Debt Fueled Economic Growth

EconomPic:

Ignoring the massive spike in government related debt (Federal, State, AND Local) for the time being and focusing instead on household liabilities as a percent of the national income, we see mortgage debt is now at 70% of GDP (more than double the level seen in the 1980's and 50% more than that seen at the beginning of this decade) and consumer debt is now at 18% of GDP.

The importance of all this is of course that all that debt that has been added over the years has been a huge contributor to that GDP. The fear is that the debt has just pulled a lot of consumption forward rather than infrastructure or other long term investments that will provide future growth opportunities.

Who is this debt owed to?  I presume most of it is just owed to other Americans.  The current account deficit represents the additional debt that is owed abroad.  Nevertheless, increasing credit tends to increase GDP and if that credit was spent on productive investment that makes the country more productive, then it will be easy to unwind the increase in debt.  If not, well...
The mortgage debt is a far bigger deal than the other debt because it is on a much bigger scale.  They should be graphed on the same scale and then it would be clearer.

Why capitalism fails - Minsky

Why capitalism fails - The Boston Globe:
I copied part of the article below, but click on the above Boston Globe link and read the whole thing.  There are five short parts.

"Minsky called his idea the “Financial Instability Hypothesis.” In the wake of a depression, he noted, financial institutions are extraordinarily conservative, as are businesses. With the borrowers and the lenders who fuel the economy all steering clear of high-risk deals, things go smoothly: loans are almost always paid on time, businesses generally succeed, and everyone does well. That success, however, inevitably encourages borrowers and lenders to take on more risk in the reasonable hope of making more money. As Minsky observed, “Success breeds a disregard of the possibility of failure.”

As people forget that failure is a possibility, a “euphoric economy” eventually develops, fueled by the rise of far riskier borrowers - what he called speculative borrowers, those whose income would cover interest payments but not the principal; and those he called “Ponzi borrowers,” those whose income could cover neither, and could only pay their bills by borrowing still further. As these latter categories grew, the overall economy would shift from a conservative but profitable environment to a much more freewheeling system dominated by players whose survival depended not on sound business plans, but on borrowed money and freely available credit.

Once that kind of economy had developed, any panic could wreck the market. The failure of a single firm, for example, or the revelation of a staggering fraud could trigger fear and a sudden, economy-wide attempt to shed debt. This watershed moment - what was later dubbed the “Minsky moment” - would create an environment deeply inhospitable to all borrowers. The speculators and Ponzi borrowers would collapse first, as they lost access to the credit they needed to survive. Even the more stable players might find themselves unable to pay their debt without selling off assets; their forced sales would send asset prices spiraling downward, and inevitably, the entire rickety financial edifice would start to collapse. Businesses would falter, and the crisis would spill over to the “real” economy that depended on the now-collapsing financial system."

Falkenblog: Minsky a Keynesian Sockpuppet

Falkenblog: Minsky a Keynesian Sockpuppet: "crises tend to occur in specific subsets in the economy: in 1990, hotels and Commercial real estate, in 2001, high tech, in 2008, mortgages. The mistake is not one made in aggregate, but in different sectors each recession. By noting these areas, but not the aggregate economy, had too much leverage, and depended on expected future increases in collateral value, he might have been more successful proselytizing his colleagues."

Overcoming America's Debt Overhang: The Case for Inflation | The New America Foundation

Overcoming America's Debt Overhang: The Case for Inflation | The New America Foundation: "It might be called the 'World's Scariest Chart.' It is a snapshot of the fragile foundations of the American economy and the epic boulder it now finds itself trapped beneath. The graph shows total debt outstanding in the United States, both secured and unsecured, as a percentage of GDP. In 1981 it was a manageable 168 percent, in 1996 253 percent, and by the first quarter of 2009 with the collapse of the housing and credit bubbles it had reached a staggering 373 percent of GDP."