Thursday, March 11, 2010

The Changing Face of American Debt

The Federal Reserve released their latest Flow of Funds report, which contains TONS of great info. Below is a look at the change in debt outstanding by sector (as a percent of GDP) over a variety of periods since 1979.

1979 - 1989:

The "decade of debt" was led by the Federal government (Federal debt to GDP jumped from 26% to 41%) thanks to huge tax cuts, but businesses weren't far behind due to the leveraged buyout craze that saw over 2000 leveraged buyouts between 1979 and 1989 (and business debt to GDP from 53% to 66%).

1989 - 1999:

This decade saw continued growth in housing related debt (home mortgages grew from 33% in 1979 to 41% in 1989 to 47% in 1999). On the other hand, businesses and all three segments of the government delevered as there was a Federal budget surplus (seems impossible).

1999 - 2007:

In the next 8 years, the housing bubble was king. Home mortgages grew to 75% of GDP (2.3x the level of 1979) and helped keep consumer debt in check (have credit card debt? Simply take out a home equity loan to pay it down). Businesses once again levered up with cheap financing and a wave of private equity buyouts (business debt grew from 65% of GDP to 76%). The Federal government did continue to delever, as the economy outpaced the growth in the Federal government's debt (though the majority of this was due to a 5% decline in the Federal debt level from 1999 to 2000 (from 39% to 34%).

2007 - 2009:

The financial crisis wiped out a significant share of these debt levels, with home mortgages declining 2.5% and consumer credit a bit less than 1%, though as discussed earlier this was due to default vs. paydowns. The big story of course has been the change in outstanding debt issued by the Federal government (from 36% of GDP to 55% in 2 years!).

Source: Federal Reserve

Update: Changed the title of this post based on a title given to it when linked to by Real Clear Markets... credit, where credit is due


  1. Looks lie the 80's not only had the greatest rock and roll, but the best fiscal situation as well. Next bubble is Federal debt, what happens when that one pops?

  2. oh cmon guys, have faith, this is totally gonna end well. =)