Wednesday, November 9, 2011

Our Ability to Pay Interest v.2

This is a continuation of a previous post with the data presented in a different way.

Click to enlarge.

The chart compares the yield of the 10-year Treasury to that of the total debt (total credit market debt owed) to GDP ratio.

It would seem to be a good idea to stay below the red trend line whenever possible. We had no problem doing that before the 1980s. It was trivial. It has been more difficult in recent years. Here's some good news. If Japan is any indicator, it is amazing how much we can borrow if the interest rates are low enough. As of today, the 10-year Treasury yields just 2.00% . That's well below the trend line.

It would also seem to be a good idea to stop moving to the right on the chart. We've actually done that and it is giving us some breathing room. Let's just hope we don't have another recession shortly that would undo some of this good work.

September 30, 2011
U.S. Economy Tipping into Recession

It’s important to understand that recession doesn’t mean a bad economy – we’ve had that for years now. It means an economy that keeps worsening, because it’s locked into a vicious cycle. It means that the jobless rate, already above 9%, will go much higher, and the federal budget deficit, already above a trillion dollars, will soar.

Here’s what ECRI’s recession call really says: if you think this is a bad economy, you haven’t seen anything yet. And that has profound implications for both Main Street and Wall Street.

Source Data:
St. Louis Fed: GDP
St. Louis Fed: Total Credit Market Debt Owed
St. Louis Fed: 10-Year Treasury


Troy said... is an interesting chart that breaks it down by sector -- corporate debt (red) then finance (yellow) got a boost in the late 1990s and then households (blue) got going.

Corporate debt take-on faded with the dot com bust but households just picked up speed, peaking at $1.2T+ per year of debt take-on in 2006.

With the revived consumer, corporations were also able to get back into the debt game.

Then when the home ATM failed everything collapsed, except governments (cyan) became the borrower of last resort.

(I wish CR would do more analytical charts like this, I feel like a voice in the wilderness on this)

tj and the bear said...

What, we can't handle bond rates like those facing the PIIGS? ;-)

Being the least worst option has it's benefits, but even those aren't infinite. When we fail, it'll definitely be EPIC!

AllanF said...

Hey Mark,

If you haven't seen it yet, Barry R, has finally caught up with you:


Stagflationary Mark said...


...I feel like a voice in the wilderness on this...

If future generations are to remember us with gratitude rather than contempt, we must leave them something more than the miracles of technology. We must leave them a glimpse of the world as it was in the beginning, not just after we got through with it. — President Lyndon B. Johnson, on the signing of the Wilderness Act of 1964

Behold the era of financial contempt.

Stagflationary Mark said...

tj and the bear,

What, we can't handle bond rates like those facing the PIIGS? ;-)

For 200 years we were able to handle higher bond rates if we so desired. Surely all we need to do is get a better rear view mirror. I joke!! ;)

Stagflationary Mark said...


I feel a bit like Bruce Willis in Die Hard!


"Hey babe, I negotiate million dollar deals for breakfast. I think I can handle this Eurotrash."

If Die Hard is any indicator, never get complacent with the Eurotrash! ;)