When we got the latest data on the household debt service ratio (blue line in Figure 1), we had to reconsider our recent assertion that the debt service ratio and not the absolute value of the total credit market debt outstanding is what determines economic expansion through marginal increase in spending (An Insight into the Impact of Debt on Economic Growth).

Figure 1. Household Debt Service Payments as a Percent of Disposable Personal Income (TDSP: blue line), Real Disposable Personal Income (red line), and Personal Consumption Expenditures (PCE: green line) (click to open in new window).

The red line in Figure 1 shows that TDSP has been flat since the recession started in 2007 bur PCE has been rising (green line). With about a 3.5% fall in TDSP since its maximum in 2007 just before the recession started, that should translate into roughly $350 billion of additional spending, but PCE has increased roughly 3 times this amount. This translates into roughly $700 billion of spending in addition to the marginal increase in disposable income available through the decrease in debt service payments.

Returning to Figure 1 in An Insight into the Impact of Debt on Economic Growth), if we look at the green line, we see that consumer credit has expanded by about $500 billion in the same time frame leaving an extra $200 billion of spending to find the source for funding.

We note that this period covers the entire period of active Fed intervention through its quantitative easy measures which have been designed to lower interest rates across the entire yield curve. This must have had a large impact on the decrease in debt service payments although we have no idea how to quantify such.