## Sunday, July 3, 2016

### Debt service

I was never much of a reader, but I did read a book by John Barth one time, back in the days when I read things other than econ. Giles Goat-Boy it was called. The thing I remember is that Barth used the word "service" as you might use the word "rogering".

At FRED I search for debt service and select Household Debt Service Payments as a Percent of Disposable Personal Income (TDSP).

Debt Service Payments (DSP) as a percent of Disposable Personal Income (DPI). The calculation for that is TDSP=100*DSP/DPI. For some reason, FRED doesn't give DSP in billions -- or if they do, I can't find it. To get DSP in billions I have to convert back from percent of DPI using DSP=DPI*TDSP/100, thus:

 Graph #1: Household Debt Service Payments in Billions of Dollars
I want to check this.

Debt service payments include both interest and principal. FRED provides a data series called Monetary interest paid: Households. This should be the interest portion of household debt service payments. Together on a graph, "monetary interest paid" should be less than debt service payments in billions. It is:

 Graph #2: Household Debt Service (blue) and Monetary Interest Paid (red)
Monetary interest paid is consistently lower than debt service in billions. Plus, I see a satisfying similarity between the two. This graph gives me confidence in both my calculation and the monetary interest series.

I wonder how the red line compares to the blue when I take the ratio. Here is interest payments as a percent of debt service:

 Graph #3: Household Interest Paid as a Percent of Household Debt Service Payments
Going down since 1983.

The interest portion falls from near 70% of debt service in the early 1980s, to less than 50% at present. So we know the "repayment of principal" portion increased, from near 30% to more than half of debt service. Falling interest rates probably had something to do with these changes. Okay.

You know... If we have debt service in billions, and we have the interest portion of it also in billions, then we can calculate the difference, the "principal repayment" portion of debt service. I never had that number before. Secrets are revealed!

 Graph #4: The Principal Repayment Portion of Household Debt Service, in Billions of Dollars
Going up. No surprise there.

We can look at household debt principal repayment as a portion of household debt:

 Graph #5: Principal Repayment as a Percent of Household Debt
Wandering. I want to say it is going down, but I see it trying to go up.

Repayment of principal falls during the first two recessions shown, and rises during the last two. Is this a change in behavior? Perhaps. It's gotta be more difficult to make those payments in times of recession. In the 1980s and '90s we were not so concerned about our debt, household debt. We let the principal payments fall before and during recessions. But since 2000 we seem to be more concerned about our debt: Repayment of principal increases during recessions.

A change like that could have a significant negative effect on economic growth.

One more graph.  Two more graphs. I want to compare principal repayment to the change in household debt. Why? Because if new borrowing is gaining on principal repayment, we're getting further behind.

Graph #6 shows a ratio (not a percent). When principal repayment and the change in household debt are approximately equal, the graph will show a value near 1.0. When principal repayment is greater, the value will be above 1.0. And when principal repayment is less, the value shown will be less than 1.0.

 Graph #6: Principal Repayment relative to the Change in Household Debt
At first glance, the plot appears to run close to 1.0 from start-of-data to the start of our recent troubles. In other words, for all that time, since 1980, we were paying back nearly as much money as we borrowed. Things changed with the crisis, of course. But it appears that for 25 years or more we paid back amounts near equal to the amounts we borrowed. However, if you take a closer look, this first-glance conclusion does not hold up:

 Graph #7: Principal Repayment relative to the Change in Household Debt (thru 1980)
I chopped off everything after 2008, where things started going crazy. You can see that the ratio reaches 1.0 just once, during the 1982 recession. Just less than 1.0, actually. In other words, even during that very severe recession, our new borrowing was more than we paid back.

The average repayment for the full period (2008 excluded) looks to be about 0.6, or 60% of the addition to borrowing.

So that means ... If we borrowed 100 we paid back about 60 so the net was ... no ... It means if the data says the change in household debt was 100, new borrowing was actually 100 + 60, and principal repayment was 60.

What that tells me, I don't know. But if every time I borrow \$160 I only pay back \$60, well, that's the how and why of debt accumulation. Roger that.