Morgan Stanley reckons that total American debt (ie, the gross debt of households, companies and the government) has risen inexorably since 1980 to more than 300% of GDP (see chart), higher than it was in the Depression. Consumers, in particular, were encouraged to borrow by low unemployment and interest rates and (until last year) rising asset prices. Their debt jumped from 71% of GDP in 2000 to 100% in 2007, a bigger increase in seven years than had occurred in the previous 20.
I'm no economics wiz but this seems clear to me. Consumer spending is a huge part of the economy. People buying HD TV's on credit cards is not an engine of wealth. Mortgages are a big chunk of the problem, but only a part. US prosperity in recent times has partly been a mirage. Perhaps a bailout is still the thing to do to soften the landing, but we are in for years of contracting consumer spending, leading to economic problems, meaning less consumer spending, meaning more recession.
The sooner, the better. Putting it off can only be done by more borrowing, making it worse later. Government policy is geared towards putting it off, however, because no one wants to be in charge when the pain comes. And let me just say that "stimulating" the economy by giving tax refunds and encouraging people to spend it, while they are already up to their eyeballs in debt, is cowardly and stupid.
People are going to hurt. How best to deal with that for both the short and the long term are hard questions.
4 comments:
I'm no economics wiz but this seems clear to me. Consumer spending is a huge part of the economy. People buying HD TV's on credit cards is not an engine of wealth. Mortgages are a big chunk of the problem, but only a part.
Why isn't buying an HD TV on credit a way to drive wealth? Seems to me it is only a problem if they can't afford it. In other words, if that person cannot eventually be compensated in an amount equal to the value of the good plus the service of providing the money.
This gets back to my issue about wages, perhaps the contribution of most workers (workers being defines broadly enough to include doctors, lawyers and engineers) is generally undervalued.
Debt is not in itself bad, unless people are so leveraged that they cannot pay that back. This applies to mortgages as well as credit cards.
I wonder how much of this is due to the growing polarization of wages over the last ten-twenty years. You've all heard the statistics - that real take home pay for the median worked has declined, while the income of the top 5% has increased greatly. Median workers spend their wages more efficiently for stimulating the economy -- buying HDTVs and the like. People like me invest it, which is good for me, but not as effective a stimulus for industry. (Bear in mind that I am "loaning" my money to AAPL, but when I buy a mac, I;m giving it to them.) Also, there are a lot more of the middle class, numerically, which multiplies the effect of their economic activity. So the effect of the kleptocracy of the uber-rich is to diminish the spending power of the middle class, making them less able to spend, and to carry debt. A healthy middle class is essential to a broad-based growing economy.
Perhaps added to this may be the fact that banks have been overly permissive in granting credit.
And I agree entirely that when you have an economy with serious structural defects, the "solution" of a series of $600 tax rebates is beyond stupid.
I think you're dead on, Josh. Jim and Liam's note that debt is not automatically a negative force is true, but I think what you're talking about is the skewing of the balance of debt and savings out of all proportion. Americans have a negative level of personal savings, and of course the federal government has taken that to the nth degree. I can imagine no economic wiz explanation that could make that sustainable.
As James points, while debt is not inherently bad, we have lost our sense of proportion, as a society.
It has become the norm in this country to spend more than you can afford, and to paper over the problem with more and more credit. If that debt is to pay for necessities, then we have to look at things like wages. If its for luxuries, eating out or TV's or nice cars, then the average Joe has to change their behavior.
I'm in danger of sounding self righteous. Look, there was a period after college that I was working part time at slightly over minimum wage and paying rent with a credit card. I was wildly irresponsible, more so than someone with a decent job slowly digging themselves deeper in debt chasing the "good life". But I turned it around. America, as a whole, has not turned it around, and has been digging a deeper and deeper pit.
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