The above chart shows the borrowing rate as a percentage of GDP for government (federal, state and local), the private sector, and the total of the two from 2003 to Q3 2009. Last quarter it was unclear whether the rate of private sector debt reduction would keep increasing or stabilize, and for now it has stabilized (actually a slight decrease, with the trend unclear). The result is that the rate of total borrowing has stayed between -1% and -3% of GDP for the first three quarters of 2009. Some thoughts on the details:
- Steve Keen often discusses the "debt contribution to demand", i.e., borrowing adds to total demand and reducing debt subtracts from it. This stabilization in the rate of total borrowing (and its associated spending) since Q1 likely is one of the larger factors in the stabilization of GDP in Q2 and Q3 from a state of freefall (see graph on right). But see the following caveat on how this conclusion could be flawed.
- This data is a somewhat crude proxy for debt's contribution to demand in the sense that some government borrowing (e.g., TARP) goes to propping up balance sheets rather than supporting spending on goods and services and thus incomes. Similarly, private debt contraction is still dominated by the financial sector, the debt of which likely has a less direct correlation to GDP-related spending than does household credit, for example. Perhaps I will try separating these in a later post, but it may not be feasible to do well.
- One of the reasons why treasuries have no trouble finding buyers (more details in posts here and here) is that in a balance sheet recession, public debt simply fills the "hole" left by disappearing private sector debt.
Evaluation of these debt trends is complicated by the huge size of both financial sector and Federal government changes in borrowing relative to other sectors:
Mortgage debt and consumer credit are being reduced (these are typically cited symptoms of attempted deleveraging) but they are dwarfed in absolute terms by the debt reduction of the financial sector, at least so far. In relative terms (debt reduction relative to stock of existing debt of that type) the rates are slightly closer: as of Q3 around -9% for the financial sector, -4% for home mortgage debt, and -3% for consumer credit. This chart shows the annualized rates by sector:
And here is the first chart of borrowing by sector on a longer time line, 1974 to Q3 2009: