January 15, 2009

US Financial Sector Debt = Way Overboard

Financial Times columnist Martin Wolf presented a graph of US private sector debt in his column from last Tuesday:

The growth of financial sector debt is simply amazing, and reflects the absolutely out-sized growth of the financial sector compared to the real value-generating businesses. One has to note that this graph is relative to the size of the GDP and ultimately susceptible for mean-reversion.

As one can see from the figures, business and household debt has been reasonably stable, at least until the end of the techno-bubble around 2000, but the indebtedness of the financial sector has just been growing since at least 1976. It is quite incomprehensible that the financial sector has more debt than all other business sectors combined. It is quite clear that this situation has not been in any way sustainable for at least 10 years.

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