Debt permeates every nook and cranny of the US economy. Since Bush took office, the "fiscally responsible" Republicans have increased total debt outstanding from $5.6 trillion to $8.4 trillion (according to the
Bureau for Public Debt). The
international trade deficit has increased from $314 billion in the fourth quarter of 2001 to $816 billion in the first quarter of 2006 on a seasonally adjusted annualized basis. And households have been piling on debt during a period when their spending is out-of-control and earnings are stagnant. As a result the household deficit is at an all-time high.
Thanks to Dave V for providing a chart that is corrected for inflation and population.
So, what is the household deficit?
Based on first-half data, it looks as though households are on course to run yet another record deficit in 2006. To refresh your memory, we subtract from disposable personal income (after-tax income) the sum of expenditures on consumer goods/services and residential investment (value-added in housing). If households' total expenditures are less than their after-tax income, then they are, in effect, running a surplus. This implies that they are advancing funds to other sectors - businesses, governments and/or foreign entities. If households' total expenditures are more than their after-tax income, then they are running a deficit. This implies that they are borrowing from or selling assets to other sectors. In the first quarter of this year, households ran an annualized deficit of $566.2 billion. In the second quarter, this annualized deficit increased to $588.0 billion. Based on this first-half data, households are on course to run a 2006 deficit of $577.1 billion, which would break the 2005 deficit record of $476.7 billion (see chart below).
Essentially, this measurement looks at household income and expenditures to see where the money for expenditures comes from. If expenditures are less than income, than current income is sufficient for all expenditures. In this situation, households don't have to sell assets or go into debt to finance their lifestyle. When expenditures are greater than income, households must either sell assets or go into debt to pay for expenditures. As the chart about indicates, people are spending much more than income, indicating there is a ton of debt in the system to finance these expenditures.
And indeed there is a ton of debt in the system now, no matter how you measure it. In the first quarter of 2001, consumer debt was 74% of GDP. That number increased to 91% in the first quarter of 2006. Over the same period, mortgages alone increased from $5.2 trillion to $8.9 trillion.
It's important to remember that inflation adjusted non-supervisory wages have decreased for this expansion, even after the economy hit "full employment" in December of 2005. This is one of the primary reasons for the massive increase in debt. At the beginning of this expansion the savings rate was about 2%. This indicates people were already spending most of their paycheck before the expansion. Although consumers have continued to increase their spending each quarter since 2000, their respective paychecks have not kept up with the increased spending. As a result, consumers have gone into debt to buy goods and services.
The article notes there were two other periods in the post-WWII era when this happened. The first period was right after WWII when there was a ton of consumer demand, massive savings and a flood of consumer goods on the market. It also occurred twice during the great depression, when unemployment was high and people were selling anything and everything just to make ends meet. In both of these eras there is a strong fundamental reason for the deficit. However, we are currently not in a post-WWII boom with pent-up demand and massive savings nor are we in the middle of a great depression.
Essentially, we are in a period where wages are not keeping up with real expenditures meaning we are simply living beyond our collective means.
NBBooks and I posted on the same article today. NB was kind enough to delete his diary. He's added some really good additional information in this comment. Please give him some tips. Thanks.