Wednesday, June 29, 2022

The Problem of Credit-Market Debt: The Ratio of Credit-Market Debt to Disposable Income

Introduction

Many workers in the U.S. do not have much in the way of money to spend on anything other than necessities. This leaves them with very little in the way of discretionary income to make a living for themselves and their families. In fact, most workers have little if any discretionary income to spend on anything else.

One of the largest expenses facing the U.S. economy is the payment of the interest on the massive quantity of debt that has accumulated in the past decade. The chart below shows that the share of disposable income used for interest payments has been steadily increasing.

According to the Bank for International Settlements, the average effective interest rate for all outstanding debt instruments in the United States is 4.5%.

The Limits of Economic Growth in Solving the Debt Problem

Basic Books and New Society Publishers have brought out an important update of the 1972 Limits to Growth study, a study that was first published in 1972 and that has been cited by almost everyone who has ever proposed the idea of a climate change crisis.I would recommend that people buy and read this book. It should be out of print, but Amazon and others can’t seem to find an easy listing of it. It has been translated into five languages.Dana Frank was the primary author of the study. She’s a professor of sociology at University of California at Santa Barbara.

Debt-to-GDP Ratio

There are three debts: government, business, and household. The government has been breaking it’s promises and failing to pay its bills, the business sector has been cutting investment and hiring in order to preserve cash on hand, and households have been selling off their assets to pay for credit. If the current denouement of the business cycle does not occur, we will have a new depression, the worst since the 1930s.

In the 1930s there was no inflation. I repeat, no inflation. All prices went up, but inflation was nonexistent. There were no credit markets, and it is not clear to me that there were in the 1930s. I presume that it was too dangerous to allow credit to be made available.

Credit-Market Debt to Disposable Income

In 2016, total US household debt, including mortgages, credit card debt, auto loans and student loans, exceeded total household income by a record $9.2 trillion, an increase of $1.4 trillion or approximately 20 percent in just one year. Such numbers are both devastating and sobering.

Such numbers are both devastating and sobering.

Households borrow both to purchase real assets and to service real debts. A household’s debt service obligations are usually income-limited, but sometimes include loans for tangible assets.

Even in a period of record low interest rates, households are finding it difficult to service their debts. This problem can be remedied by lowering interest rates or cutting loan principal.

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