The debts of households, companies and governments
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The debts of households, companies and governments
Jeremy Hobson: Well at the core of the coordinated central bank action yesterday was one thing: debt. The reason credit markets were starting to freeze up is because lenders were worried they wouldn’t get their money back — from countries, from banks, from small businesses, and from consumers — all of whom are carrying a lot of debt.
Here to put it all in perspective for us is Marketplace economics correspondent Chris Farrell. Good morning.
Chris Farrell: Good morning, Jeremy.
Hobson: Well Chris, often when economists talk about debt, they talk about it in relation to a country’s economic output, or GDP. Explain why they do that, and how different countries are measuring up right now.
Farrell: It gives you a measure about, you know, how much wealth you have, how much economic activity you have relative to your debt, and how much can you carry. And there’s the big debate about what is the upper limit. But when you look at the U.S. relative to the other developed nations, we’re nowhere near our upper limit, and we’re relatively healthy compared to most other developed nations, say in Europe and Japan.
Hobson: Well of course you’re talking about government debt, Chris. What about households within the United States and their debt, and what about companies in the U.S. and their debt?
Farrell: I find it fascinating just to break down the numbers. So if you’re looking at the household — household debt is 88 percent of gross domestic product. Corporate? Seventy-three percent of gross domestic product. And we talk about the government all the time, but it’s 65 percent.
Hobson: So it’s actually lower than the others.
Farrell: It’s lower than the others. Now, the trend — and the trend is important, Jeremy, as you know — household debt is down. Same thing with corporate, it’s down around 9 percent. And what’s been happening is that the federal debt has been growing sharply.
Hobson: Now, when the federal debt grows sharply, and the others go down, are those happening because of each other — when a household reduces its debt, does that debt get shifted to the federal government sometimes?
Farrell: You know, that’s partially what’s happening. I mean, look, the households are saving more; corporations are saving more. What’s the offsetting pressure? The offsetting pressure’s government spending. So what you want to see is federal debt increasing — state and local government debt, by the way, is flat — while the other ones are declining. Otherwise, this economy goes into a downward spiral.
Hobson: Marketplace economics correspondent Chris Farrell. Chris, thanks.
Farrell: Thanks a lot.
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