Car Crash

Check this out: data from 1961 forward, looking only at periods where growth was positive in every quarter (thank you, The Secret Economist). This is nominal Non-Financial Debt growth regressed on Real GDP growth. Debt grew slower than GDP prior to '73 and then blasted off - check out Georgie from '01 to '07:

Period DtGrowth Rsq

61-69 0.37x .98

71-73 0.59x .98

75-80 1.34x .96

82-90 2.8x .98

91-00 2.07x .998

01-07 6.02x .984

Since the 2001 recession, nominal nonfinancial debt has grown at almost 10x the rate of GDP to current data. This is unbelievable.

The US debt laden economy now features (end 2008 data) nonfinancial debt per household in excess of $280,000 with a median household income of $69k. Every $1 trillion in incremental non financial debt is roughly $8,000 per household, well over 10% of median income.

Does the Fed think it can raise the rate of inflation so that it will raise free (real) cash flow in the economy? What is going to be the impact on this country if (when) the government debt bubble deflates like the Nasdaq or housing? For this there is no backstop. Be afraid.