## Sunday, August 28, 2016

### Household Debt and Debt Service

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)
A small decline in debt since the crisis; a big decline in debt service. But the blue line uses the left scale and the red uses the right. So you can't look at the two lines and see relative sizes or anything useful like that. About all we can learn from this graph is that the Debt Service data doesn't start until 1980.

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Here are the same two data sets, the one relative to the other:

 Graph #2: Household Debt relative to Household Debt Service Payments
Well, debt is high, relative to debt service. High and rising. I don't like that too much. The only good thing I can say is that the increase seems to be slowing -- for what that's worth.

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 striking, that big decline since the crisis. Reminds me of the big decline in debt service. I wonder how the two compare -- household debt (relative to income) and household debt service (relative to 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
So, about six dollars of debt in 1985 for every debt service dollar paid... about eight dollars in the mid-1990s... about 10 dollars before the crisis and almost eleven after; but it has dropped a bit since 2013. Still very high, though. And with interest rates on the low side, this graph says households owe an awful lot of debt. An awful lot of debt, compared to what we're paying back.

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)
Let me talk thru how to read this graph. Take 1980 as an example, just when the red line starts.

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.

Maybe Malthus said...

Well done! Do you know why the FRB data are truncated @ 14/15? No current data?
I have been monitoring yield spreads nnd can see narrowing, add in fed actions that may cause problems for sales & sub prime debt [if current debt is f(prime)], I am concerned GDP is almost wholly a function of consumption at the moment (negative trend in business investment and government spending). Trouble ahead.

The Arthurian said...

Thank you Maybe Malthus!

No current data. The last update for CMDEBT was in June; the data is thru Q1 2016. We probably won't get the second-quarter number for another month.

The TDSP (debt service) is even worse. Last update March 2016, for data thru Q4 2015. We are overdue for an update on this one, for sure. Mine of 14 August may be relevant here.

"I am concerned GDP is almost wholly a function of consumption at the moment"

Brilliant insight. This clears up some of my thinking. I think you have it just right.

Not sure about "trouble ahead" -- not yet, anyway. In my last graph above, the most recent numbers show a large gap between the red and blue lines. Debt service is high relative to current household borrowing.

I think consumers are likely to close that gap by borrowing more, and the increase in borrowing should make the economy better for a while. Growth should pick up.

Of course, the increased borrowing will reduce that gap again. When the gap gets small enough, we'll be in Trouble with a capital "T".

I should add that I am not an economist and not an investor, so my views on the future don't cost me anything, right or wrong!!

The Arthurian said...

Here's something: The TDSP series was updated "20 hours ago" according to FRED just now. Data thru Q1 2016.