A Business-Cycle Indicator For Independent Thinkers, Part 2

<< Read More: A Business-Cycle Indicator For Independent Thinkers, Part 1

Have you ever lacked for information about America’s various debt burdens? Twenty-odd years ago, if you paid any attention to debt, you might have relied on original source data to stay current. But the times they are-a-changing, aren’t they? In today’s high-tech, data-rich world, anyone who follows financial news should know roughly where we stand with our borrowings. Whether you’re a mainstream media addict or a blog junkie, your daily dose includes more commentary than ever before on which types of borrowers are increasing their leverage and by how much.

For example, don’t bother to sit down and ready yourself before reading the following observations about debt ratios, they should come as no big surprise (but note that we’re comparing debt to the highest prior GDP reading, or peak GDP):

  • At 51% of peak GDP at the end of 2017, home mortgage debt has fallen to levels last seen in 2002, just before five years of manic home buying pushed it to a short-lived high of 73%.
  • By comparison, nonfinancial business debt (72% of peak GDP) and consumer debt (19% of peak GDP) have edged above their prior highs, setting new records in 2017 and raising concerns about a possible credit bust.
  • But the private debt trajectory appears relatively flat compared to general government debt (99% of peak GDP), which despite recent stability is all but certain to climb steadily higher. (See herefor projections.)

Of course, we can also add it up and report that the major nonfinancial debt categories now total 249% of peak GDP, well above the pre–Global Financial Crisis high of 227%. But that, too, is probably unsurprising, so let’s move on. Let’s discuss a caveat that you might not have considered, which is this—most reported debt figures, including those noted above, play only one side of a two-sided record. As the B-side gets relatively little airtime, today we’ll narrow the deficit. We’ll flip the record over and see how the music changes, which means leaving the borrowers alone for a change and sizing up the lenders.

In other words, we’ll ask: Who exactly finances America’s debt? Using data from the Federal Reserve, we can divide total debt (public and private but excluding financial companies) among four financing sources with only a small residual. Here’s a picture showing the breakdown for the last 69 years, omitting the residual to keep it simple:

econ indicator 3

As you can see, the financing sources we’ve included are banks, the Fed, foreigners and prior domestic saving. The first three are self-explanatory, while the fourth refers mostly to U.S. households, pension funds and insurance companies, none of which can make investments without first accumulating wealth. The amount of wealth that these domestic, nonbank investors place in bonds, loans and bond funds composes most of our prior domestic saving category.

What Exactly Does the Financing Breakdown Reveal? A: Support for Our Nonmainstream Views or B: The Secrets of the Shugborough Inscription?

Okay, we’ll admit that the financing breakdown doesn’t knock you over with wisdom at first, but the closer you look, the more meaningful it becomes. For example, total lending by banks, the Fed and foreigners—which I’ll call risky lending because those financing sources are most prone to volatility—tends to lead the fourth source, prior domestic saving, through the business cycle. Also, risky lending always reaches its peak during an expansion, not a recession, whereas the peak in lending from prior domestic saving occurs either later in the same expansion, in the next recession or even further out.

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