Wasn't a debt bubble in early 80's . I remember the cost of service /re- finance of debt at those high 80's rates being about the same as at is now. 4-5 trill after Reagan to 16 trill now. Maybe look to recent events 2010-2012 in Europe regarding 6% rates and debt/GDP above 100% . Credit risk is high, re-fi rates rise, rinse repeat....unsustainable until a central bank becomes a direct or inderect purchaser/creditor/monitizer/printer/promiser. Rates fall. The other reason for rates rising is inflation expectations, the seemingly more likely scenario in the US but there is little sign of it here. Personal income, employment, gdp, sp500 earnings arent good. Fed keeping pedal to the metal . Doent seem like they fear inflation either.
Starting in the 80's computers were able to track and measure data to a micro level. It could access risks more systematically and this allowed for greater leverage. Computers could better track consumer debt and track credit card spending. Credit scores could be accessed across large groups. All this allowed more leverage and more debt in the economy.
Wasn't about 1980 the time when America financially degenerated from world's largest creditor to net debtor??
+1 Easy credit I remember clearly my college campus mail box stuffed with credit card offers from all over the place. It was also during this period that you pretty much saw the end of the "layaway" programs that most retailers ran that gave shoppers a chance to buy something they couldn't afford. With credit cards, you could afford anything and pay for it later.
The alternative to saving is consumption. So the real question is, why consumption over saving in 1980? Part of the answer is demographic, in 1980 the boomers were forming households. If you figure the average boomer was born in 1954, then he and she would be 26 in 1980 and forming households, buying a house, car, etc. Consuming and not saving. At the same time, Reagan was spending on defense and cutting taxes, which drove up US budget deficit and interest rates and combined with the strong US economy drove the dollar to new highs. That in turn hollowed out the US manufacturing sector at the same time it made imports cheaper from countries like Japan pursuing export driven growth, leading to more consumption and a shift of investment from capital-intensive manufacturing towards service industries.
I don't mean to offend you (or anyone), just to get to the economic truth as I can understand it. My own first response to your reply was what a silly answer, what can divorce have to do with a major economic change? But I have read past good posts from you, I thought I would check it out. Some research has produced an anomaly. First, I read a comment years ago about what fundamentally caused the subprime mess. The author claimed it was the Equal Rights Amendment. Of course, digging into the article, it was not the equal rights part (who can logically argue that?) but the implementation of that policy by the government. The article claimed that the government originally mandated 2% of loans be given by banks to people who would not normally qualify. (Banks don't want to lose capital on risky ventures, and governments don't care since they are not spending their own money) Quietly, slowly, but surely that percentage rose to be 20%? of new loans ( if I recall correctly), set by congress in the name of equality. At least that is what the article claimed. The banks not being stupid, packaged the risk parts and sold it to others who were stupid with the help of a non-functioning (AKA captured) regulatory system and tacit government approval since they followed their policy orders. That is what the article explained. I wish I still had the link. Now, to quickly disprove Nutmeg's comment, I thought to myself what was the biggest economic factor of a higher divorce rate. My first reply was more women entering the workforce. So I researched for a chart to show no correlation to recessions and found this gem: http://research.stlouisfed.org/fred2/series/EMRATIO/ There is more at http://research.stlouisfed.org/publications/es/article/9622 This chart seems to show a correlation that something indeed changed around 1975. Digging further I found a section under http://en.wikipedia.org/wiki/Women_in_the_workforce in the section "Laws protecting women's rights as workers" stating that" In 1966, the United Nations General Assembly adopted the International Covenant on Economic, Social and Cultural Rights, which went into force in 1976." Wowee! Could this be a repeated story? More research needs to be done. The US St Louis chart shows an anomaly. Less families, more women entering the workforce. I remember women's rights being a big driver of government policy then and hearing that some western governments had quietly passed laws identifying UN laws as superceeding their own country's laws. Productivity was the big watchword then as I recall - if you want higher wages, then produce more and your pay will go up. That has all changed. To enforce the UN policies, I think government would have to increase its size. The market would eventually pay for productivity and if wages fell, then socialism would seem to be required - that is "The market is wrong so we will fix it through legislation". That is doomed to failure in the very long run I think. Is this a similar case as the article I read about the subprime mess - Government policy trying to change market forces (AKA reality) by passing laws? Has the quality of productivity in workers declined causing a slow but steady bankrupcy due to bad government policy? Can anyone point to the flaws in my line of reasoning. I find the correlation eerie.
Actually the downfall began the moment we JFK died and we got a Hawk for a president. The moment we entered the Vietnam war was the beginning of our problems.
I'm glad you took the trouble to explain the econometrics. Before Reagan, the US was held in high regard econometrically. Then the US became the "greatest debtor nation". I am relatively old now and nowadays I am affected by what it is like to be operating day to day and how different it is now compared to the before and after of that transition. I can eaily see why the OP started the thread. And I know he didn't "get the experience" of the US transitioning. I was always welcome at EOP during the before. You know the # by heart and expect to pack and go do the white papers. We flipped coins to decide who would give what speech. I remember losing a flip to headline at the ABA annual. Go back over the Reagan speeches. He always put the cards in his right pocket at the end during applause. Also review the enlarging of the cabinet. This transitional disaster you all get to inherit is very telling. A lot of people were really valiant for a long time, but they are all sold out. Now, it gets really bad. So we extract all the quick profits and cut and run (about 10% an hour on total capital is the offer)
1980 was Carters last year. His presidency was plagued with problems he was only able to partially overcome by the '80 election which "swept" Reagan into office with 28% of the eligible voters voting for him, versus 22% for Carter, . Only 54% of those who could vote actually did. (There was a third candidate as well, a "liberal" Republican, i.e., an old fashioned Republican.) Reagan's near decade ('81-89) in office brought an ideological sea change to Washington. Gone were the old fiscally conservative, socially liberal Republicans. A new kind of Republican emerged, one fiscally liberal and socially conservative; inverting as it were 154 years of Republican tradition. Reagan and his army of neocons launched an attack on welfare and other perceived government evils such as "regulation"; annihilating, or ignoring, as much of the government regulatory apparatus as they could while growing the defense industry at a breakneck pace to achieve record deficits, all while battling a non-existent communist menace. (The deregulated Savings and Loan Industry, later collapsed.) The Reaganites were aided and abetted every step of the way, except for one notable exception, by the Democrats who also enthusiastically supported lowering the upper bracket tax rate, first from 70% to 50%, then later to 28%; thus more or less dismantling what was formerly a progressive tax schedule. The Democrats were there in the wings always happy to overlook this little transgression or that, such as ignoring the "War Powers Act" for instance, and allowing the President "plausible deniability" when it was necessary to shift blame onto hapless underlings. But even though the Democrats were always happy to lend a hand, they don't deserve any of the glory for the surprising amount of innovation introduced by the Reaganites. It was Reagan and his Chicago School economists who were the true "geniuses". Who else could have come up with the novel idea of reducing revenues to increase them? (We know now, of course, that they must have been counting borrowed money as revenue! ) Other than being Bonzo's bedtime buddy, marrying a steadfast believer in astrology, running up unconscionable debt, finding a communist threat everywhere he looked, and having by far the best speech delivery of any U.S. president since the advent of Edison's recording machine, Reagan will always be remembered for his version of "supply side economics" -- an idea that no matter how absurd, refuses to die. Reagan wholeheartedly embraced supply-side economics; though he had no formal training in economics whatsoever, and was without question among the least well-educated of U.S. Presidents. Under Reagan's interpretation of supply-side economics, taxes were slashed. This presumably made them fairer by reducing the gap between rates paid by the rich and the poor, while at the same time having the magical result of increasing revenues! The extra bucks lining the pockets of the rich that would result were expected to spontaneously "trickle down" to the grateful poor, leaving everyone, rich and poor alike, very satisfied. Of course none of this worked as hoped. Revenues did eventually rise some, after trillions were borrowed and spent on useless military hardware to fight an imaginary communist enemy. The increased revenues, however, came from increased government spending, not tax cuts. The revenues were sadly dwarfed by spending. The huge Treasury shortfall had to be made up by record borrowing. (I can still hear the goings-on in the Oval Office-- "Damn, it seemed to work fine on paper. Well, we can't admit we were wrong. They'll crucify us. Only thing to do is to carry on as though it were a great success.") Whereas American style capitalism has never been kind to the poor, under Reagan it began to be unkind to the middle class as well! It was Reagan-nomics that began the slow slide of the middle class toward a progressively smaller piece of the prosperity pie. So for example, when Reagan took office the average CEO salary was about forty times that of a typical factory worker. But by the time he left office that ratio had grown from 40 to 99 --more than doubling! In the decade of the '80s, before tax income of the wealthiest 1 % rose 75% while the income of the bottom 40% declined slightly. Meanwhile Reagan was faced with depletion of the Social Security Trust Fund, a buffer against hardship in old age for the lower classes, but a feature of little interest to the wealthy. This was fixed, and resulted in the approximate 3 trillion surplus in the fund today. However by the end of Reagan's time in office, a middle income family making 40K paid about 7.5 % into Social Security and a family making 400K paid about 1.5%. This is the path that both Republicans and Democrats launched us on during the 1980's. But let's be fair, Reagan deserves all the credit. We continue on that same path today -- with only a little respite having occurred during the Clinton years. And now, with the Republicans fixated on "ruining" the Obama presidency, who knows when these tireless efforts might come to fruition; efforts, unwittingly evil, to turn a once prosperous nation into something resembling the crackpot religious colony it began as, or worse, a plutocracy with many desperate poor, as it was in the early days of the Republic.