Domestic Debt Is in 'Goldilocks' Territory

Note to readers: Bob Johnson is on sabbatical, and his column will return on Nov. 15. In place of his weekly update, Morningstar.com will be featuring video reports taped prior to his departure or featuring members of Bob's team as well as Francisco Torralba from Morningstar Investment Management, highlighting recent economic data and trends.

Bob Johnson: This week's chart focuses on the level of growth in debt in various parts of the economy--the federal government debt, individual debt, and corporate debt. All of these sectors paradoxically are about the same size at about $14 to $15 trillion a piece, so each is an important component in and of itself. But we're focusing here on growth rates. Some growth in debt is a very good thing. We wouldn't want a cash economy; it would dramatically slow the growth of the economy if there was no debt growth. On the other hand, when debt growth gets too high, it causes inflation, and it causes a lot of other problems. And it certainly isn't sustainable growth.

So, first of all, let's look at the growth early in the period. If you look to the far left-hand side of the scale, you can see that all of the growth rates in all three components were relatively the same--all near a 10% growth rate. Subsequently, if you look at the far right-hand side of the equation, you can see the debt has come way down, although it's not quite at the all-time lows that we experienced during the recession. Now, we've got growth, overall, back a little bit higher but still well below what we saw on the left side of the chart, with growth centering more on 4% to 5% instead of the 10% that we spoke of earlier.

Now, the other key thing to look at on this graph is, in the period between 1996 and 2000, you can see how countercyclical the debt acts. We had business and individual lending go way up in dramatic amounts. Meanwhile, the government debt took a dramatic dip. Then, things reversed themselves. Coming out of the recession in 2009, you can see that government growth in debt soared, while the growth in consumer and business debt collapsed. In fact, it moved into negative territory, which normally would have amplified the recession if it hadn't been for the natural circuit breakers that helped move government debt up. And now, as we've come out of the recession, those have moved back in line with more normal conditions. Looking forward, I think we're in Goldilocks territory now, with debt growth not too high, not too low, and relatively balanced between categories.