We’re Nowhere Near Another Debt Crisis

Elizabeth Warren says nobody listened to her before the 2008 crash, so she’s sounding a warning again:

When I look at the economy today, I see a lot to worry about again. I see a manufacturing sector in recession. I see a precarious economy that is built on debt — both household debt and corporate debt — and that is vulnerable to shocks. And I see a number of serious shocks on the horizon that could cause our economy’s shaky foundation to crumble.

This is really not good. Sure, household debt is at an all-time high, but only if you don’t adjust for inflation or anything else. By that measure, household debt is almost always at an all-time high. Here is debt service as a share of income, which is the proper way to look at it:

As you can see, household debt is at a historical low, and has been for several years. As for corporate debt, there are several ways of looking at it, but old-school debt-to-equity is probably the best. Here it is:

This isn’t quite an all-time low, but it misses by only a couple of percentage points. Finally, although no one will claim that manufacturing is going gangbusters, suggesting that it’s in a “recession” is special pleading at best. The Fed’s manufacturing index went up in both May and June, and on a year-over-year basis it’s never gone below zero during Donald Trump’s presidency:

Our current expansion has lasted a long time, and there are good reasons to think that we might be due for a normal cyclical recession. But there’s no reason to think we’re about to replay the 2008 debt crisis and there’s no reason to think that manufacturing is leading the way into economic catastrophe. Even if manufacturing were in a recession, it’s only about 10 percent of the economy and every other sector is doing well.

I get that opposition candidates think they need to badmouth the economy if the economy is doing well.¹ It’s all part of the game. But this kind of stuff crosses the line into being deliberately misleading. We can do better.

¹I happen to think this is wrong, and even if it’s right it does no good to badmouth a strong economy anyway. But it does seem to be a widely held view.


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