Monday, March 2, 2009
In response to this request: "I'm wondering why you never post or review the long term data on net consumer debt. Even when removing record low home equity, comsumers have more debt as a percent of disposable income than ever before. Isn't this at the root of the crisis we face?"
This chart is the answer, and I think I've posted it before. The data for this chart only go through September '08, unfortunately, but I doubt things changed significantly in subsequent months. The important thing here is that the chart measures payments on debt and other financial obligations as a percent of disposable income. If you compared total net debt to disposable income you would get much larger ratios, but that is not a valid comparison. Consider a family making $100,000 per year. If they took on $50,000 of debt with a 20% interest rate (e.g., credit card debt) that would be a lot more burdensome than $50,000 of mortgage debt with a 6% interest rate and 30 years to pay. You have to compare flows (debt payments) to flows (income). You can't compare the stock of debt to a flow of income—that's apples and oranges.
Back to the chart, we see that debt and financial obligations are only slightly more burdensome today than they were 20 years ago, and roughly the same today as they were just prior to the 2001 recession. I fail to see where or how this chart displays any big warning signs of impending doom, or how it could be at the root of our problems today.
Posted by Scott Grannis at 5:48 PM