I'm not talking about government debt. I'm talking about the debt of households and firms. And I'm talking long run, not just the last few years. Over the last several decades, the ratio of debt to GDP has increased a lot. Not just in Canada, but in most rich countries, as far as I know. Why?
I don't have a good answer to that question. Or rather, I have several answers, but I don't know if any of them are good answers. I'm not sure if any of the effects I'm talking about are big enough to matter. And I'm not sure if they fit all the facts.
So I'm going to crowd-source the question.
I'm a bit hesitant to do this, because I know that this is one of those questions that excites popular opinion. And sometimes (not always) excited popular opinion just doesn't make sense. SO PLEASE READ THIS BIT FIRST:
Here are two popular "explanations" that don't add up:
1. "Everybody has been borrowing and spending too much!"
To get debt, you need both a borrower and a lender. Demand and supply. If everyone was borrowing and spending more than their income….they couldn't. Because there would be nobody lending and spending less than their income.
2. "The banks created loans out of thin air, and lent too much!"
Now, banks can indeed create money and loans out of thin air. And when they do that, and people spend the money they borrowed, we get an increase in aggregate demand and a short run boom. But we aren't talking about short run booms here, that last a couple of years. We are talking about a long run secular phenomenon that has trended up over decades. In the long run, when the economy is neither in boom or recession, the demand for loans from people who want to spend more than their income must match the supply of loans from those who want to spend less than their income. Banks can create loans out of thin air, but they can't create real saving out of thin air when real income is bolted down to the long run equilibrium trend line.
So, before answering, think about both the supply and the demand side.
Here are my "explanations", for what they are worth. I think they make theoretical sense, and are not obviously wrong, but I wouldn't claim any more than that.
1. Demographics. Globally, people are living longer, and expect to retire before they die. They want to save for their retirement. Plus, there have been a wave of boomers in many countries (with different dates). Young adults want to borrow to invest in education, houses, kids, cars, etc.. Maybe, just maybe, the world population has had an increasing proportion of people both in the big lending years and in the big borrowing years. So both supply and demand for debt increased, with interest rates adjusting to make up any small differences.
2. Growth of pension plans. Suppose you don't have a pension plan. You save to buy your own investments, like house and land and business, which you can use to finance your retirement. There's no debt. If you do have a pension plan, all your savings go into the pension plan, and you borrow (from someone's pension plan) to buy your house and land and business. So there's debt. Pension plans create intermediation where before there used to be self-financed investments. This caused both the supply and the demand curves for debt to increase.
3. Falling transactions costs. Financial intermediation has gotten more "efficient" over time. The supply and demand curves for debt didn't shift, but it's hard for lenders and borrowers to do a deal. There are "transactions costs" to borrowing and lending, that create a wedge between the supply and demand curves. Over time, those transactions costs have gotten smaller, so the equilibrium quantity of loans has increased. It's just like when a reduction in transport costs brings more buyers and sellers together even for the same supply and demand.
4. The Great Moderation/Minsky. Over time, risks of unexpected inflation or deflation, and risks of booms and busts, and financial crises, and political and legal risks, have become smaller. So it's been perceived as safer to borrow and safer to lend. So both the supply and the demand for loans increased.
I don't really find any of those explanations especially convincing.
Remember, it's demand and supply. And if you shift only one curve, remember what should happen to interest rates?
Anyone got good graphs, showing private debt/income ratios back over several decades? (Canada good, but any countries good too.) I know I've seen them, and it's doubled or trebled or quadrupled or more since the 1950's. But I've forgotten where. Thanks.
Worthwhile Canadian Initiative 
FDI? Consumption loans from China depressing real rates?
I might casually tell a story where:
(1) the rise of China (and maybe BRICs/EMs more generally) as an exporting power with a huge current account surplus to invest provided the supply side, and the demand side is relatively straightforwardly taken care of by your first popular explanation, and/or
(2) increasing wealth inequality in the rich world has created both supply (there are now more people with more money than they know what to do with) and demand (there are now more people with less money than they need to keep up with popular perceptions of how much stuff is the right amount of stuff – popular perceptions that are perhaps driven by the conspicuous consumption of the very wealthy).
Both of these are pop-y explanations that are probably better as stories than as statistics but I find them intuitively compelling as a first cut.
I have trouble buying the ‘it’s China’ story. This is a trend going back to at least the 70s, well before China emerged on the world scene. Now, I suppose, you could tell a ‘it’s Japan’ story…
K: If China is part of the story, it’s presumably just one example of the global demographics story, along with many other countries. I think China is too small, and too recent, for a “China only” explanation to make sense. We don’t all have big capital account deficits like the US. And lots of other countries have capital account surpluses like China, or bigger. The world doesn’t seem to be China + US. And even the China + US story is very recent.
OK, agreed. Then the big one, of course: Massively increased publicly insured risk taking post Glass-Steagal and other “de-regulation”. Why wouldn’t you borrow?
Don’t you get part of the answer by looking at household net worth over the same time?
It’s now dated, but this chart showed a rapid growth in household assets (both financial and non-financial) over the course of the 1990’s and early 2000s (http://www.statcan.gc.ca/pub/13-605-x/2003001/chrono/2004net/index-eng.htm). Certainly on the demand side, you’d expect individuals with assets that are increasing in value, particularly where those assets that are generally not terribly liquid (housing, pension plans, RRSPs), to borrow more (or save less, which amounts to the same thing) to smooth their consumption over time. And you’d expect that, all else being equal, increasingly wealthy borrowers would be seen as better credit risks.
On the supply side, I suppose you could tell a story about the rise of China and India and larger pools of savings from those countries. I also wonder if you couldn’t tell a story, at least in the 1990’s and early 2000s, about decreasing borrowing by governments (remember all those stories about how repaying the US national debt would leave savers in the lurch – ah, the good old days), leading to an increased supply of debt for private borrowers. Certainly part of the explanation for the rise of the asset backed commercial paper market (which, indirectly, financed a fair bit of consumer spending) was that they could offer “good” (and puportedly safe) returns in an environment where the yields on government debt were low.
Stuff.
A firm produces stuff – a T.V., a car, a cell phone, some shoes – and then offers the consumer the following contract:
– firm gives consumer $1,000 of stuff
– consumer promises to pay firm $1,000 over the new few weeks/months/years.
Debt has been created without any corresponding increase in household savings. The firm has “saved”, I suppose, if creating stuff and foisting it onto consumers is counted as savings (technically, that would be how it would appear on the firm’s balance sheet “accounts receivable” is an asset).
I remember seeing once a chart showing how household debt rose every time some new way of buying stuff on credit was introduced – rent to own, credit cards, etc.
The flip side of this is China, where one needs to save great wads of cash to buy a house and – especially – there is inadequate public pension and especially health care provision. So people save in the anticipation of having to pay for stuff in the future with cash.
And why do firms want to foist stuff on consumers? Increasing returns to scale + imperfect competition, so price>marginal cost and selling more generates profits.
Hi Nick,
My guess is that a long term chart of household debt to GDP would show a consistent uptrend over decades, maybe even centuries.
But I’d be curious to know how much of the increase in the long-term ratio of debt-to-GDP is an outright increase, and how much is just a displacement of informal debt relations (loans from family and friends, lines of credit at the local grocer, advances from the local loan shark) by formal debt relations (bank and credit card loans), the latter of which are much more readily transcribed into statistics while the former are not so easily measured.
I concur with Frances – I would put the bulk of it at financial innovation.
Nick,
while I think all of the above is partly correct. A couple of points:
“In the long run, when the economy is neither in boom or recession, the demand for loans from people who want to spend more than their income must match the supply of loans from those who want to spend less than their income. Banks can create loans out of thin air, but they can’t create real saving out of thin air when real income is bolted down to the long run equilibrium trend line.”
I wonder if the word “people” there is misleading and that banks are not just pure intermediaries.
Frances: Hang on. Ignoring government, and ignoring net exports (if this is a global phenomenon, S=I. If some households are saving less (to buy stuff) then either other households are saving more (buying less stuff) or there’s less investment. AFAIK, there hasn’t been a secular fall in investment rates big enough. And if there were a fall in the capital stock/GDP ratio, that would presumably mean less corporate debt.
I have to interpret your story as a “lower transactions costs of financial intermediation due to financial innovation induced my firms’ desire to sell more stuff” story.
JP: Good one. Informal loans were never measured. Assuming your story is correct, why did informal loans fall as a percentage of total loans? Either: falling transactions costs in formal lending; or smaller families/people moving around more made informal lending harder?
On the demand side (I mean demand for financial assets):
1) Demographics/pension plans – mostly agree with your explanation.
2) Oil exporters sovereign funds/FX reserves – oil exporters are forced to save a big part of export revenues to reduce exchange rate volatility and prepare for the eventual arrival of a post-oil economy.
3) Other countries’ FX reserves – many countries have been building up their FX reserves to manipulate the exchange rate and/or prevent current account crises.
4) Growing income inequality may have also contributed to a higher demand for financial assets, since wealthy people tend to save a bigger part of their income.
On the supply side (in particular in the US):
1) Low interest rates – the most obvious way to increase supply of financial assets.
2) The real estate boom (largely explained by low-interest rates) allowed households and non-corporate businesses to replace expensive unsecured loans with cheap mortgages, so they could borrow much more at the same debt-to-income ratio.
3) Securitization (in particular MBS) allowed banks to make o lot of loans without dramatically expanding the money supply and raising new capital.
4) Corporate businesses were not really borrowing – net borrowing has been close to zero for the last ten year – but rather replacing equity with debt for a number of regulatory, financial and other reasons.
However, private supply of financial assets was still too low, so the U.S. government had to run large budget deficits throughout the 00s.
I think a big part of this is asset prices (land and also shares especially) and the two income household (see “The two income trap”). People are trying to save for their retirement – and one way they do is to buy land. The same period has seen increasing concentration of the population in cities where land is expensive. Of course the crunch will come when they all try to cash in this “saving” at once. But you are right, there is the question of what do the people selling the land do with the money (shares are more complicated). Well there are some people in my parents generation (born in the 1930s) who are pretty well off. They tend to buy bonds and shares. And who benefits from their purchases of shares? Well what has happened to executive income?
So is maybe this story one of a massive con job?
For the 2011 Jackson Hole do, Stephen Cecchetti pulled together data for household, corporate and government debt as a % of GDP over the last 30 years for 18 OECD countries :
http://www.bis.org/publ/othp16.pdf
which is very inspiring and shows several fairly different patterns.
reason: “I wonder if the word “people” there is misleading and that banks are not just pure intermediaries.”
People own banks. Roughly speaking (ignoring the value of bank shares, which don’t get counted as debt), a bank has liabilities of $100 and assets of $100. If the bank suddenly disappeared, and the ultimate lenders lent directly to the ultimate borrowers, both assets and liabilities fall by $100 because the bank’s assets and liabilities disappear, but people’s assets and liabilities stay the same (ignoring transactions costs, and ignoring monetary consequences on AD).
Mike: “I concur with Frances – I would put the bulk of it at financial innovation.”
But no matter how a loan is structured that doesn’t change the actual amount of credit risk the ultimate lender is bearing. What changed is that much of those vast quantities of new credit risk didn’t end up directly on the
“lender’s” balance sheet. Instead it ended up out of sight in AAA rated SIV’s, RMBS CDO’s and other shadow banks. And then those instruments ended up back on publicly guaranteed balance sheets (and then on the Fed balance sheet through the discount window, etc) as repo collateral – I.e they created lots of publicly guaranteed money that had to be rescued when the collateral failed. The rating agencies and substitution of capital regulation for risk management coupled with the public guarantees created the perfect storm. Borrow, gamble, repeat. The incentives were perfectly wrong.
Assume asset prices are a function of pull-forward demand from high consumption-propensity households. These households faced a “temporary” stagnation in real wages, and they borrowed to supplement incomes. As house prices rose, their future earnings expectations rose, and they borrowed/spent more. On the supply side, wealthy savers reaped large capital gains. They spent a fraction of these, and lent the difference to middle class households through shadow banks. Because of the Great Moderation and free Fed puts, financial intermediaries reduced lending standards, which helped fuel household borrowing and increase financial intermediary debt and asset prices. As this “system” progressed, the bottom 90% became heavily indebted, the top 1% gained enormous capital gains, overall debt increased, and wealth and income inequality increased.
All you need to make the above “model” work is a link between pull-forward spending and asset prices, and a Fed put. A model with both of those should tend to higher leverage over time. It should also “bust” any time perceptions of future income growth come back in line with reality.
Another way to put it: MM’s argue for the economy to have an “income trend”. Which trend are they referring to? The stagnant trend for 90% of households, or the steep rise for the top 1%? If my feet are on ice and my hair is on fire, my average body temperature is irrelevant.
Henri: good find!
Cecchetti et al add a couple of explanations to mine: easier regulation has lowered transactions costs; tax policy has increasing favoured debt(?); and lower real interest rates (however caused) mean a higher level of debt gives the same debt service/income ratio.
Nick: “If some households are saving less (to buy stuff) then either other households are saving more (buying less stuff) or there’s less investment.”
We could have two things happening:
– Suppose we have an equilibrium where everyone earns and everyone spends $1,000 a month. If everyone suddenly shifts from buying in cash from buying in credit there is one time increase in the household sector’s liabilities of $1,000# households and a one time increase in the corporate sector’s assets of $1,000# households. You’re probably going to ask:
* what does the household do with that extra $1,000 during the month when they switched from cash to credit. I think the answer is: they spent it. You’ll also ask:
* how did the corporate sector finance the switch from cash to credit, didn’t it have cash flow problems? We can finesse that with one of your other explanations you give in the post. So a pension plan gives a corporation $500 to invest, it uses that $500 to produce stuff, which it then sells to consumers for $1,000 on credit.
Perhaps you’ll say: corporations are owned by households, corporations saving more = households saving more.
But to the extent that corporate wealth has a tendency to be transferred offshore to places like the Cayman Islands, and the wealth of the ultra rich tends to disappear into the ether (foundations, trusts, off-shore, wherever it’s unlikely to be taxed) an increase in the indebtedness of the average New Brunswicker matched by an increase in the assets of the Irving family may not be a total wash.
Question (I’m an English teacher, not an economist): If, at time 1, people paid COD for all goods and, at time 2, everyone suddenly shifted to paying one day after they received the good, would the ratio of debt to GDP increase and would capital investment change?
Nick, I like some of your reasons, and you probably don’t want to debate this, since you tried to killed it up front in this post, but I just don’t know if I agree with how you describe lending. Maybe I do though.
It’s one thing if banks didn’t exist in the economy, and all the money that existed were wads of cash under peoples’ pillows, and loans were created by people literally loaning their pillow cash to those wanting to borrow.
But banks do exist, and they have accounts at the Central Bank, and Central Banks supplies reserves on demand to banks at a Central Bank determined policy rate.
The way banks make loans is that a loan is placed on the asset side of their balance sheet and a deposit is placed on their liability side. The borrower then gets a deposit as an asset and a loan as a liability. If the bank then needs reserves to meet reserve requirements or settle payments across banks or withdrawals, they go to the interbank lending market and borrow at the interbank rate. They also have the discount window. And the price of the loans they make will necessarily reflect this borrowing cost.
I don’t see how your demand and supply description properly describes this world of bank lending; maybe it somehow does. The demand for loans from creditworthy borrows will be met by banks that see them as profitable opportunities with the borrowing cost of reserves in mind. The supply or ‘funding’ of those loans comes from reserves, which are theoretically infinitely supplied at some central bank determined cost.
Why, in the long run, under this system, does the supply of loans have to come from those who want to spend less than their income? The supply of loans does not appear connected to those who want to spend less than their income. Bank capital requirements, however, do place real limits on how much banks can expand their balance sheets. Also, the central bank can change the cost of acquiring reserves, and thus the price of a loan, which may affect the demand for loans, but it doesn’t place a threshold limit on how many loans banks can make.
But in general, assuming there are always creditworthy borrowers in banks’ eyes that look profitable to banks, banks can theoretically make these loans indefinitely (again, capital requirements place restrictions on balance sheet expansion).
So why can’t you have a cycle where increased bank loaning is somewhat sustainable in the long-run if everyone keeps increasing the amount they loan or the govt keeps increasing net financial assets through fiscal policy, all this against the backdrop of a growing economy, a growing financial sector chasing market share and profits, a growing consumer culture, etc etc?
“and lower real interest rates (however caused) mean a higher level of debt gives the same debt service/income ratio.”
Is this a rational criterion? Surely the relevant criterion (which also goes the same way) is the ratio of price after interest to cash price.
(P.S. In the above comment I’m assuming that they want to pay off the debt and aren’t just speculating on asset prices.)
Nick,
I see that Frances is saying roughly what I was saying more eloquently. I think it is a bit of a con to say that the banks could just disappear. To ignore that massive concentration of continuing power seems to me a bit dishonest. And bank executives seem to very efficiently milk their shareholders. And one thing that just occured to me is this – household debts in most western countries die with their originators. Not so corporate debts – but they are somewhat influenced by limited liability. But doesn’t this mean that corporate debts are not limited by the need to be able to eventually pay them off. Could a comparison of (nominal) corporate wealth vs (nominal) private wealth be interesting in this regard?
Brett: assume the economy consists of me and you. In the morning I buy your apples for cash, and in the afternoon you buy my bananas for cash. Then we both agree to each lend the other 1 day’s trade credit. Total debt/GDP ratio is now 1/365. No change in net saving, investment, or rate of interest. The only difference is that for one day (the day we make the agreement) we are both sitting on cash we don’t know what to do with.
reason: “I see that Frances is saying roughly what I was saying more eloquently. ”
Ouch!
reason: yes it’s rational: can you make the monthly payments from your income? can you repay the loan before you die (or by selling your assets)? are both rational questions to ask. But the answers go in opposite directions if asset prices rise when interest rates fall.
Frances: I’m sure he meant it the other way around!
I still disagree with both of you, under that interpretation though. Total spending = total income. If someone’s spending more than income, someone else is spending less. All bank income goes to someone. Managers. owners, whoever.
Another possibility is that people have been borrowing based on expected increases in income that haven’t materialised.
(Yes, I finally got around to reading Tyler Cowen’s “The Great Stagnation.”)
Stephen: OK, but who are the lenders? Is there another half of the population that had overly pessimistic expectations of their future income?
Or is it that, when expected future income is higher, it looks safer to borrow and lend more as a percentage of current income? OK. That’s probably what you meant.
Nick: “OK, but who are the lenders?”
Exactly. Real rates were dropping not rising throughout. Doesn’t sound like a story of overenthusiasm about the future. Sounds more like a bubble fueled by an oversupply of credit.
Government guarantees to creditors?
If we go back far enough, businessmen are proprietors who save by investing in their own firms. Both the lower and upper classes save by accumulating gold and silver. None of this involves debt.
Finanical markets evolve. Some involve equity, like stock markets. But many involve debt. Those folks that would have been accumulating gold instead lend to business and fund more investment.
More recently–government guarantees lots of debt, and gives preferred treatment to debt used to finance owner occupied houses. This is supply and lowers interest rates for home mortages. Perhaps there is less stock financed business investment.
On the demand side, rising home prices causes more people to want to be homeowners, causing higher housing prices. This causes a higher demand for home loans. Lenders come up with great plans like charging low payments now, and then high payment later, after the house has appreciated!
While you could have an equity financed company that purchases single family homes as a speculative investment, this doesn’t allow the investors to take advantage of the government protection.
Haven’t we seen this before, at least in the run up to the Great Depression? I saw some commentary about that last year or the year before. i’ll try to find it.
The U. S. also had a run-up of private debt before the depression of 1837 – 1843. That was fueled by land speculation, not consumerism.
Obviously, I’m with Bill. Massive government subsidies to the financial sector. The tragedy is that the low disequilibrium real yields which fueled the bubble have now given way to even lower equilibrium (in the sense of consistent with expected growth) real yields fueled by the resulting capital misallocation and demand disaster.
I think the key lies in the international angle. The pattern of higher private (and public) debt in advanced countries is the counterpart to increased saving in the developing world (i.e. lending by the developing world to the developed world). Why? At least part of the answer is related to the fact that social safety nets and capital markets in many developing countries have not developed at the same rate as their economies. Caballero has written about this (see 2 of his recent NBER papers). He hypothesises that as people in emerging economies get richer and are not provided with much of a social safety net, they self-insure by saving. But because capital markets in these economies are unable to offer safe(and less safe), liquid, transparent assets on the required scale, there are large capital inflows from developing countries into advanced economies, notably from China to the US. This has led to lower real interest rates in the advanced world. Caballero also argues that this pattern partly explains the subprime crisis as new synthetic “safe” assets were created to meet vociferous demand for them from emerging countries.
Min: Haven’t we seen this before, at least in the run up to the Great Depression? I saw some commentary about that last year or the year before. i’ll try to find it.”
That strikes a note with me too. If we saw the same thing happening 90 years ago, it might rule out some explanations based on very recent events. (Though I expect you could always argue two separate events and two separate causes.)
http://www.nakedcapitalism.com/2010/12/guest-post-extreme-inequality-helped-cause-both-the-great-depression-and-the-current-economic-crisis.html
“Robert Reich has theorized for some time that there are 3 causal connections between inequality and crashes:
First, the rich spend a smaller proportion of their wealth than the less-affluent, and so when more and more wealth becomes concentrated in the hands of the wealth, there is less overall spending and less overall manufacturing to meet consumer needs.
Second, in both the Roaring 20s and 2000-2007 period, the middle class incurred a lot of debt to pay for the things they wanted, as their real wages were stagnating and they were getting a smaller and smaller piece of the pie. In other words, they had less and less wealth, and so they borrowed more and more to make up the difference. As Reich notes:
Between 1913 and 1928, the ratio of private credit to the total national economy nearly doubled. Total mortgage debt was almost three times higher in 1929 than in 1920. Eventually, in 1929, as in 2008, there were “no more poker chips to be loaned on credit,” in [former Fed chairman Mariner] Eccles’ words. And “when their credit ran out, the game stopped.”
And third, since the wealthy accumulated more, they wanted to invest more, so a lot of money poured into speculative investments, leading to huge bubbles, which eventually burst. Reich points out:
In the 1920s, richer Americans created stock and real estate bubbles that foreshadowed those of the late 1990s and 2000s. The Dow Jones Stock Index ballooned from 63.9 in mid-1921 to a peak of 381.2 eight years later, before it plunged. There was also frantic speculation in land. The Florida real estate boom lured thousands of investors into the Everglades, from where many never returned, at least financially.
Wall Street cheered them on in the 1920s, almost exactly as it did in the 2000s.
But I believe there may be a fourth causal connection between inequality and crashes. Specifically, when enough wealth gets concentrated in a few hands, it becomes easy for the wealthiest to buy off the politicians, to repeal regulations, and to directly or indirectly bribe regulators to look the other way when banks were speculating with depositors money, selling Ponzi schemes or doing other shady things which end up undermining the financial system and the economy.”
I’ll add another one, the economy goes from mostly supply constrained to mostly demand constrained, contrary to most definitions of economics.
http://www.debtdeflation.com/blogs/2010/01/24/debtwatch-no-42-the-economic-case-against-bernanke/
Figures 1 thru 6
Is too much debt (whether private or gov’t) actually a medium of exchange problem?
I can probably find more. Can I have more than one(1) post?
“So both the supply and the demand for loans increased.”
I believe you need to do budgeting for demand and correctly understand how banks work.
If JKH is out there, please jump in about the supply side of loans and banks.
Nick, do I have a post in the spam filter? Thanks!
Hey! Me and Paul Krugman post on (sort of) the same subject within 10 minutes of each other. Just proves, doesn’t it, that great minds think alike! OK, maybe not.
http://krugman.blogs.nytimes.com/2011/11/29/debt-history/
He’s got a good graph for the US, since 1916.
Hmmm. Makes me think of another hypothesis: it just takes a very long time for debt/GDP ratios to get back to the same long run equilibrium after a shock like the Great Depression, and post-war unexpected inflation.
Actually, that is not such a daft hypothesis. Start in LR equilibrium. Then assume a great inflation (say) wipes out all the debt. How long would it take for the stock of debt to get back to long run equilibrium? We might be talking human lifetimes, or maybe even more, with bequests.
“If JKH is out there, please jump in about the supply side of loans and banks.”
I was thinking the same thing.
I thought I attempted, but I don’t see my post here.
wh10 and TMF: Our spam filter has been playing up. But I just checked it, and will check again periodically.
Oh, and remember (sometimes) you need to answer the antispam question before your comment is published.
Yeah Nick, I think I probably didn’t answer the spam question, so my fault.
Nick, I’ll keep that in mind. I’m pretty sure my first post did not ask for an antispam question, but said my comment was published. However, I won’t guarantee that. The post is up now (1:02 p.m.). Thanks!
Ah, mine’s up too! Now I kind of regret starting this debate… Hopefully JKH will come in for back up :).
wh10, what about lending based on collateral? I’m thinking about the housing bubble. Either prices won’t fall, or they won’t fall more than 10% so the banks and bank-likes don’t have to worry about the ability to make interest payments and principal payments.
TMF, are you asking if that is a reason for the long-run trend? I mean I don’t really know the detailed history and haven’t lived through the century, so I really don’t know, but I think you could make a sensible argument of this. If not housing, then whatever collateral, as the economy develops and grows.
Here’s a link to the US Federal Reserve’s “household debt service and financial obligation ratios”
http://www.federalreserve.gov/releases/housedebt/default.htm
The data only go back to 1980. Interestingly, the Debt Service Ratio, which was 11.21% of disposable personal income in 1980Q1 is 11.09% in 201Q2. The broadest measure, the Financial Obligations Ratio, which includes things that are not entirely debt, was 16.04% in 1980Q1 and 16.09% in 2011Q2.
This is not a debt-to-income ratio, but rather an debt-amortization-payment-to-income ratio. Falling interest rates (and they are lower now than in 1980) means that a given debt service ratio actually supports more debt…
I don’t know that I feel like asserting an explanation for this, but the data are interesting.