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The Deleveraging of America?

By: Jeff Goble

The chart below from Ned Davis Research illustrates the dramatic buildup in total credit market debt dating back to the 1920s and you easily see how out of kilter our debt to gross domestic product ratio is at present. We now have $3.53 in debt per $1 of GDP, down slightly from the $3.85/$1 peak set in 2008.

If you like history, you will probably enjoy this chart as the debt spike on the left side of the chart was caused by FDR’s New Deal projects that helped build the Hoover Dam, the Empire State Building and the Golden Gate Bridge. Many schools in the United States were also built via the Workers Progress Administration projects. In addition, you can see the zigzagging federal debt that occurred a few years later during the WWII war effort in the early 1940s.

There is still much debate on the subject, but many historians make the case that both the New Deal programs in the 1930s and the military buildup leading to WWII contributed to creating jobs that lifted America out of the Great Depression. Other historians have argued that it was more specifically worker confidence that improved so dramatically once people were working again that was responsible for the remarkable economic recovery from the deepest recession in history.

My research shows the invention of the credit card was by John Biggins of the Flatbush National Bank in Brooklyn, N.Y., in 1946. It was not a revolving line of credit like we have today, as local customers and merchants held deposit slips for each other and the bank billed the card user.

The first home equity loan was created in the early 1980s. You can see the incredible buildup of debt that occurred after that point, which stands in sharp contrast to the previous three decades of relatively low and stable debt levels. This mountain of debt is the mortgage bubble, which has obviously burst.

If there is a positive here, you can see in the upper right hand corner of the chart that it looks like the debt has peaked and is now slowly working its way down. The 60-year average debt to GDP ratio, by the way, is approximately 2:1. It took us three decades to build these debt levels, so I do not think we should expect a sudden reversal as using credit is very much part of our culture.
We face tough economic choices now as a nation about debt and as Winston Churchill once said, “Americans can always be counted on to do the right thing … after they have exhausted all other possibilities.”

Let us hope we find the cooperation, courage and confidence needed … soon.

Click chart to view larger version.

Jeff Goble is executive vice president and managing director, investment banking, at UMB Bank, n.a., Kansas City. His email address is Jeffrey.Goble(at)umb.com.

Copyright (c) July 2012 by BankNews Media


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