Debt Growth Drives GDP Growth
By Annaly Salvos.
We breathlessly await the release of the next Z.1 from the Federal Reserve on June 10 to check on a number of things, such as the change in the amount of equity in the average American’s home in the first quarter, but we also look to update the graph below, which measures the real rate of growth in credit market debt against the real rate of growth in GDP. It’s a graph we have maintained for some time (thanks, Gary Gordon), and what it shows is something we all intuitively know: In the US, GDP growth and credit creation go hand in hand.
We were reminded of the graph by the release of the new consumer credit numbers yesterday by the Federal Reserve. While the total rose for the first time in three months—by $1 billion in April—the previous month was restated from a $2 billion increase to a $5.4 billion decline. The graph below shows the rise in debt outstanding in the four main categories of the US debt stack—household debt (mainly mortgage debt), financial debt (mainly market-related financing), non-financial debt (mainly corporate debt) and government debt (both federal and state & local). The legend in the graph gives the latest data point for each. For government debt, the total is comprised of $7.8 trillion in Federal debt and $2.4 trillion in state & local government debt
There has been a dip in debt outstanding for most of the US debt stack. The busy graph below gives the year-over-year growth rates in each category. Let us help you cut through the clutter of the spaghetti strands of lines to the main point of this mini-essay: the only part of the US debt stack that is growing is government debt. Breaking down the government portion, the Federal debt is growing 22.7% and state & local is growing 4.8%. Year-over-year Federal debt growth has averaged 28.2% over the last 5 quarters. In a private-sector deleveraging like we are experiencing, growth slows and the government tries to pick up the slack. Obviously, this policy has its consequences…