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November 05, 2007

Your World in Charts: Debtor Nation

Via Justin Fox comes this revealing chart:


Fox goes on to post another chart showing that, historically, the amount were paying to service our debt is not, as a percentage of national income, all that bad. But as he points out, the people with the national income (hint!) and the people with the debt are not, in fact, the same people.

November 5, 2007 in Charts | Permalink


The graph seems to track interest rates pretty closely. Flat in the 1970s when rates were high. Steepening in the '80s and '90s as they came down. Then shooting up with the cheap money of the early 2000s.

Posted by: Spike | Nov 5, 2007 9:46:24 AM

This is tricky. I am a very big saver but because of out system that that creates continual inflation I ended up with lower net worth that my brothers who spent every penny that they could. They always bought the biggest more expensive homes that they could finance. I always lived well under me means, even when I was making $12,000/year. It comes to the question of what is saving. All payments to capital on longer term assets are savings especially if inflation continues. Think about it, insulation for a home is saving, a home is savings, stocks are savings, a new more efficient air conditioner is saving etc.

Posted by: Floccina | Nov 5, 2007 10:34:38 AM

Historically, Floccina, one can save by investing in securities that, very conservatively invested, will earn 2-3% above inflation, and only if invested in moderate ways will make 5-8% above inflation. The value of savings at 5% above inflation will double in 14 years -- that same money invested in an air conditioner will be gone, indeed will have to be replaced. There is some risk in such saving, but if the aim is long term gain, there hasn't been much.

Posted by: David in NY | Nov 5, 2007 11:16:30 AM

Doesn't that track pretty close to home ownership as well? Residental fixed assets increased from 306 Billion in 1952 to 15,150 Billion in 2006. If consumers assets are gorwwing at a greater pace then the debt it's a good thing. Hopefully instead of saving money to buy a car you take advantage of that 0% or low APR put the cash in an IRA and come out way ahead.

Posted by: Nate O | Nov 5, 2007 11:28:25 AM

Now that the boost to household income from refinancing the house to take out cash for creature comforts has become impossible, folks are turning to their credit cards to supplement income (and credit card debt is booming). Gotcha: most credit card debt cannot be written off in bankruptcy anymore.

That which isn't sustainable will not be sustained (can't find the exact quote).

Old song, revised:

You load sixteen tons, what do you get?
Another day older and deeper in debt
Saint Peter don't you call me 'cause I can't go
I owe my soul to the company store VISAcard whore.

Posted by: JimPortlandOR | Nov 5, 2007 11:35:49 AM

Generally, it's a good thing to put all your spare assets in high-return (or otherwise favored) investment vehicles first and pay off your debts afterwards.

It's why I know people who make more than 100k/yr who still make the minimum payment on their student loans: they're dumping all the money they can into their 401(k).

Contra Nate O, however, it's a bad idea to borrow money to buy a car because a car is a depreciating asset. You're underwater on the car loan the instant you drive it off the lot. I prefer to keep my older car in working order and make a "monthly payment" into a high-interest account. In short, I pay myself rather than pay a bank for the privilege of (eventually) having a new car.

Also, we have to consider the issue of credit card debt in all of this-- a high-interest form of debt that does not add any value to the debtor's earning prospects and carries an interest rate much higher than one could get on any investments.

Posted by: Tyro | Nov 5, 2007 11:42:45 AM

I disagree on the credit card debt, it takes work but it can be managed so it is very attractive. I know people that borrow on their credit cards, buy CDs with the cash and come out ahead. I have credit card offers every month for 3.99% for 6-12 months or 7.99 till it is paid off. Compare that to the 16% interest 2nds on some of my investment properities and I'm further ahead putting the debt on Credit Cards then keeping the mortgage.

If you can borrow 50K at 3.99 and buy a CD paying 6 that's 2% profit, $1000 is a $1000 specially if it comes with no risk.

On cars your always better off driving a cr with no payment or one bought by a sugamama but absent that the 0% APR is a better deal if you invest the money you would have paid upfront. In fact I have taken out car loans specifically to invest the money. If someone will loan you 10K secured by your car at 7% and you can invest it making 12% your further ahead.

Posted by: Nate O | Nov 5, 2007 12:27:08 PM

I've been busy and am too tired now to google: What happened in 1986? Did Reagan deregulate the credit card industry or something like that? The graph looks like going into debt became increasingly popular in '85 or'86...

Posted by: Gray | Nov 5, 2007 12:27:49 PM

Thats when apple starting selling the Mac, the entire increase in debt charts perfectly to Apple's revenue. As long as we allow Jobs to market Ipods and Iphones and what ever other ingenous ideas are floating in his head debt will contime to rise. We are humans we can't possiblly expect to resist those shiny gadgets of lust.

Posted by: Nate O | Nov 5, 2007 1:13:19 PM

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