The Progress of Debt

After I posted this graph, many asked me for the data source:

So, I tried to replicate it, and got close — my data only begins in 1952, but the shape of the graph from there is similar, though the levels are a little lower.


The debt figures came from the Federal Reserve’s Z.1 report, adding the Domestic nonfinancial sectors and Domestic financial sectors data from the D.3 table.  I think I would reproduce the first graph if I added in the foreign debt, but that is money borrowed by foreign institutions from US institutions.  But, that’s not what I am trying to analyze.  I don’t care about the debts of other countries (for this purpose), only that of the US.

This graph tells two stories:

1) Increasing financial intermediation over the last 56 years, with a small over-reported disintermediation in the mid-70s.  (For this purpose, money market funds are intermediaries.)

2) Relatively stable debt levels until the middle of the Reagan Administration, and then a rapid increase over the next 23 years.  The increase was faster for the second term of Reagan, and for Bush, Jr, and slower for Bush, Sr, and Clinton.  That said, the increase in financial intermediation accelerated during the terms of Bush, Sr, and Clinton.  Securitization was running ahead, and no one was questioning it.


From 1984 through 2008, the financial system of the US experienced a quantum leap in terms of size and complexity, which was enabled by regulatory policy and monetary policy.  Monetary policy did not take away the punchbowl, and regulatory policy did not check to see if banks were lending prudently or not.  Both were corrosive in the long term to a fiat currency system in the US.  Both were promoted by politicians, because they accelerated “prosperity” in the US.  Pity that the prosperity was fake in aggregate.

My friend Caroline Baum argues that central banks should fight debt and asset bubbles.  I agree.  Perhaps if central banks should have a dual mandate, it should be to maintain  a certain inflation level (fairly calculated), and a certain debt/GDP ratio, say 150% at maximum.  Ignore labor unemployment, and let people maximize their efforts within a paradigm that would not be given to big booms and busts.

I think this would be a good system, but I am open to comments.