After spending almost this whole month on debt service, I still don't know enough about the relation between debt service and debt owed. Here are the givens:
|Graph #1: Household Debt (blue) and Household Debt Service Payments (red)|
Here are the same two data sets, the one relative to the other:
|Graph #2: Household Debt relative to Household Debt Service Payments|
But this graph shows billions of dollars of debt, relative to debt service as a percent of income. The units are billions of dollars relative to percent. The units are screwy. I don't really know what the graph is telling me. Don't put too much stock in this one.
When I started on this little project this morning I didn't have my coffee yet. It was four in the morning, and even the dogs were still asleep. I took a sip of coffee and looked at what I was working with: debt in billions on the one hand, and debt repayment as a percent of income on the other. Apples and oranges.
I took the debt series (household debt) and made it "percent of income" like the debt service series:
|Graph #3: Household Debt as a Percent of Disposable Personal Income|
It's okay to compare 'em now, because both data sets are "relative to income". In fact, when I divide "debt-to-income" by "debt-service-to-income" income cancels income, and I'm left with "debt relative to debt-service", billions relative to billions. It shows how much debt we owe, for each dollar of debt service paid:
|Graph #4: Dollars of Household Debt for every Dollar of Household Debt Service Paid|
Now it gets interesting.
Instead of looking at household debt as one big painful lump, let's look at how much it changes from year to year. And lets compare that to how much we pay as debt service in dollars each year, billions of dollars.
|Graph #5: Change in Household Debt in Billions of Dollars (blue) and |
Household Debt Service Payments in Billions of Dollars (red)
In 1980 we paid just about 200 billion dollars in debt service -- interest and principal on the debt we owed that year. I don't know how much was interest and how much was principal. Let's say half and half. So we paid 100 billion interest that year, and we paid off 100 billion of debt. That's what the red line says.
That same year, 1980, the blue line shows that household debt increased by just under 200 billion dollars. See it on the graph? The blue line, just where the red line starts.
So in 1980 we paid off 100 billion of debt, and our debt increased by about 200 billion. What does this mean? It means we actually borrowed about 300 billion in 1980, but since we paid off 100 billion the net increase is 200 billion -- and the graph shows the net increase.
It makes sense to show the net increase, certainly, but it's also important to know that we actually borrowed more than that.
Second, take the 1990s as an example. The blue line is jiggy in the 1990s but if you imagine it smooth it is pretty much parallel to the red line during the period. So the net increase in household debt (blue) increased during the period, but so did debt service (red).
It looks like we were staying ahead of our debt in those years. But we were not staying ahead. Around the time of the 1991 recession, the net increase in debt was about half as much as debt service. But by the time of the 2001 recession, the net increase in debt was about two-thirds as much as debt service. The net increase in household debt gained on debt service during the decade.
Next, look at the years just before the crisis, where the blue line jumps up and runs neck-and-neck with the red -- and then suddenly falls, creating the crisis.
During those neck-and-neck years, the net increase in household debt was equal to our debt service payments. I'm not going to try to put into words how troubling this seems to me. I'm just going to say that this graph shows the problem that created the crisis.
Look at 2006 there, where the blue line rises above the red, then turns and starts to fall. In round numbers we paid about 1300 billion in debt service, and the net increase in household debt was about 1350 billion. The net increase in debt was more than we paid in debt service.
We were definitely not "staying ahead" that year. And the next thing you know, there was a crisis.