Debt grows faster than GDP

Debt grows faster than GDP. So if you look at the Federal debt relative to GDP, it goes up. If you look at Household debt relative to GDP, it goes up. If you look at Household Mortgage debt relative to GDP, it goes up. Pretty much any debt you look at, if you look at it relative to GDP, it goes up.

So what you can do is, no matter who you want to blame, you make a graph of their debt relative to GDP. And you show people that it goes up, and they say "Yeah, look at that." And then that debt becomes a problem. Or, at least they think it's a problem.

It may be a problem, or it may not. Me, I always say debt is a problem. But here's the thing. If you only look at one type of debt, like Federal debt or Household debt, and you always look at it "relative to GDP", then you will always see it going up. So it doesn't tell you anything.

I like to look at debt relative to "All Sectors" debt. All debt. This way I can see if the Federal debt is growing as a share of all debt, or if household debt is growing as a share of all debt. I can check any component of the "all debt" total. Looking at it this way, if some of them are growing as a share of total debt, then other ones must be shrinking as a share of total debt.

The shrinkers could still be a problem, of course. The shrinking doesn't mean it's not a problem. But the ones that are shrinking are growing more slowly than the ones that are rising. And that could be a useful thing to know.

For example, here is Household debt:

Graph #1: Household Debt as % of GDP (blue) and as % of All Sectors Debt (red)

You have probably seen the blue one before, Household Debt to GDP. Flat in the 1970s, rising since the '80s, and peaking just before 2010. Enough debt to make you shudder.

The red one is the same debt, relative to All Sectors debt. This line is pretty flat. Actually, it's a shrinker. It looks like it's been going downhill since the mid-60s, and it ends up in 2017 as low as it was in 1955. It's obviously not crowding anything out.

The blue line is way higher than the red because GDP is way smaller than All Sectors Debt. The blue line goes up because Household Debt is growing faster than GDP. The red line drifts downward because Household Debt is growing a little slower than All Sectors Debt.

What else does this graph show? It shows that if Household Debt is a problem because it is too high, then All Sectors Debt must also be a problem because it is too high. And that could be a useful thing to know.

// Part three tomorrow.