Stimulus Addiction Disorder: The Debt-Disposable Earnings Pyramid

For those who suspect the status quo is unsustainable but aren't quite sure why, I've prepared a simple chart that explains the financial precariousness many sense. The chart depicts the two core elements of a debt-based, consumerist economy: disposable earnings, defined as the earnings left after paying for essentials which can then be used to service debt and debt.

In other words, if all the household earnings are spent on non-discretionary expenses (rent or mortgage, taxes, food, utilities, healthcare, etc.) then there is no money left to pay the interest and principal on a loan. Lenders consider this household uncreditworthy for the simple reason that their earnings cannot support the monthly nut of debt service (interest and principal).

Note the word earnings as opposed to income. Social entitlements such as Social Security are income but they are funded by taxes paid by those with earnings. (All of America's social entitlements are pay as you go--the trust funds are PR fiction.) The investment income (interest) paid to owners of Treasury bonds is also paid by taxes on earnings.

All the interest and principal of debt is ultimately paid out of earnings, either private-sector debt paid directly out of wages or public-sector debt paid out of taxes which are paid out of earnings.

The problem with servicing debt out of income is two-fold: one, earnings of the bottom 95% have been stagnant for decades, which means earnings aren't actually rising in terms of the goods and services they can buy, and two, the cost of non-discretionary expenses (essentials) has been rising, especially the big-ticket costs such as housing, healthcare and higher education.

You see the problem: since earnings are flat and the cost of essentials are steadily rising, there is less disposable earnings left every month to service debt. This is a problem in an economy like America's that depends on debt-funded consumption to fuel "growth." No increase in debt means no increase in consumption which means no "growth."

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Disclosures: None.

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