## Monday, May 19, 2014

### The Repayment of Household Debt

When there is a dollar of debt for every dollar of income, paying down 10% of the debt takes 10% of the income.

When there is \$10 of debt for every dollar of income, paying down 10% of the debt takes all of the income.

I've seen graphs of debt repayment as a percent of disposable income. Never saw anything on the amount of debt repaid as a percent of debt outstanding.

We can look at debt service to see how much debt we pay off each year, and then compare "debt paid off" to "debt outstanding" to see the relation between these two.

At FRED a search for debt service turned up lots of hits. One of the first was "household" debt service payments out of "disposable personal income". I know there are measures of household debt, so "household debt service payments" might make a good comparison. I looked a little more and found three measures of debt service as a percent of disposable personal income:

 Graph #1: Three Measures of Debt Service out of Disposable Personal Income
At first glance the blue line looks a lot higher than the others. But the vertical axis doesn't go all the way down to zero, so the red and green are higher than they look. I wonder: if I add the red and green together, do they equal the blue?

 Graph #2: "Consumer" + "Mortgage" Debt Service Payments as % of DPI (red, dashed) overlaid on "Household" Debt Service Payments as a Percent of DPI (blue)
Looks like it from here. That could be useful information.

So anyway, I'll use the total, the "household" debt service number.

I should be able to get household debt service in dollars -- or, billions -- by undoing the "Percent of DPI" calculation.

If I was figuring debt service as a percent of disposable personal income, I'd divide debt service by disposable personal income (DPI) and multiply by 100. To undo the calculation and get the debt service number back, I'd divide by 100 and multiply by DPI. Now I know how to get "household debt service" from FRED's household debt service ratio -- divide by 100 and multiply by DPI.

 Graph #3: Household Debt Service Payments, in Billions For DPI I used FRED's DSPI
Crap. It only goes back to 1980. Oh, well.

Now we can look at household debt service payments, the number from Graph #3, as a percent of household debt:

 Graph #4: Household Debt Service Payments as a Percent of Household Debt For "Household Debt" I used FRED's CMDEBT

Wellsir, it seems we're paying down debt even slower now than before the crisis. That can't be good.

Notice the flat spot there, in the latter 1990s when the economy was doing good.

I wonder what this ratio looked like before 1980.

jim said...

Art wrote:
" it seems we're paying down debt even slower now than before the crisis"

That is not what the graph shows. Only some of debt service payment is going to pay down the principal on debt.

For the last 65 years most of the time, household debt has been increasing, which means that in aggregate, most of the time, none of the debt service cost goes to paying down debt.

The Arthurian said...

Hi, Jim.

"Only some of debt service payment is going to pay down the principal on debt."

That's true. In my original notes for the post I wrote:
Set aside the cost of interest...
But I set that note aside and never thought of it again, till now.

Nonetheless, the amount we pay in debt service has been falling quite consistently, as a portion of the debt we owe.

"... in aggregate, most of the time, none of the debt service cost goes to paying down debt."

I see it from the other side. New borrowing is generally more than the "change from year ago" of debt, because some debt, certainly, was paid down.

The Arthurian said...

The graph shows the maximum possible that we could be paying on our debts, by assuming an interest rate of zero.

jim said...

The Arthurian said:
" The graph shows the maximum possible that we could be paying on our debts, by assuming an interest rate of zero."

That is true, but interest isn't zero. Right now, new borrowing is about equal to debt repayment. That means debt service cost is just the interest cost.

It might be more useful to subtract debt service cost from new borrowings and add that flow to disposable income to get the actual household disposable income. See this graph:

http://research.stlouisfed.org/fred2/graph/?g=Bah

That shows how "actual disposable income" is what drives GDP.

The Arthurian said...

Jim: "Right now, new borrowing is about equal to debt repayment. That means debt service cost is just the interest cost."

No. It means we are taking out new loans at about the same rate we are paying off old ones. "In aggregate" notwithstanding, this matters because
1. taking out new loans boosts the economy, but
2. paying off old debt too slowly inevitably leads to credit crisis.

It is certainly not true that everyone is only paying interest and no one is paying down principal. And it is certainly true that there is some new borrowing. I'm not trying to draw any brave new conclusions from that. I'm just exploring. You are telling me not to explore. I don't understand that. It's not like the math is wrong...

//

"It might be more useful to subtract debt service cost from new borrowings and add that flow to disposable income to get the actual household disposable income."

This sounds like a Steve Keen idea. Keen adds new borrowing to GDP or something (I forget exactly).

I like it. I need to see your graph in comparison to disposable income without new borrowings... and perhaps to disposable income less debt service. I didn't have a chance to look at it yet.

jim said...

Art wrote:

"It means we are taking out new loans at about the same rate we are paying off old ones."

That means the total amount going for debt service is equal to the total amount of interest. If the interest were lower then more of the principal could be paid if debt service and borrowing remained the same.

"This sounds like a Steve Keen idea. Keen adds new borrowing to GDP or something (I forget exactly)."

Yes, same idea but applied to just household income.

What the graph shows is that debt service cost was about equal to credit expansion for a long
while before the crash. That meant debt service was not taking away from total disposable income for years and then all of a sudden it was.

" I need to see your graph in comparison to disposable income without new borrowings"

Disposable income without new borrowings is on the graph.