Humpty Dumpty sat on a wall.
Humpty Dumpty had a great fall.
All the king's horses and all the king's men
Couldn't put Humpty together again.
The government’s efforts to revive the economy are all coming to naught. I believe this situation will continue. I will explain why, in my opinion, everything has changed.
For the last twenty-five years, real disposable personal income has grown at an average rate of about two-and-a-half to three percent per year. That means that in twenty-five years, the purchasing power of the typical household has doubled. Americans live much better today than they did twenty-five years ago. That is the good news.
For the last twenty-five years, household debt has grown at an average rate of eight to nine percent per year. That means that in twenty-five years, the debt burden of the typical household has doubled three times. That equals an eight-fold increase. This is the bad news.
Think of it this way. If income has gone from $25,000 to $50,000, then debt has gone from $50,000 to $400,000. I have watched these numbers (published along with a host of others, mostly in graphic form, by the Federal Reserve Bank of St. Louis), for years and asked myself, “How long can this go on?”
(http://research.stlouisfed.org/publications/)
The answer, it seems, was until 2007. By then the growth rate of household debt had fallen from 12% per year to 9% per year on its way to near 3% per year today, a level so low, it has been seen only once in the last thirty-five years. If you wonder how we recovered from the bursting of the dotcom bubble, the answer is that we borrowed and spent furiously, growing our debt at eleven to twelve percent per year for three straight years beginning in 2003.
When debt growth dwarfs income growth for a long enough period of time, the economy falls off a wall. It simply has to. Too many people are far too deeply in debt. Banks are more cautious (they’ve been burned); consumers are more cautious (job uncertainty and market chaos).
And now, neither the Fed, nor the Treasury, nor the President will be able to get the economy going again by getting consumers to splurge on cars or houses because we already owe so much. We have over-borrowed, over leveraged our assets, run our credit to the max. The sub-prime crisis and all the rest is just the beginning of de-leveraging (debt reduction through paying it off, having creditors write it off, or discharge through bankruptcy) that is likely to continue for a number of years to come. Think of it as the seven lean years.
This is one powerful reason why everything has changed. But it is not the only reason. In fact, there is a second reason that may be even more powerful, and I will explain it in my next post, perhaps as soon as tomorrow.
If you found this helpful and informative, please leave a comment or reply to me (Was it too short, too long, too arcane? How can it be improved?), and forward it to someone else that you believe may also be interested. Thank you!
Labels: consumer, debt, economy, leverage
¶ 8:48 PM
