January 23, 2008

Is the Amazing US Debt Productivity Decline Coming to a

Bad End?
By Ron Robins, MBA

From my blog: Enlightened Economics

For decades, each dollar of new debt has created increasingly less and less
national income and economic activity. With this ‘debt productivity decline,’ new
evidence suggests we could be near the end-game in this economic cycle.
American collective consciousness will need to change to accept the new reality.

Getting less and less economic benefit from each dollar of new debt is becoming
an enormous and onerous problem for the US. Quoting Michael Hodges in
his Total America Debt Report, “In 1957 there was $1.86 in debt for each dollar
of net national income, but in 2006 there was $4.60 of debt for each dollar of
national income – up 147%. It also means this extra $2.74 of debt per dollar of
national income produced zilch extra national income. In 2006 alone it took
$6.32 of new debt to produce one dollar of national income.” (Underlining
added.) See his chart below.

Source: Michael Hodges America’s Total Debt Report/financialsense.com

According to Dr. Kurt Richebacher, writing for The Daily Reckoning, US credit
expansion in 2005 was $3,335.9 billion and matched by nominal GDP growth of
$752.8 billion, equalling $4.43 in new debt for each dollar of GDP growth. In
2006 total credit market debt increased $3.9 trillion while nominal GDP
(seasonally adjusted) grew by $686.8 billion showing that it took $5.68 of new
debt for each dollar increase in GDP. What must be noted is that for the thirty
years prior to the late 1970s the credit-to-GDP ratio held steady around 1:1.4.

Exponential debt growth in relation to income and GDP growth stops at some
point. I believe we could be there now. The following chart illustrates that US
household debt service costs as a percentage of disposable income seems to
have reached a plateau at around 14.4%.

Source: www.contraryinvestor.com…

And this chart shows US savings rates at around zero as a percentage of

personal income.
 Source: Michael Hodges America’s Total Debt Report/financialsense.com

These three charts together indicate that US households may already have hit a
‘debt wall.’ That is, with no savings additional new expenditures require
additional debt.

It is no wonder that mortgage foreclosures, auto and credit delinquencies, etc.,

are rising dramatically. Americans have gotten to this point as they sought
fulfillment almost exclusively in the material world around them.

It is possible that the US Federal Reserve and the financial system will continue
to produce ever increasing amounts of debt relative to national income and
GDP. This would only further exacerbate the decline in debt productivity.
However, should this happen, watch out for much higher inflation.

In the years ahead many Americans will need to look more within themselves,
rather than to material goods, to find personal fulfillment.

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© Ron Robins, 2008. Permissions: Provided full credit, which includes title, my name, and link
to this post is given, anyone may print or re-produce this article in part, or in full, to any
relevant web page.