What Did We Buy With All the Debt We Accumulated?

The graph below is from a study the San Francisco Fed did on household deleveraging and consumption growth. It doesn’t have any truly surprising insights but it is short, well-written and a nice compilation of facts. This graph, however, confounds me.

At first glance, it seemed pretty straightforward. Household debt spiked up, followed by personal consumption and then the growth rate of debt would tail down along with consumption. Up until the early ’90’s the ups and downs were pretty close together. There weren’t long periods of debt accumulation or deleveraging.

Obviously all of this changed somewhere around 1991and the country went on a sustained period of debt accumulation. Except for a few blips, the growth rate of household debt was on a pretty steeply upward sloping curve and really took off after 2001. It’s probably safe to assume that most of this growth is accounted for by an increase in mortgage related debt.

So far so good, but what about personal consumption. The meme is that Americans were on a spending spree for most of the early years of this decade. The chart indicates otherwise. It appears as if the growth rate in consumption peaked around 2000 tailed off a bit and then was pretty much flat until it fell off a cliff late last year. So were we really not buying out the world’s supply of flat screen TVs? Why did debt grow so quickly but consumption not follow along? It doesn’t match up to the historical numbers.

Take a look at this chart:

That one tells me pretty clearly why we have crashed and burned. The debt load and by extension debt service just got too big. It’s easy to see why we went cliff diving.

But that doesn’t solve the puzzle about personal consumption. If conventional wisdom is wrong and Americans weren’t relatively growing consumption expenditures what was the money used for?

I need to think about this a bit more. If I am just totally misinterpreting these graphs please let me know. If you have some information that will get me on the right path let me know as well. If I figure out anything I’ll let you know.