In recent years, it has taken over $5 of new debt to generate an incremental dollar of US national income, a ratio up 70% in a decade. Debt, like any economic factor, suffers from diminishing marginal returns. US gross national debt/GDP will rise to 82.5% in 2010 (up from 55% in 2000) according to OECD projections, after running at least a 12% fiscal deficit this year. Globally, only two other major economies, Japan at 177% and Italy at 115% will have higher debt burdens, but both have enormous private sector savings and little personal debt. Household mortgage and financial sector debt both doubled from 2000 to 2007 from a base that was itself an all-time high.
Most of this debt was taken out to overpay for non-productive assets like real-estate that continue to decline in value, while income available to service the payments is under pressure. US consumers have no choice but to pull back from spending to try to service that debt in the context of huge personal balance sheet destruction. Hence the fast rising personal savings rate, already at 5% and headed to 8-10% over the next year as the private sector begins to pay down its debt load. I think the national debt, corporate debt and personal debt are all ultimately claims on the same thing: the future productive work of taxpaying US citizens.
On that basis, we should look at the total debt load imposed by all three, because the ratio of that total debt to the reasonable capacity for future work is what makes credit, in the aggregate, believable or not. Is the US now adding public debt faster than it is shedding personal/corporate debt? Absolutely, and it's simply not sustainable as looming demographic decline reduces trend growth rates. Those 4% medium-term growth forecasts in the Obama budget are utter fantasy in a deleveraging environment; the US struggled to reach even 3% in 2003-7 as it binged on cheap credit.
The US average household debt to income ratio was above 1.6x at end 2008, similar to the UK; the Eurozone is half that level. That average flatters the situation; the distribution of debt versus income and net household wealth is particularly extreme in the US, and that 'two paychecks from bankruptcy' cliche rings true for many. Aggregate public, corporate (including financial sector) and consumer US debt is currently about $57trn or 4 times national income, and likely to rise further by end 2009, as a function of falling GDP and rising government spending. The question now is: will this crushing debt burden be repaid, eroded by inflation or simply repudiated?
