Private Debt

Just in case the last two posts weren’t sufficiently distressing, today I’m going to give you some facts about private debt in this country that are as troubling as those related to public debt.

Total public debt in this country (federal, state and local) exceeds $11 trillion (exclusive of unfunded liabilities).  As shocking as that is, private debt is even worse.  According to Kevin Phillips’ new book Bad Money, U.S. private debt now exceeds $36 trillion!  That astonishing amount is almost four times the national GDP.  In 2006, on average 14.5% of American families’ incomes was spent just to service debt-such as interest payments on mortgages, cars, credit cards, etc. (up from 10% in 1983).  In part because of this debt burden a typical dual income family in the mid-2000s actually had less discretionary income than a typical single income family in the early 1970s.  Home mortgage debt, for example, doubled between 2001 and 2007–a $5 trillion increase. 

There are several things that have contributed to this explosion of private debt–not the least of which is a federal central bank that actively promoted it at the expense of the prudent.  Ironically, but predictably, having first caused the problem, the Fed and the government then stepped in to “fix” it.   One commentator calls that the Fed Uncertainty Principle Corrollary #3: 

As always with governmental/Fed actions, the cure was worse than the disease. Someday I’ll rant about the so-called Stimulus Payments and the Fed’s bailout of the guilty and foolish at the expense of the innocent and prudent.  We will inevitably pay a very high price for those mistakes. 

But back to the issue of private debt.  This debt is collateralized by assets whose supposed values have been propped up, or created, merely as a vehicle for the issuance of more and more debt.  Once the American people were completely tapped out, and getting by on less disposable income with both spouses working than they had with only one spouse working 30 years earlier, it wasn’t possible to extract anything further from them.  But if they should suddenly discover that their homes, as if by magic, had doubled or tripled in value,  then a massive new source of borrowing and debt became available.  Thus the national frenzy of buying and selling houses began, with seemingly the entire nation buying into the lie that real estate prices never go down, and treating their homes as sources of wealth creation (at best) and as ATM machines (at worst). 

Unfortunately this is a massive bubble, which must eventually and painfully burst.  The more the government and the Fed delay the inevitable, by continuing to inflate the currency for example, the more devastating the eventual adjustment will be.

As citizens we must address this in two ways, in my opinion.  First, we must be careful to manage our own affairs prudently.  Thrift and moderation have historically been prototypical American virtues.  Sadly, the policies of our government, misguided at best and malevolent at worst, have turned borrowing, spending and speculation into civic virtues, and made saving and fiscal caution into civic vices.  When the government tells us that its our patriotic duty to go shopping, just say no.  When the Fed drops interest rates so low that savings returns are near zero, and your mailbox if daily filled with credit card offers with teaser intro rates, just say no. 

Secondly, we must demand that our government stop manipulating free markets.  Institutions that make foolish loans, or borrow foolishly, to reap easy profits, should be left to suffer the consequences of their actions.  We should refuse to allow taxes extracted from our hard-earned income to be used to fund bailouts of those institutions.  We should likewise refuse to fund mortgage bailouts, and we should demand that the government keep out of the housing and credit markets.  Asset values must become rational again, and that can only happen if the malinvestment is liquidated.  In other words, we should elect folks who believe in the operation of free markets, and who will oppose government “management” of the economy. 

As I’ve said before, the first step toward trying to solve these problems, is to stop them from getting any worse. 

Grace and Peace.