History of U.S. debt cycles

Debt as percentage of gross domestic product (GDP) rivals post-WWII levels

Chart is shown for illustrative purposes only.

Source data: Paolo Mauro, Rafael Romeu, Ariel Binder and Asad Zaman, "A Modern History of Fiscal Prudence and Profligacy," IMF Working Paper No. 13/5, International Monetary Fund, 2013 (for data between 1880 and 2011); The Federal Reserve Bank of St. Louis (data from 2012 to 2015).

A look at U.S. financial history shows a series of peaks and valleys in how much debt the government, businesses, and consumers take on in the U.S. economy. But as this illustration of debt as a percentage of GDP demonstrates, the cycles of debt were more constrained in the late 19th and early 20th centuries. That was in spite of the fact that economic life during that period could be volatile, with panics, bank runs, and economic downturns occurring regularly. With little in the way of government interference, booms and busts were common. There was one advantage when debtors went bust or banks failed — the next upturn started with relatively clean balance sheets.

The dramatic financial and economic effects of the 1930s’ Great Depression, however, caused the government to realize that it could not allow this kind of severe contraction to happen again. That was the start of the government stepping in with spending and fiscal policies to smooth out business cycles. By the time World War II began, government intervention had produced a more stable pattern. But excesses accumulated during booms were no longer washed out during recessions. Instead, each new cycle carried the debt and imbalances to increasingly higher levels. That led economists to term these debt cycles as "supercycles."

The chart shows that the level of debt in the latest supercycle is nearly as high as just following World War II, a war that required massive amounts of debt to conduct it, and with a post-war period of enormous pent-up demand in the private sector.


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