Our economy did not deleverage. The “normal” methods of reducing our country’s debt burdens did not work. Economists will be quick to tell you that this doesn’t really matter because debt service burdens fell. That has allowed disposable income to rise and led to “solid” economic growth that, eventually, will allow these debts to be repaid. Please remember this idea: It is because debt service obligations have fallen (relative to GDP) that our economy recovered, not because of any reduction in debt load. As you know, interest rates have fallen dramatically over the past eight years. Yields on corporate junk bonds have never been lower. Same with yields on government debt. Same with most mortgage loans. These huge reductions in borrowing costs allowed the economy to continue growing despite the lack of any deleveraging and the continued growth of our debt burden. These massive reductions in interest rates were caused by the Federal Reserve’s actions... which are now being reversed. There’s another problem that most people haven’t figured out yet... Most of the household credit growth over the last few years wasn’t in mortgages, which are normally safe loans. They’re well collateralized. And most people who buy a house have the income required to support the loan. The new debt has been highly concentrated in the poorest segments of our society .
Credit Suisse Chief Global Strategist Jonathan Wilmot published some debt research that looked at debt-to-income ratios across different segments of the population. In the late 1980s, the 20% of Americans with the least amount of income held little debt, when measured against their income levels. Today, however, this segment of the population is the most in debt when measured against income. The poorest Americans now hold debts in excess of 250% of their incomes, or about five times more debt than the wealthiest 20% . This massive change in the character of our household debts came about because of “innovations” in lending – like subprime auto loans, pay day lenders, and, most important, student loans. Today total household debt is almost $13 trillion. That’s higher than the previous all-time high of $12.6 trillion, set in the third quarter of 2008 – immediately prior to the last crisis. And what’s most important to understand is that the cost of this debt burden has been artificially reduced since 2009 by the Fed. These costs – not just the normal debt service, but also the cost of defaults – are about to soar. More than 10% of these loans are student loans ($1.5 trillion outstanding). Most were made to poor people against zero collateral , where there isn’t any legal process to deal with defaults. This is a serious economic problem that will transform into a serious political problem because we have no economic or legal way to deal with these debts .
This massive change in the character of our household debts came about because of "innovations" in lending – like subprime auto loans,
pay day lenders,
and, most important, student loans.
American Consequences | 27
Made with FlippingBook Online document