Another day older and deeper in... Well, you know.

I wrote this post back in August of 2010. For some reason I never posted it. But I'm back on the same theme now, and I found it, so I'm posting it today. Hodges has since updated his numbers.

I've come across pages of The Grandfather Economic Report a few times lately. Found one on debt just now. I want to review it in this post.

Clicking the image at right will take you to Grandfather Hodges' summary of debt, the page I'm reviewing here.

Hodges sets the tone right away: "America has become more a debt 'junkie' - - than ever before with total debt of $57 Trillion." Big number. Hodges uses the "debt junkie" imagery more than once.

Hodges points out the size difference between federal debt and total debt:

"The Federal Government Debt Report covers just the federal government debt of $12.3 Trillion... This chapter covers all U.S. debt... Total Debt in America is now $57 Trillion"

Then he presents a graph comparing that $57 trillion debt to National Income:

"This is A SCARY CHART - showing trends of total debt in America (the red line) reaching $57 trillion in 2009 vs. growth of the economy as measured by national income (blue line). (adjusted for inflation)."

Hodges does a lot with large fonts and capitals, and red and blue text and such. I'm not trying to duplicate that when I quote him. (The capitals copied over, of course.) To distinguish his text from mine, I'm putting his words in quotes and italics.

"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. As of beginning 2010 total debt was $57 Trillion ($42.3 trillion private household/business/financial sector debt PLUS $14.7 trillion federal, state and local government debt)."

Yeah, debt grew only a little faster than National Income in the early years of the graph. Then it started growing a lot faster. Hodges puts a date on the change: the mid 1970s. Minor point: I would put the change around 1981, at the time of the K-R Shift.

Hodges makes some interesting observations about the graph:

"Total debt (red line) increased about $3 trillion per year the past several years. BUT - last year, for first time EVER, total inflation-adjusted debt stopped growing at $57 trillion, as if it hit a brick wall - and national income (blue line) stagnated and declined."

Yeah, that was the Paulson crisis, and the recession.

"It took $9 of new debt to produce but $1 of added national income - a new record."

I prefer to think of it as $9 of credit-use that produced $1 of National Income. Debt is only the record of credit in use. It's another minor point. But sometimes the little things help to clarify the big things.

"Although total debt in America stopped growing last year, federal, state & local government debt zoomed upward FASTER than EVER - by more than $1.8 trillion, while private sector debt decreased by about same amount."

Another consequence of the Paulson crisis, of course.

"This chart shows < 2009 debt of $57 trillion was 505% of national income; the debt ratio in 1957 was 186%. If 2009 debt had been at the 1957 debt ratio then 2009's debt would have been $21 trillion, not $57 trillion - - indicating excess debt in America today of $36 trillion."

Oh, I like the arithmetic! If not for our increasing reliance on credit, we'd have had $36 trillion less debt in 2009. With that much less debt, we'd have avoided the Paulson crisis. And by the way, economic growth was better in the 1950s and '60s, when there was less debt. Hodges makes another excellent point:

"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)."

One more little thing:

"Please note 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..."