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Where Is The Debt? A Breakdown Of U.S. Debt To GDP

Dec 17, 2021


Executive Summary

  • The 2008 crisis was characterized by excessive debt in the single-family home market and the financial sector.

  • Since the last major crisis, the single-family home market and the financial sector have deleveraged.

  • The total public and private debt burden have accumulated in the government sector and several other segments of the economy.

  • Aggregate debt levels are beyond well-documented thresholds and will drain economic growth in the years ahead.


Where Is The Debt? A Breakdown Of U.S. Debt To GDP

The 2008 financial crisis was characterized by excessive leverage, primarily in the single-family home market and the financial sector.

In Q1 2007, total public and private debt was 345% of US GDP.

Today, as of Q3 2021, total public and private debt stands at 372% of GDP, but the composition has radically changed.

Politicians and governing agencies often fight the last war, regulating and supervising the areas of the economy that led to the last crisis.

In this post, we'll look at the four main sectors of the economy, including the household, non-financial business, financial and government sector, and the relative indebtedness, measured as a percentage of total GDP.

Debt to GDP ratios are the most heavily researched and proven way to measure relative indebtedness, more effective than debt service ratios which can be misleading and are comparatively unsupported by academic research.

When appropriate, we'll also look at various "thresholds" of indebtedness outlined across multiple research studies, including a BIS paper titled "The Real Effects of Debt," published by Cecchetti, Mohanty, and Zampolli.

In total, aggregate indebtedness continues to worsen in the public and private sector or the more narrow domestic non-financial sector.

This increasingly large debt burden will continue to act as a draining force on real economic growth and will only be supported by a continued reduction in benchmark Treasury rates.

Aggregate Debt to GDP Ratios

Total public and private debt in the United States stands at 372% of US GDP.

The COVID crisis pushed the level of indebtedness to a new peak, over 400%, but this spike was mainly a result of a fall in the denominator of the equation. As GDP recovered in the quarters after the initial economic lockdown, the ratio fell but still sits almost 30% higher relative to the start of the crisis.

Domestic non-financial debt, a summation of the debt in the federal government, state & local government, household, and business sector, sits at 275% of GDP, about 25% higher than Q4 2019.

The private sector has deleveraged since the 2008 crisis as the financial sector and household sector suffered heavy losses, but the indebtedness is 230% of GDP compared to 223% before the COVID crisis.

In the sections that follow, we'll take a closer look at the debt levels in the household, business, financial, and government sectors.

Household Sector

The household sector holds debt equal to roughly 75% of total GDP. Household debt primarily consists of 1-4 family mortgage debt and consumer debt.

The BIS paper, "The Real Effects of Debt," outlines a threshold at roughly 85% of GDP, a level at which more debt leads to worse outcomes. The shaded red area does not come from the research paper but rather is my personal range as these thresholds are not exact figures but rather rough ranges.

All the deleveraging in the household sector has come via a reduction in 1-4 family mortgage debt, falling from over 70% to roughly 53% today.

While the household sector has deleveraged, which is a net positive, the blend of debt has worsened.

Consumer debt is a mix that consists primarily of credit card loans, student loans, and auto loans, three forms of credit that are generally more toxic than mortgage debt which is often linked to an appreciating asset.

Overall, the household sector is in better shape than in the days leading up to the 2008 housing crisis, but we should be mindful that households are carrying a very high level of consumer credit in exchange for lower levels of single-family home debt.

Non-financial Business Sector

While the household sector has deleveraged since the 2008 crisis, the non-financial business sector has taken the baton and increased debt to roughly 78% of GDP.

The threshold for the business sector is estimated to be roughly 90% of GDP, a level that was breached during the COVID crisis.

It is not wise to push these debt levels into and through the problematic ranges, so any increase in indebtedness over the coming years will pose risks to the non-financial business sector.

If we dig deeper, we can see that most of the mortgage debt, excluding single-family homes, is held in the non-financial business sector, which includes multifamily (apartment) debt and commercial mortgage debt.

After the 2008 crisis, lending standards in the single-family home market tightened, and a deleveraging occurred.

However, a large share of the economic growth in the post-2008 period came from robust apartment construction, as illustrated by the level of multifamily mortgage debt to GDP.

Commercial mortgage debt declined in the post-2008 period and has remained roughly stable. Commercial mortgage debt includes office buildings, retail stores, industrial facilities, and more.

The non-financial business sector has significantly increased leverage in the post-2008 period, and multifamily mortgage debt is one of the main drivers.

Financial Sector

Debt in the financial sector increased beyond 100% of GDP in the years leading up to the financial crisis.

Through stringent banking regulations imposed after the crisis, leverage has declined to roughly 75%.

The US banking sector is unlikely to be a significant source of stress in the years ahead, particularly if the general trend of deleveraging continues.

Government Sector

Most of the increased indebtedness in the post-2008 period has come in the government sector.

There is a threshold in the government sector of roughly 85% of GDP, outlined in the BIS paper and numerous other academic studies across many countries.

The Federal government is the source of the problem, with debt exceeding 100% of GDP.

The Federal government has been covering for the State & Local government, which has seen debt drop to roughly 14% of GDP.

Government debt will continue to be a major problem for the US economy as current Social Security and Medicare laws, coupled with an aging population, ensure more federal spending.

This should not be taken as a call for a sovereign debt crisis or a coming spike in US interest rates - actually quite the opposite.

As the level of debt in the government sector increases, resources are being diverted from the productive (private) economy through the unproductive (government) economy.

This reshuffling of resources reduces overall productivity, starves the economy of capital deepening, and reduces the rate of real economic growth.

Lower levels of real economic growth require ever-lower interest rates to prevent a deleveraging and a negative economic spiral leading to a reduction in employment.


Aggregate debt in the economy continues to increase, but the household sector and financial sector are not to blame this time.

Households are still struggling despite a meaningful deleveraging because the blend of debt has shifted towards consumer debt which is more problematic.

Most of the increased leverage in the post-2008 economy comes from the non-financial business and government sectors.

A lot of economic growth in the post-2008 economy has come from apartment construction, and this could become problematic as the non-financial business sector is brushing up against the threshold of diminishing returns.

While not outlined in the BIS paper, if we take the rough thresholds from the three domestic non-financial sectors, we can imply a rough threshold in the 250%-270% range, which means that increasing debt in any sector is unlikely to yield positive results going forward.

This increasingly large debt burden will continue to act as a draining force on real economic growth and will only be supported by a continued reduction in benchmark Treasury rates.



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