Household Debt

Have you known that in German word for “debt” – Schuld – is the same as the German word for “guilt”? If Germans got it right, then Americans are very guilty. Guilty of indebtedness. Let’s take a look at the chart below. It shows the U.S. household debt – i.e., the combined debt of all people in a household – over time.

_{Chart 1: US Household Debt as a % of GDP from 1950 to 2017.}

As one can see, the American household debt have ballooned from 25 percent of GDP in 1950 to 100 percent in 2007. The acceleration in household indebtedness in the 2000s was the key cause of the following financial crisis. Since the Great Recession, American households have deleveraged somewhat, so the level of household debt has decreased. The deleveraging was necessary, but it reduced consumer spending, contributing to slow GDP growth.

Household Debt and Gold
What is the link between household debt and gold? Well, if debt is limited, then the link is rather weak. But the excessive indebtedness implies an elevated risk of an economic crisis, which supports gold as a safe haven. It is no coincidence that the price of the yellow metal peaked after the burst of the housing bubble fueled by cheap debt. The debt overhang can also lead to the slower economic growth and lower real interest rates, which is also supportive for gold prices.

There is one more link, but subtler. In a sense, debt and gold are the opposites. Really. Some people believe that debt is a slavery (i.e., Andrew Jackson said that once), while gold (ask Alan Greenspan) is freedom.