From 2000 through 2006, GDP averaged a 2.5% annual growth rate in real terms. Total domestic debt outside the financial space rose from 183% to 232% of the GDP. In this period, debt grew by an annualized 3 percentage points more than did the GDP, a ratio of 2.2 to 1.
From 2007 to the present, debt levels further increased from 232% of GDP to 254%. GDP averaged 0.6% growth in real terms, and total debt climbed by an annualized 1.8 percentage points more than did the GDP, or a 4-to-1 ratio. (Most of this debt increase was at the federal government level.)
(These data are from the Bureau of Economic Analysis for GDP and the St. Louis Fed for debt levels, and the debt levels include government debt at all levels of government, as well as private debt levels outside the financial sector. Remember that debt for a financial firm, such as a bank, includes deposits like savings accounts and CDs, and their inclusion can give a misleading understanding of the total indebtedness of the country when included in these debt totals, since those deposits are then lent out.)
Clearly, the economy has relied extensively on the growth of credit since the 1980s in fueling the growth rate we had enjoyed. We can surmise that credit growth was partly responsible for economic growth during this period, as annual household income growth has fallen in real terms over time. Instead of consumption growth being financed by income growth, as it had been in the past, it was financed through increased debt. During the housing boom, we saw explosive growth of mortgage debt -- and, since the recession, government debt has thus far taken the lead role in fueling the recovery.
Now, the focus in Washington is on cutting the deficit -- not expanding it -- and households are limiting their growth of credit products while banks focus on better-credit-risk customers. As a result, total debt growth of the economy, across all sectors, is likely to be constrained. As it seems to have taken an increasing amount of debt to fund each dollar in further GDP growth during these successive time periods, I wonder how we can expect economic growth to be robust from here, given that this process is now running partly in reverse.