Three Decades (and an Update)

When there is too much debt, it is necessary to reduce debt. In an environment where everything is growing, it is possible to reduce debt simply by having debt grow more slowly. This is what happened in the 1980s, after about 1986.

When there is not too much debt, the economy is able to grow with vigor. This is what happened in the 1990s. The economy grew faster. And debt started growing faster again -- just as fast as GDP.

When debt grows, it accumulates. The cost of debt -- interest and principal combined -- increases. Eventually, this cost becomes too much, and the economy cannot grow. This is what happened in the 2000s.

Graph #1: The Growth of Debt (blue) and the Growth of Output (red)

Debt growth is always higher than real economic growth, except at the very end.

For most of the 1980s, the growth gap between the two lines was getting smaller. For most of the 1990s, the growth gap remained small. After the 1990s, the growth gap increased.

In the '80s, the growth gap narrowed as debt growth fell. In the '90s, the growth gap did not change, because the growth rates matched. In the 2000s, the growth gap widened because output growth slowed.

Output growth slowed when debt became excessive.

//UPDATE:

At Jazzbumpa's suggestion, I changed the red line to show Nominal GDP (Graph #2):

Graph #2: The Growth of Debt (blue) and the Growth of Nominal GDP (red)

The same analysis applies:

For most of the 1980s, the growth gap between the two lines was getting smaller. For most of the 1990s, the growth gap remained small. After the 1990s, the growth gap increased.

The reduction of debt growth in the 1980s created slack in the financial system. This slack let the economy rise like a helium balloon in the 1990s. After a few years debt growth had taken up all of the slack, and economic growth suffered as a result.