what to take away from this data.

Thanks.

My Reply to Question #1:

Thanks for the thoughts. I should have been clearer. First, the financial sector is comprised of: Commercial banks, savings institutions, Credit Unions, government sponsored enterprises (GSEs), Asset-backed security (ABS) issuers, Finance companies, REITs to name a few. Second, the debt instruments they owe are things like: GSE issues, mortgage pools, mortgages, corporate bonds, bank loans, open market paper.

You are right, a bank’s loans become assets on its balance sheet and deposits are liabilities. What I am showing here is different. It is the debt that the financial sector owes. An example would be when a bank makes a loan to another financial company (say Goldman). It becomes an asset for the bank, but is debt that Goldman owes. Another example would be if Bank of American issues corporate debt, it would show up in the financial sector debt outstanding.

As far as the debt instruments, bank loans are a small part of the whole (i.e. most of the debt that the financial sector has taken on in recent years is not from bank loans). The big instruments are GSE issues, mortgage pools, and corporate debt. These instruments make up over 80% of the debt owed by the financial sector.

I guess the main point I was making was to show the growth in leverage that the financial sector has taken on in recent years. I think it is a main cause of the current crisis.

Thanks again for the question. I could have been clearer.

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Question #2 from N. Leblanc:

Thank you for this graph.

A quick calculation, from 1980 to today:
1) Total debt increased 200% of GDP
2) Time span: 29 years
3) GDP today of, roughly, 14 trillions

So, 14T x 200% / 29 years = 965 billions per year of additionnal debt.

That is more than Obama’s stimulus package each and every year since 1980. How can that be sustainable???

My reply to Question #2:

How can that be sustainable? I don’t think it can be (could be) unless you debase the heck out of the dollar.

I often argue (and warned years back) that the lack of savings and increase in debt (speculative lending) were accelerating growth in the economy (creating a bubble). Going forward the savings rate will increase (it already has increased as I predicted some time back) and stay higher. As far as debt, the speculative lending (easy money) is gone. Therefore, at best, I believe that we return to a long period of slower growth (after more pain). The past few decades were not normal. What we are going through is a return to normal. I think many people still think we will get through this crisis shortly and then return to the way it was. I don’t. The only wildcard would be if there is some type of game changer (new technology) to accelerate growth. We could see some big quarterly or annual growth in GDP, but on a longer-term basis I see slower growth. I really think 2008 will go down in history as a watershed year. The lives of many people will be very different pre and post 2008.

Thanks for the comment.

The level of U.S. domestic debt as a percentage of GDP was pretty flat from 1945 - 1980.  However, from 1980 until 2009 the level has spiked to over 350%.  What is also interesting is how the level of debt as a percentage of GDP in the U.S. financial sector exploded from about 20% of GDP in 1980 to over 120% of GDP in 2009.

Note:  The Federal Reserves Flow of Funds report does not include the intragovernmental holdings portion of the U.S. government’s debt.  Intragovernmental holdings includes things like money the U.S. government has borrowed from Social Security.  Intragovernmental holdings were 4.27 trillion as of June 22, 2009.  If added to the above chart, the total outstanding domestic debt in the U.S. would be around 390% of GDP.

Data source:

U.S. Federal Reserve - Flow of Funds

U.S. Bureau Economic Analysis

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The above chart shows the cumulative increase in outstanding debt for the domestic nonfinancial sector and domestic financial sector since 1980.  This is just another view of the huge leverage that the U.S. financial sector took on over the past few decades.

Last week a reader asked if I could show this type of data relative to GDP.  I will do that in tomorrow’s post.

Data source

U.S. Federal Reserve - Flow of Funds report

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The above chart shows the increase in outstanding domestic debt in the U.S. for both the nonfinanical sector and financial sector since 1980.  Outstanding debt from the finanical sector accounted for about 1/8 of total outstanding domestic debt in the U.S. in 1980.  In the first quarter of 2009 this figure had increased to about 1/3 of total outstanding domestic debt in the U.S.

Data source:

U.S. Federal Reserve - Flow of Funds report.  The above chart does not include the portion of the federal government’s debt for intergovernmental holdings.  The Fed’s Flow of Funds report does not include this in their outstanding debt totals.  Domestic nonfinancial debt includes:  Household debt, business debt, state & local government debt, and the portion of the federal government’s debt hold by the public.

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The above chart shows the growth in the outstanding debt of the U.S. domestic finanical sector vs. the U.S. non-financial business sector from 1976 to Q1′09.  Just another sign of the tremendous leverage the U.S. financial sector took on over the past few decades.

I’ll have a few more charts on this topic next week.

Data source:

U.S. Federal Reserve - Flow of Funds

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The above charts show the amount of outstanding debt in the U.S. by sector in 1976 and in the first quarter of 2009.  As you can see the overall level of debt in the U.S. has increased dramatically (no big surprise).  Also of interest is how much more of the total outstanding debt in the U.S. is from the domestic financial sector now than in 1976.  Also note how domestic nonfinancial business debt has become a much smaller piece of overall debt in the U.S since 1976.

Data sources:

U.S. Federal Reserve - Flow of Funds report.  The Flow of Funds report does not include the intergovernmental holdings portion of the federal debt.  This information is from the U.S. Treasury Department.  Intergovernmental holdings includes things like borrowing from the Social Security fund.

U.S. Treasury Department