Now that Robert Higgs and David Cay Johnston have both brought up personal and business lending as an indicator that credit isn’t frozen after all, I’m feeling a meme coming on. And this chart, from Martin Wolf in the FT, does a good job at showing the bigger picture.
The aggregate stock of US debt rose from a mere 163 per cent of gross domestic product in 1980 to 346 per cent in 2007. Just two sectors of the economy were responsible for this massive rise in leverage: households, whose indebtedness jumped from 50 per cent of GDP in 1980 to 71 per cent in 2000 and 100 per cent in 2007; and the financial sector, whose indebtedness jumped from just 21 per cent of GDP in 1980 to 83 per cent in 2000 and 116 per cent in 2007 (see charts). The balance sheets of the financial sector exploded, as did the sector’s notional profitability. But leverage, alas, works both ways.
To put it another way, in the chart, the red area at the bottom (mortgages, mainly) has been rising fast. The grey area at the top (financial-sector debt) has been rising even faster. The orange area in the middle (non-financial businesses) has been holding steady, and never really took part in the credit bubble. So if you look at the orange area in the middle, determine that it’s healthy, and conclude that the debt markets are fine, then you’re basically deliberately ignoring the entire problem.