The Long Debt Emergency Has Arrived


The long debt emergency has arrived – From 1950 to 1980 total US credit market debt to GDP held a ratio of 1.5. Today that figure is above 3.5 with total US credit market debt at $54 trillion.

We are reaching a point of no return with global debt.  The US will be running deficits for as far as the indebted eye can see.  This isn’t a new or novel trend but the magnitude certainly is.  Since we stepped on the deficits do not matter accelerator in the 1980s the US dollar has been losing its purchasing power year after year.  This might not be a big deal for you if you have a large share of international currencies and major investments overseas but the results for theworking and middle class are financially disastrous.  Most American workers are paid with US dollars and not with foreign currencies.  The troubling aspect of our economy is that we are starting to move backwards and for younger Americans and their parents, it is hard to imagine a world where the subsequent generation will be in worse shape but that is the plate we are being served.  We need to look at some data very carefully to see how incredibly indebted we are as a nation.


Total debt reaching peak levels

Total US credit market debt is over $54 trillion.  To put this in perspective, we went ahead and charted this out with our annual GDP:

total credit market debt owed

One thing is very interesting in the data above.  From the 1950s to 1980 the ratio remained around 1.5 but that changed in the 1980s when we suddenly went into “deficits don’t matter” mode and haven’t looked back since.  However global debt does have a maximum inflection point.  Ask Ireland, Spain, Portugal, Japan, and Greece how good it is to have debt that surpasses annual GDP.  Take a look at the total market debt and GDP as a ratio:

total credit market as a percent of gdp

Something definitely peaked with this financial crisis.  Did we reach a peak debt situation?  Keep in mind what is happening right now with all the foreclosures in housing.  Say someone bought a home for $500,000.  The home now sells for $250,000.  What happened to that other $250,000?  Did it just disappear?  In a sense it did.  That is the nature of bubbles.  This bubble manifested itself in real estate but is really at its core a debt bubble.  It is now migrating to government debt and student debt.

Take a look at some other countries with very high debt to GDP ratios:

debt to gdp countries

You’ll notice the PIIGS (Portugal, Iceland, Ireland, Greece, and Spain) all coupling together.  We already know the story with Greece.  Spain isn’t exactly looking pretty right now with a 50 percent youth unemployment and headline unemployment of over 23 percent (these are depression like figures for a western industrialized nation).  None of the economies on this list are actually booming.

Read the rest at My Budget 360