Figures for aggregate personal debt should always be normalised with respect to household income, because only then can we really see if rising debt is something we should be concerned about, or just the result of growing incomes.
Lets look at that.
The first problem is to pick some appropriate data. I'm just gonna use "disposable personal income" -- personal income after taxes -- and CMDEBT, FRED's measure of household debt. I don't have good reasons for choosing these two particular series. I'm not an economist; I don't know these things. Usually I try to use the same data that the guy I quoted was using. But Simon is making a general statement and doesn't get into specific data. I'm on my own here.
At FRED I put CMDEBT over DPI, turned off the recession bars, and took five snapshots of the graph, with the mouse highlighting five different turning points in the plotted line. I cut and pasted them to get all five turning point indicators in one picture:
|Graph #1: Household Debt relative to Disposable Personal Income, 1952-2015|
1 = 1964Q4 ... 2 = 1984Q3 ... 3 = 1987Q2 ... 4 = 2001Q1 ... 5 = 2007Q4
|Before turning point 1:||rapid increase|
|From turning point 1 to 2:||not much change at all|
|From turning point 2 to 3:||very rapid increase, faster than the years before #1|
|From turning point 3 to 4:||gradual increase (slower than the years before #1)|
|From turning point 4 to 5:||very rapid increase, like 2 to 3, for a longer period|
|After turning point 5:||decline, at first very rapid but then gradual.|
So -- what does all this mean? Can you see from the graph whether "rising debt is something we should be concerned about, or just the result of growing incomes"?
From what we know about the economy, we can look at the graph and say wow, the very rapid, sustained increase from point 4 to 5 was something we should have been concerned about.
Funny thing, though. From what I know about the economy, I look at the graph and say we should have been concerned about debt from 4 to 5... and from 3 to 4... and from 2 to 3... and from the start to 1, too. The way I look at it, debt was going up all the while.
But, you say, but debt obviously was not going up from point 1 to point 2. I think that's what you say. And then you might add: so the debt problem could not have started before turning point 2.
Many people think that. It is true that the plotted line on Graph #1 runs pretty flat from turning point 1 to 2. But that does not mean debt wasn't going up. All it means is that debt wasn't going up relative to disposable personal income. It means debt and DPI were going up about the same, from point 1 to point 2. In the other periods, 2 to 3 and 3 to 4 and 4 to 5 (and also before point 1) debt was going up faster than DPI. That's what makes the line go up, debt going up faster than DPI.
Oh, and after turning point 5, debt is going up more slowly than DPI. That's what makes the line go down. Yeah. And the line going down is how we know rising debt is something we should have been concerned about before the peak at turning point 5.
Sadly, you don't know it's going to be a peak until after the line starts going down. And then ... well, by then it's too late.
What about that flat spot between turning points 1 and 2? I say debt and income were growing at the same rate, give or take. To see if I'm right we can separate debt from income and look at them separately.
Graph #2 shows year-on-year increase in household debt:
|Graph #2: Growth Rate of Household Debt (blue)|
Knowing that much, we can say that household debt growth in the 1960s was mostly between 5% and 10%, with an average about halfway between. Then in the 1970s the plot line races up and down, but seems fairly well centered on the line that indicates 10% growth, up from 7.5% or so the decade before.
The next graph, Graph #3, shows year-on-year increase in disposable personal income, in red. Again the line is all over the place. But it looks to be centered on the 5% line in the 1950s and the early 1960s. Then it runs a little higher, centered maybe a little above the 7.5% line for most of the 1960s and early 1970s. Then it runs higher yet, averaging somewhere close to the 10% line for most of the 1970s and early 1980s.
|Graph #3: Growth Rate of Disposable Personal Income (red)|
That's why we see a flat spot for that 20-year period on Graph #1.
There is another line on Graph #3, a very faint gray line. That line also shows disposable personal income, like the red line, but with inflation stripped out of the numbers. You can see that before the mid-1960s the red and gray follow the same pattern and run close together. Then the two lines separate for about 20 years; during those years there was rather a lot of inflation. Then after the early 1980s the two lines come together again.
As you can see, the inflation of that 20-year period pushed disposable personal income up. This is the reason debt and income grew at comparable rates in those years. It explains why the debt-to-income ratio on Graph #1 runs flat in those years.
If not for that inflation, there would be no flat spot on Graph #1. The graph would show increase from inception to crisis. At what point in that counterfactual would you say rising debt becomes a concern?
Rising debt is always a concern, because policymakers don't yet know enough stop it before it brings the economy to ruin.