The Illusion Of Declining Debt To Income Ratios

Authored by Lance Roberts via,

In some states, when a couple enters into divorce, the court may award “alimony,” or spousal support, to one of the former spouses for the express purpose of limiting any unfair economic effects by providing a continuing income to the spouse. The purpose is to help that spouse continue the “standard of living” they had during the marriage.

The idea of “maintaining a standard of living,” has become a foundational bedrock in our society today. Americans, in general, have come to believe they are “entitled” to a certain type of house, car, and general lifestyle which includes NOT just the very basic necessities of living such as food, running water and electricity, but also the latest mobile phone, computer, and Internet connection. Really, what would be the point of living if you didn’t have access to Facebook every two minutes?

One of the charts that are often bantered about in the media is the increasing prosperity of the average American as witnessed by the following chart.

But, like most data extracted from the Federal Reserve, you have to dig behind the numbers to reveal the true story.

So let’s do that, shall we?

In America, the problem of maintaining the basic lifestyle is becoming ever more problematic as shown in an updated 2015 Pew Research study.

In the U.S., the poverty line in 2011 was $15.77 per day per capita for a household with four people (the precise poverty line varies by household size and composition). The poverty line is defined as the income three times the cost of an economy food plan as determined by the U.S. Department of Agriculture (Orshansky, 1965). In July 2011, the daily per capita cost of the USDA’s thrifty food plan was $5.07 for a family of four with two children ages 6-8 and 9-11 years.”

In the U.S., the definition of “poor” is enviable in most every other region of the world. Yet, despite higher levels of low income, (now there’s an oxymoron) inflation-adjusted median incomes have remained virtually stagnant since 1998.

But here is why looking at the “median” of personal incomes is misleading as to what is happening within the economy. A recent study from the Chicago Booth Review revealed the underlying problem with income strata:

“The data set reveals since 1980 a ‘sharp divergence in the growth experienced by the bottom 50 percent versus the rest of the economy,’ the researchers write. The average pretax income of the bottom 50 percent of US adults has stagnated since 1980, while the share of income of US adults in the bottom half of the distribution collapsed from 20 percent in 1980 to 12 percent in 2014. In a mirror-image move, the top 1 percent commanded 12 percent of income in 1980 but 20 percent in 2014. The top 1 percent of US adults now earns on average 81 times more than the bottom 50 percent of adults; in 1981, they earned 27 times what the lower half earned.

Given this information, it should not be surprising that personal consumption expenditures, which make up roughly 70% of the economic equation, have had to be supported by surging debt levels to offset the lack wage growth in the bottom 90% of the economy.

Furthermore, this also explains why the gap between wages and the cost of supporting the required “standard of living” continues to expand. 

More importantly, despite economic reports of rising employment, low jobless claims, surging corporate profitability and continuing economic expansion, the percentage of government transfer payments (social benefits) as compared to disposable incomes have surged to the highest level on record.

This anomaly was also noted in the study:

“Government transfer payments have ‘offset only a small fraction of the increase in pre-tax inequality,’ Piketty, Saez, and Zucman conclude—and those payments fail to bridge the gap for the bottom 50 percent because they go mostly to the middle class and the elderly. Pretax income of the middle class (adults between the median and the 90th percentile) has grown 40 percent since 1980, ‘faster than what tax and survey data suggest, due in particular to the rise of tax-exempt fringe benefits,’ the researchers write. ‘For the working-age population, post-tax bottom 50 percent income has hardly increased at all since 1980.’”

Of course, by just looking at household net worth, once again you would not really suspect a problem existed. In the Fed’s latest Flow of Funds report, the Fed revealed households currently held $110.0 trillion in assets with just a modest $15.2 trillion in liabilities, which brought the net worth of the average US household to a new all-time high of $94 trillion. The majority of the increase over the last several years has come from increasing real estate values and the rise in various stock-market linked financial assets like corporate equities, mutual and pension funds.

However, once again, the headlines are deceiving even if we just slightly scratch the surface. Given the breakdown of wealth across America we once again find that virtually all of the net worth, and the associated increase thereof, has only benefited a handful of the wealthiest Americans. 

Despite the mainstream media’s belief that surging asset prices, driven by the Federal Reserve’s monetary interventions, has provided a boost to the overall economy, it has really been anything but. Given the bulk of the population either does not, or only marginally, participates in the financial markets, the “boost” has remained concentrated in the upper 10%. The Federal Reserve study breaks the data down in several ways, but the story remains the same – “if you are wealthy – life is good.”


The illusion of the decline in the debt-to-income ratios leaves the majority of Americans with an inability to increase consumption, the driver of economic growth, without increasing debt burdens further. For those in the top-10% of the wealth holders, things like higher asset prices, tax cuts, etc. do not lead to further boosts in consumption as they are already consuming as needed. 

The problem is quite clear. With interest rates already at historic lows, the consumer already heavily leveraged and wage growth stagnant, the capability to increase consumption to foster higher rates of economic growth is limited.

While the ongoing interventions by the Federal Reserve have certainly boosted asset prices higher, the only real accomplishment has been a widening of the wealth gap between the top 10% of individuals that have dollars invested in the financial markets and everyone else. What monetary interventions have failed to accomplish is an increase in production to foster higher levels of economic activity.

Corporate profitability, which has primarily been a function of cost cutting, increased productivity, stock buybacks, and accounting gimmicks can certainly maintain the illusion of economic prosperity on the surface, however, the real economy remains very subject to actual economic activity.  It is here that the inability to re-leverage balance sheets, to any great degree, to support consumption provides an inherent long-term headwind to economic prosperity.

With the average American still living well beyond their means, the reality is that economic growth will remain mired at lower levels as savings continue to be diverted from productive investment into debt service.  The issue, of course, is not just a central theme to the U.S. but to the global economy as well.  After eight years of excessive monetary interventions, global debt levels have yet to be resolved.

The “structural shift” is quite apparent as burdensome debt levels prohibit the productive investment necessary to fuel higher rates of production, employment, wage growth, and consumption. Many will look back at this point in the future and wonder why governments failed to use such artificially low-interest rates and excessive liquidity to support the deleveraging process, fund productive investments, refinance government debts, and restructure unfunded social welfare systems.

Until the deleveraging cycle is allowed to occur, and household balance sheets return to more sustainable levels, the attainment of stronger, and more importantly, self-sustaining economic growth could be far more elusive than currently imagined.

In the meantime, those in the top 10% of income brackets are very likely enjoying an increase in overall prosperity. For everyone else, it is highly unlikely that debt-to-income ratios have actually improved much. But at least can bask in the reality they are “rich” compared to everyone else in the world.


White Knight Mon, 06/19/2017 - 14:21 Permalink

Just the other day, I bought myself some new paintball gear for the season. Was on ebay looking for some used, for some new stuff. Know what I keep noticing lately? Payment plan options available right next to the 'complete order' button. Anyone else noticing this? Never did I think I would be offered a pre-calculated monthly payment plan for a $60 barrel or a $25 head wrap, but there they were. This is f****** ludicrous!

DaBard51 Mon, 06/19/2017 - 14:24 Permalink

Data skewed by excess of:golfers, hockey, basketball, baseball, and football players in the US of A.  When nine hundred years old you become, look this good you will not.

Endgame Napoleon DaBard51 Mon, 06/19/2017 - 15:59 Permalink

As he mentioned, the data is skewed by reporting people who make too little to afford food as employed, although he is indicating that people live above the *defined* poverty threshold. He fails to mention anyone but people with children in the household whose wages are augmented by many types of welfare and tax credits. But still, Tyler is the only one talking about what underlies the Fake Economic Numbers.

The "Thrifty Plan" gauging of what it takes for a family of four to eat is interesting, especially when you have worked at the Department of Human Services, seeing how very far above that number it goes. And the monthly amount of public assistance has supposedly gone up a ton, whereas I worked there at the end of the Bush Administration.

Momma of 4

She has her low wages, with income limits set at about $869 back then, when she also qualified for the cash assistance program

She has $720/month in food stamps, assuming she qualifies along with the kids,

She has $575/month in cash assistance, assuming all the kids were born within the time-spacing constraints, and she names the low-income father so that they can chase him down to pay the state back, although he, like childless people, qualifies for zero welfare/taxfare and often makes low wages.

She has free energy in many cases.

She has nearly free daycare.

She has nearly free Section 8 rent or, back then, about $100 off per child on the rent in nice, mixed-income apartments that are too expensive for me, with a college degree, multiple licenses and years of work experience.

She often has a boyfriend's income that is not traceable and unreported.

Almost always, she has lots of help from her parents.

She has a $6,269 Child Tax Credit, although it was a little smaller back then.

If you add all of her unearned income together, not counting the $869 in wages, and then divide the Child Tax Credit windfall over 12 months, the poor, single mom has $2,579/month in taxpayer-funded expenses.

Her welfare alone, not counting her wages and help from a boyfriend, her parents and charity, is considerably more than most college grads in pretty hard jobs are paid.

Take a finance grad in a bank call center or a retail-banking setting under heavy quota pressure. He does not make that much in many cases. How about all of us who have a bachelor's degree and then, like idiots, added 4 insurance licenses that we must renew every 2 years, taking more long tests and paying the state more money? H**l no, most do not get paid what she is paid by taxpayers for sex and reproduction, including when we meet the quotas every month.

In reply to by DaBard51

decentraliseds… (not verified) Mon, 06/19/2017 - 14:29 Permalink

 Why waste time on this alligator when the swamp’s most critical economic and political problems revolve around the hegemony of a global corporate cartel, which is headquartered in the US because this is where their dominant military force resides. The US Constitution is therefore the “kingpin” of an all-inclusive global financial empire. These fictitious entities now own the USA and command its military infrastructure by virtue of the Federal Reserve Corporation, regulatory capture, MSM propaganda, and congressional lobbying. The Founders had to fight a bloody Revolutionary War to win our right to incorporate as a nation – the USA. But then, for whatever reason, our Founders granted the greediest businessmen among them unrestricted corporate charters with enough potential capital & power to compete with the individual states, smaller sovereign nations, and eventually to buy out the USA itself. The only way The People can regain our sovereignty as a constitutional republic now is to severely curtail the privileges of any corporation doing business here. To remain sovereign we have to stop granting corporate charters to just any “suit” that comes along without fulfilling a defined social value in return. The "Divine Right Of Kings” should not apply to fictitious entities just because they are “Too Big To Fail”. We can't afford to privatize our Treasury to transnational banks anymore. Government must be held responsible only to the electorate, not fictitious entities; and banks must be held responsible to the government if we are ever to restore sanity, much less prosperity, to the world. It was a loophole in our Constitution that allowed corporate charters to be so easily obtained that a swamp of corruption inevitably flooded our entire economic system. It is a swamp that can't be drained at this point because the Constitution doesn’t provide a drain. This 28th amendment is intended to install that drain so Congress can pull the plug ASAP. As a matter of political practicality we must rely on the Article 5 option to do this, for which the electorate will need overwhelming consensus beforehand. Seriously; an Article 5 Constitutional Convention is rapidly becoming our only sensible option. This is what I think it will take to save the world; and nobody gets hurt: 28th Amendment: Corporations are not persons in any sense of the word and shall be granted only those rights and privileges that Congress deems necessary for the well-being of the People. Congress shall provide legislation defining the terms and conditions of corporate charters according to their purpose; which shall include, but are not limited to: 1, prohibitions against any corporation; a, owning another corporation; b, becoming economically indispensable or monopolistic; or c, otherwise distorting the general economy; 2, prohibitions against any form of interference in the affairs of; a, government, b, education, c, news media; or d, healthcare, and 3, provisions for; a, the auditing of standardized, current, and transparent account books; b, the establishment of state and municipal banking; and c, civil and criminal penalties to be suffered by corporate executives for violation of the terms of a corporate charter.    

Silver Savior Mon, 06/19/2017 - 14:30 Permalink

I am in debt with Kohl's for $60. After that no more debt. But I hate the thought of even paying that though. That's three ounces of silver that I will need to hedge against the banks! Maybe I should ask for a limit increase and buy some of their 60% off gold with another 30% coupon for charging the purchase and the other 10% some other way. lol.

Silver Savior Mon, 06/19/2017 - 14:39 Permalink

I wish Starbucks would give me a payment plan on my $2.45 coffee. How about 30 cents down and 7 cents a month? But no really, things are getting worse. Well not really for me but the general public. I work in retail. I know the kind of shit people still buy but the have to charge it. I am beyond all hope lost. People are a total loss. I don't even want this career anymore it's depressing. Consumers suck.

Blankfuck Mon, 06/19/2017 - 15:38 Permalink

I know whats worth investing in! NOTHING!  Way too corrupt and when the shit hits the fan it will be a race to the exits again!Zero hedge take note$10000 im offering for anyone with information that brings the fed reserve down along with 4 of the big banks! Wells, Goldman, Bank of America, Citicorp-------serious posting here. The crime? collusion, corruption and stock market manipulation

montresor (not verified) Mon, 06/19/2017 - 16:46 Permalink

All I have to do is go camping for a year or so to defeat these fucking guys? Let's have a Great American camping trip.. Everyone with debts to pay is invited.

Sudden Debt Mon, 06/19/2017 - 17:23 Permalink

15 dollars a day for 4 people....nice... the Chinese have it better then those Americans.Just wait untill the rest of the country turns into a 3rd world reservation....while they're all dreaming of universal basic income... 

strickler Mon, 06/19/2017 - 19:18 Permalink

Since we have an aging populace globally, known as baby boomers, isn't it time we stop looking at income as many of them are retiring and the elderly are living longer..For God's sake, give me a thorough and rigerous data set with the obvious outliers and confounding populations  removed and stop with the all inclusive averages.

strickler Mon, 06/19/2017 - 19:21 Permalink

I really don't care what the top 1% are "earning".  It. Doesn't. Effect. Me..All it does is scew the data.  Remove the fucking outliers.  Their income and share of the wealth is not significant to anyone else's life.  Continuously bringing it up just shows your jealousy.