Household Debt Vs. GDP

Filed in Uncategorized by on May 31, 2009 0 Comments

In 2007, American household debt reached $13 trillion, equal to our nation’s GDP. The last time that household debt was 100% of GDP was in 1929, the start of the Great Depression.

Consumer debt rose sharply between 2000 and 2008. And in 2007, it came to equal gross domestic product. That means we owed as much as our entire economy was worth. 

By last year, household debt had reached $14.5 trillion, while GDP stood at $14.2 trillion.

U.S. consumer revolving credit debt (including credit cards) rose 20 percent in the past five years, from $799.8 billion in 2004 to $960.4 billion in 2008, according to the Federal Reserve. Preliminary numbers for January 2009 show that figure continued to grow to $961.3 billion. In essence, it’s approaching a trillion dollars.

We are currently facing a national debt crisis. For many years, our national economic growth has been fictitious – an illusion of prosperity rooted in debt. 

We’ve consumed more than we produced. We’ve imported more than we exported. We’ve borrowed more than we saved. 

We’ve done all this for a quarter-century, and the day of reckoning has finally arrived.

Last fall, Time Magazine reported that the bottom 99% of American wage earners experienced a growth in real average income of just 8% since 1980, while that of the top 1% jumped 177%.

To make up for these stagnant wages and perpetuate our continual-growth economy, lending practices were loosened and money made cheap and easy. People were made to feel affluent with money they didn’t really have, but would eventually need to pay back – with interest.

This is how the masses, the common folks, were allowed to participate in the consumption economy along with the truly affluent. It was simply an illusion of wealth for millions.

Second mortgages, home-equity lines of credit, homeownership itself; it was all utilized to promote mass consumption, overspending, and crippling debt. 

For far too long, our government and its citizens have behaved irresponsibly and irrationally, spending way beyond our means. Now, from this point forward – and for many years to come – we will be paying the costs of that excess through a decreased standard of living. 

As Columbia professor David Beim said, “The problem is us. The problem is not the banks, greedy though they may be, overpaid though they may be. The problem is us… We’ve been living very high on the hog. Our living standard has been rising dramatically in the last 25 years. And we have been borrowing much of the money to make that prosperity happen.”

It has all finally, depressingly, crushingly come to an end. There is no re-inflating the debt bubble that propped up our phony economy. The lifestyle we maintained for more than a quarter of a century was simply unsustainable, and our crash inevitable.To double-down on our debt binge would only be an attempt to forestall the necessary de-leveraging of our economy and be even more crippling in the long run.

Indeed, it has been a long run, and that particular run is over. We are faced with a new reality that will continue to reveal itself in some rather profound and shocking ways over the next 20 or so years.

Are you ready?

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I write about economics and my work has been featured in news outlets from coast to coast, from Portland, Oregon to Portsmouth, New Hampshire. I've also been published in online sites such as TheOilDrum.com, EnergyBulletin.net and San Francisco B

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