Yesterday the Federal Reserve, seemingly appropriately exactly 5 years since the peak of the tech stock bubble came out with its quarterly flow of funds report . In the section on debt levels we can see that several psychological “landmarks” for debt levels were reached during the fourth quarter of 2004.For example for the first time did:
-Household debt exceed $10 trillion. Actually, we now know that it was exceeded already during the third quarter, but this wasn’t revealed until now when third quarter levels were upwardly revised by $79.1 billion to $10028.3 billion from the $9949.2 billion previously reported. In the fourth quarter it rose an additional 2.35% ( 9.75% at an annual rate, not the 9.4% the Fed claims it is, as it for some reason fails to use the fundamental mathematical compound growth concept ) to $10264.2 billion. This represents a record 116.2% of disposable income (excluding the temporary effect of Microsoft’s extra dividend) and a record 85.6% of GDP.
-[Domestic non-financial] Private sector debt exceed 150% of GDP.
-[Domestic non-financial] Total (Both private sector and government) debt exceed 200% of GDP. Again, because of the upward revisions this level was exceeded already during the third quarter.
Note here also that a narrow definition of federal government debt is used, that is only the debt held by the public. It does not include federal debt held by other government agencies, including the social security trust fund.
-[Domestic] Financial sector debt exceed 100% of GDP. Again, because of the upward revisions of the third quarter number this level was reached already during the third quarter.
The optimistic take on this is that these higher debt levels only reflect higher levels of financial intermediation as Greenspan put it, and they point out that not only is debt levels growing relative to GDP but so is asset values.
But since asset values are ultimately supposed to derive its value from production, it is questionable how sound these increases in asset values are. And unlike debts whose levels are fixed, assets can fall in value as we saw with tech stocks 5 years ago.