Total Credit Market Debt (All Sectors) As % Of U.S. GDP

The information for this article was kindly provided to us by the Gabelli Funds.

This chart features Total Credit Market Debt as a percentage of the Gross Domestic Product. Total Credit Market Debt, which includes debt from the financial sector, measures the total amount of debt in the U.S. economy.

Debt levels ballooned in the 1980s --from the first quarter of 1981 through the fourth quarter of 1993, Total Credit Market Debt surged from $4.8 trillion to $16.0 trillion. Even when viewed as a percentage of the U.S. economy, debt levels surged from 162.4% to 247.3% during the period.

The problem with large deficits is that over time, they weaken the Fed's ability to guide the U.S. economy. This occurs when the private sector must raise interest rates in order to compete with the financing needed by the public sector (the "crowding out" effect). Higher interest rates eventually slow economic growth, at which point the Fed must act with greater authority in order to direct larger amounts of borrowed capital. This leverage most likely increases economic risk by making the economy more volatile and more vulnerable to outside shocks.

High debt levels also have another side effect: disinflation. Because consumers and businesses have limited spending, they must retrench once they reach their saturation points. When the demand for goods and services diminishes due to the over-extension of credit, the result is disinflation.

Source:  Ned Davis Research

Source of data:

1916-1951: Historical Statistics of the U.S. Colonial Times to 1970; 1952 - 2004: Federal Reserve Board