Every once in a while, the mainstream press wakes up briefly and reports "oh, we remember—Americans have boatloads of debt. Maybe that's why the economy is not growing as fast it should be!"
CNN Money's America's own 'Lost Decade' is a case in point.
NEW YORK (CNNMoney) -- The economy is still struggling. And Americans are in for a long and painful adjustment period.
One major reason: their own household debt.
Many experts say private debt owed by households, as well as businesses, is an even bigger problem than the government debt that's getting so much attention lately. And it won't be solved without a difficult stretch of high unemployment and slow growth that will likely last for six or seven more years, producing America's own version of Japan's "Lost Decade."
"I think it's one of the major headwinds we're fighting against right now," said David Wyss, a visiting fellow at Brown University and former chief economist at Standard & Poor's...
"I think we're in for a lot of disappointment," said Carmen Reinhart, a senior fellow at the Peterson Institute for International Economics and a leading expert on financial crises. "If historic norms hold, deleveraging isn't pretty, and it is not a smooth process. We're already four years into this. I don't think the next six years look great."
The bubble economy that led to the recession was fueled by American consumers, businesses and banks taking on too much debt, particularly in real estate, during the decade before the crisis.
Speaking of disappointment, Core Logic reports that at the end of the first quarter, 22.9% of those with mortgages were underwater, meaning their house was worth less than the debt owed on the house. This is called negative equity.
CoreLogic ... today released negative equity data showing that 10.9 million, or 22.7 percent, of all residential properties with a mortgage were in negative equity at the end of the first quarter of 2011, down slightly from 11.1 million, or 23.1 percent, in the fourth quarter.
An additional 2.4 million borrowers had less than five percent equity, referred to as near-negative equity, in the first quarter.
Let's list some key points, None of this is rocket science.
- When house prices decline, as they've been doing for months now as shown in the graph below, more "homeowners" go into negative equity. Their mortgage debt, while nominally the same, does not cover their potential loss if the house needs to be sold. The difference must come from somewhere, so negative equity creates more debt for the "homeowner".
- Even if you've still got (positive) equity in your house, your potential gain at resale is now less if the value of your house has decreased. Assuming you had plans for that equity, this loss of wealth may entail greater debt in the future (e.g. if you are trying to "downsize" from a bigger house into a smaller house).
- There are four ways to pare down mortgage debt if you're underwater: 1) you can default (stop paying and go into foreclosure); 2) refinance to try to lower the principal & interest; 3) you can just keep paying on the mortgage and pray for rain; or 4) you can sell your house (a "short sale"), and if successful, absorb the loss.
Thus the total amount of household debt outstanding is in a state of constant flux. Some "homeowners" are defaulting, while others are piling up more debt when house prices decline to cover lost equity. And of course there are still new and existing home sales requiring the purchaser to acquire a mortgage, though not nearly as many as there used to be.
When a "homeowner" defaults, he or she has said in effect that they are no longer responsible for the debt, so the loan turns bad. Somebody has to take the loss. The graph (above) shows private sector debt as a percentage of GDP, which includes household and business debt. You can see that total private debt has declined from 284% of Gross Domestic Product (GDP) in 2008 to 234% in 2011. How did this happen?
Total private sector debt — held by consumers and businesses combined — peaked at 283% of gross domestic product in early 2008 — nearly three times the size of the entire economy.
The good news is that since the recession, consumers have been paying off debt and saving more. Private debt fell to 234% by the end of last year, though much of that decline resulted from bad mortgage debt shifting from banks to the government through the bailout of mortgage finance giants Fannie Mae and Freddie Mac, Reinhart said.
But even with some modest improvement in savings in recent years, households still can't afford the current debt levels, which are well above the average disposable income.
So what happened to the mortgage debt? Mostly, it was transferred from the "homeowner" to Fannie and Freddie by way of the banK which originally lent out the money according to Carmen Reinhart. Who took the loss? Fannie and Freddie, which the government took over in 2008, and which has cost taxpayers over $153 billion so far. Meanwhile, the household debt mountain was holding steady the last time I looked, meaning that total thousehold debt, including soaring student debt, was no longer shrinking. So much for our vaunted de-leveraging.
One more time from CNN Money—
'Zombie consumers'
Without a jump in consumer spending, the economy is unlikely to really get going again. And until that happens, Americans can expect to see lingering high unemployment and additional suffering in the years ahead.
"The engine-of-growth role that [consumer spending] played in earlier recoveries is unlikely in this one," Reinhart said.
Stephen Roach, the chair of Morgan Stanley Asia, wrote a recent note suggesting that American consumers were turning into "zombie consumers," greatly because "burdened with underwater mortgages, excessive debt, and subpar saving, U.S. consumers are stretched as never before."
Zombie consumers? I thought "consumers" were the living dead... Zombie zombies? In any case, what should you say to glass-half-full optimists who see a bright economic future in America? What do you say to neo-keynesian liberal economists who say that if we only applied trillions of dollars of additional stimulus, all of our problems would eventually be solved?
It's the debt, stupid!
'Nuff said.
Just walk, debt zombies! Walk away from the debt!
If you can afford it, just file bankruptcy- get a fresh new start.
If you can't, go off the radar screen or if you are tied down due to kids,etc- go buy a Nolo Press book and file your own bankruptcy.
Whatever you do, don't keep listening to the experts on the television, you know the ones who never saw a housing bubble coming, or saw it popping soon.
The rich have outsourced the good jobs, they ain't coming back, you ain't ever paying off your debts on what you will be making when you finally get another job. Nor will you ever overcome the power of compound interest.
Get off the treadmill before the bankers wise up and make the bankruptcy laws even more draconian.
Posted by: william mcdonald | 06/08/2011 at 01:15 PM