Twin Peaks: Average Household Debt vs. GDP
March 13, 2009 § 3 Comments
Alex Blumberg: I talked to a guy who has something to say to people who want to pin this whole thing on banks. I talked to David Beim at Columbia Business School. He’s in his office showing me a graph showing how much debt we the citizens of America are in — how much we all owe on our mortgages and credit cards compared to the economy as a whole, the GDP. For most of American history it was below 50%. And then…
David Beim: From 2000 to 2008, it goes like almost a hockey stick. It goes dramatically upward like a rocket. It’s 100% of GDP. That is to say, currently consumers owe $13 trillion when the GDP is $13 trillion. That 100% of GDP owed by individuals. That is a ton.
Alex Blumberg: I’m going to ask you a leading question because I’m looking at the graph right now. Tell me, professor, has there ever been a time in history when we’ve owed that much before?
David Beim: I’m glad you asked me that. And guess what! The earlier peak way off on the left part of the chart is 100% of GDP in 1929. This is a map of twin peaks. One in 1929. One in 2007.
Alex Blumberg: Does that chart scare you?
David Beim: Yes! That chart is the most striking piece of evidence I have that what is happening to us is something that goes way beyond toxic assets in banks. It’s something that has little to do with the mechanics of mortgage securitization or ethics on Wall Street or anything else. It says the problem is us. The problem is not the banks, greedy though they may be, overpaid though they may be. The problem is us. We have overborrowed. We’ve been living very high on the hog. Our standard of living has been rising dramatically in the last 25 years and we have been borrowing much of the money needed to make that prosperity happen.
Alex Blumberg: In other words, the problem the banks are facing is the problem we as a society are facing. We all have too much debt. Getting rid of it is going to be painful.