Sunday, August 28, 2011


I want to compare the money we pay in taxes to the money we pay on our debt.

FRED has this on taxes:

Graph #1: Personal Current Taxes  (billions of dollars)

And this on debt service payments:

Graph #2: Household Debt Service Payments  (percentage)

But Graph #2 doesn't show dollars, or billions of dollars. It shows percent of Disposable Personal Income.

But FRED also has Disposable Personal Income:

Graph #3: Disposable Personal Income  (billions of dollars)

When I multiply Graph #2 by Graph #3, I get debt service payments in billions:

Graph #4: Household Debt Service Payments  (billions of dollars)

I had to divide by 100 to convert from FRED's percentage values.

Now I can bring in Personal Current Taxes from Graph #1. It shows up in red:

Graph #5: We pay about as much on our debt as we do to run the Federal government

Huh. Closer than I expected. The taxes are even somewhat higher, until about 2001.

So now I have to ask you a dangerous question: Which would you rather cut? Would you rather have no debt or no government? Be realistic in your assessment.

Would you rather cut the size of government in half, or cut your debt in half? If you had to pick one.

Would you rather not have sent astronauts to the moon and stuff, or avoided the economic policies that drove money out of circulation and encouraged the use of credit? Money in circulation, remember, is the money you receive as income and the money you spend. It was policy to reduce that, to fight inflation. And it was policy to encourage the use of credit, which caused inflation and left us full of debt besides.

I say cut the debt. But then, what would you expect me to say?


jim said...

Hi Art,

I think one thing you are overlooking is that not all of the bubble debt was in the household sector. A rough breakdown of bubble debt that accumulated from 1998-2008 in trillions of $$ would be:

Financial sector ______12
Households___________ 8
Small businesses_____ 3.5
Large corporations ___3.5

Total private debt_____27 trillion

And if you look at the last 4 bubble year it is clear that small businesses and the financial sector got caught with their pants down as they were borrowing like crazy right up to the end. The household sector had already started to move towards delevering in 2006. Large corporate borrowing was not so unusually high during the bubble period.

The real problem of course is not the debt per se but the true value of the assets that the borrow and spend spree produced. It is reasonable to argue that real estate and equities were already overvalued before all the borrowing drove up the prices. This is why it is a balance sheet recession since the asset side of the ledger is still in great jeopardy of shrinking enormouly if the classic Fisher "debt deflation" were to kick in.


Jazzbumpa said...

I say you are presenting a false choice.

Further, there is a story behind the numbers. Consider personal taxes. In any given year, between 40 and 50% of the population pay no Fed income tax. So taxes are paid by high earners. That is lost in the aggregate number.

Debt service payments are 1) squirmy, and 2) almost certainly distributed among the population differently than tax payments.

The similar magnitudes of the two is interesting, but I have no idea what to make of it.


Clonal said...

I would compare 100*W055RC1/DSPI and TDSP

Definitely a much better comparison. Definitely shows the effect of the Real Estate Bubble.

Further, TDSP goes towards increasing wealth disparities, while 100*W055RC1/DSPI likely decreases inequality.

See Margrit Kennedy - If money rules the world – who rules money

Comparing the average interest payments and income from interest in ten equal parts of 2.5 million households in Germany, we can show that 80 percent of the population pays almost twice as much as they receive, 10 percent receive slightly more than they pay, and the remaining 10 percent receive more than twice as much interest as they pay. This last amount is the share that the first 80 percent loses. This illustrates one of the least understood reasons why the rich get richer and the poor get poorer – and that the economists’ notion that money is just a neutral veil for the economy is incorrect.
Many believe that those 10 percent who profit from the system are the culprits who will not allow fundamental change to take place. However, even the rich are just as helpless to change it as the poor. The late billionaire Sir James Goldsmith once said: “What use is more money to me when I will be surrounded by more and more poor and suffering people who hate me? I feel as if I have won a game of poker on the Titanic!”

Clonal said...

Or better still just show TDSP/(100*W055RC1/DSPI + TDSP)

of course, the above does not take into consideration the millions of jobless, who have little or no disposable income!

Clonal said...


If you want to see some really scary graphs, look at proportion of total debt being repaid

Also, the average interest paid by households can be graphed

Further, debt is accumulating faster than it is being repaid

From 1980 to 2006, the households were just looking at their monthly payments and monthly income, and not at their entire balance sheet to make borrowing and spending decisions!

jim said...

@ clonal:

The graph below suggests Households were indeed looking at their balance sheets for their borrowing decisions. Specifically they were looking at one part of their balance sheet "Home owner equity"

graph:household debt minus home equity

From WW2 until 2007 households kept their home equity and total liabilities in balance or slightly above water.

Then what they thought was out of the realm of the possible happened (Home values fell dramatically)

This is why households are no longer willing to borrow and are focused on paying back debt - they now understand that housing values can fall and may well fall further.
So their borrowing decisions are still very much focused on that one part oftheir balance sheets.

Meanwhile the financial sector bought into the housing mythology even worse than households did. They are leveraged to the gills on derivative bets that are also based on that belief that real estate values can never substantially decrease. That huge amount of debt in the financial sector is what makes the whole debt mess too big to fail and too big to bail.

Clonal said...

Slight error in my last comment

Accumulated Net Debt is CMDEBT
However total debt which is Net Debt PLUS repaid principal should be

From Q1-1980 to Q4-2008 NET Debt grew at an average rate of 8.8%

For the same period Gross Debt grew at 8.67%

Both of the curves from 1980 to 2008 are almost perfect exponential curves Rsq between time and natural log of series is 0.993

The Arthurian said...

"Both of the curves from 1980 to 2008 are almost perfect exponential curves..."

Yeah, isn't weird how close to "perfect" it is? I know, growth is exponential. But we're dealing with people here, free choice and all that.

Maybe it's The Matrix.

Clonal said...


The only reason I can think of which would lead to such a good fit, is that the debt principal is not being paid off, and that the interest is only partly being paid off, and new debt is being taken on. The net result is that the private debt is being compounded at about an 8.8% interest rate. The average inflation over the same period was 3.5% Thus real wealth was shifting from the bottom 80% to the top via differential. This is on top of the 10 to 18% interest already paid on the debt over the same period!

See the graph (DSPI*TDSP)/100)/CMDEBT

Clonal said...

Also, the FODSP needs to be taken out in all my calculations. That includes non debt financial obligations like rent and taxes. The percentage of Debt service going to interest vs principal repayment is really calculated using the average age of loans which is around 30 months. So between 10% to 25% of the debt service payments are going toward principal repayments. More when interest rates are low, and less when interest is high.