Archive

Tag Archives: Debt

When analyzing debt and economic growth, usually only government debts are examined. They are seen as a corollary to economic crises, devaluation of currencies, and government defaults — and while I’m not going to dispute or discuss these claims here in this post, perhaps on a later day, I will say that they are misleading trends of analyses in relation to the current financial crisis. There is another ‘kind’ of debt that is up for discussion and more pertinent to the crisis of 2007 — credit market debt, which consists of domestic non-financial sectors (household debt, business/corporate debt, and government debt) and domestic financial sector debt.

This explosion of credit began around the time of the institution of ‘Reaganomics,’ where individuals took to lending and spending over saving despite stagnant wages. 

A more detailed look of the trend since 2002, with its peak. The shaded area depicts the length of the recession.

However, the above graphs show the total credit market debt. Broken down, household (consumer) credit debt depicts the same trend.

What does all this mean? Fundamentally, this means that the expansive economic growth of the previous three decades were on shaky footing to begin with, likely leading to the global economic collapse that followed. The impact of the credit boom since the 1980s is described in an article by the research institute Center for American Progress (CAP) by Christian E. Weller. He writes:

“The debt is highest among the middle class. Middle-income families before the crisis had a debt-to-income ratio of 155.4 percent in 2007, the last year for which data are available, for families with incomes between $62,000 and $100,000, which constituted the fourth quintile of income in our nation in 2007. This ratio is higher than for any other income group. Families in the top 20 percent of income (with incomes above $100,000) had a ratio of debt to income of 123.6 percent, and families in the third quintile (with incomes between $39,100 and $62,000) owed 130.7 percent of their income. Households in the bottom 40 percent of the income distribution (with incomes below $39,100 in 2007) owed well below 100 percent of their income.”

Shocking as it is, this is the not the first time such a credit upsurge occurred. There was a similar phenomenon that occurred before the Great Depression of the 30s. Samuel Brittan, in his review of Richard Duncan’s ‘The New Depression: The Breakdown of the Paper Money Economy,’ writes:

“It is certainly striking how both the 1929 Wall Street crash and the 2007-08 financial crisis were preceded by a huge credit explosion. Credit market debt as proportion of US gross domestic product jumped from about 160 per cent in the mid-1920s to 260 per cent in 1929-30. It then fell sharply in the 1930s to its original position. Later it surged ahead in two upswings after 1980 to reach 350 per cent of GDP in 2008.

 

This analysis of crises in relation to credit market debt is attributed to economist Irving Fisher, and his ideas were largely ignored in favor of mainstream Keynesian view of economic crises, which argued that they were caused by an insufficiency of aggregate demand. Since the recent economic crash of 2007, Fisher’s ideas have enjoyed a resurgence in economic thought. His theory on debt deflation has been of significant fascination in the heterodox Post-Keynesian school of economics, and is now beginning to enter the mainstream. Economist Paul Krugman discusses Fisher’s ideas in one of his posts on his blog “Conscious of a Liberal” in the NY Times — below is the graphic taken from the article (with added information).        

Since the total credit market debt owed has been stagnant since late 2009, reaching its ‘peak,’ and if GDP steadily keeps rising, it is likely that debt deflation will occur all the same as it did during the Great Depression. However, the issue of private debt and its hindrance on the consumer is still an issue — and if spending is ever to increase significantly, the issue of wages and consumer debt must be addressed.

***

– An analysis of the total credit market debt by Crestmont Research.

The United States has grown economically, for the most part, throughout all of its history. And for much of its history, this growth was accompanied by corresponding increases in real wagesIt was assumed that with economic growth, the purchasing power of your wage for all your hard work would pay off and it would increase with time; it was part of the American Dream.

Ever since the 60s, real wages have remained mostly stagnant  – even taking a downward trend in the past year. Although maybe our nominal wages have increased, our real wages have remained the same and even more alarming the purchasing power of income has plummeted. Even worse so, the price of food and energy has gone up in recent years and we’re still working the same amount of hours, sometimes more. Where is the improvement and, most importantly, why is the middle class shrinking? Although all this issues would usually mean a rise in unionization amongst workers and rallies to demand for higher wages/benefits and perhaps more equal distribution of wealth, as happened during the Great Depression and the 1910s, union membership has actually paradoxically decreased in the last 50 years.The Bureau of Labor Statistics reports that only 6.9% of workers in the private sector are union members.

Although I’ve oftentimes heard the right demonize unions as dangerous to the delicate fabric of a free market, and oftentimes advocate enacting legislation to curb their power, there is no question the decrease in union membership has had a direct effect on the concentration of wealth in the United States and the middle class share of aggregate income. Here is are the results that were found by Karla Waters and David Madland of the at the Center for American Progress (CAP):
Now, before I get to the credit illusion, which is likely the culprit, first we have to dispel a few arguments against the stagnation of real wages in the United States – three of them specifically I want to talk about.
Q: Well, maybe workers’ productivity has not increased and their real wages are a direct result of a stagnation in their output? This cannot be true, hourly outputs per workers have actually been steadily increasingThis is based on information from the Bureau of Labor Statistics and Bureau of Economic Analysis; there is indeed a growing gap between output and real wages:
Q: The average income per household has gone up, isn’t that inconsistent in the stagnation of real wages? 
No, it is not. The Second Wave of feminism, which started in the early 60s, brought many more women to the workforce. It’s not that the workers are bringing more real income home, it’s that more people are working in the household. In an article in the journal article by Rebecca A. Clay of the American Psychological Association:

In 1940, according to the Employment Policy Foundation’s Center for Work and Family Balance, 66 percent of working households consisted of single-earner married couples. By 2000, that percentage had dropped to less than 25 percent. By 2030, the center estimates, a mere 17 percent of households will conform to the traditional “Ozzie and Harriet” model.

It is this phenomenon that has caused an increase in average income per household – there are now many more new sources income per family, but that doesn’t necessarily tell us anything about the average real wage for each individual bringing it home.

Q: You are not adding benefits to the real wage. The Bureau of Labor statistics has shown there has been a upward trend in real compensation per hour since the 1940s. Does this not explain the stagnation of wages?

It is true there has been a steady increase of real compensation (wages + benefits) per hour, below is a graph taken from the Bureau of Labor Statistics;

However, we have to look at this data with the increase in workers’ output rather than by itself. Since the year 2000, there has been especially a disconnect between real compensation per hour and output.
But this disconnect in average hourly compensation and productivity started far before the 00s; it actually began in the late 70s and got progressively worse since the Reagan years. Below is a graph from the Economic Policy Institute;
And although this graph does not show the growing gap between productivity and average hourly compensation since ’07, it has gotten much worse since then. So yes, average hourly compensation has been increasing but not as nearly as the same rate as productivity has.
————————————————————————————————————————————-
Now, for the topic of this post which may actually be shorter than the background information; Why aren’t the workers mobilizing and demanding higher wages as they did in the first half of the 20th century? There are many reasons; one being the destruction of unionism during the Reagan years and another being the of spending money you don’t actually have; the illusion of credit. Ever since real wages have become stagnant and the sharp decline of unionization in the 80s, there has been a sharp increase in household debt in the United States, which actually dissuades workers from demanding higher wages in some respects. It is this exploitative dichotomy that has kept corporate profits high and wages low; all in the guise of “buy now, pay later!” and ‘economic growth.
Below is a graph of household debt versus persona savings taken from ‘The Basis Point,’ a blog by mortgage banker Julian Hebron:
Why is the middle class shrinking and being anesthetized by credit? It is this type of behavior that drives society outside of its means and gives it working class families the false perception that their wages are increases; maybe nominally they are, which is deceptive in itself, but the main hurdle we must overcome is realizing the distraction of mass consumption by credit going forward. This requires questioning this entire system which has, for the most part, become based on credit and money yet to be paid. I highly fear the collapse of this ‘credit culture’ and the shaky foundation it is built on; And perhaps worst of all, we are unjustly condemning future posterity to debt bondage. What happened during the crisis of 2008 we may find to become a staple in the modern 21st century economic model; and since debt wasn’t properly liquidated, worse may be yet to come. The functionality of such an illusionary market method I am highly skeptical of, and its outcome will most definitely hurt the current mainstream liberal capitalist model.
Neotenianos

A Blog about Propaganda

YesterYear Once More

Life as it was reported back then

Victor Serge's Ghost

"One must range oneself actively against everything that diminishes man, and involve oneself in all struggles which tend to liberate and enlarge him"

Collecting Russian Art

20th century Russian art and its uniqueness

Communist League Tampa

proletarians of the world, unite!

Mosul Eye

To Put Mosul on the Global Map

Uglytruth-Thailand

Thai politics

Yanis Varoufakis

THOUGHTS FOR THE POST-2008 WORLD

Fractal Ontology

refracting theory: politics, cybernetics, philosophy

Russia Without BS

How am I still doing this?

The Disorder Of Things

For the Relentless Criticism of All Existing Conditions Since 2010

United States Hypocrisy

A critical analysis of the American empire's high-minded rhetoric, and the ways in which it fails to square with reality.

Valentino's blog

A blog about visual arts (well, mostly...)

synthetic zerØ

aequilibrium movere

rheomode

..............................the research base of jon goodbun

Paths to Utopia

scattered reflections on politics for our time

Evvycology

It's Evelyn, It's Ecology, all in one convenient package

John Riddell

MARXIST ESSAYS AND COMMENTARY

Idiot Joy Showland

This is why I hate intellectuals

All that is Solid for Glenn Rikowski

All that is Solid ... is a radical blog that seeks to promote a future beyond capital's social universe. "All that is solid melts into air" (Karl Marx and Friedrich Engels, 'The Communist Manifesto', 1848).

Symptomatic Commentary

Notes, Interviews, and Commentary on Art, Education, Poetics, and Culture

The View East

Central and Eastern Europe, Past and Present.

IRRUSSIANALITY

Russia, the West, and the world

Uneven And Combined Development

theorising the international

Bezbozhnik - безбожник

On anti-religious propaganda in the early USSR, with some disgressions on the Russian Soul.

Nationalism Studies

Monitoring the Changing World

Old Woman on a Bicycle

My Photography, Mostly

Sráid Marx

An Irish Marxist Blog

SIMON BRIERCLIFFE

Historian and geographer, writer and researcher

Pedagogy & the Inhumanities

Pedagogic nihilism fights a windmill battle against international capital

Peter Marcuse's Blog

Critical planning and other thoughts

communists in situ

leberwurst proletariat

People and Nature

Some socialist ideas about society, the earth and their interaction

Clio Ancient Art & Antiquities

Exploring the world of antiquities dealing, collecting, heritage issues and a bit of archaeological travel

Posthegemony

Something always escapes!

New Historical Express

(Formerly Hatful of History)

RedneckRevolt Blog

Dave Strano | Anti-fascist | Anti-racist | Gunslinger

Words As Intervention

Anthropological Reflections