READER: Here's Why That Chart Showing Debt Going Down Is A Total Lie

Yesterday we posted a chart showing that debt-to-GDP — contra what most people think — has actually fallen.

The key is that the chart showed total, societal debt to GDP… not just government debt to GDP. And really, there’s no reason at all to focus narrowly on government debt.

Reader Hannes Kunz of the Institute for Integrated Economic Research in Switzerland writes in to argue that progress is a total lie.

I saw this chart ( and compared with Flow of Funds data from the Fed, doesn’t make sense…. For many reasons (the attached graph might illustrate that):

 1)      The data includes financial services debt, which is only intermediary debt, i.e. it cancels out when paid back. When excluding it, things look different (pre-crisis level in Q2/2008: 225% of GDP, Q2/2011: 242% of GDP).

2)      The “decrease” is largely an artifact, even when including financial services. Due to shrinking GDP in late 2008 and early 2009, debt relative to GDP shot up, and with the partial recovery, it eased again (total debt including financial services: Q2/2008: 340% of GDP, Q1/2011: 336% of GDP)

3)      When including the latest participant in “financial services” – the Federal Reserve holding marketable securities – total debt (including financial services) actually stands higher than before the crisis (Q2/2008: 340% of GDP, Q1/2011: 345% of GDP)

 And yes, your second warning is right – deleveraging has a long way to go – our computer models clearly say that anything above 200% (excluding financial debt) is unsustainable. And for that, one would have to add intergovernmental debt($4.6 tn), which raises total (non-financial) debt levels to 273%. That’s solid “Great Depression” territory, and the only reason why no deleveraging happens is that more than 2/3 of it are held or guaranteed by the government in the form of direct government debt and indirectly guaranteed mortgage, education loans.

This points are valid, but we’ll note one main thing. No matter how you slice it, debt-to-GDP has basically stopped growing for the first time in ages. Even the debt excluding financial services has flatlined.


Photo: Institute for Integrated Economic Research

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