This chart is the most succinct sub-orbital view of our current condition: It shows the total amount of credit-market debt as a fraction of our economic output. Basically, the equation is what you owe, divided by your productivity. If you flipped the chart upside down, it would show you how much thrust you have left in your tank.


Click to enlarge

So in the big-picture view, we still have a massive debt problem. The symptoms of this problem are legion, and the pain is acute. What’s now becoming painfully clear to many is that there are really just 3 things to do with debt: Pay it down/off; convert it to equity; or default.

Paying it down or off is the most responsible thing you can do. You entered into a contract, and adhering to the terms of the contract is the honorable thing to do for as long as you are able. But paying down debt diverts cash from productive investments and current spending. The intermediate consequence: a slower economy.

During the recent upward market move, companies with decent businesses but higher debt burdens are issuing new common stock and using the funds to pay down debt. New stock issuance is at a relatively recent high. This isn’t an immediately productive use of capital, and of course is massively dilutive to existing shareholders.

Finally, default is the last way out. It hurts everyone involved. For the lender, their capital is destroyed; for the borrower, there’s destruction of their future ability to take risk with borrowed money. This potentially removes those borrowers from economic arenas in which they would otherwise have been involved.

The other major issue we have, other than debt, is our lack of savings. A recent study showed that most people are 1 to 2 paychecks away from economic meltdown. Personal savings rates have been declining since 1982, and have sometimes even been negative. And while we have seen a surge in savings recently, it will take a long time to repair the financial damage created over the last 27 years.

So yes - we’ll be out of this dismal economic mess when we actively deal with the big issue: Too much debt, too little savings. That’s the simple view - but it shows us the glide path to success.