Richard
Duncan’s most recent book The New Depression (the best
book of this year) did an incredible job explaining how both the United
States and global economy have become dependent on credit growth for economic
growth. The inflection point came in 1971 when the world moved off the gold
standard and all currencies began to float against each other, backed by
nothing, allowing an unlimited amount of credit to be created.
And grow it
did. Between 1971 and 2008, the United States economy saw a credit expansion
from $1 trillion to over $50 trillion. The impact this had on global economic growth
cannot be overstated. It allowed a massive global stock market boom (1980 –
2000) followed by an even larger global real estate boom (1997 – 2008). In some
countries, such as Canada, this real estate boom even continues today.
The American
consumer took on an unprecedented amount of debt in order to finance an
enormous consumption binge. Home equity lines were withdrawn to purchase new
kitchens, vacations, clothes, and electronics. An unlimited amount of credit was provided at 0% interest to finance new
car purchases. Anything remaining to be desired could be financed through
credit cards. And it was.
Then in 2008, the ability to finance this debt, in many cases through borrowing additional
debt, reached the breaking point. Since the 2008 financial crisis, the US consumer has entered a massive deleveraging period where they have paid down (or defaulted on)
credit cards, auto loans, and mortgages. Taking on more debt or opening a
credit card, once the trendy thing to do, has now become uncool.
The
following shows total household debt through the first quarter of 2012. All categories
of debt continue to fall month after month, except one (which we will get to in
a moment).
+total+household+debt+q1+12.JPG)
The main
reason why debt can no longer expand is that income growth did not rise with
the borrowing binge of the past few decades. We will discuss both income and employment in the next section.
You may have
read in the headlines recently that total consumer debt has been rising and it
has. It rose by $21.4 billion from February to March - the largest month over month rise since November of 2001.
The problem is that almost all of these gains have come from only one sector: student loans. While the American consumer has continued to pay down mortgages, credit cards, and auto loans, they have opened the floodgates with student loans.
+borrowing+more+and+less.png)
Since the
peak of household debt in the third quarter of 2008, student loan debt has
increased by $293 billion while other forms of debt have fell a combined $1.53
trillion. The following graph helps paint the picture of the exponential growth
in this market.
+Student+loan+exponential+growth.png)
This massive
surge in debt (along with federal government spending which we will get to)
has provided a form of the “economic miracle” in the business of education. The
unlimited amount of money has allowed tuition prices to soar to
unimaginable levels and real estate construction and local businesses to boom
in college towns.
The
problem, just as the Chinese have recently found out, is that someone needs to
actually pay back the money that has been borrowed. Student loans that are 90+
days delinquent have surged to 8.7% in the first quarter, a number that is
higher than the peak in mortgage delinquencies. The government essentially took
over 100% of this market back in 2010 through its Sallie Mae vehicle (think
Fannie Mae for student loans). As these loans continue to sour, Sallie Mae will
need a massive injection of tax payer support.
Why are
these loans beginning to go bad? The income is not there to support the
payments. How do you create income? Employment and wage growth. We will now
look at both.
Up Next: US Employment & Income
h/t Calculated Risk, Wall Street Journal
Up Next: US Employment & Income
h/t Calculated Risk, Wall Street Journal
