Debt geek that I am, I got into a debate with a colleague recently about the merits of using stocks vs flows in thinking about consumer solvency. He was talking in terms of the ratio of a stock to a flow – consumer debt to personal income, which I wasn’t entirely convinced was the right way to think about it.
Here is the chart, which shows how U.S. consumer debt has climbed past personal income in the U.S. over the last sixty years.
Now, that’s interesting and important, but there are buried assumptions. For starters, it makes the most sense if you assume that rates skew variable, so comparing the stock to the flow matters because of what will happen when rates change. We are currently at historically low rates, but higher rates would increase the debt burden. But the composition of consumer debt burden belies that argument, with more of the debt fixed than variable, with credit card debt being the obvious exception. Granted, at higher rates – which are in our near future – will choke off credit expansion, but the compositional point stands.
So as interesting as this ratio of stocks to flows is, I prefer looking at things in as ratios of flows to flows, like total household debt service as a percentage of income. That is as follows.
Feel free to share your thoughts.