Nearly a decade after the onset of the global financial crisis, real economic growth remains constrained by high levels of household debt, particularly for those at the lower end of the income and wealth distributions. The build-up of indebtedness in these households prior to the onset of the crisis continues to cast a shadow over the real economy.

Quantitative easing (QE) policies by the Federal Reserve and other global central banks have revived asset price appreciation without addressing the burden of the bottom 80%. As long as “middle class” households continue to carry excessive debt burdens, real economic growth will not move much above 2%. Let’s take a look at these issues in this article; Part II will examine asset-allocation implications.

From the Golden Age to money market capitalism

From 1945 to 1970, the U.S. economy experienced strong real GDP growth, low unemployment, low inflation, high productivity growth and declining income inequality in what it often referred to as the economic Golden Age of capitalism. However, inflation began to rise in the mid-1960s (guns and butter), leading to the collapse of the Bretton Wood Monetary Accords and, eventually U.S. dollar weakness. Steps taken by the Volcker-led Fed at the end of the 1970s and the election of conservative governments in the U.K. and U.S. at the end of the 1970s prompted a shift toward free markets and neoliberal ideology, as various sectors, including finance, were deregulated and liberalized.

Financial market liberalization beginning in the 1980s increased (“democratized”) access to credit, prompting rapid growth in private sector debt relative to GDP. Having remained closely linked with GDP for the previous quarter century (see chart below), private sector debt ratios decoupled and began to rise during the 1980s. From 1983 to 2007, private sector debt rose from 96% to 172% of GDP; even today debt remains at 150% of GDP.