The nation's GDP, or Gross Domestic Product, is about $14 trillion today. GDP, which is the most widely used measure of a country's wealth, tells us how many goods and services are produced in a year. If we want to know how wealthy the average citizen is, however, we're better off looking at GDP per capita, or the amount of goods and services produced in a year, per person. Our GDP per capita is about $45,000 these days, which is one of the highest figures in the world.
Now debt's not always a bad thing. If you or I or a business or the government borrows money to make a sensible investment, then debt can be good. So if I borrow to pay for a solid college education, a business borrows to build a new factory, or the government borrows to build a better transportation system for the country, then those things are most likely going to pay me, the business, and the country back several times over in the long run. Similarly, if the government borrows to fight a necessary war, well - that's a necessity, isn't it? That's good debt.
On the other hand, though, if I borrow so I can take a high-end European vacation, the business borrows to pay its top executives un-Godly large bonuses, and the government borrows to pay for wasteful pork or an expensive war that perhaps was unnecessary, then all of us are going to end up with nothing to show for it down the road except a reduction in our net worth. That's bad debt.
I think the reality is that a lot of the borrowing that we saw in the 1980s was associated with a number of supply-side policies, and that it was "good debt". Starting in 1981, marginal tax rates for businesses and individuals were cut, giving them more incentive to work harder and invest. Regulations on businesses were cut back, making it easier and more profitable for them to operate and expand. More savings was encouraged by opening up IRAs and 401(k) plans to millions of Americans, helping to reduce the cost for businesses to borrow. The end result of all this was that more money went into research and development, into opening new businesses and expanding existing ones. All this investment (along with major developments in technology, communication, and trade) then set the stage for the explosive growth of the late-1980s and all of the 1990s.
To be sure, a lot of the borrowing of the 1980s, and especially the 1990s, went for silly, materialistic stuff as Americans became more and more interested in "having it all." I'm just guessing here, but my intuition is that a lot of borrowed money went into productive businesses, research, infrastructure, etc. in the mid-1980s, but the percentage going there gradually dropped as the '80s became the 90s, and then the 21st century. My guess is that more and more borrowed money went into replacing smaller cars and houses with bigger cars and houses, eating at home with eating out, sensible clothes with designer label stuff, and so forth. And more money on an endless variety of government programs and bureaucracies.
To whatever degree that is true, then the nation switched from focusing on a better future, to having a better now. This would be a reversal of countless generations of thought, where it was always: "I want my children to have a better life than I did." And to whatever degree this is true, then, the answer to "where did all the money go?" is that it went to the banks, the wealthy, and the foreigners who lent us the money. By borrowing, we basically got lots of stuff, and they got lots of IOUs that are now starting to strangle the country. Next time, we're going to take a closer look at this huge paradigm shift, this gonzo consumerism that came to characterize the United States in the 1990s and continues even today.