Debt Relatives: The Cousins

That's us, the cousins. Everybody except Uncle Sam. This is the post about our debt, the Non-Federal debt.

I begin again with the third graph from mine of the 11th, shown now as Graph #1:

Graph #1: Debt Relatives

We're looking at the red line this time, Non-Federal debt per dollar of Federal debt.

It is easy to see the striking increase in Non-Federal debt between the late 1940s and 1974. The vigorous growth of private-sector debt in those years corresponds to the vigorous growth of the economy after World War II, which lasted (by no coincidence) until the 1974 recession.

Since 1974 the Non-Federal debt relative has been stuck (in limbo?) between three and four times the size of the Federal debt.

You know Uncle Sam's debt is a big one. So you know the cousins are way deep in debt.

Oddly, the one time that Non-Federal debt fell below $3 per dollar of Federal debt was in the late '80s, early '90s. Not so oddly at all, that low level of private debt created an opportunity for private debt to increase rapidly. And private debt did increase rapidly as you can see, in the latter 1990s.

And just as the rapid growth of private debt after World War II gave us a "golden age", the rapid growth of private debt in the late 1990s gave us a golden decade, or a bronze decade, or a few pretty good years anyway beginning around 1995.

Again, this is no coincidence. This is the way we run our economy. We use debt for growth. It works really well when there is relatively little private-sector debt. But it doesn't work very well at all when there is relatively a lot. The Non-Federal relative hit a high in 1974 that ended the golden age. It reached a high again in 2001, bringing the late-1990s boom to an end. When the Non-Federal relative gets too high, it chokes off economic growth.

This is how economic cycles arise. An increase in debt is good for growth. But a large accumulation of debt is bad for growth. So when debt starts out low, the economy can grow easily. But the growth produces a growing accumulation of debt. And this accumulation eventually grows large enough that it hinders growth. And then, slower growth creates debt-repayment problems, which increases debt, hinder growth further, and aggravate debt-repayment problems. The only solution is to wipe out accumulated debt by crisis or by policy, and again create the low-debt conditions that are hospitable to growth.

There is, then, some small hope that this economic recovery may turn into a good one, for Non-Federal debt is again below $3 per dollar of Federal debt. We just need to get things turned around. The trouble, of course, is that if the trend-line turns upward again, it won't be long before accumulated debt is again such a burden that it crushes the recovery.


So.

Some people say the solution is to massively increase the Federal debt, by means of stimulus spending. Others say the solution is to massively reduce Non-Federal debt, by one method or another. I've been known to say such things, myself.

But the real solution to the problem should be obvious: The real solution is to find a way to have economic growth without accumulating a massive private debt. For only then will we be able to avoid the crisis, avoid the depression, and avoid the quagmire, the next time around.