Not sure I have this graph right. I'm taking "Household Debt Service Payments as a Percent of Disposable Personal Income", dividing by 100 to eliminate "percent" and multiplying by "Disposable Personal Income" (FRED's DPI) to get Household Debt Service Payments in Billions. But the DPI numbers are quarterly at an annual rate and the debt service numbers are just "quarterly". My numbers might be mismatched.
Don't let that stop me.
After I get Household Debt Service Payments in Billions, I multiply by 100 to get percent and divide by Household Debt (FRED's CMDEBT) to see Household Debt Service Payments as a Percent of Household Debt:
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| Graph #1: Household Debt Service Payments as a Percent of Household Debt |
Not happy with the downward trend. The lower the number, the faster debt accumulates.
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FRED doesn't offer Household Debt Service Payments data for the years before 1980. So I don't know what the graph of those years would look like. But I expect it would be pretty much a mirror image, increasing irregularly from the 1950s to the 1985 peak.
9 comments:
"Not happy with the downward trend. The lower the number, the faster debt accumulates."
If I understand why this graph is measuring the above conclusion may not be true. It sounds to me like they are measuring what portion of household spending is going to paying down debt. If less is going to paying down debt it CAN be because the cost of debt is lower. People refinance their mortgages at lower interest rates and get their payments to a lower percentage of income (but they pay longer). This is not an accumulation of debt its just a stretching out of it.
In fact what I think is happening today (and over the last 7-8 years) is people are refinancing their debt if they can and there is not as many new mortgages being issued (for newly built homes) reshuffling of old housing stocks at decreasing rates gets more people playing the game and strings it out longer but its NOT economic growth. Only new construction counts as econ growth (or should)
You seem to be taking the view that these graphs are evidence that people aren't paying down their debts as fast and it is therefore accumulating. I think its eroding slower but not necessarily accumulating.
The ratio of household debt to the cost of household debt has been declining for over 30 years. The burden of debt used to be 16% of the total debt back in the mid 80's and now its close to 9%.
That is what you would expect from the laws of supply and demand.
Household debt was increasing fastest when the relative cost of debt was highest. And household debt increased the slowest (it was negative growth 2009-2013) when the relative burden of debt was lowest.
"The ratio of household debt to the cost of household debt has been declining for over 30 years. The burden of debt used to be 16% of the total debt back in the mid 80's and now its close to 9%"
Ratio of household debt to the cost of debt is a bit of a confusing term. When they graph debt levels they are only counting the principle I assume. The costs of interest are not graphed when they follow level of debt accumulation but when they graph the costs of debt to consumers( what percentage of income is going to pay down debts) that most definitely includes the interest payment costs.... does it not? Im just going to use mortgages as an example, since most of monetary policy and consumer borrowing is via real estate;
When interest rates were high I would think that ( and certainly the CBers think so too) would mean less borrowing, fewer people taking out new mortgages and less new construction. But the costs to the consumers would be just as high since interest costs were higher. So the percent that households are paying includes interest payments and is thus higher, but the level of principal which doesn't include interest obviously is lower. Fast forward to the last few years, lower interest rates were intended to stimulate more borrowing (more principal) but at a lower cost. So household ratios of cost of debt to the total principal is lower, but the CBers still don't think we are taking on enough new debt/principal (slow growth). Even at 0% the principal still needs repayment. But at 0% the cost of the debt would be 0. That would make the above ratio pretty meaningless. A number over 0 as expressed by x/0 is meaningless. 0/x is useless too. Some monetarists even suggest we need negative interest rates!! What will that do to those graphs? To me this is the folly of monetary policy in regulating the economy and the idiocy of some of the metrics we decide to measure and compare.
"When interest rates were high I would think that ( and certainly the CBers think so too) would mean less borrowing, "
Your thinking is backwards. The fastest expansion of debt occurred when interest rates were highest and the least expansion of debt occurred when interest rates are lowest.
If you look at the data it becomes obvious that:
Lower interest rates are consequence of low borrowing.
The Fed is not controlling market interest rates.
Market interest rates are controlling the Fed.
I agree Jim. The interest rate vs borrowing relationship is counterintuitive. My comment was just trying to illustrate that. It does seem like a higher cost of borrowing would lead to less of it and at some point (like Volckers extreme over reaction) it does
but most of the time its more the case that high growth supports the higher rates and lower growth supports lower rates.
I dont agree entirely though that the Fed is not controlling market rates. They don't control mortgage rates directly but they can control to a very large extent the rates on govt debt. They set the overnight rate and all other rates are derived from that. They can buy bonds all along the maturity spectrum and influence those rates too. QE
Interesting discussion.
Greg: "It does seem like a higher cost of borrowing would lead to less of it and at some point (like Volckers extreme over reaction) it does"
Yeah I agree. If rates are going up but are below the "breaking point", borrowing may only accelerate. And the breaking point may even increase. But eventually, when rates catch up to the breaking point, borrowing (and economic growth) must slow.
Jim, it is not clear to me that "The fastest expansion of debt occurred when interest rates were highest and the least expansion of debt occurred when interest rates are lowest."
https://research.stlouisfed.org/fred2/graph/?g=1Yog
Art,
What I was saying is the ratio of household debt to cost was 16% in the mid 80's because that reflects what households were actually paying in interest at that time. The much lower ratio from 2009-2012 likewise reflects the lower amount of interest being paid. The ratio was highest when debt was expanding the fastest and lowest when debt was contracting.
The high rates of borrowing in the 70's and 80's led to high interest rates just as low rates of borrowing have recently led to low rates.
Art
One would think as that each worker’s ability to pay down debt worsens due to an increasing stock of debt that banks would require higher interest to offset the higher risk.
So we would expect an increasing stock of debt and interest to have a negative correlation, but I agree with Jim what you find is that is not the case.
However to me this implies risk is being under- priced if the stock of debt grows as interest rates reduce, and debt growth is being priced at a level for which debt will be taken on rather than in accordance to the risk.
This IMO is core to the destabilization shock waves private debt has on the economy, which is risk being underpriced (or the perception that it is). In a private sector liquidity crunch, if your financial assets are underpriced (or the market perceives that are) for risk; the only way to unload them is to reduce their price and macro deflation dynamics take over.
The only way to stop it is for someone (buyer or lender of last resort) to have deep enough pockets to put a floor on the price by buying enough to meet the target (or make the market believe it will).
I have attached a link to one of my graphs hope it works.
https://research.stlouisfed.org/fred2/graph/?graph_id=258767
If you cannot view the graph
It shows that Jan 2015 the value at 122% and current 30 Year conventional mortgage rate for that time period is 3.71%. Last time the value was close to 122% Jan 2003 rate of 5.92%.
(a) Households and Nonprofit Organizations; Home Mortgages; Liability, Billions of Dollars, Not Seasonally Adjusted (HMLBSHNO)/ (b) Compensation of Employees, Received: Wage and Salary Disbursements, Billions of Dollars, Seasonally Adjusted Annual Rate (A576RC1)*100
Art I remember you doing a lot of work on the golden 90’s so look at my graph. We grew the economy with household debt and interest rates more or less stable. Need to figure out how we did that to fix the problem we currently are in.
Oilfield Trash, your link works fine. Interesting contrast of trends. I'll get back to you on the rest.
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